by Roger Feldman -- Bingham, Dana L.L.P.
A number of competing perspectives and developments deserve notice. They suggest the value that a Congressional, rather than a FERC solution, would have for the underlying twin issues:
Citizens for State Power has been more clear eyed than many in recognizing the breadth of the proposed NOPR. It has also, however, been a good deal more obstreperous than most, terming FERC a power grabbing bureaucratic agency with grandiose plans to strip generators of ownership rights with respect to their assets, place them in RTOs, and regulate their rates. It appears that states rights equals utility rights, in this formulation.
Clear eyed too, but with a far different perspective, is the American Public Power Association, concerned that absent extensive RTO regulation, their old friends the investor owned utilities, will use ISO/RTO governance to crush wires access and viability of public power. Its concern is that the NOPR has not gone far enough: it has identified the problems, with the currently partially deregulated system but stopped short of prescribing the regulatory answer. It fears voluntarism-based, jerry-built markets that have the net effect of being consumer unfriendly.
Propounding the merit of its middle of the road position, Chairman Hoecker of FERC has highlighted FERCs rationale: ISOs are better anti-discriminatory devices than are transcos, but transcos (i.e. privately owned, profit making entities) are better at raising capital for needed transmission. Hoecker points favorably to the experiment proposed in Wisconsin, for the IOUs to sell their grids to a for-profit transco (in return for State-sponsored end to investment caps on regulated and non-regulated earnings).
The Congress is hearing more from that portion of the utility industry that want to keep its grid but are pro-transcos, because they . The theme is simply that ISOs are bureaucratic, and that while they can plan, but have no capital to spend and are not profit-oriented, they will not serve effectively. It is recognized that ISOs may be easier to set up than transcos. They require FERC, State, Hart-Scott Rodino anti-trust, PUHCA and possibly nuclear approvals. In addition, since transcos are new companies, there are employee benefit, labor and tax issues to be worked out, as well. One theme struck as a compromise in this regard has been to start with ISOs and move to Transcos. That approach may, however, sound better in theory than it is likely to be in institutional practice, given the propensity of established bodies such as ISOs to survive once established. Chairman Hoecker, however, believes that this pattern might be established.
There is a great deal at stake for all involved in the utility industry. Most obvious is that of bondholders in existing utilities. Duff & Phelps, a leading rating agency has asserted that from a utilitys credit perspective, it is irrelevant whether a Transco or ISO exists, as much as that one or the other does, i.e. utilities unable to achieve resolution of their presence in one or the other will become less competitive than those who have.
Boring down a level, its useful to understand what is at stake in the ISO/RTO debate for individual companies strategies. In an insightful article in Public Utilities Fortnightly, Messrs. Cicchetti and Long suggest that it is nothing less than a fundamentally different focus on what is to be sold, and at what price. ISOs are focused on the preservation of free network use, and deal with congestion and the need for system expansion as adjuncts to the planning process, not as a part of their "product definition". They are trying to design tariffs to compensate all incumbent utility owners. Transcos, are autonomous from generation owners, and are focused on pricing the product of the transmission access paths that they have control over. System expansion is viewed in this light. Therefore "(a)s an independently owned business, most transcos would be less likely to be based on the products that are created by the club-like or equalitarian atmosphere of measured ISO-use pricing."
There is, however, a whole additional dimension to this debate necessarily unreflected in its tunnel focus on the governance of the utilization of the electric transmission wires system. That dimension is the convergence of telecom and electricity in the wires network field. It has ramifications for the importance of retention of control of wires and their associated rights of way. While electrical wires are sometimes called "dumb" since it is cable and TV wires that carry data, voice and pictures, electric utilities own many smart wires and the rights of way to site many more. In fact, already, a four utility, eight state alliance to link fiber optic networks to provide greater access to higher bandwidth advanced voice and video communications service has been announced. Hook ups with other major electric utilities to develop a competitive national network is contemplated by it.
The use of utility rights of way is not some next century blueprint on a planners desk. Consequently, the ISO/Transco decision must be evaluated with the telecommunications dimension involved. It has, for example, ramifications for wires/right-of-way ownership; the role of for-profit entities in directing new wires construction; and the rights of non-wire owners to participate at all in the electricity/telecommunications convergence.
In sum, there are high stakes in the high wires game beyond the management control structure of the power industry. Stay tuned as Washington catches up with reality.
ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon Markets Group has practiced law related to the finance of environmental and energy projects and companies for 40 years. In particular, he has analyzed and executed a wide variety and substantial value of project financings. He chairs the American Bar Association’s Committee on Carbon Trading and Finance, serves on the Board of the American Council for Renewable Energy, and has been a senior official in the Federal Energy Administration. He is a graduate of Brown University, Yale Law School and Harvard Business School.