by Roger Feldman -- Bingham, Dana L.L.P.
Ah the joys of linear thinking in legislating electric power reform. Twenty five years ago, the United States had a regular seasonal fright the Winter Curtailment season the disappearance of available natural gas (sometimes known as "Let the Yankees freeze in the dark"). Now gas gushes from hitherto unknown quarries to our burgeoning fleet of merchant powerplants in deregulating electricity markets. Now we have the annual summers Big Spike: the one that causes price spurts and brown-outs and lets Mayor Guiliani of New York make believe he is Spike Lee.
The solution to gas curtailments was gas deregulation. So now we are told the solution to these Big Spikes is full, laissez faire power deregulation: Competition will increase, power supply will increase, prices will decline. New innovation will benefit consumers in many new ways look at telecom, now you can even buy services to screen out the slammers trying to sell you new telephone service.
There remains among the public at large that native skepticism of the consummeratti, born of slivers of fact and of knowledge of how competitive markets tend to contract in number of players.
The objective foundations of the opposition seem clear. Half of all auctioned generation assets have been purchased by 5 companies. Major electric utility mergers now span different, non adjacent service areas of the country. State legislatures in certain parts of the country allow utilities either to have merchant and non-merchant plants in their service territory or to buy back the plants they are selling. Large industrial users push for three major RTO regions embracing all generation suppliers. Federal legislation would remove traditional PUHCA constraints and leave the FERC as a lightly armed police observer. It is on this perhaps populist skepticism that the private power industry is having to exercise its suasion as it pushes in Congress for its version of deregulation.
The result is that various spats have broken out among those who would benefit from certain types of power deregulation, but are concerned that some continued checks be placed on certain others, lest unfairness reign in the marketplace and/or Big Spikes will continue to be the order of the day. In these spats may be found the seeds of the current legislature deregulation stalemate. Two key areas of deregulation debate, in which recent developments are discussed below, are (i) the locus of power governance and (ii) the regulation of power marketers.
Deregulation has been a Federal play, although there has always been recognition that the United States does not have a national grid and that the absence of such a grid in fact one of the sources of "spike" problems. Proposed Federal legislation reflects some deference to the States in that regard. Not enough, apparently, for the U.S. Chamber of Commerce which recently rejected a federal role for restructuring and instead called for a states rights approach. In effect, it echoed the denunciation of FERC for "unleashing a torrent of federal regulation" by Citizens for State Power. A surprising bedfellow for the Chamber, Big Labor, agrees, asserting "In a preposterous turn of events, advocates of federally-dictated electricity deregulation suddenly claims that the problem the crunch on transmission system [that is, the Spike] infrastructure precipitated by deregulation is now the cure to emerging reliability challenges." It is not surprising that private powers Alliance for Affordable Energy has snapped back in rejoinder that only Congress can guarantee a reliable, nationwide electricity marketplace. It is some indication of the newfound homogeneity of most of private power and mildly amusing to those who know their more customary stances to find the hard core congressional denizens of the right chiming in publicly in a letter to their erstwhile blood brethren at the Chamber, that as to Federal electric deregulation: "Congress would simply be directing the States to act in the best interest of interstate commerce."
Far from this madding political crowd (not very), FERC has, in addition to pressing its RTO NOPR objectives, been forced to take a look at whether the new deregulatory order it is seeking to wrought will, in fact, be a fair one for all those who wish to participate. A key area in which the proposed new legislation is silent is the field of power marketing. In a recent case involving Southern Company Services, FERC chose to increase the standard for reporting by power marketers to that of utilities, i.e., requiring a public filing of all long term agreements, rather than reducing that of utilities to that of power marketers, as they requested. Now, all parties with market based ratemaking authority i.e., utilities and power marketers, have been invited by FERC to participate in rehearing of the case. In another recent analogous case, AES was required to file with the Commission its Tolling Agreement with Williams which was the basis for its West Coast powerplant acquisitions, even though it reasonably alleged that commercially sensitive information was contained in it. It certainly does appear that FERC has recognized: the importance of broad public market knowledge in an increasingly competitively centralized market environment, even if the Congress has made no gestures in that direction.
Its not clear, however, that FERC fine-tuning at the edges of the deregulating market will be sufficient (or even legally available) to deal with special competitive problems which power deregulation appears to inevitably bring in its wake. Recently, the 8th Circuit U.S. Court of Appeals issued an order in a transmission case which "affected" retail service, in which it stated that FERC had overstepped its jurisdictional bounds in Order No. 888 in addressing transmission open access. While rehearing is being sought in the case, it does highlight the reason why ultimately Federal legislation - not judicious exercise of administrative discretion - may be necessary to address potential competitive flaws in power deregulation in a coherent manner.
Seasons of discontent gasless winters or powerless summers ultimately produce action. But as the public debate and regulatory scene highlight, the details in structuring power deregulation are, in fact different than those which confronted natural gas, and a respect for the operational details, rather than simply a blanket press for Federalization of regulation may turn out to be a necessary compromise on the part of private power proponents. Another season, another reason.....
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.