January 2000

Centennial: History's Little Electric Lessons

by Roger Feldman  --   Bingham, Dana L.L.P.
(originally published by PMA OnLine Magazine: 2000/02)

Since the distinguished Editor of Merchant Power Monthly is too modest (or commercially inept) to admit it, this issue of the newsletter represents the centennial of its initial publication, it has fallen to me to do so. There are millenium grade lessons to be learned from its history, which is so intertwined with the history of the electric power industry.

The publication began as the "Merchant Shipping News" along the New York docks a century ago, reporting on the arrival of new shipments of specialized marine steam engine parts manufactured in England, whose export had just deregulated by the Crown and made available as part of the Imperial "privatisation" program. Widely derided as technically unworkable by the highly subsidized U.S. clipper ship merchant marine, their importation was resisted at first.

Nevertheless, the engine parts were secretly incorporated by Thomas Edison’s Cockney-born secretary, Samuel Insull into the Pearl Street Electric Generating Station (direct current) in New York, and thus was born the American electric power industry. The Monthly began to print little newsblurbs of the progress of the odd new service up Manhattan island – starting with J.P. Morgan’s home (the organizer of General Electric) and Broadway (which hence became the "Great White Way"). AC came soon enough thereafter. The founding predecessor of our current Editor (and a man equally astute as he), declined to sell his gas mantle manufacturing stock and invest in the electric flyer on which he had begun reporting.

Over time, the Merchant Shipping News publication switched its emphasis to electric affairs and changed its name to "Power Monthly". It reported on the rapid wiring of the cities and establishment of giant electric utilities stretching across the nation from New York. The grandfather of the current Editor, old Vox Pop, as he was known, was a leader in bringing power to the people, smashing the electric utility holding companies along with Congressman Sam Rayburn, and launching the great regional power marketing agencies, along with Senator George Norris.

However, his Populist instincts were diverted when he realized that the future of electricity was nuclear: free production (as President Eisenhower suggested in his "Atomic for Peace" message), and profit on distribution charges or possibly toaster sales. He did buy some penny Canadian uranium stocks (and as a hedge, high sulphur coal-holding companies).

Offered the opportunity in the early ‘80s to invest in something called a "co-generation" plant Pop declined, saying the technology could never be made compatible with the grid or be able to compete with central generation. His son did open the newsletter to little blurbs describing the doomed-to-failure wildcatting efforts in out-of-the-way locations of these projects, some of which used exotic so-called "renewable" fuels and ran on a shoestring using "project financing". He also opened a resort at a lovely little spot called Three Mile Island.

In connection with this centennial piece, I tried to meet with the current Editor, to gather his views about the next century of electric power management. Unfortunately, he proved very difficult to pin down, as he has become a full time arbitrateur - a day (and night) trader of merging utility stocks. He firmly believes there will be three utilities left in the country in five years which generate or own the grids in each part of our land (except the Southeast where the existing utilities will own everything or receive protection money), so he had better take his last fling at the power industry before it disappears as an investment opportunity. His only personal financial hedge is through an on-line magazine which covers the news of the electric industry called (and here my notes blurred), either "PMS" or "PMA".

Consequently, I did not get a chance to go over with him the questions I had developed with his nerdy nephew, is heir to the Monthly publishing empire, who bears the unfortunate nick name of "Rusebud". Here are the questions. You can read the answers in my next centennial column (I am not currently planning for a next millennial column, although rumor has it the editor is counting on cryogenics in his case.)

(1) There seem to be new technologies emerging which could, if applied, revolutionize electricity production, supply and usage all over again. These include efficiency/size advances in dispersed generation and applications of superconductivity to motors as well as transmission. Is the U.S. regulatory system likely to bring these to the fore, or will market concentration in large competing central station facilities, linked to a regulated low profit-yielding grid, stifle its potential (at least in America)?

(2) B2B internet marketing is now being adopted by more and more industrial companies to lower costs through supplier competition. B2C internet marketing is undercutting "bricks and mortar" marketing institutions. Is the U.S. physical power supply and transmission system, (and its regulation), flexible enough to capitalize on these on-rushing cyber-developments.

(3) Expanding customer market interface is now the goal of the infotainment/telecom. Customer interface through wires and rights of way, and established brand names are what utilities have. Margins on gridcos are limited; margins on infotainment are not. Is it likely we will see a further energy-telecom convergence at the user interface? Is the regulatory system established to accommodate such developments? If so, who will acquire whom?

(4) The U.S. power transmission system and telecom transmission systems are separate and separately regulated. So were trains, subways, buses and highways once upon a time. Can regulators sustain this type of separation of networks given the future intense use of electricity as the lifeblood of telecommunications and information memory?

(5) Energy trading is where the profit is for merchant plant fleet owners. It is unregulated. It is fragmented. The big securities exchanges are fighting back against dispersed, off systems ECNs through upgraded open systems. Will the exchanges efforts extend to commodities? Will energy commodity trading come to be separately regulated (or regulated in connection with securities offerings?) How will this interface with Congressional regulation?

(6) Power is now a commodity, and almost a necessity. It is treated as a public good in some parts of the country and private good elsewhere. The result is not just inequity but economic distortion of production and pricing. Even the oil depletion allowance got cut back eventually. What are the prospects for a uniform regulatory environment so the electric commodity can be uniformly produced and distributed on an equitable basis? Will U.S. global competitive needs be taken into account in this regard?

(7) Competition is global. Power needs are global. Information and power transfer (directly and through trade) can be global. Oil and gas is a global industry. Will national power regulation be viable (from a U.S. global standpoint) in a world of global markets? What will be the implications for related environmental issues such as those posed by Kyoto and dramatized at WTO/Seattle?

Stay tuned to Merchant Power Monthly, now accessible at www.rusebud.com as we face the new century and millenium. (One other special hint in closing: our editor is stocking up on .com securities; use your own judgment.) Power and light to you all in 2000+.

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.