July 2000

e2e vs. General Edison OnLine

by Roger Feldman  --   Bingham, Dana L.L.P.
(originally published by PMA OnLine Magazine: 2000/08)

To the power industry, 1984 came late. In its Newspeak "deregulation" turns out to mean "oligopoly." This is occurring at the same time a the internet experience presents a different, better model of network organization. Ironically, the result may be that in the power industry e-commerce will become the captured tool of oligopolists (er... "deregulationists"). The facts behind the development are of fundamental importance; naturally enough, they are not a significant part of this year’s legislative fight. Perhaps a good reason for legislation fans to wait until next year.

As background first, a power parable: how big power got its groove back. The CSW/AEP merger creating the nation’s preeminent diversified utility, spanning three non-contiguous service territories has received FERC and SEC approval. According to a recent newsletter report, Texas Governor Bush made this possible. Piqued at CSW’s opposition to his effort to deregulate the Texas power market, he encouraged the State PSC to slam CSW’s rates. Its share value declined. CSW was driven into the arms of AEP. Texas opened its retail markets thereafter. But AEP-CSW now stands athwart the mid-American corridor from Dallas to Columbus. The PUHCA notion of a single contiguous service territory has been laid to rest. So it goes: nominal deregulation gives way to oligopoly. Signs of the emerging big ten or twelve national generators are everywhere. We can chat about it on our next airplane flight.

Compare (at least for the time being) the evolution, at least to date, of the internet. Its proponents say that its emergence proves the inherent triumph of open architecture. They cite the key to this as the internet’s underlying architectural principle: "end to end"("e2e"): Keep the network simple and build intelligence in the application ("ends"). Simple networks, smart applications: a formula to encourage innovation. Why? Because simple networks can’t discriminate among network uses – and because innovators don’t need to negotiate with every network owner before a new technology is available to all. Thus, the burden on innovation is kept small. [One serpent in paradise, though: Professor Lessig of Harvard Law School has pointed out that the e2e principle may now be coming under siege as broadband transmitters (e.g., cable companies), which are allowed to discriminate, have begun triumphal entry into the market].

How does this relate to electric power? Certainly FERC’s goal in Order 2000 was to foster e2e in the power industry. But major competing factors gravitate in the other direction. First, the extent to which regulators (particularly since they are, to say the least, unabated by Congress) can oversee markets with that objective in mind is limited. Second, the creativity of would-be oligopolists in integrating e-commerce into their offerings far outstrips government’s interest in or willingness to pursue them.

The first point is aptly confirmed by an internal memorandum circulated throughout FERC by a senior member of its Office of Markets, Tariffs and Rates (OMTR) concluding that the agency is essentially powerless to police the electric industry for market abuses (a conclusion confirmed by recent independent studies and vigorously argued by Federal legislative reform proponents). As always, at the mid-level bureaucratic strata of the pyramid, the culprit is not jurisdictional entities, it is anonymous, analyzable, neutral data: "We need actual data, either real time or close to real time about bidding behavior and transmission constraints and things like that" explained an aide for a pro-deregulation Commissioner. Ah the numbing paralysis of innumeracy... .

What FERC needs, perhaps, is Mister Data, direct from Star Trek, in light of what may be coming from private (deregulated) firms as they seek to cope with the challenge to their traditional market share and industry primacy and the potential of e-commerce. From the perspective of an industry, profiting from electric power’s every convulsion of deregulation, comes this basic observation from Jack Welsh of GE, which is already transforming itself to the internet age and is now bringing along its staid sidekick, the power industry: "Why should I ask a dot com to come between my customer and me." His mighty six sigma method has been deployed, using the web as the window on his customer’s needs, and more importantly, to lure and advocate his customers to use more of his services. For example, the New York Times recently reported that several GE businesses have given their Websites so-called "configurations and wizards" – "electronic guides that enable customers to customize their own systems, be it a redone kitchen or a lighting system for a new plant and even helping customers fix them in the future."

What could this mean for the power industry? Connecting the dots here isn’t hard. Savvy utility management will seek large and larger market shares, and vertically incorporate e-commerce to push more energy product and services. They will do so directly in strategic alliance with major supplier players. They will do so in convergence with cable-net-content providers. NewPower is in the air, so to speak.

Very possibly, we should say good bye to that Jeffersonian e2e dream for electronic industry innovation in any configuration much different than oligopoly. Maybe that’s what deregulation was meant to be. Certainly that’s the argument of Microsoft’s economists: the so-called network effect creates a frantic winner-take all race to be the dominant player, and the dominant player establishes the industry standard (incidentally keeping a lock on the configuration technology as well). War is peace, as Orwell would say.

The moral for proponents of true Federal "deregulation" is that their message must be promotion of true "e2e" for power. In addition, beyond their current energy focus, protection of incipient uses of e-commerce in or in conjunction with the electric industry needs to be an explicit focus. Otherwise, the national electric power deregulation experiment will simply have been an exercise of going the long way round from fragmented regional Power and Lights, to "Baby Edisons" to "General Edison On Line." Not quite the e2e FERC had in mind.

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.