September 2000

Of Air and Power Rage

by Roger Feldman  --   Bingham, Dana L.L.P.
(originally published by PMA OnLine Magazine: 2000/10)

It was the summer where people packed the airplanes; stifled, simmered and suffered; applauded humorists who mocked their fate and their "captors"; and began to mull seriously news magazine columnists’ suggestion that airline deregulation should give way to public-private partnerships When prices went up in a devilishly targeted manner, mega- mergers were proposed to achieve efficiency; regulators were mocked for their inefficacy in providing computerized management systems up-dated to correspond to service levels; the weather was blamed for everything, and economists celebrated whole thing as the triumph of deregulation. After all, there was more travel and per unit it was more efficient. It was the summer of air rage.

This, of course would never happen in the electric power/natural gas industry. It was the summer when shortages were most pronounced in the regions where deregulation had first occurred. Where regulators turned to price caps to deal with spikes in power prices; when the AGA dusted off its explanation for gas price uses and inventory declines (prices it seems had been too low and inventories too high to stimulate needed search); and, above all, a summer when a new fear of re-regulation stalked the private power industry. ("Deregulation sucks" was the headline in a parched San Francisco newspaper). The deregulated power supply industry’s trade association convened a major war council to take the lead in developing a response to "spreading consumer, political and regulatory concerns about power supply in certain areas of the country." No power rage here.

It was the summer before the election, and all of the players responded to the crisis admirably. As the notion of comprehensive legislation creaked futiley on, older rifle shot ideas - like mandatory hard lending deregulation dates, resurfaced with a vengeance. In this case, the vengeance (Sen. Schumer) was in part on the Governor (of New York) who had administratively deregulated only to discover that deregulation could lead to ongoing price escalation (of ConEdison) as real wholesale prices became retail prices. Surely, however, someone wise reasoned, Federally imposed deregulation would not have that effect in a mandated deregulation quilt of fifty state colors... If Congress saw the energy crisis as a football it chose not to touch in an election year, Chairman Greenspan, unhampered by that constraint, did not feel so encumbered. Atlas shrugged (oblivious to the facts it might appear) that Congressional inaction on deregulation was making the needs for new powerplants unclear; that there was a disincentivization to construction; and that instability in the economy therefore might result. One takes comfort in knowing that he clearly believes that price increases and other power industry perturbations don’t reflect the increase in natural gas prices and will not be impacted in the future at a time when the new fleet of plants being built turns out to be all combined cycle gas. Greenspan reassured us that it takes a while to get the wells in place and bring up the level of inventories of natural gas. That laugh track you hear in the background is courtesy of OPEC, by the way folks.

Well, at least Greenspan was keeping his eye on that old economy supply-demand thing. That’s better than in strife-form California, as PG&E prepared to consummate the State’s successful deregulation by auctioning off its huge, non polluting successful hydro system. Two Green powers clashed over this proposition. Each, however, promised to downward tilt the supply half of the power equation: Sierra Green wants the dams busted so the salmon can swim freely and multiply; Dollar Green wants to fragment the PG&E ownership thereby maximizing the optionality of individual sites, without reference to what that does to the productivity of the system. Even (Sen.) Pease, the deregulation sponsor, is now breaking out in hives and publicly suggesting that maybe his baby was Rosemary’s. No power rage here.

Fortunately, our national leaders – at least, our presidential candidates – have clear fixes in mind to fill the vacuum of Congressional inactivity and State political paralysis. "W"’s presumptive Secretary of Energy and Commerce, Ken Lay, told Congress to get cracking on deregulation (presumably in a manner which was conservatively compassionate and conducive to large volumes of trading of energy commodities). To hedge his bets, Secretary Presumptive also announced his deal with Blockbuster, as well as his new energy marketing joint venture with AOL and IBM. His top corporate aide assured us all that more power plants were on the way and all would then be well. Vice President Gore brought a whiff of ‘60’s eco-incense and ‘70’s malaise to the debate, calling for billions of dollars in tax incentives to promote new technologies, solar powered homes and cleaner running cars. Comforted were we all to learn, that it was a timid old way of thinking to trade off the economy and the environment (as to the latter of which his commitment "has always run deeper than politics.")

Yet, it was not yet a summer where energy rage joined air rage, because we Americans have learned to deal with the depths of inability of our leaders to lead and planners to plan. When supply and demand are out of whack, while our public procurators posture, we organize; we try to smooth imbalances by moving goods; we engage specific new technologies to overcome the core of problems as well as the discontents of consumers. The kinds of bright spots that will grow that saw the light of day this summer:

• The City of Chicago (located in a spike impacted region) joined with 47 other local governments to aggregate electric power loads, in order to seek cheaper power in the competitive market. It was advantage of the first opportunity since its State deregulation to pursue that route. An RFP was issued with a 20% mandatory renewable resource component.
  

• Plans for a major B2B transmission exchange were unveiled by AEP, CP&L, Duke and Unicom allowing those seeking to reserve and schedule transmission capacity to consolidate transactions they currently make on 2 or more OASIS sites. A regional exchange in the Carolinas was announced hard on its heels.
  

• Otter Tail Power (which you may know better as the owners of the Fargo Red Hawks – it pays to diversify) introduced new real time load management software which allows the customer to reduce consumption during critical price event periods, and by thereby creating negawatts become a resource to the network.

Ward Uggerud, energy supply officer and lead developer of the technology captured the spirit of all of these innovations – which we can only hope will percolate upwards and color the regulation/deregulation energy debate which has gridlocked Washington: "I have spent my entire career..dealing with our load control area… The philosophy behind the (customer choice) technology is to take and expand those things that load control areas do at the utility level and make them available at a retail customer level."

So as we leave the summer furnace and look past the election, we are left with the hope that Air Rage will not give way to any Power Rage (other than the election), because America’s market adaptation instincts – as distinguished from Washington’s formulaic recitation of adherence to market based principles without notice of mundane consequences – can prevail within a workable time period.

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.