September  2002

Green Line Tracks

by Roger Feldman  --   Bingham, Dana L.L.P.
(originally published by PMA OnLine Magazine: 2002/11/27)
 

Energy policy these days looks like a Washington Metro subway map. There are lines of development, there are hubs and intersections. But it’s hard to know where all of it takes you. While Federal energy policy has not, for not so inexplicable reasons, glided along the "true blue" line of the Cheney "Energy" Plan, neither has it suddenly veered onto an environmentally-sound or resource-conservative alternative energy "green line" as a solution to the real long-term "energy crisis" of fossil fuel dependence that never went away. FERC has been preoccupied with fixing the broker and hodgepodge status of economic trading markets – not on energy consumption patterns.

So, like an increasing number of public policy matters, it has been left to the fifty states by default to come up with approaches that address key national policy issues. State programs for required alternate energy portfolio use, and provision of special incentives and tax credits for green developers, are necessary to move the ball in the right direction, even though the states are heterogeneous and each has limited jurisdictional reach. But even to be successful on their own terms in their own markets, however, many individual state programs must come to grips with the fact that other rules with respect to distributed generation within their own boundaries may have the contradictory effect of constraining alternate energy development. Small projects based on renewable resources qualify as DG, if these resources are connected to the grid at the distribution or sub-transmission level. While this issue of the interplay of Federal and state programs is now in flux as a result of SMD, Federal jurisdiction still does not extend, in all respects, to state oversight of the utility distribution systems to which distributed generation is interconnected. Those state utility distribution systems, in turn, not surprisingly are focused on containing the impact of DG on their future operations and economics, and highlighting to state commissions the importance of conservative cost/benefit evaluation of system impacts versus the potential policy advantages of distributed green energy sources. The result is policy gridlock.

The generic challenges that confront DG at the state level – grid connection, grid dispatch and standby and backup changes – represent green line roadblocks for alternative energy developers as well. Here’s how resolution of DG issues could facilitate states’ efforts to in some measure be green – or could frustrate alternative energy development, if adversely resolved. The specifics may vary from state to state, but the fundamental energy policy issues are present in them all. SMD should be molded by the FERC to be consistent with these suggestions.

Regarding grid connect issues, in response to the requirements of good utility engineering practice to serve new loads via a radial system, each utility has developed a somewhat unique customer service system based on its system design. To capture the benefits of DG and the potential of alternative energy systems, interconnection of DG units needs to move toward performance standards rather than equipment specification, preferably on a uniform statewide basis. Similarly, there should be a common statewide market-grounded basis for determining the value of net-metered energy.

DG also needs grid dispatch measures that allows it to compete with larger central station loads. These include authorization of demand side bidding, demand sale back, and permitted bidding to aggregated DG loads in order to qualify as a power block for grid dispatch. Creative amalgamation of alternative energy project loads could be a result.

The ability to reduce or eliminate the cost of obtaining standby power is a key constraint in deciding whether to install alternative energy. Presently, standby and backup services are priced in a variety of ways by distribution companies. Standard and backup power should be priced not on an embedded cost-of-service basis but on a long-term, marginal cost-of-service basis, reflecting the effects of deregulation on the commodity component and a formula for actual costs for the non-commodity component. DG installation shopping for bilateral contractual arrangements should be available. In addition, DG providers also should be afforded the ability, if bilateral arrangements are not available, to contract for standardized backup and standby fees from supply companies/delivery distribution companies.

Issues affecting DG needed to be worked on at Federal, state and ISO levels involving both the wholesale and the retail markets, and take into account the ramifications of the new SMD rulemaking. There are policies at the retail ratemaking level that can best capture the benefits of wholesale competition for retail customers. Such policies

include encouragement of energy marketers to offer pricing options to retail customers that reflect market prices at the wholesale level, and thereby afford customer options including time-of-day and demand response pricing. Overall, DG works best when state regulatory commissions provide bright line separation between regulated T & D investment and operations functions on the one hand, and the deregulated energy supply function (which may include DG) on the other.

There are narrow specific and larger general conclusions to be gained from examining the DG/alternative energy issue at the state level. The specific conclusions are clear:

- As long as fuels policy success is herein a secondary derivative to competing electric industry regulatory policies, it is improbable to assume that it will achieve important national stature.

- As long as reconciliation of regulatory and fuels policies is left at the fifty state level, there is not a high probability that a cohesive national policy will emerge.

- As long as Federal policymakers do not clearly delineate their position on DG issues, so that the Federal/state jurisdictional line remains blurred, another barrier to alternate energy development will remain.

DG Green Line tracks are necessary, if an effective alternative green power train is to roll.

There is a larger philosophical point that emerges as well: the importance of a "sustainable" energy policy consistent with the long-term national interest. From a historical perspective, the national reliance on market operations to set fuels policy effectively pits short-term economics against the long-term national ability to act internationally. In microcosm, the same issue is faced by states seeking to web alternative energy and DG policy. As we enter the new round of FERC SMD and the debate over Federal legislation, it is important to understand that the Green Line is not just a local to the homes of a pampered few but a trunk-line to ongoing American economic viability.

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.