December 2005

WWDD-2006 Preamble

by Roger Feldman  --   Bingham, Dana L.L.P.
(originally published by PMA OnLine Magazine: 2006/01/14)
 

2005 was the year when intelligent design (ne creationism) clashed with natural selection (Darwinism). It was also the year of EPACT: yet another effort by man to emulate nature by promulgating laws to govern the adaptation to change of its institutions. High among these changes was the right to allow the Species Utilities to commingle and cohabit ("hold" or "merge") with each other without supervening excessive oversight by "semi-divine" surrogates for the public interest (SEC or FERC).

However, that Utilitarian Act measures had to be fit into the American system: one basically skeptical of the disinterested capabilities of mankind to act without individual self interest overcoming the commonweal. As we all thought we had learned in grade school, in the nature of the tripartite system of our "founders" however, is one "checks and balances" (not to be confused with balanced checkbooks). In it the Legislature’s broad intent is divined and implemented by officers of the Executive (in this case, principally the Federal Energy Regulatory Commission) and perhaps in turn be subjected to judicial review.

We’re not at that second stage yet. We’re at Stage I. It’s hard to tell if it’s about "creationism" or "survival of the fittest" masquerading as creationism. The Legislature, in the person of the Chairman of the House Energy and Commerce Subcommittee, now seeks to cause the Executive to construe EPACT’s "original meaning" as he understands it (as distinguished-perhaps – from how the two houses of Congress understood it. His action can be judged from a legal standpoint (and doubtless ultimately will at some point). Misinterpretation should be evaluated by us however, from the standpoint of its impact on the evolution of the energy industry. Without turning "red" or "blue" in the face, let’s grasp the evolutionary significance of this debate for the electric power industry (which is, after all, the central nervous system of the American organism in which the body politic resides).

At issue are whether FERC has set off on the right path in implementing EPACT’s replacement of the 1935 Public Utility Holding Company Act and the modifications of its provisions regarding merger review, FERC has proposed rules in each of these areas [RMO5-32 (PUHCA) and RM05-34 (merger guidelines)]. Congressman Barton, one of the principal drafters of EPACT, has filed comments in each case thundering his delineation of Congressional intent.

EPACT clearly repealed the detailed SEC-managed machinery held over from the New Deal, which first leveled the watered-securities pyramid-utility abuses of that era and then for decades thereafter coldly eyed the efforts of the survivors to engage in intercorporate transactions, of newcomers to broaden out their utility platforms through acquisitions which were not geographically integrated together and of the regulated to matriculate profits into unregulated – even unrelated areas of endeavor. The PUHCA portion of EPACT was dubbed a "books and records statute" though crypt, not cryptography was the intention of many of its sponsors. Perhaps inevitably, as a corollary of Parkinson’s law, the FERC entry into the post-PUHCA implementation field entailed trying to preclude through extensive disclosure what could not longer be imposed by statutory fiat. Equally inevitably, the oxen who thought a yoke was to be lifted from them felt gored. And so, Congressman Barton made vigorously clear that "PUHCA is a regulatory reform not a regulatory vacuum." He denounced not only the importation of new replacement record and filing requirements, but also the extension of these requirements to previously PUHCA – exempt persons – electric wholesale generators (utility owned/market-based rates entitled); foreign utility companies (FUCOs) – and certain passive holders of utility securities (e.g., mutual funds). He also opposed FERC’s efforts to preserve through its proposed regulations, limitations on cross-subsidization and structural protection mandates with roots in PUHCA.

Part of the justification of PUHCA repeal was that it was better to have one watchdog – FERC – applying its statutory jurisdictional authority (which were in some measure enhanced by EPACT) and providing necessary public interest protection, than two. SEC therefore exits left. Steriodly enhancing FERC are EPACT measures including review of purely generation transfers, and arrangements to preclude affiliate-abuse. Dollar thresholds for taking cases were raised and provision for expedited review also were included. In its proposed regulations, cross-subsidization was very much in the crosshairs of FERC and cash management, previously a subject of PUHCA regulation was added. So too was merger by FUCOs with their US affiliates. (Surviving into the new law are the old, limiting statutory standards for merger approval of causing "no harm" on rates, competition, and regulation, FERC’s application of the same competition standards as are applied by DOJ and FTC to mergers in far less complicated and specialized industries than power. In response to these Agency incursions, Congressman Barton pointedly reminded the FERC that "EPACT was not intended to expand significantly the Commission’s jurisdiction or provide for more burdensome regulations."

One can and many will argue indefinitely over the constitutional proprieties of Barton’s actions; the meaning of Congressional and original intent; the appropriateness of agencies filling in the major administrative lacunae left by sweeping Congressional pronouncements; the public policy merits of deregulation of wholesale rates and of combination of companies given the proclivities of unrestricted parties in free markets to conspire (noted by Adam Smith not Karl Marx and hailed by some social Darwinists as the ne plus ultra of human adaptation). No, we are in the year of the Beagle, and the question is: WWDD (What Would Darwin Do?) Put differently: do our rules regulating actions of electric utility persons lead to the continuation of an electric power central nervous system which can adapt on behalf of the social organism to the challenges of our current and coming ages. The challenges to be faced in these ages – need for fuel cost control and conservation in the face likely rising energy prices; adaptation of new technologies to exploit new digital age telecommunications markets (one of the goals of deregulation in the telecommunication field); reliability of response to natural disasters and secure hardening of response to man-made disasters; reduction of market barriers to the introduction of new technologies (one of the goals of deregulation in the telecommunication field). Automatic or knee jerk answers are not in order. Capital scale capability is important; but encouragement of innovation and more sophisticated system linkage (as distinguished from territorial insularity) is too. Mergers are not a proven solution to national problems and are not necessarily efficiency producers. Unleashing the free spirit of capitalism does not by itself serve all of these requirements; motivated, cooperative, thoughtful mammals outstripped the giants they succeeded on earth (although it took an energy crisis-like meteor to make way for them).

WWDD? The conclusion arrived at, as 2006 dawns, is that there is no perfect intelligent design for man’s affairs. There is both a need for allowing for industry scale and rational consolidation, and a need for nurturing innovation which scale sometimes crushes. There is a need to not let formulae – which frequently ultimately represents the interests of those propounding them as much as eternal reasoning – (from right or left) – cloud the need for responsive human technical organizations which includes building inhibitions on human and corporate nature in the equation.

Having said something like this, Darwin would mount a Galapagos Tortoise bareback, salute not only Congressman Barton and Chairman Kelliher, but also the perfectors of fuel cells and carbon reduction innovations and ride off into the mists of the future electric of 2006.

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.