June 2006

Casper's OATTs

by Roger Feldman  --   Bingham, Dana L.L.P.
(originally published by PMA OnLine Magazine: 2006/10/27)
 

This is the story of a regulatory ghost returned to haunt the power industry scene. What a long road it’s been, trying to get the transmission system to support competitive interlopers on utility service territories. First there was the seminal deregulation Order No. 888, establishing Open Access Transmission Tariffs (OATTs). We all know the turbulent history that followed. FERC and its allies pressed unsuccessfully in Order No. 2000 for greater national regulatory homogeneity. The wasting hulk of Standard Market Design sits by the side of the road in testimony to the greater staying power of integrated utilities’ emphasis on “regional differences.” In promulgating the newest proposed rulemaking to remedy continual undue preference and discrimination in the provision of transmission access services, Chairman Kelliher in effect conceded this, indicating: “The (political) reality is we will have different kinds of “markets,” not just RTOs, so FERC has a duty to ensure all function fairly.” A second key reality, which compounds its need to do so was pointed out by Commissioner Kelly: neither deregulation nor market forces have produced the level of transmission investment needed to meet industry needs or minimum load growth requirements.

So FERC has now issued a 539 page ghost story, NOPR (RM05-25, RMES-17) focused on OATT reform as a means of confronting again the state of the transmission system. The watchword of this ghost story is transparency. The NOPR relates only to wholesale service — no intrusion on bundled native load. While not editing out either the pro-competitive requirements of public utility “comparable treatment” of all system users or the traditional protection of customer native load, the NOPR seeks to make discrimination harder by making the ghost of discrimination less gossamer. It does not undercut transparency arrangements ISOs have already put in place. Its basic tack is to raise the overall requirements for clarity and transparency, so that whatever regional regulatory system is in place, the parties can better discern their rights and thereby be able to act on them. Key provisions designed to achieve this objective include the following:

• More consistent calculations of Available Transfer Capacity (“ATC”) are required, so that hoarding by local service providers cannot be masked by inconsistent or obscure calculation methodologies.
   

• Participation by each transmission provider in an open and coordinated transmission planning process (and provision of a description of that process in its OATT tariff). The requirements of the process have a familiar ring: openness, transparency, comparability, regional coordination.
   

• Pricing is only reformed in special cases such as the mitigation of presently discriminatory imbalance penalties for wind and other intermittent generators.
   

• Current price caps on assignments of capacity (presently the higher of: original, maximum, or customer opportunity rate) would be removed.
   

• Requirements for rollover rights would be enlarged to five years additional service and one year’s advance notice. Flexibility for merchants to nail down needed capacity therefore could be reduced.
   

• Required posting by transmission owners of all business rules, practices and enlargement of the posting requirements.

The NOPR, in effect, embodies a hoary principle of regulations, updated to the quasi-free market power grid setting: if you can’t direct it, mandate its shape, or even police it, make it embarrassingly transparent. A skeptic might term this the “Casper the Friendly Ghost” transparent approach. A skeptic might ask: if basic industry governance structure is not modified or new construction incented, to what extent can the problems confronted by the FERC be solved, particularly in an environment where consolidation of utilities is the order of the day? To what extent will it facilitate the balanced development by diverse merchants in multiple of the IGCC plants that are in the nation’s future, or the construction of needed new transmission to make them optimally cost effective?

Perhaps in short, the NOPR amounts to an American formulation of the recent weary remark of a senior advisor to the EU competition commissioner: “A market which requires such [a scale of investment] and is so technical is not effective if you have thousands of small operators...The best structure in terms of competition is an oligopoly — the question is ‘what kind of oligopoly do we want.’”

This may be too skeptical a view, certainly of FERC’s intentions. But whether its Casper-like approach will be much more comforting from the standpoint of merchant power remains to be seen.

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.