July 2006

Nuggets in the EPACT PAN

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

The Energy Policy Act (“EPACT”) may have been a gold mine for certain clean technologies from an incentive standpoint. It clearly hasn’t been from a regulatory standpoint, given its strongly pro-traditional industry bent. Merchant power entrepreneurs need to soberly absorb this lesson and then focus on finding the nuggets which may be buried in EPACT, or the Reports and proceedings implementing EPACT. For those seeking to turn energy efficiency enhancement into profitable business ventures, areas of promise do exist.

To begin, let’s understand the state in which EPACT left the markets for merchants, from a regulatory standpoint. In the EPACT, Congress directed a multi-agency task force to report on the status of wholesale electric and retail markets in the United States. The intent of report proponents, which has now been released for comment [http://www.ferc.gov/legal/staffreports/competion-rpt.pdf.] was not merely to provide another dusty tome, but to establish a record for evaluating potential responses to key issues which have plagued the power industry: wholesale price spikes; the merits of capacity payments in organized wholesale markets; the need for construction of more transmission facilities and the evaluation of traditional regulation (i.e., the looming prospect of re-regulation in the retail market). More basically it addressed the consequences of the obvious gap between the 30-year federal effort to balance competition by promoting innovative regulation and the disparate evolution of regional wholesale power markets (or lack thereof).

The Report’s conclusions, while carefully couched in bureaucratese, are pro-Federal innovation at the wholesale level:

* Regions principally reliant on bilateral sales arrangements (i.e., non-ISO/RTOs) are less efficient (i.e., further from least cost) relative to regional generation dispatch governance scenarios;

* Specifically, the former regions have greater capacity constraints, lower transmission access, and therefore fewer least cost supply options;

* On the other hand, while RTO/ISO regions have more efficient trading and provide better signals for generation construction, they pose other issues related to long term transmission construction, with sometimes high commodity price levels.

On the other hand, the Report acknowledges that, as price caps in seven key states are just ending, overall retail sales programs have been a failure in bringing competition and lower prices to the market. Some industrial customers have more choices, but even where multiple suppliers serve retail customers, not only have prices not decreased, but the range of new products and services (other than some green energy products and customized energy management products for large commercial and industrial customers) has been limited. One collateral benefit: power suppliers have made efforts to solicit large customers, which has created incentives for customers to cut consumption during peak demand periods.

The Report provides the action backdrop not only for FERC’s new NOPRs clarifying transmission and market based rates rules as ways of dealing with abuses - without basically changing industry structure - but also for creative state and non-regulated utility action in response to the “Smart Metering” provisions also contained in EPACT. Section 1252 of EPACT contains a requirement that states and other regulatory bodies must make a finding as to whether they should require utilities to offer time-based rates (“DR”) and advanced metering (“AMI”) to all customers. While there has been uncertainty as to the timing of this EPACT requirement, the current dates appear to be August 2006 for commencement of consideration, and August 2007 for a state’s completion of a determination on whether to adopt the requirement (a rough analog to the original implementation of PURPA). Previously conducted state proceedings, e.g., California, are subject to grandfathering provisions.

Consideration of the Demand Response and AMI requirements of EPACT § 1252, will not be conducted, against a completely blank record. EPACT also requires FERC to prepare an annual report beginning in August 2006 which identifies the saturation and penetration rate of advanced metering and demand response programs. The Congressional intent was for this Report to provide a foundation for decision makers by responsible policy makers.

Municipal utilities and rural coops are jurisdictional all under EPACT § 1252. Evidently they believe it will be a plus for their entire service offering package to offer AMI to their customers, and they are conducting training sessions for their members. Perhaps they believe such programs ultimately will enhance their competitiveness relative to investor-owned competitors for new markets.

There has been good initial state response to EPACT § 1252 implementation— including states where retail deregulation has not been a successful process. Different states are taking different approaches to EPACT §1252, as they are permitted to do under the law. However, not all IOUs are being as positive in their willingness to let public process rather than their internal operations define AMI and DR programs.

What does all this mean for potential merchant entrepreneurs in the changing electric power market. Simply this: EPACT was not enacted, nor can FERC turn it into a reincarnation of the original model of open access deregulation which had such promise (at least partially realized) for merchant power. But it does provide in §1252 and other identifiable isolated contexts, a framework in which strategic teaming to exploit economically competitive technical initiatives is a very logical strategy. Seeking to influence the regulatory environment to create a favorable climate for merchant initiatives is, of course, a proven useful strategy. It certainly should be pursued vigorously.

Panning for nuggets in EPACT in the areas of demonstrated energy efficiency and productivity is potentially significantly as or more productive than relying on EPACT regulation of utilities or  scams of EPACT incentives to create new business.

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.