MAY 1997

OPEN ACCESS/OPEN SESAME: A POWER MARKETER'S GUIDE TO THE PROPOSED NEW LEGISLATION

by Roger Feldman  --   Bingham, Dana and Gould, P.C.
(originally published by PMA OnLine Magazine: 04/98)

All open access legislative proposals do not have the same positive benefits for power marketers. None of them address their specialized issues in sufficient detail. Here is a rundown of some key factors.

The Schaefer bill, originally introduced last year, represented a bold thrust toward deregulation, but one designed to offer placatory incentives to electric utilities and to holding companies. The more recently introduced DeLay bill is consistent in spirit with Schaefer, but also is designed as a warning shot across the bow of the recalcitrant utilities. The Bumpers bill, from the other side of the aisle, supports deregulation, but reflects additional environmental and populist concerns.

There are three key policy denominators of these bills affecting power marketers.

(1) First, the extent of substitution of federal directives for state action. The underlying conflict here is between open access, proponents, anxious both to press their case and avoid the need to deal with a crazy quilt of jurisdictional responses to open access, and a variety of supporters of the contrary position include higher cost "just go slower" utilities; legislators from lower cost power states; certain consumer groups; public power systems; and, of course, state regulators.

The Schaefer bill seeks to straddle this issue, by providing the states with an opportunity to conduct proceedings to establish non-discriminatory retail access by a date certain, as reflected in proceedings which include mandatory consideration of specified principles. If they fail to do so, FERC is directed to step in and by December 15, 2000 to effectuate customer choice.

DeLay’s proposed legislation would delete the craftsmanship of the Schaefer bill — leaving regulatory authorities only with deference in certain decisions relating to electric service, and obliterating any distinction between regulated and non-regulated utilities.

The Bumpers bill would make specific provisions for "re-regulation" of the deregulated transmission sector. It makes recommendations, for example, for transmission regions; standards for and regulation of Independent System Operators through Regional Transmission Oversight Boards.

(2) A second generic basis for distinguishing among current legislative proposals is their treatment related to assurance of removal of market imperfections. Principally, this will relate to two issues: treatment of market power, and the form and scope of dismantling of the Public Utility Holding Company Act (and PURPA).

The Schaefer bill, whether from naive or disingenuous faith in how private firms actually behave in free markets, or fundamental aversion to the recrudescence of intrusive regulation, basically does not focus squarely on the market power issue. It does make clear that the anti-trust laws are not superseded, but for the most part its focus is on assurance of the removal of governmental barriers to competitive market entry.

DeLay would direct FERC specifically to ensure that present and future utility exercises of market power do not impair the objectives of open access. The proposed authority is very broad, extending to restrictions, under certain circumstances, on sales at market prices and divestiture orders. Bumpers would go even further, focusing an entire statutory Title on "Competitive Generation Markets," providing FERC with authority to deal with situations "inconsistent with effective competition among retail and wholesale electrical providers.

It is somewhat ironic that at the same time as markets are slated to be made more competitive, there is a perceived need by some to give FERC the general type of oversight powers which the SEC has exercised with respect to holding companies — which all of the proposed bills contemplate repealing. The logic in the latter case, is that the need for PUHCA is obviated if the competitive circumstances necessitating its imposition are removed. The politics are that the same utilities which are being asked to cede open access — and basically are opposed to it — are also, however, anxious to see Holding Company Act repeal.

PURPA repeal is an element of all three bills, to be triggered upon full realization of open access. The proposals are focused on preservation of old contracts. Only Bumpers explicitly purports to protect against mandatory downward negotiation of existing rates. A possible additional condition to these PURPA repeal provisions, which many power marketers would favor, would be the preclusion of utility participation in distant territories which have been deregulated, unless their own territory has been deregulated as well.

(3) While the battle swirls around the larger generic legal issues just discussed, power marketers would do well to assure that the new legislation also serves the purposes of enabling them to continue to develop and expand their own transactional niches: convergent energy supply services; interface of energy management/service and power marketing.

Power marketing and natural gas marketing (not to mention the marketing of additional fuels) are becoming a single (sometimes national, sometimes regional) enterprise. Schaefer recognizes this in its PUHCA authorization — which requires as a condition of the lapse of PUHCA jurisdiction over a holding company, that its gas utility customers also have the benefit of retail open access in the gas field as well. In all other respects, its focus is on electric retail access. DeLay does not deal with the issue. Bumpers’ more extensive concern with the potential unfair impact of market competition extends to "natural gas utility company" acquisition, to which it would apply a broad "public interest" standard. It also has an explicit anti-cross subsidization provision.

The issue of interface of power marketing with energy service activities is critical to many companies. Some power marketers have offered ESCO services and vice versa. Some of each have emphasized the superiority of their respective approaches.

The Schaefer bill captures in its definition of "retail electric energy service" the full panoply of activities which may occur as a result of retail access. The DeLay bill is as expansive in its definition, including virtually all services other than transmission and distribution. Bumpers would seem to be more narrow in the markets it opens: it applies to "ancillary services sold for ultimate consumption." Markets for power marketing are created through, or in conjunction with, effective energy efficiency activities. The issue of whether E.M.S. services are properly treated as an unbundled component of supply or merely an ancillary activity would benefit from closer delineation.

In a related context, the interface between power markets and customer groups — of "aggregation" — which has begun to emerge nationwide. Aggregators may facilitate their operations by engaging in energy management as well. Interestingly, while the Schaefer bill is a consumer driven statute, focused on removing barriers to consumer sales, it does not specifically make provision for the rights to consumers to form cooperative purchasing arrangements. Bumpers specifically acknowledges the existence and permissibility of aggregation, but only if the members are in a state "where there is retail electric competition."

The treatment of renewables as a specially favored source of electric energy could have a positive benefit to the limited population of power marketers/aggregators who wish to focus on renewable energy supply. It could, however, result in an additional burden for those marketers also directly or indirectly in effect are compelled to traffic in renewable energy.

Under the Schaefer bill, each "electric generator" must meet a quota for renewable energy — not including hydro. The DeLay bill is silent on the use of renewables — probably reflecting its aversion to the imposition of new regulatory disciplines. Bumpers proposes an elaborate renewable energy credit package, which also provides for the accommodation of additional requirements of state renewable energy programs as well.

Until the full outlines of the legislative compromises are visible, it will not be entirely clear how rapidly retail access and the opportunity for power marketers will emerge. But power marketing based transactions, and transactions launched to take advantage of power marketing, need to be planned now with the possibility of the difference among legislative scenarios in mind. Open access is a foundation of market opportunities, but not, by itself, for product differentiation. Open access is not open sesame.

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.