JUNE 1997
DOE PRIVITIZATION TOOL KIT GRIDLOCK

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

The Energy Department is still developing its blueprint for our deregulated electric future — while states, companies, and consumers all rush pell mell ahead of it.

Potentially, however, DOE has another redeeming role, which it has just begun to play, and whose expansion could be a model for many other applications. That role would be to provide a sterling and viable model of how an energy efficient landlord manages its extensive (and somewhat aging) facilities stock. DOE’s study "Harrassing the Market" suggests that there is a hitch, however: DOE’s contract rules today are not themselves compatible to any significant extent with this attainable, common sense agenda.

There is, perhaps, another hitch as well. The activity of creating efficiency has, unfortunately, been labeled "privatization", because — remarkably — it takes an entrepreneurial, incentivized private contractor to achieve the full potential of energy efficiency savings, which form the basis for its profit. And Secretary Pena (he of the Denver Airport and more recently the trust fund subsidized public highways program) has not expressed any views on whether "privatization" (in any of its myriad outsourcing of ownership forms), is any good. He is looking over his shoulder at the unionized workers at the big, obsolescing polluted national laboratory sites and reservations.

Private power certainly could benefit from an enlargement of public markets like that offered by the Federal Government. (If you doubt it, take a look at the lists of the top 20 customers of many of the largest IOUs sometime). So this brief presentation of the good, the bad and the woebegone in DOE’s efficiency/privatization program should be of interest to it.

The good stems from the synthesis of both public and private initiative. At least one DOE Lab (Oak Ridge) has joined with a private company to permit private conversion of one of its utility facilities to cogeneration and to integrate the facility’s conversion into the overall economic requirements of the region the lab occupies. While observers have questioned the efficacy of this integration, and some have questioned the sufficiency of its link to energy Too bad neither supply nor demand can fully avail of the private sector potential it has begun to tap. This "ugly" fact stems from what superficially would seem to be two innocuous operative principles: (i) if you want to provide energy services to DOE, you have to contract with it; (2) if you want to secure capital market financing for the facilities you use to provide DOE with energy services, your contracts have to assure lenders not only of satisfactory prices, but also firm cash flow as well. Under ordinary DOE rules, absent special waivers, applicable contract rules frequently won’t permit the provision of such assurance:

• They will allow the government to terminate for "convenience" (i.e. not cause, but lack of Federal appropriation or simply lack of further Federal interest) without necessarily making the contractor whole for the entirety of its investment, e.g., interest, transaction costs, and actual lost profits.
  
• DOE utility contracts have term limits, without automatic renewals, which fact may preclude the contractor from having enough time to realistically amortize its new investment or necessary improvements.
  
• DOE rules may prevent government commitments to pay for the level of contractor output which has been contracted for, and thereby deprive the contractor of the needed firm payments to amortize its debt service, i.e., its capacity charge.

Some of these limitations were avoided in the TRWS nuclear vitrification project — but they are still very much on the books. There are valid general policies behind these rules; but there are valid policies for setting them aside in a privatization context. These reasons extend beyond being a policy paradigm to being a reasonably perspicuous proprietor of managing a building stock with staggering O&M cost. There is no public interest justification for not dealing with the issue of removal of legal barriers to energy privatization adjudged to be beneficial to the Department.

That "woebegone" part. The Department can’t, if it wants to, be an energy paradigm, without a specific effort of will at the top to modify rules on the books. When it exercises that will, it can achieve wonderful things. But it has, as of now, been reduced to calling privatization nothing more than a "strategic management tool." And in that mind set, without top level policy expression, privatization can neither be a capitalist tool or therefore a tool for demonstration of cost effective energy policy.

Perhaps in this context (as perhaps in energy policy) the Department should lead, follow or get out of the way. So far it hasn’t even gotten the tools out of the kit.

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.