September 1997

ALL POWER TO LILLIPUT: THE EMERGING GROUND WAR FOR COMPETITIVE MARKETS

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

All beer may be a commodity (American brands anyway), but microbreweries are flourishing. All power may be nothing but electrons; and all service territories may disappear; but increasingly all markets are local. For private power intent on retail access, which it has long regarded as the final mile of its journey back to prosperity, it is clear that commercial success is dependent on developing smaller local area markets and persuading regulators to assure their actual (as opposed to theoretical) long term availability. In fact, it is a matter of critical strategic importance for the next five years.

More is going to be involved than saturation TV advertising. Four factors, each recently highlighted, emphasize this uncomfortable reality: aggregation, municipalization, multi-service convergence and privatization. These are not just "megatrends," but locally focused expressions of keen local competition focus. Recent key examples of each of these trends - certain to be proliferated - include the following:

Aggregation: The Building Owners and Managers Association of Chicago and its suburban counterpart (60% of the office space market) have issued RFQs to seek ESCOs to reduce costs now pre-deregulation, as well as in the hereafter. It does not represent that its members will adopt proposals it receives, but it does commit itself to seek participation commitments. The prospect of ultimate state-sponsored deregulation is not enough to make real estate owners sit still today, when the possibility of near term cost reduction is present.

Municipalization: While restructuring on Long Island, through public takeover of LILCO’s distribution system and private absorption of its viable generation may seem to work to local pols, individual residential communities, for whom resulting rates are not slashed sufficiently, have turned to the creation of a municipal utilities as their salvation. Undaunted by its small load (20 MW), Farmingdale, NY has issued its own RFP. Another referendum on municipalization is slated for the upstate Rochester area.

Full Service Convergence: The bundling of telecom and security services with power delivery by your friendly local, new full service restructured utility, has graduated from announcements of grand national alliances (e.g. Utilicorp) to matters-of-fact bulletins from regionally focused utilities (e.g. PEPCO) and focused joint venture alliances (e.g. BECO). New in the neighborhood? Get one wire, one bill - and one market-blanketing provider. Get it now; get the benefits of retail access later - maybe. It’s a blandishment any other power privateer must confront.

Privatization: Even the lumbering Federal establishment has caught on to the local aggregation now(!) theme. The Government’s landlord, GSA’s National Capital Region, has solicited input for an upcoming RFP regarding (as it puts it in turgid governmentalese), "feasible strategies for short term cost savings in federal fiscal year 1998 and an innovative program over the next 5 years for optimal electric power acquisition and management in a competitive electric market." This RFP will affect many of its "customers": 72.6 million square feet housing 325,000 odd DC-area government employees. Technology innovation in management is a key focus of GSA - as it will be for many landlords: implementation of advanced metering; managing electric account payment and usage data; balancing of over and under deliveries in a competitive electric environment.

The commercial message for private power therefore is: reach out for local markets now, and do not assume they will still be there when retail regulation comes. The political message for private power therefore is: support measures to perserve local market availability, and do not assume that uninhibited deregulation will result in optimum local market structures. The underlying message is the need not only for a strategy, but for grass roots communications. As a recent article in Energy Markets put it: "Through grass roots communications, the ability to mobilize smaller constituencies, one side or another will gain a tactical advantage - the support of the infantry. This is where the deregulated market will be deregulated or thwarted."

While power privateers focus on preserving recovery of stranded IPP contract costs, at least some governments are seeing the future and getting the message of the need to protect local markets as well. The Missouri Public Service Commission recently petitioned FERC to defer additional so-called market based rate orders until protections against exercise of utility vertical market power was in place. It focused on complaints in the implementation of utilities’ OASIS systems, and made an important point: until defects in transmission pricing are rendered, the just and reasonable character of unregulated prices is not necessarily knowable. This observation means skepticism that full scale deregulation by itself will provide local markets with the type of deals which, through self help measures of the type illustrated above different types of localized entities are pursuing.

Substantive responses to this observation are possible. The GSA National Capital Region, one such "local entity", has highlighted this fact in its functionally oriented request for two types of information inputs from potential respondents to its RFP:

- Analyses and "techniques for discussion" in support of its electric cost reduction goals with relevant public service commissions, current utility suppliers and related customer groups.

- Actions that could be taken by the Federal Government to reduce adverse economic impacts of retail competition on residential and other customer groups.

Here in local Lilliput, all over the USA, power supply by private providers is one variable in the complex energy market, for whose change customers are not willing to wait. Successful power privateers must use all the commercial and political tools at hand to make aggregation, municipalization, multi-service convergence and privatization tools for their own aggrandizement. A tall order, but one of critical importance, since, as Energy Markets points out: "Electricity restructuring will play out as a ground war, fought in every home and business in America." All Power to Lilliput!

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.