April 1998

THE NEW DOMESTIC PRIVATIZATION

by Roger Feldman  --   Bingham, Dana and Gould, P.C.
(originally published by PMA OnLine Magazine: 05/98)

 

Privatization has swept the rest of the world. U.S. power privateers are in the thick of seeking pieces of newly available power systems. Is the U.S. next?

What will become of the rural electric coops? Perhaps it seems an arcane question, until we recall that 7.4% of all generation and no less than 45.7% of the nation’s power lines reside in these entities. Currently, they are subject to a congerie of FERC (mostly transmission, unless they have paid off all Federal loans); Rural Utilities Service ("RUS"), the old REA; State Utility Commission; and (in many jurisdictions) self regulation. Certainly they are at most a secondary focus of the newly released Administration energy plan - indeed of most open market plans that have surfaced. As far as the GAO is concerned, the RUS - serviced sector amounts to a fiscal mess to be cleaned up: future federal loans should be targeted to the most sparsely populated areas; financially stable borrowers should be chased off the program; means tests, loan limits and delinquent borrower restrictions should be instituted. The RUS belt may be ripe for picking.

What will become of the public power sector? It received a reprieve from competitive obscurity when the IRS liberalized restrictions on the private use of electric facilities financed by tax exempt bonds - an opportunity, say the IOUs, for muni competition fueled by cheap money at the expense of the consumer. That move has now, however, come under Congressional attack, however, from the House Ways and Means Chair. The Chair of the Senate Energy and Natural Resources Committee is now friend either: his earlier proposal for restriction of muni competition is still on the table. Privatization promises to thrive in formerly public markets.

For private power "sooners", blooded overseas by the opportunities created by privatization, deregulation sounds like the gunshot to occupy the territory. After all, private power exported PURPA, discovered privatization, and now may be able to import it to America under a new name: competition. Most of the action to date has been on the capture by private firms of large C&I customer classes; these markets have the earmarks of an opportunity to pursue large and stable residential loads as well, from stakeholders in some ways less well equipped to defend them than IOU competitors.

Perhaps - but it is a strategy which will take time to unfold and even could begin to backfire. Certainly not all municipalities have concluded that divestiture is the way to go. The Large Public Power Council is fighting back. Its emphasis is that the pressure on muni bonds is actually more generally on public jurisdictions: as states restructure, competitive pressures are forcing many municipals to choose between refinancing their bonds at considerable cost or violating the private Use restrictions. Los Angeles Department of Water and Power is a good example of a large urban utility that is getting lean so as to be competitive in its new deregulated environment. And Memphis, which seemed on the verge of privatization, has pulled back from what its Mayor termed a divisive issue (and what its consultant termed "hysteric").

On the coop front, Glenn English, NRECA’s Chairman proclaimed "Any place that grass is growing is rural to me." With that in mind, he sought to bring into the fold traditional adherents to the coop principal who had found electric religion in the age of deregulation: an alliance of California agricultural producers and a beehive of New York coop apartment dwellers. His brethren, however, were not prepared, as yet, to move as fast as he: they did not admit the new acolytes to the rural electric congregation. But change may be anticipated.

Because beyond these fits and starts of non-private sector guerilla resistance to privatization, true drumbeats of organized resistance - strength through numbers - has begun to materialize. Both coops and munis are turning to aggregation purchasing alliances; to collaborative dispatch efforts; to product branding; to efforts to utilize consumer contract and confidence to diversify in short to emulation of the private sector with an added "public interest" confidence overlay.

So far those pursuing the privatization strategy, the prospect is one of promise and a threat: The promise, of course, is that new public or quasi-public markets can be opened up. The threat is that the public interest focus of the public/cooperative sector can gain public favor and put a damper on private sector ambition, by throwing it into clear relief.

What will become of the "new privatization"? It’s too soon to jump to conclusory judgments. In the U.S. there is competitive juice in the old public entities yet.

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.