June 1998

OVERHAULING THE POWER PARADIGM 98 TRANSMISSION

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

A quick test drive of the Paradigm 98, the newest model electric car, through New England, the most advanced deregulated region, reveals a disturbing pattern of traffic congestion and potential road rage with national ramifications.

Essentially, the New England power structure is fragmenting into a few large wire holders (currently the formerly integrated utilities); a relative handful of major generation suppliers (positioned via success in asset auctions and a few major greenfields transactions); and a used car lot of unsold, still serviceable nuclear plants. The public policies expected to be served by this scenario in the region are reduced prices through competition and expansion of capacity to meet the emerging requirements resulting from nuclear shutdowns.

Certain troubles in deregulation paradise seem to be emerging. While estimates of near term future need are well over 20,000 MW, there is considerable foreboding that actual availability will be considerably less and that the overall timing of actual arrivals of such availability as there may be delayed. In part, this reflects current ISO New England rules -now being challenged at FERC - which provide "first in time - first in right" cue up for scarce transmission rights. In part, it reflects the reality of a transmission constrained system and one in which the existing transmission system lacks the necessary interchanges to service the new merchant plant generating load centers. (It has also been suggested that it may reflect the potentially low highly competitive prices which utilities can now offer into the new power exchange, sourced from their unsold residual nuclear capacity, sold over the wires which the _______ still control.)

Attention all would-be Paradigm 98 buyers - lovers of the open road; these scenarios - wires companies vs. would-be merchant suppliers; transmission constrained new suppliers vs. transmission unconstrained existing suppliers (the keepers of the "native load") - are fated to be replayed with appropriate regional variations throughout the country. The key emerging issue for Paradigm gas dealers therefore is: whether the transmission system can be counted on to right itself subsequent to integrated utility unbundling simply through provision of satisfactory regulatory policy guidance by FERC traffic cops? From a would be merchant power privateer developer’s perspective, it may be phrased more dramatically: Will highway transmission constraints stall out otherwise present Paradigm ’98 sales possibilities?

FERC is seeking to refute this possibility. The well established "affiliate abuse doctrine is one launching pad. In a recent decision involving Wisconsin Public Services, Wisconsin Power & Light and Illinois Power (E2 98-2,7,11, 29) Chairman Hoecker flagged the issue that "transmission owners are stalling the process to competitive markets." The case involved the limitation of available transmission capacity to third parties by utilities in favor of their own power marketing affiliates. The utilities argued that transmission capacity needed to be reserved to support its merchant function, through option contracts. The would-be seller merchants (in this case a public power firm utilizing a power moderator) accused the utilities of being in effect nefarious "Gates-keeper, protecting their own solely at the expense of third parties, even though sufficient capacity was available.

FERC agreed. Its remedy, keyed off the finding that sufficient transmission capacity was available, was provision of open access (rather than, as it had proposed in its earlier Washington Water Power case, the possibility of a ban on the affiliate’s use of the parent’s grid for a period of time). The opinion was read as a Commission nudge to utilities to join ISOs (a result which there is question that FERC can compel). (It is pertinent to be aware too that FERC cannot upset grandfathered retail arrangements to serve native load by utilities.)

To further preclude transmission abuse, FERC also voted on the same day as this decision to order grid owners to post the source and destination of planned power sales, in order to facilitate FERC’s efforts to be knowledgeable enough to preclude grid owner favoritism. In doing so, FERC established a policy priority for marketplace integrity over individual customer protection of information. All of those developments are helpful but not dispositive.

Can the cop clear the traffic jam? Does FERC’s clear awareness of the transmission constraint problem point toward its solution? Perhaps only to a limited extent. Preservation of fairness is no remedy in itself for basic transmission shortage and only a short term remedy for short term transmission bottlenecks. ISO - governance of transmission constraint issues will only result in improved transmission access for merchant facilities where the minutiae of ISO rules are subject to sufficient oversight to assure that they do not, as in New England, have the effect of protecting the status quo. Most basically, case by case FERC policing and improved ISO governance of fairness is insufficient as a remedy in the absence of policies focused on injecting true competition into entire regions and overseeing the transmission constraints among regions. The governmental system is not set up to provide these results.

The usual position of deregulation proponents is that deregulation through unbundling is what it takes to achieve untrammeled flows of power. What recent experience seems to be demonstrating is that for merchant power suppliers to be able to sell Paradigm 98s off the lot, the buggy’s transmission may need more of a regulatory overhaul than was anticipated.

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.