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About The Author:

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Washington Viewpoint by Roger Feldman

June 1999

REAL TIME OPEN ARCHITECTURE RULEMAKING

by Roger Feldman  --   Bingham, Dana and Gould, P.C.
(originally published by PMA OnLine Magazine: 06/99)

 

 

The FERC NOPR on Regional Transmission Organizations (Docket No. RM 99-2-000) represents the logical and significant extension of Orders 888, 889, in the face of the system issues which, predictably, the implementation of these Orders created. It raises new questions particularly for those utilities which keyed their strategy to a wires retention and augmentation game, and for those who would seek to join them. It clearly impacts those generating acquisition strategies which were predicated on the present or future locational value of generation assets, and potentially realigns new merchant plant investment analysis as well.

Part of the reason for the strategic uncertainties is what could be termed the "real time open architecture" of the NOPR: its clear statement of prescriptive purposes and its tentative and pluralistic delineation of how private parties may comply with these prescriptions. Likely, this was intentional. There are no unanimous FERC votes delineating the new structure of regulation of an industry without them. Proponents of "deregulation, now," have some point, therefore, in criticizing it as a halfway measure.

Thus, within the framework of mandating that every utility must, in effect, join an RTO or let FERC know the reason why, there remain major questions. Are RTOs to be not-for-profit or for profit? Will they own transmission assets or merely operate them? May they incorporate power exchanges, or is that incompatible with regulation? Are they expanded ISOs, in terms of governance or can they be more focused trancos? Do they include public power systems, or can public power (notably power marketing agencies) be the core of its own RTO? Are they delagees of FERC authority, or merely administrators of FERC guidelines? The answer to all of the above questions is: "Yes". (At least for now.)

Yet, for all this ambiguity at the same time, there is steel in the velvet glove. FERC has identified the shortcomings of utility functionalization in the absence of mandatory divestiture: the potentials for subtle forms of affiliate abuse related to transmission line owners stated available transmission capacity and reservation of capacity. FERC has noted the slowdown in transmission construction, and recognized that unless the RTO can influence future transmission planning its ability to provide congestion relief – and more broadly to cope with the vastly different use of the grid post-deregulation will be limited. It has recognized the need to strongly push the introduction of RTO congestion management pricing and the need to mandate RTOs of a size and scope to deal with loop flow issues. Above all, it has recognized that more centralized transmission management is necessary in a deregulating markets to avoid more price spike attacks like those last summer.

FERC also has been shrewd enough to tantalize the electric power operation community with visions of grants of FERC candy in reward for RTO membership. Proposals on which comments are sought include higher ROE on transmission plant; retention of shared savings; accelerated recovery for costs of transmission expansion; rate recovery based on replacement cost. The NOPR goes so far as to suggest: "Where an RTO or independent owner purchases transmission assets and pays a price that reflects such an enhanced valuation of assets, the Commission may want to consider allowing the RTO to include in its rates an acquisition premium that reflects the enhanced value." FERC might even consider providing levelized rate methods, it goes on to suggest. Provision for cost recovery in the larger RTO service territories will be made. All on a case-by-case basis, however, and presumably as FERC deems necessary in its discretion.

Finally, the Commission has gazed Janus-like in both directions as to RTO regulation. On the one hand, it has sketched out a serious program for regional regulation. On the other, it has clarified its legal basis for establishing a small number of RTOs, becoming more aggressive in compelling membership, and providing protection against anti-competitive practices.

For FERC to have achieved NOPR publication in thirty days, is comparable to the still standing Book of Genesis’ world standard of six (plus a day for internet distribution and posting on OASIS).

The strategic implications of the NOPR remain to be sorted out. Entities holding wires and subjecting them to RTO oversight (with regional, non-pancaked rates, subject to fairness review) may not realize the level of revenues for operations otherwise anticipated – unless rates are somehow appropriately adjusted. Sale of transmission assets may be an option for some generation owners or other utilities, but the return is hard to judge. Creation of a "for-profit" transco simply to include it in the RTO does not seem to have high return appeal. But creation of an RTO as a for-profit transco, cf. National Grid, benefiting from appropriate performance-based incentives, and spreading across an enlarging geographic market is not necessarily ruled out. "Outsourcing" by an operator of RTO non-regulatory responsibilities is another possibility, which is not ruled out by the NOPR, could be an attractive variant.

Moreover, there are some benefits which may commonly be realized from the NOPR by proponents of each of these options. Systems today face the possibilities of operational losses – even, perhaps, catastrophes – as a result of lack of coordination among themselves. Systems face uncertainties as to the timing and shape of change – and necessarily an unwillingness to commit themselves to capital improvement investments while their competitors hold back. Systems need to consider further, while the competitive situation is fluid, how they will handle unbundling.

Investors need a more rapidly evolving transmission environment for rational economic evaluation of merchant plant development or refinancing. They have faced uncertainties in transco evaluation – particularly in regions where transmission has been balkanized among public and private power; merging and private power systems, and vying ISOs. In some measure, the NOPR provides (or at least, when implemented should provide) for a set of rational expectations as to how already dated FERC orders on transmission may evolve. The NOPR does not provide certainty for them, but it certainly points in the directions in which power and market opportunities may flow.

There obviously remains substantial uncertainty as to how the NOPR’s implementation will unfold, particularly because of the regulatory/political environment. Certainly State regulators – especially those not offered RTO positions – may feel that under the NOPR they have been left to implement retail access while the question of the shape of wholesale governance has just been delegated elsewhere, i.e. very unhappy. Utilities which planned to remain substantially vertically integrated, for example, within transmission constrained or holding company territory domains, may be expected to weigh in on just what shape RTOs should take, so that their embedded option asset values are preserved. Big industrials and power marketers may see negotiating swamp rather than granite foundations in the Order. Congressmen may see unauthorized usurpation (regardless of their views or deregulation).

The questions then: FERC virtual, virtuous or victorious? Investors: comforted, colicky or just confused? Such are the virtues and vices of the NOPR’s trying to solve current problems, leaving open the future and refereeing the present. Privateers can catch cold from the drafts blowing through real time open architecture rulemaking.


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.

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