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Policy Shift: 2009 Law & Lawyers Report

Legal and regulatory changes are transforming the industry.

Fortnightly Magazine - November 2009

or worse. Such changes are happening today in both wholesale and retail energy markets, with outcomes that are difficult to predict.

“In general, deregulation hasn’t produced the competition and price reductions that were anticipated, so a number of states have begun a process of retrenching,” Speck observes. “This has been stimulated by reliability concerns in both PJM and the Northeast ISO, when [load-serving entities] had to go outside the market for capacity. They concluded the energy markets alone weren’t sufficient to give generators enough incentive.”

With wholesale markets being pushed and pulled in multiple directions, and with retail deregulation going through trial by fire in such states as Michigan and Texas, policy makers face a difficult challenge in deciding what market mechanisms will most effectively yield cost-effective energy services.

“What is the paradigm that will be most satisfactory for developing new base load and variable generation?” Eisenstat asks. “Are we going back to the old utility-build scenario, an essentially non-competitive model? Or are we going forward toward more competitive products and markets?”

Additional pressure is coming from securities regulators. Perceived abuses in financial derivatives for a variety of commodities have attracted scrutiny from regulators in Washington, D.C.—and energy traders haven’t escaped that scrutiny. For example, the Commodity Futures Trading Commission (CFTC) issued a notice of intent recently that it might for the first time designate several electricity futures contracts on the InterContinental Exchange (ICE) as “significant price discovery contracts” in CFTC parlance, triggering regulations, limitations and requirements affecting how these contracts are traded.

“There’s a robust debate among policy makers on whether you want to put position limits or trading limits on various markets,” says Bill Scherman, a partner with Skadden, Arps. “It amounts to a referendum on markets. I don’t know how you put the genie back in the bottle, but that’s where it’s heading if the federal government imposes restrictions that diminish the tools used to make commodity markets work and manage volatility. The folks who use those tools will just get out of the market, and we’ll go back to traditional command-and-control regulation. That’s the logical outcome.”

Such actions might portend a general slide backward toward vertical integration and cost-plus ratemaking, or they might be only a short-term effect of the past year’s financial market turmoil. But to the degree policy makers impose such restrictions on markets, they will affect competitive processes, with potentially widespread effects on price signals and resource planning strategies at national and local levels. The challenge now, as the industry and its lawmakers continue hammering out market structures and regulatory mechanisms, will be to facilitate efficient competition while balancing the interests of local ratepayers against evolving national interests. Doing so will require policy makers to marshal tremendous political will and wisdom—especially at the federal level, where America’s national leaders establish the country’s energy strategy.

“What will we do as a nation regarding the development of renewable energy?” Sikora asks. “Is it something we’re really going to focus on? Will policy makers on Capitol Hill and the administration come together with a national energy plan, in