If anyone ever asks about what you read in this column, tell them you heard it somewhere else.
Of course, I don't really mean that. Let me put it another way: The FORTNIGHTLY gets invited here and there with the understanding that some things will end up in print, and others not. And while I never quote anyone if they were holding a fork or a glass, I do my best to bring back the inside story.
A while back I heard a story from the general counsel of a major East Coast electric utility. Talking about obstacles that have sprung up in his business, he complained: "Power marketers are buying up our reserve generating capacity at nonfirm rates and turning around and selling it back to our own customers at firm rates. How do they think they can get away with that?"
Well, the power marketers may have found a way. It's called leveraging. Or hedging.
Just like the junk bond kings of the 1980s, who launched leveraged buyouts to gobble up unseen asset value in much bigger companies, the power marketers have found an edge. These alchemists take standby and make it firm. They've apparently discovered that the sum of all local reserve capacity in the United States far exceeds what you would need to supply all U.S. electric needs if you ran the national grid as a single company. So how do you create your own virtual national utility? Just lock up enough nonfirm reserves with just the right mix of hedging contracts. That's what's going on when, during any 24-hour period, some commodity futures markets customarily trade many times the value of a commodity than could ever be consumed on any given day. What better proof that electric utility mergers are just lying around waiting to happen?
Recently I heard another attorney in private practice describe how marketers have invaded the transportation industry, striking their own deals between long-haul truckers, shippers, and others: "Transportation has become intermodal and seamless. All the actors are involved (em rail, motor, maritime, air. The marketers marry capacity with traffic. They operate across all sectors, courtesy of the strength of their information databases."
He added, "Motor carriers are moving toward a system like airline reservations (em don't ask, don't tell. If you ask for price you'll get price. You won't get terms and conditions of service."
After the sunset of the Interstate Commerce Commission, this lawyer sees a debate arising on the future of transport regulation, with the Department of Transportation (DOT) opposing industry moves to create a "FERC-like" agency within the DOT with multimodal authority. Yet, at the same time, he notes: "Very real forces are at work that have no sympathy for entrenched federal agencies." Meanwhile, the state commissions (PUCs) complain that if their power to regulate transportation is restricted to public health and safety (excluding economic regulation), "they'll be left with an unfunded mandate (em no revenue source to carry out their authority."
Is there a lesson here for electric deregulation?
Will electricity and gas become intermodal? One Washington energy lawyer I know said recently, "Just about every gas company these days is getting into selling electricity, to keep up their load factors." My East Coast electric lawyer sums it up this way: "Marketers will make regulation superfluous. Even in the PJM in the winter of 1994, there was power for sale if the price was high enough." He adds, "We're looking at 2.5 cents per kilowatt-hour to sell in the electric wholesale market."
Now there's an unfunded mandate.
On a recent weekend I faced this choice: (a) tune in to the NCAA "Final Four" basketball playoffs, or (b) spend a relaxing evening at home reading the complete, unabridged "Giga NOPR" on open-access electric transmission and stranded investment, issued by the Federal Energy Regulatory Commission (FERC) on March 29. Foolishly, I tried to do both.
As I rooted and read, I noticed that the FERC thinks it can solve the riddle of CAJUN ELECTRIC. For wholesale stranded investment, which clearly falls under federal jurisdiction, the FERC will again propose to recover costs with a transmission charge, arguing that it will have finally made transmission truly competitive, so that no prejudice will lie in tying generating costs to transmission-only rates. It will again leave retail stranded costs to the states, but will assume default powers if the states drop the ball. The FERC is trading on its success on the gas side, where it has ably juggled take-or-pay costs between discrete wholesale and retail businesses.
But on the electric side, I don't get it. Will somebody please tell me the difference between wholesale and retail electrons? All politics is local. All electricity is retail. That's the gist of comments filed by Public Service Electric and Gas Co., as paraphrased by the FERC in its Giga NOPR, p. 228:
"[D]ue to the vertical integration of electric utilities, the distinction between wholesale and retail stranded costs is merely a matter of cost allocation. . . . [U]tilities generally do not have specific generating facilities in place to serve strictly wholesale customers . . . . [They] include wholesale customer loads into their planning models as if they were retail customers.
As one former FERC commissioner has said, "Gas is a commodity, electricity is a phenomenon."
I wonder how much of the FERC's work stems from off-the-record meetings, such as the sessions held periodically for energy lawyers and regulators by the American Bar Association's Coordinating Committee on Energy Law, which operates out of the ABA's Washington, DC, office at 1800 M Street, NW.
In May 1994, for instance, the Committee sponsored an off-the-record session in Washington that included Daniel Fessler (California PUC), Robert Gee (Texas PUC), Susan Clark (Florida PSC), Craig Glazer (then of the Ohio PUC), Duncan Kincheloe (Missouri PSC), and FERC commissioners William Massey and James Hoecker. This group then retired behind closed doors to debate the future of the electric utility industry.
Later, I'm told, the commissioners declared that the meeting "was just outstanding." They said it offered a "unique opportunity" to work out their differences. An energy lawyer I know who sat in on the meeting says he took a vow of secrecy as to what transpired. Nevertheless, he did reveal that he was absolutely amazed by the frank and open level of discussion (em especially concerning stranded investment and the financial consequences that these regulators might be willing to live with.
I understand that the ABA Coordinating Committee holds three such meetings a year, and was planning its next session for San Francisco, where it will invite ABA representatives and members of the state and local bar to sit in on an informal roundtable to discuss regulatory policy at the California PUC.
Off the record, of course.
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