Contents
Speaker Bios
1
Sandy K. Feldman
Donald A. Kaplan
Richard S. Miller
Charles R. Mills
Roger D. Stark
Andrew B. Young
Powerpoint Presentations
A Comparison of Major Energy
Policy Provisions
2
3
K&L Gates presentation on House-Passed
H.R. 3221 and Senate-Passed H.R. 6,
August 2007.
Anticipating a Greenhouse Gas
Compliance Strategy
4
The Metropolitan Corporate Counsel,
Roger D. Stark and John F. Spinello, April 2007.
A Continuing Reign of Incoherence:
How EPACT Fails to Address Key
Industry Issues
Public Utilities Fortnightly, Roger D. Stark,
December 2005.
5
Sandy K. Feldman
AREAS OF PRACTICE
NEW YORK OFFICE
212.536.4089
TEL
212.536.3901
FAX
sandy.feldman
@klgates.com
Mr. Feldman represents clients in mergers and acquisitions, joint ventures and other
business relationships and related financings, including project financings and tax credit
monetizations. His practice is largely international and has included extensive experience
in Europe, South America, Canada (particularly in Quebec) and the United States. His
industry experience is similarly broad and embraces a number of industries including
pulp and paper, energy, telecommunications, media, textiles, wine production and
distribution and heavy construction. Many of Mr. Feldman s transactions have involved
the acquisition of distressed companies or their assets in a variety of contexts, including
Chapter 11 bankruptcy proceedings.
PUBLICATIONS
Is it a Material Adverse Effect? The Metropolitan Corporate Counsel, January
2006
Co-Author, Purchasing Assets in Bankruptcy, New York Law Journal, April 25,
2002
PRESENTATIONS
Mr. Feldman is a regular speaker at the KPMG Executive Education Programs Mergers
& Acquisitions Workshops.
"Biomass Energy Production Tax Credits -- Law and Structures" speaker at Energy
From Biomass and Waste Conference, 2007.
PROFESSIONAL/CIVIC ACTIVITIES
Association of the Bar of the City of New York
American Bar Association (International Law and Practice Section)
American Bar Association (Business Law Section)
BAR MEMBERSHIPS
District of Columbia
New York
EDUCATION
LL.B., Queens College, University of Cambridge, England, 1980
J.D., Brooklyn Law School, 1979
B.A., George Washington University, 1975
LANGUAGES
French
Donald A. Kaplan
AREAS OF PRACTICE
Mr. Kaplan concentrates his practice in litigation and representation before
administrative agencies, with particular emphasis on antitrust, economic regulation,
energy, and competition and pricing issues in regulated industries.
WASHINGTON, D.C. OFFICE
202.661.6266 TEL
202.331.1024 FAX
don.kaplan@klgates.com
Before joining K&L Gates in 1990, Mr. Kaplan was special litigation counsel for the
Antitrust Division of the United States Department of Justice for more than nine years.
Before that, he was chief of the Energy Section of the Antitrust Division. He joined
the Department of Justice in 1975. As special litigation counsel, Mr. Kaplan
conducted significant and complex litigation, regulatory interventions and
investigations for the Antitrust Division, and was the Department s principal counsel
before the Federal Energy Regulatory Commission. He represented the Department in
numerous major proceedings at the Commission, including the initial Trans Alaska
Pipeline System rate case, the interstate natural pipeline marketing affiliates
rulemaking (Order No. 497), and the Southern California Edison/San Diego Gas &
Electric Company proposed merger. He also conducted litigation and merger
investigations in a variety of energy industries, as well as the oil field equipment and
services, financial services and postal services industries.
Since joining K&L Gates, Mr. Kaplan has developed an extensive practice before the
FERC. He has been active in a wide variety of issues, including electric utility
restructuring and reorganization, transmission and open access, market power,
stranded costs, mergers and asset acquisitions, sham wholesale transaction litigation,
and federal wholesale and state retail competition. He has been an active participant
in the FERC proceedings growing out of the California electricity crisis and the
formation of the Regional Transmission Organizations. He helped draft the
Pennsylvania electric power industry restructuring legislation, and prepared the first
restructuring plan filed under the new legislation. He has also acted as antitrust
counsel in a successful defense against a major utility hostile takeover attempt. He
has also has testified as an expert witness before a state commissions on competition
issues.
In addition to his regulated energy practice, Mr. Kaplan represents clients on mergers,
antitrust investigations, litigation and administrative proceedings in the publishing and
computer software industries. He has advised clients on the Export Administration
anti-boycott regulations and the Foreign Corrupt Practices Act. He was also principal
trial counsel for the United States in its successful arbitration against the United
Kingdom over Heathrow Airport user charges.
Mr. Kaplan is a 1970 cum laude graduate of the Harvard Law School. He clerked for
the Hon. John F. Dooling, Jr. of the U.S. District Court for the Eastern District of New
York. He is a member of the U.S. Supreme Court, New York and Washington, DC
bars, and is also a member of the American Bar Association, including its Antitrust,
Administrative, and Public Utility Law Sections, and has been the chair of the Energy
Bar Association s Antitrust Committee. He has spoken at numerous seminars and bar
association conferences.
Donald A. Kaplan
COURT ADMISSIONS
U.S. Court of Appeals for the District of Columbia Circuit
U.S. Court of Appeals for the Ninth Circuit
U.S. Court of Appeals for the Second Circuit
U.S. District Court for the District of Columbia
U.S. District Court for the District of Maryland
U.S. District Court for the Eastern District of New York
U.S. District Court for the Southern District of New York
U.S. Supreme Court
BAR MEMBERSHIPS
District of Columbia
New York
EDUCATION
J.D. Harvard Law School, 1970 (cum laude)
A.B. Rutgers College, 1967 (summa cum laude)
Richard S. Miller
AREAS OF PRACTICE
NEW YORK
212.536.3922
TEL
212.536.3901
FAX
richard.miller@klgates.com
Richard Miller, partner in K&L Gates New York office, concentrates in restructuring,
insolvency, the structuring of complex public and private financial, corporate and real
estate transactions, as well as the acquisition or disposition of assets and entities
involving circumstances of existing or anticipated financial distress. Mr. Miller has
represented debtor companies (in and out of Chapter 11), court-appointed and ad hoc
committees of creditors as well as corporate lenders, institutional trustees, debt holders
and equity interests in situations involving domestic and cross-border negotiations and
out-of-court and in-court reorganizations, transactions and financings. He is often
involved in strategic counseling on business opportunities and adverse situations. His
experience includes domestic and international businesses and operations, including
financial and other services, energy, commodity-based businesses, transportation,
manufacturing, media, technology, equipment leasing, consumer retail, and real estate.
PROFESSIONAL BACKGROUND
Prior to joining K&L Gates, Mr. Miller was a partner in the bankruptcy and insolvency
practices of major New York law firms and a pre-eminent bankruptcy boutique. Mr.
Miller has also served as an Assistant District Attorney in New York City.
REPRESENTATIVE ENGAGEMENTS
International bank and its wholly-owned US investment bank in workouts and, as
necessary, Chapter 11 cases for a number of mortgage lending and servicing
companies involved in "sub-prime" and "alt A" mortgages with regard to outstanding
loans, repurchase, swap and related derivative agreements, purchasing of servicing
rights and prosecution/defense of claims arising from credit market disruptions.
Bankruptcy and litigation counsel to international financial institution in Chapter 11
cases of cable communications companies, repayment of outstanding loans and
defense against claims asserted by official creditors' and equity committees and
litigation trust.
Restructuring counsel for international financial institution on existing and
anticipated lending and other financial relationships with US-based international
automotive manufacturing company.
US bankruptcy counsel to largest Canadian creditor in Chapter 11 cases of US-based
power producer and its Canadian affiliates.
Creditors' Committee counsel in US Chapter 11 cases filed by international airline
based in Colombia.
Restructuring and Chapter 11 counsel for US manufacturing operations of
international Tier One automotive parts company.
Restructuring and Chapter 11 counsel to debt holders of non-debtor gas-fired
generation plant affiliated with Chapter 11 companies, resulting in state law
foreclosure on the non-debtor facility and collection of Chapter 11 parent's guarantee
yielding a return to clients in excess of 100% of the nominal amount of their claims.
Richard S. Miller
Restructuring and Chapter 11 counsel to public company rollup of equipment leasing
companies resulting in enhanced recovery to creditors by reason of creative taxefficient reorganization plan.
Lead counsel in successful hostile acquisition of coal-fired generation plants and
related assets owned and operated by mid-western utility operating in Chapter 11
utilizing an innovative structure involving approvals of Chapter 11 reorganization
plan by the bankruptcy court as well as state and federal regulatory agencies.
Restructuring and Chapter 11 counsel to public multi-state commercial and
residential mortgage originator, servicer and securitization issuer.
Restructuring and Chapter 11 counsel to the primary international owner of
landmarked historic New York City office/retail complex and development of
strategies for the simultaneous workout of owner s property interests in western US
and London.
Chapter 11 counsel to debt holders and indenture trustees for various tranches of
public debt issued by a number of US airlines.
Restructuring and Chapter 11 counsel for nationwide real estate investments of
pension funds for two Fortune 100 companies.
Chapter 11 counsel to holders of Swiss-Franc-denominated debt issued by US
financial and real estate conglomerate.
PROFESSIONAL/CIVIC ACTIVITIES
American Bar Association
American Bankruptcy Institute
International Bar Association
Advisory Board, St. John's University Law School LLM Program in Bankruptcy
COURT ADMISSIONS
U.S. District Court for the Southern District of New York
U.S. District Court for the Eastern District of New York
U.S. Court of Appeals, Second Circuit
U.S. Court of Appeals, Sixth Circuit
BAR MEMBERSHIP
New York
EDUCATION
J.D., New York University School of Law, 1977 (Moot Court Honors)
B.A. with Honors, University of Pennsylvania, 1974
Charles R. Mills
AREAS OF PRACTICE
WASHINGTON D.C.
OFFICE
202.778.9096
TEL
202.778.9100
FAX
charles.mills@klgates.com
Mr. Mills practice concentrates on securities and derivatives enforcement, litigation, and
regulatory counseling. His clients include public and private companies and corporate
officers, broker-dealers, investment advisers, hedge funds, traders, energy marketers,
commodity trading advisors and pool operators, and other professionals and executives.
He defends clients in investigations and enforcement actions of the SEC, CFTC, FERC,
DOJ, State regulators and self-regulatory organizations and in private litigation and
arbitration. He regularly represents clients in regulatory matters before the agencies
counsels clients on regulatory compliance, including such issues as disclosure, internal
compliance procedures, regulatory audits, trading rules, registration, fiduciary obligations
and derivatives trading. He has represented, as well, many companies in listing and delisting proceedings before the principal securities exchanges.
In 2005, the Compliance Reporter, a publication of Institutional Investor, honored Mr.
Mills as one of its Lawyers of the Year as part of its Achievement in Regulatory
Compliance Awards for his precedent-setting victory in WHX Corp. v. SEC, 362 F.3d
854 (D.C. Cir. 2004).
Representative experience includes:
Victories against the SEC and NASD e.g., Howard v. SEC, 376 F. 3d 1136 (D.C.
Cir. 2004); WHX Corp. v. SEC, 362 F.3d 854 (D.C. Cir. 2004); and In re
Richardson, 2005 SEC Lexis 414 (SEC 2005)
Settlements of SEC and CFTC enforcement actions e.g., In re Dominion
Resources, Inc., (CFTC 2006); In re Vertical Computer Systems, Inc., (SEC 2005);
In re Littell, (SEC 2003); CFTC v. American Electric Power, CA, No. 2:03-cv-891
(E.D. Ohio 2005); In re DiPlacido, (CFTC 2002)
Defense of SEC, CFTC, NASD, NYSE, FERC and DOJ investigations
Defense of many private securities actions in federal and state court
Internal investigations, securities compliance reviews and regulatory compliance
training
Counseling utilities, natural gas pipeline companies, and energy storage operators on
energy trading compliance
Directing the defense of over 750 securities and commodities arbitrations before the
NASD, NYSE, AAA, NFA and other forums.
PROFESSIONAL BACKGROUND
Commodity Futures Trading Commission, Attorney, Office of the General Counsel
and Office of Hearings and Appeals, 1977 1983
Charles R. Mills
PROFESSIONAL ACTIVITIES
Adjunct Professor, Georgetown University Law Center, 1994 present
Fraud and Fiduciary Duties Under the Federal Securities Laws
Regulation of Commodity Futures Transactions
District of Columbia Bar
Steering Committee of the Corporation, Finance and Securities Law Section
American Bar Association (Litigation and Business Law Sections)
Vice Chair of the Committee on Regulation of Futures and Derivative
Instruments
Committee on Federal Regulation of Securities
The Association of the Bar of the City of New York (Futures & Derivatives
Committee)
National Futures Association (Hearing Committee)
Futures Industry Association, Executive Committee for Law & Compliance Division
Frequent speaker at securities and commodity law conferences and CLE courses
Board of Editors, Futures & Derivatives Law Report (Thomson/West publisher)
COURT ADMISSIONS
U.S. Supreme Court
U.S. Courts of Appeals for the District of Columbia, Second, Fourth, Sixth, Seventh
and Ninth Circuits
U.S. District Courts for the District of Columbia, District of Maryland, Eastern
District of Virginia, Southern District of New York and Northern and Central
Districts of California
BAR MEMBERSHIP
California
District of Columbia
Maryland
New York
Virginia
EDUCATION
J.D., Georgetown University Law Center, 1977 (Dean s List)
B.A., Occidental College, 1974 (cum laude)
Charles R. Mills
REPRESENTATIVE PUBLICATIONS
The Securities Enforcement Manual Tactics and Strategies (ABA, 2d ed. 2007)
Money Manager s Compliance Guide (Thompson Publishing Group)
Co-author, Regulation of Commodities and Enforcement
Broker-Dealer Regulation (PLI 2007)
Contributing author, Customer Transactions: Suitability, Unauthorized Trading
and Churning
ARTICLES
2nd Circuit: Credit Default Swap Terms Must Be Strictly Construed, Futures &
Derivatives Law Report, by Charles R. Mills. April 2007.
Regulation Through Litigation: Is the CFTC s Authority Expanding Into OTC and
Cash Markets? , Futures Industry, by Charles R. Mills. February 2006.
Regulatory Issues When Publishing Hedge Fund Information Online , MFA
Reporter, by Charles R. Mills, Ronald Holinsky. May 2002.
The USA PATRIOT Act: Requirements of Broker-Dealers and Financial Services
Institutions , Securities Regulatory UPDATE, by Charles R. Mills, Leigh Freund.
March 18, 2002.
The Tokyo Joe Case: When Web Site Operators May Be Deemed Investment
Advisers , The Investment Lawyer, by Charles R. Mills, Terri Ambron. September
2001.
Security Futures: Compliance Concerns for Money Managers , MFA Reporter, by
Charles R. Mills. June/July 2001.
Antifraud Concepts under the Commodity Futures Modernization Act of 2000 ,
Futures & Derivatives Law Report, by Charles R. Mills. February 2001.
Enforcement Program Against Internet Publishers Tests Limits of Investment
Advisers Act , wallstreetlawyer.com, by Charles R. Mills. February 2000.
Money Market Fund Insurance: The Duty of Directors , Investment Lawyer, by
Charles R. Mills. December 1999.
Tab 900 Regulation of Commodities and Tab 1000 Enforcement , Money
Manager s Compliance Guide, by Charles R. Mills. 1994-1995.
BOOKS
The Securities Enforcement Manual , published by the American Bar Association
and edited by Richard M. Phillips with contributions from other attorneys at
Kirkpatrick & Lockhart, by Richard M. Phillips, Michael J. Missal, Jeffrey B.
Maletta, Charles R. Mills, Glenn R. Reichardt, Stephen W. Grafman, Richard D.
Marshall. 1997.
CLIENT ALERTS/UPDATES
CFTC Proposes Major Relief from the CFTC Registration Requirements for CPOs
and CTAs, Offshore Fund Bulletin, by Cary J. Meer, Charles R. Mills, Marc
Mehrespand, Ronald Holinsky, David Michehl. May 2003.
CFTC Proposes Major Relief from the CFTC Registration Requirements for CPOs
Charles R. Mills
and CTAs, Investment Management Commentary, by Cary J. Meer, Charles R. Mills,
Marc Mehrespand, Ronald Holinsky, David Michehl. April 2003.
CFTC Provides Relief From Registration Requirements for Certain Commodity Pool
Operators and Commodity Trading Advisors, Investment Management Alert, by Cary
J. Meer, Charles R. Mills, Ronald Holinsky. November 2002.
CFTC Expands the Ability of Mutual Funds, Banks, Insurance Companies and
Pension Plans to Use Futures Contracts and Commodity Options for Other Than
Hedging Purposes, Securities Law Commentary, by Marc Mehrespand, Arthur C.
Delibert, Cary J. Meer, Charles R. Mills. November 2002.
New SEC Interpretation Extends Safe Harbor of Section 28(e) of the Securities
Exchange Act to Certain Principal Transactions, Investment Management
Commentary, by Arthur C. Delibert, Charles R. Mills, Lori L. Schneider. January
2002.
PRESENTATIONS
Hedge Fund Enforcement 2005 The Year of the Triple Whammy, presented at the
ABA Committee on Regulation of Futures and Derivative Instruments Winter
Meeting, by Charles R. Mills. February 2-4, 2006.
Recent Cases Affecting Futures Commission Merchants and Their Affiliates,
Presentation at Futures Industry Association Law and Compliance Division
Workshop, by Charles R. Mills, Karsie Kish. May 6, 2002.
The 1933 & 1934 Acts: SEC Enforcement & Private Actions, Presented at
Introduction to Securities Law Series, by Charles R. Mills. April 30, 2002.
Know Your Customer Obligations under Anti-Money Laundering Programs of
Commodity Futures Registrants and Broker-Dealers, Presentation to ABA
Committee on Futures and Derivative Instruments, by Charles R. Mills. February 7,
2002.
How Do You Manage a Private Fund?, Prepared for K&L s Comprehensive
Overview of Hedge and Other Private Funds Seminar, by Catherine S. Bardsley,
Cary J. Meer, Charles R. Mills, Theodore L. Press, Francine J. Rosenberger, Tara C.
Sirmans, Charlotte Veazie, Eric Berger, Sandip Kakar. May 15-16, 2001.
Roger D. Stark
AREAS OF PRACTICE
WASHINGTON, D.C. OFFICE
202.778.9435
TEL
202.778.9100
FAX
roger.stark@klgates.com
For more than 19 years, Mr. Stark has concentrated his practice on a wide variety of
domestic and international energy and infrastructure transactions. His experience
includes complex project and structured financings, mergers and acquisitions,
privatizations and all manner of commercial agreements relating to energy and
infrastructure. Building on over 10 years of domestic practice involving projects in 12
U.S. states, he has worked in over 16 Latin American countries and numerous other
locations worldwide and is fluent in Spanish and proficient in Portuguese. He has
structured, documented and/or closed over US$1 billion in complex infrastructure
financings, including the first limited recourse electric sector financings in Kenya and
Panama (representing the borrower and lender, respectively). He has also worked on a
variety of domestic electric generation project financings utilizing conventional and nonconventional fuels (e.g., the two largest waste-tire-to-energy projects in the world and the
first gas-fired co-generation plant located on a New York State superfund site).
Mr. Stark s practice also involves telecommunications and transportation infrastructure
transactions and extends to regulatory matters, including advising a major multinational
oil corporation on considerations, strategies and tactics for its entry into the electric
power business and advising numerous clients on the rules and requirements of various
U.S. and international energy regulatory structures. In addition, he has participated in a
variety of contested regulatory and litigation/international arbitration matters concerning
energy projects. Notably, he participated in a World Bank mission to advise the
government of Argentina in connection with the proposed restructuring of its public
service concessions after the peso crash of 2001.
REPRESENTATIVE EXPERIENCE
PROJECT FINANCINGS
United States
Represented project sponsors in US$100 million non-recourse financing of a
gas-fired cogeneration project in New York State, including integrated resource
financing of dedicated gas reserves, gas transportation and supply contracts,
credit enhancement and environmental remediation issues.
Represented project sponsors in US$125 million non-recourse financing of a
coal-fired electric generating project in New York State, which included the
issuance of industrial development agency tax-exempt bonds.
Represented project sponsors in the four-tiered, tax-exempt debt financing of a
US$100 million waste tire-to-energy facility.
Panama/Dominican Republic. Represented multilateral development bank in project
financing of a $90 million electric generation facility in Panama and a US$188
million structured financing of two electric distribution companies in the Dominican
Republic.
Brazil. Represented multilateral development bank in connection with financing and
post-financing negotiation of credit facilities for several major toll roads totaling
Roger D. Stark
over US$300 million.
Kazakhstan and Russia. Represented U.S. conglomerate in the limited recourse
financing of oil fields that are the subject of the largest foreign joint venture
investment in Russia to date.
Kenya. Represented sponsor in limited recourse financing of a US$100 million
power project.
PROJECT DEVELOPMENT/M&A
Chile. Advisor to the U.S. National Science Foundation contractor in connection
with the development and construction of a US$500 million radio telescope array in
Atacama desert.
Bolivia. Represented the purchasers of an electric generation company created
through the corporatization/capitalization process and advised on the impacts of
Bolivia's electric market restructuring.
Brazil. Represented U.S. electric utility affiliate in the due diligence, bidding and
purchase of a major electric distribution company in Brazil.
Ecuador. Represented the developer of a 300 MW refinery residual fuel/diesel-fired
power plant, including drafting and negotiation of off-take contract, 150 km
transmission line EPC and operation agreements, and structuring of financing.
Ecuador. Advised major Chinese oil company on oil sector regulations, acted as
special counsel on due diligence and participated in acquisition documents for a
working interest in an Ecuadorian oil property.
Chile. Represented the subsidiary of a U.S. utility in purchasing an equity interest in
a major electric distribution company.
Kazakhstan. Represented U.S. conglomerate in connection with development of
largest open-mouth coal mine in the world and evaluation of greenfield power
projects.
ADVISORY
United States. Advisor to major oil corporation on considerations, strategies and
tactics for entry into U.S. electric power business.
Argentina. Advisor to World Bank re alternatives for re-structuring Argentine public
service concessions following collapse of Argentine peso.
PROFESSIONAL BACKGROUND
Prior to joining K&L Gates, Mr. Stark was a partner, Chair of the Global Energy Group
and Co-Chair of the Latin America Group, at a New York law firm. He also served as
interim in-house counsel to a U.S. power development company.
PROFESSIONAL/CIVIC ACTIVITIES
Member, American Bar Association
Vice-Chair, American Bar Association Committee on Energy and Environmental
Finance
Vice-Chair, American Bar Association Committee on Renewable Energy Resources
Roger D. Stark
Member, Board of Directors, Chilean-American Chamber of Commerce
Board of Advisors, Inter-American Dialogue
COURT ADMISSIONS
U.S. Court of Appeals for the 9th Circuit
U.S. Court of Appeals for the District of Columbia Circuit
District of Columbia Court of Appeals
BAR MEMBERSHIP
District of Columbia
New York
EDUCATION
J.D., Vanderbilt University School of Law, 1984 (Associate Editor, Vanderbilt Journal of
Transnational Law)
B.A., Queens College of the City University of New York, 1981
Andrew B. Young
AREAS OF PRACTICE
WASHINGTON, D.C.
202.778.9125
TEL
202.778.9100
FAX
andrew.young@klgates.com
Andrew Young, a partner in K&L Gates Washington, D.C. office, concentrates his
practice on issues related to the energy industry. Mr. Young s practice includes the
representation of electric utilities, transmission providers, independent power producers,
power marketers, qualifying facilities, public utility holding companies, large consumers,
and debt and equity investors in a wide variety of matters, including mergers and
acquisitions, spin-offs and restructurings, the development and re-design of Regional
Transmission Organization (RTO) markets, transmission, ancillary service and
interconnection issues, market-based and cost based rates, contract drafting and
negotiations, settlements, administrative hearings, trial and appellate litigation,
bankruptcy, and advice on state and federal regulatory issues. Mr. Young has experience
representing clients before the Federal Energy Regulatory Commission (FERC), the
Department of Energy (DOE), the Securities and Exchange Commission (SEC), state
public utility commissions and federal district and appellate courts.
Mr. Young has advised clients with respect to FERC s market-based rate policies, market
behavior and anti-manipulation rules, code of conduct, standards of conduct, open access
transmission tariff (OATT) requirements, interlocking directorates and other reporting
requirements. Mr. Young has negotiated, drafted and advised clients on a variety of
power supply agreements, including tolling agreements and fuel supply agreements.
REPRESENTATIVE EXPERIENCE
Represents U.S. power marketer in a breach of contract litigation in the U.S. District
Court for the Western District of Michigan which involves responsibility for
congestion and transmission loss charges imposed by the Midwest Independent
Transmission System Operator (MISO).
Represented the independent power subsidiary of a California utility in the redesign
of the capacity markets in PJM Interconnection, LLC (PJM).
Represented an electric utility in Colorado in a FERC audit regarding compliance
with OATT and standards of conduct requirements.
Represented a Maryland public utility holding company in its acquisition of a
nuclear plant in upstate New York.
Represented a power marketer in a FERC investigation of market power mitigation
measures in PJM s energy markets.
Represented an Indiana public utility holding company in connection with its
successful $8.8 billion hostile acquisition of an interstate gas pipeline company.
Represented an electric utility in Kentucky in its long-term lease of generating
facilities from an electric cooperative in a chapter 11 proceeding.
Represented the independent power subsidiary of a California utility in its
acquisition of generating facilities in New England and the successful defense of
hydroelectric license transfers before the U.S. Court of Appeals for the First Circuit.
Represented a Maryland public utility holding company in the spin-off of generating
facilities as part of the retail restructuring initiatives.
Andrew B. Young
Represented the independent power subsidiary of a California utility in obtaining
FERC s authorization to ring-fence its assets and the successful defense of the
ring-fencing before the U.S. Court of Appeals for the Ninth Circuit.
Represented the independent power subsidiary of a California utility in FERC
proceedings to integrate Commonwealth Edison Company (ComEd) and American
Electric Power Service Corporation into PJM.
Represented the independent power subsidiary of a California utility in the
elimination of regional through and out rates (RTORs) and the establishment of a
long-term transmission rate design in the combined PJM/MISO region.
Represented wholesale and retail power marketers with respect to the
implementation of seams elimination charge adjustments (SECA) to replace the
eliminated through and out transmission rates in the combined PJM/MISO region.
Represented a power marketer in its participation in a competitive solicitation by
Maryland electric utilities to procure wholesale supply to meet their standard offer
service (SOS) obligations to retail customers.
Represented numerous independent power subsidiaries in obtaining market-based
rate authorizations and in their triennial market power updates for continued marketbased market authorizations.
Represented an independent power subsidiary of a California utility in ComEd s
transmission rate case, and in a reactive power complaint against ComEd.
Successfully negotiated an operating agreement for a nuclear plant in upstate New
York.
Represented an independent power producer in its successful renegotiation of a longterm contract for a wind-powered generating facility with the California Department
of Water Resources during the California energy crisis.
PROFESSIONAL BACKGROUND
Prior to joining K&L Gates, Mr. Young came from the energy, infrastructure and project
finance group in the Washington, D.C. office of a New York law firm.
PUBLICATIONS
Increased FERC Scrutiny of Financing Activities by Public Utilities, Natural
Resources & Environment Vol. 18, No. 1, Summer 2003.
Tolling Agreements; The Next New Way to Allocate Risk, Competitive Utility,
November 2000.
Bringing Choice on Home: Retail Access in Several States, Legal Times, February
17, 1997.
Andrew B. Young
PRESENTATIONS
Chasing Certainty: FERC s Evolving Enforcement Scheme for Market Mitigation,
DC Bar Environmental, Energy and Natural Resources Committee, December 13,
2005.
PROFESSIONAL/CIVIC ACTIVITIES
Secretary, Foundation for the Energy Law Journal (2007-2008)
Board of Directors, Foundation for the Energy Law Journal (2006-2009)
Energy Bar Association
COURT ADMISSIONS
United States Court of Appeals for the Ninth Circuit
United States Court of Appeals for the District of Columbia Circuit
United States District Court for the Western District of Michigan
BAR MEMBERSHIP
District of Columbia
Maryland
EDUCATION
J.D., Harvard Law School, 1996 (cum laude)
M.A., University of Virginia, 1992
B.A., University of Virginia, 1990 (phi beta kappa)
A K&L Gates Complimentary Breakfast Seminar
October 24, 2007
New York, NY
Program Agenda
Overview of Energy Sector Trends
Legal and Regulatory Framework
Transactional Issues
2
Energy Sector Trends and Paradigm Shifts
Roger Stark
202.778.9435
roger.stark@klgates.com
Overview of Presentation
Background: Mega Trends in the Energy Sector
Key Paradigms/Paradigm Shifts Affecting Value
Conclusions
4
Mega Trend No. 1
Deregulation/possible re-regulation
Policy goals of deregulation:
Impose cost discipline through competition
Introduce rational price signals to alleviate evils of
average cost pricing
Facilitate trade between states with less industry/lowcost power and states with more industry/high-cost
power
Achieve energy security
5
Deregulation The Past
Bumps in the road (2000-03)
Legacy effects (circa. 2003-06)
Extraordinary loss of shareholder value for
companies in the power industry
Significant overcapacity in generation
No significant rate relief
Widespread need for capital investment in
transmission sector
Widespread mistrust of deregulation
6
Deregulation The Present
Current policy focus is on energy security and
conservation
Energy productivity as a major component of
energy security policies
Climate change as a driver for the allocation of
environmental externalities
Unclear how these trends will affect regulatory
policies
7
Deregulation The Future
Currently, regulated markets use average cost pricing, resulting in
prices that are wrong all the time
In a de-regulated national market, differences in marginal costs
would quickly be traded down because gas-fired generation prices
(the likely marginal producers) would tend to set the marginal price
of electricity everywhere
In this context, efficiency gains achieved in moving from the status
quo of average-cost pricing to marginal cost pricing would be much
smaller than previously believed
(Cato Institute Analysis, November 2004)
8
Anticipated/Actual Benefits of De-Regulation
Marg. Cost
(NY)
Marg. Cost
(System)
Marg. Cost
(KY)
$/
mWh
Avg. Cost
(NY)
Avg. Cost
(System)
Avg. Cost
(KY)
MW
9
Anticipated/Actual Benefits of De-Regulation
Marg.
Cost (NY)
Marg. Cost
(System)
Marg. Cost
(KY)
$/
mWh
Avg. Cost
(NY)
Avg. Cost
(System)
Avg. Cost
(KY)
MW
10
Anticipated/Actual Benefits of De-Regulation
Marg. Cost
(System)
$/
mWh
Avg. Cost
(NY)
Avg. Cost
(System)
Avg. Cost
(KY)
MW
11
Deregulation: The Take-Away
Oligopolies may be OK after all
Policy framework and market models likely to
remain uncertain for some time potential for reregulation
Fiercely competitive merchant power and fuel
markets
Transmission improvements likely FERC Order
890 will enhance competition
12
Mega Trend No. 2
Mitigation of environmental effects
Pricing and allocation of environmental externalities
Generally de-carbonize the economy to mitigate
climate change effects
13
Each year we delay action to control [greenhouse gas]
emissions increases the risk of unavoidable consequences that
could necessitate even steeper reductions in the future, at
potentially greater economic cost and social disruption. Action
sooner rather than later preserves valuable response options,
narrows the uncertainties associated with changes to the
climate, and should lower the costs of mitigation and
adaptation.
A Call For Action, U.S. Climate Change Partnership, at p. 2,
available at http://us-cap.org/
14
Climate Change Wildcard Vectors Existing Trends
Allocating costs of environmental externalities
Quest for energy security
Green energy and Cleantech
Energy efficiency/conservation
State and Federal Energy market reforms (e.g.,
deregulation/re-regulation; FERC Order 890)
Private capital investment in public infrastructure
15
Collision of Politics and Economics?
Renewable energy tax credits vs. nationwide
renewable portfolio standards
Investor returns/ratepayer costs vs. greenhouse gas
mitigation and market pricing policies
Clean/Green energy technologies vs. incumbent
energy sources required for energy security
16
Regulatory Alternatives for Greenhouse Gas Mitigation
Traditional command and control of green house
gases (GHGs)
Market based regulation ( cap and trade )
Demand based controls (carbon tax)
17
Proposed Federal Legislation
HR 6 Binghaman Bill
Lieberman-Warner Senate Cap and Trade Outline
HR 3221 (efficiency standards) and HR 2776
(energy conservation tax)
See attached side-by-side comparison of pending
legislation
18
Carbon Tax vs. Cap & Trade
Advantages
Disadvantages
Basis for Tax or
Cap
Coverage
Carbon
Tax
Predictable, simple
to administer, and
easy to plan for.
Government spending
of tax proceeds will be
subject to political
influence.
Tax on Co2
emissions,
probably based
on fuel use.
Potentially more
comprehensive
than cap and
trade.
Cap &
Trade
Economically
efficient and
environmentally
effective.
Potential for
bureaucratic
mismanagement.
Unclear which
sources/sectors
will be covered,
how caps per
annum will be
calculated, and
whether based
on nominal
emissions or
carbon intensity.
Likely to focus
on "upstream
transportation
and
downstream
power &
industry.
19
Allowances /
Offsets
Integration
Requirements
N/A
Possible credits
for sales taxes,
but no need to
integrate with
state, national,
Kyoto or other
international
programs.
Allowances
awarded or
auctioned?
Additionality
issues, types of
projects,
locations,
verification?
Integration
necessary/
desirable to
achieve market
efficiencies.
Mega Trend No. 3
Energy Security Through Energy Efficiency
Increased energy efficiency supports dual policy
goals of mitigating climate change and fostering
energy security
Efficiency measures are low hanging fruit likely to
attract rare bi-partisan support
20
Key Paradigm Shifts Affecting Value
21
Structure of Electric Companies
Paradigm: Many integrated electric utilities
combining generation, transmission and distribution
were disaggregated
Paradigm Shift: Disaggregation may be reversed in
some cases (see Cato report), enhanced in others
(e.g., proposals to re-invent the business model of
distribution companies to implement energy
efficiency strategies)
22
Utility Financing/Cost of Capital
Paradigm: Balance-sheet financing for IOUs; project
financing for IPPS
Paradigm Shift: Proliferation of alternative financing
approaches; project financing for some base-loaded
generation, balance-sheet financing for wires,
securitizations where structuring can be achieved
and all of the above to finance nuclear and diverse
renewables
23
Resource Markets
Paradigm: Competitive commodity markets in fuel
stocks (mostly coal, oil and gas)
Paradigm Shift: Climate change goals will require
alteration of resource mix to include increased use
of nuclear, clean coal, renewables and demandside management/efficiency measures
24
Product Markets
Paradigm: Tariff-based, regulated electric service
Paradigm Shift: A mix of regulated and un-regulated
services, varying by state and end-user category,
with multiple offerings driven by energy efficiency
and climate change concerns, including green
tags and white tags
25
Role of Government in Utility Sector
Paradigm: Public power limited to vestigial role in
well-defined markets; primary governmental role is
in rate regulation
Paradigm Shift: Re-regulation causing some states
to reconsider large-scale public power (e.g.
proposed NJ power authority); rate regulation may
revert to command and control or evolve to market
controls (see Cato report)
26
FERC Regulation of Utility Securities Holders
Paradigm: Aggregation of affiliate holdings with a
5% aggregate cap on own/hold/control
Paradigm Shift: For most non-regulated entities,
cap was raised to 10% in 2005 but aggregation
rules present a potential trap for unwary passive
investors (e.g., funds), prompting several to request
blanket authorizations from the FERC and
enhance their compliance procedures
27
Typical Energy Project Financing
Sponsors
Guarantees or
Support
Funding Company
Collateral
Agent
Equity Investment
Shareholders Agreement
Paying
Agent
Senior Lenders
Term Notes
-Banks
-Public
-Institutional Investors
Bank Revolver/LC Facility
Legal Counsel
Independent Engineer
Power and Natural Gas
Consultant
Insurance Consultant
Subordinated Lenders
Passive Equity
Investors
Parent Guarantor
Warranties
Performance Guarantees
Insurers
EPC Contractor
Fuel Supply Contract
Project Company
Fixed Price
EPC Contract
Equipment and
Material Suppliers
Parent Guarantor
Subcontractors
Fuel Supplier
Parent
Guarantor*
Parent
Guarantor
Power
Marketer*
Power
Purchaser(s)
Legal Counsel
Interconnection/Gas
Distribution Services
Provider
Design Engineer
Investment Banker
Revenue Modeler
O&M Provider
O&M Agreement
Offtake Agreement
Accountants
Rating Agency(ies)
*Project company power marketer and its parent guarantor may be affiliated.
**May be provided by power offtaker in tolling (energy conversion) agreement.
28
Interconnection/
Transmission Ag t**
Transmission/
Services Agreement
Idealized PPP Structure
Lender s Direct
Agreement
Procuring Authority
Project Agreement
Project Company s
Shareholders
Project Company
Loan and
Security
Documents
Project Company s
Lenders
Operating
Contractor
D&B
Contractor
Key:
= contract
= flow of money
29
Conclusions
Multiple trends vectoring the energy sector suggest
market volatility
Same trends are also affecting the ongoing
evolution of the electric utility business model
Potential effects on policy may shift costs, displace
value and create new challenges for analysts and
investors alike
30
Federal Regulatory Developments
Andrew B. Young
202.778.9125
andrew.young@klgates.com
Energy Policy Act (EPAct) of 2005
Qualifying Facilities
Public Utility Holding Companies
Mandatory Reliability Standards
Electric Transmission Infrastructure
Mergers & Acquisitions (R. Stark and D. Kaplan)
Anti-Manipulation Rules (C. Mills)
33
Qualifying Facilities
PURPA Put - right to a long-term QF contract at
host utility s avoided cost rate
EPAct of 2005 - permits utilities to avoid the
mandatory purchase obligation if:
QFs have non-discriminatory access to competitive
wholesale markets
Does not apply to QFs that are 20 MW or smaller
Does not apply to existing QF contracts
34
Renewable Portfolio Standards
26 States and the District of Columbia Have Adopted
RPS Requirements
Arizona
15% by 2025
Minnesota
25% by 2025
California
20% by 2010
Nevada
20% by 2015
Connecticut
27% by 2020
New York
25% by 2013
Delaware
20% by 2019
Oregon
25% by 2025
Maine
40% by 2017
Washington
15% by 2020
Federal Legislation - 15% by 2020 (H.R. 3221)
35
Public Utility Holding Companies
Holding Company
Company that, directly or indirectly, owns or controls
10% or more of the voting securities of an electric or
gas utility company
Repeal of PUHCA 1935 Eliminated SEC Jurisdiction
Integrated utility system (limits on geographic scope
and non-utility businesses)
Two bite rule on approval for utility acquisitions
36
PUHCA 2005 Requirements
PUHCA 2005 Created FERC Jurisdiction
Notification of holding company status
Holding companies must retain books and records
and provide access
Service companies must keep accounts per FERC s
Uniform System of Accounts and file annual report
FERC review of service company cost allocations
37
Exemption/Waiver from PUHCA 2005
Holding Companies Must File a Notification (Form 65)
Exemption (Form 65A) from Regulation Available for:
Ownership solely in QFs, EWGs and FUCOs
Passive investors
Public utilities without captive customers
Waiver (Form 65B) of Regulation Available for:
Single-state holding companies
Investors in independent transmission companies
Public utilities that own less than 100 MW
38
Mandatory Reliability Requirements
FERC Adopted Mandatory Reliability Requirements
Effective June 18, 2007
Rules Apply to All Bulk-Power Users
Fines for Violations from $1,000 to $1,000,000
Rules Enforced through NERC and Regional
Reliability Organizations
Appeal of Violations/Penalties to FERC
39
Compliance Process
NERC Registry Created for All Bulk-Power Users
NERC Proposed 107 Requirements
FERC approved 83 requirements; 24 pending
No Trial Period
Discretion in imposing penalties before December 31, 2007
Risk Violation Factors
High Risk - could directly cause bulk-power system failure
Medium Risk - directly affects bulk-power system
Low Risk - administrative in nature
40
National Interest Transmission Corridors
Department of Energy (DOE)
Transmission congestion study every three years
Designated Mid-Atlantic (NY to DC) and Southwest
(So. CA to AZ) as national interest corridors
Federal Energy Regulatory Commission (FERC)
Backstop siting authority if state lacks jurisdiction,
withholds approval or places restrictive conditions
Federal permit and eminent domain authority to
acquire rights-of-way
41
Transmission Rate Incentives
Incentive-Based Rate Treatment for Transmission
Intended to promote reliability and reduce congestion
Requires nexus between incentive and investment
Excludes routine investments to meet existing standards
Eligible Incentives Include:
ROE incentive
100% construction work in progress (CWIP) in rate base
Hypothetical capital structure
Accelerated depreciation
Recovery of costs for cancelled projects
42
Biomass Energy Production Tax Credits: Law and
Structures
Sandy K. Feldman
212.536.4089
sandy.feldman@klgates.com
Internal Revenue Code § 45
Production Tax Credit ( PTC ) of $0.02 or $0.01/KwH
available to owner, lessee or operator of power facility using
the following technologies:
Wind
Closed-loop biomass (purpose-grown plants)
Open-loop biomass
Geothermal
Solar
Small irrigation power
Municipal solid waste
Refined coal
Qualified hydropower production
Indian coal
44
Open-Loop Biomass PTC
Adjusted annually for inflation
Reduced by up to 50% of amounts received in grants,
tax-exempt financing, subsidies, and other credits
Available to owner, lessee or operator of power facility
for the following periods:
Placed-in-Service Date
End of PTC Period
Before 10.22.04
12.31.09
10.21.04
5 years from PIS date
8.8.05
8.8.05
10 years from PIS date
45
What is Open-Loop Biomass?
Any agricultural livestock manure
and litter
Any solid, non-hazardous,
cellulosic waste or lignin material
which is segregated from other
waste materials and is derived
from:
Forest-related resources
Solid wood waste materials
Agricultural sources
46
What Is Not Open-Loop Biomass?
Manufacturing or construction wood waste that has been
pressure treated, chemically treated, or painted
Municipal solid waste
Gas derived from the biodegradation of solid waste
Paper products that are commonly recycled
Closed-loop biomass
Biomass cofired with fossil fuel in excess of the minimum
amount of fossil fuel necessary for startup and flame
stabilization
47
What Is a Biomass Facility?
Courtesy of
48
What Is a Biomass Facility?
49
Qualified Open-Loop Biomass Facility
Placed in service before January 1, 2009
Except livestock waste facility - after 10.22.04 and
before 1.1.09 with a nameplate capacity of at least
150 KwH
50
Sample Monetization Transaction
Pre-Transaction Organization Structure for
Open-Loop Biomass Facilities
Holdings
Inc. (DE)
Industries Inc.
(DE)
Adam Inc.
(DE)
Hydro
Facilities
Baker Inc. (DE)
Charlie Inc.
(DE)
Delta Inc.
(DE)
Holdings,
LLC (DE)
Facility
Facility
Facility
Echo Inc. (ME)
Facility
Facility
Legend
= corporation
= partnership
= disregarded
entity/assets
51
Operations Inc.
(DE)
Objectives
Transfer ownership of five biomass facilities to Tax
Investor (a major commercial bank) in manner sufficient
to accomplish both parties objectives:
Producer Objectives
Significant cash at closing on account of future PTCs
Additional cash from PTCs generated during PTC period
Retention of cash flow from biomass facilities
Retention of operational control of biomass facilities and
receipt of O&M fees
Return to status quo ante upon expiration of the PTC period
Avoid structure risk
52
Objectives
Tax Investor Objectives
Obtain PTCs at discount (pay less than $1 per $1 of PTC)
Minimize financial risk
53
Operating and Management Agreements and Services
Agreements
Holdings Inc.
(DE)
Industries Inc.
(DE)
$14.5M Note and
$12.8M Contingent Note
$68M Note
Fund LLC
(DE)
Biomass
Holdings GP
LLC (DE)
0.01%
99.99%
Biomass
Operations Inc.
(DE)
Holdings
LP
Biomass GP
LLC (DE)
99.9% LP
0.1% GP
Adam
LP
Baker LP
Charlie
LP
Facility
Facility
Facility
Holdings
LP
Facility
Echo LP
Services Agreements
O&M Agreements
Facility
54
Delta LP
Post-Transaction Structure
Tax Investor Bank
(Limited Member)
LLC
0.01%
Holdings Inc. (DE)
99.99%
Fund I
LLC
$12.8M
Contingent Note
Fund LLC
0.01%
99.99%
Industries Inc.
(DE)
Biomass
Holdings GP
LLC (DE)
$68M Note
Holdings
LP
Biomass GP
LLC (DE)
0.1% GP
99.9% LP
Adam
LP
Baker
LP
Charlie
LP
Facility
Facility
Facility
NY Hydro
LLC
Holdings
LP
Delta LP
Facility
Echo LP
Facility
55
Biomass
Operations Inc.
(DE)
Sample Development Structure
Phase
Cash Equity
Investor
Member
Interest
PROJECT
CO.
Construction
Financing
Construction
Lender
56
Pre-Construction
Equity Capital
Contribution
Commitment
Tax Equity
Investor
Sample Development Structure
Operation Date
Commercial
PROJECT
CO.
Non-Managing Member Interest
100% Tax Benefits
Managing Member Interest
100% Cash Benefits
Cash Equity
Investor
100% Cash Benefits
(until loan repaid)
Upfront Equity
Capital (30 40% of
Total Project Cost)
Back Leverage Financing
(25 30% of Total Project Cost)
Lender
57
Upfront Equity
Capital (60 70% of
Total Project Cost)
Tax Equity
Investor
Sample Development Structure
FLIP 1 and FLIP 2
PROJECT
CO.
100% Cash and Tax Benefits
(Flip 1)
0% Cash and Tax Benefits
(Flip 1)
Cash Equity
Investor
NOTE:
90 95%
Cash and Tax
Benefits (Flip 2)
5 10%
Cash and Tax
Benefits (Flip 2)
Tax Equity
Investor
Cash Equity Investor may have purchase option
on Tax Equity Investor s interests after Flip 2.
58
Current Legislative Developments
House Bill/Senate Bill are likely to pass this
Congress with some tax-incentive provisions
Likely extension of program (placed in service date)
from end of 2008 to:
End of 2010 (House); or
End of 2013 (Senate)
Perhaps parity or greater parity
biomass (up to $0.02/KwH)
59
for open-loop
Legal and Regulatory Framework
Questions?
60
The Pitfalls Of Electric Utility Acquisition
Or
How To Screw-Up An Otherwise Good Multi-Billion
Dollar Transaction
Donald A Kaplan
202.661.6266
don.kaplan@klgates.com
Once upon a time utility mergers were relatively simple...
All you had to worry about was falling into the PUHCA trap
Since all rates were regulated, the Federal antitrust
enforcement agencies generally did not care
FERC was more concerned about small wholesale customers
who were generally easy to buy-off through a small rate
reduction or contract extension
The States often had no approval jurisdiction or, if they did,
required some fairly parochial commitments that did not
threaten the underlying economics of the deal
63
The world of utility mergers began to change in the late 1980 s
It is no coincidence that at the same time FERC, followed a
few years later by the states, increasingly turned to
competition to control the price of electricity
FERC began to recognize that mergers that eliminated
competitors and potential competitors could undermine the
move toward market-based regulation
FERC began to hold hearings in significant merger filings:
Pacific Power & Light Utah Power & Light
Northeast Utilities Public Service of New Hampshire
Southern California Edison San Diego Gas & Electric
Competitive Open-Access conditions were occasionally
imposed
64
The Mid-1990s brought significant change
Order No. 888 instituting open access transmission opened
up the electric grid to true generation competition
FERC issued formal merger guidelines that place the
emphasis on the competitive impacts of mergers and
acquisitions and specified the information to be submitted
with Section 203 applications
States began to restructure electricity markets to permit retail
competition
Four Regional Transmission Organizations were formed
greatly enlarging, at least initially, the relevant geographic
market in which the competitive effects of mergers would be
evaluated
65
The trends actually should have made utility mergers easier.
So why have three recent high profile transactions failed?
Exelon PSEG
FPL Constellation
Babcock & Brown NorthWestern
66
All three got through FERC, but failed at the state level. Why?
The buyers failed to do their homework
In formulating their strategy they failed to take into account or
under estimated the impact of local politics, key historical
facts, or the stamina of the opposition
Moreover, in each case the market (or more accurately the
arbitrage community) was equally capable of anticipating the
problems that ultimately derailed the proposed acquisitions
Let s talk about them in reverse order
67
Babcock & Brown NorthWestern
( All politics is local
Tip O Neill)
1999 Montana Power Company (MPC), the predecessor to
NorthWestern sells almost all of its generation assets to PPL,
retaining transmission, distribution facilities and the default service
obligation
As a result, the Montana PSC loses jurisdiction over sales of power
from MPC s former generation to FERC
Over the next 8 years the price of power sold back to MPC and then
to NorthWestern increased to almost double the pre-sale costbased rates
These price increases became a cause celebre in Montana,
spawning litigation at FERC and in federal court, legislation and
even a referendum
Along comes Babcock and Brown offering to pay a premium over
book prices for NorthWestern which could be recovered from retail
customers
68
FPL Constellation
( Timing is everything )
When retail competition was introduced in Maryland, BG&E was
allowed to spin-off its generation to its affiliate, Constellation
Part of the deal was that Constellation would supply BG&E subject
to a rate reduction and freeze followed by a competitive solicitation
in 2006
BG&E went out for supply offers and not surprisingly Constellation
was the major winning bidder, only this time at market, not costbased prices
The cost of the new supply contract would result in a 72% increase
to BG&E s retail customers
2006 was a state gubernatorial election year in Maryland
Along comes FP&L proposing to buy Constellation (including
BG&E) and effectively move control of the utility out-of-state
69
Exelon PSEG
( Be careful what you ask for
you may get it )
Exelon s strategy was to obtain quick FERC approval, then leverage
that approval into DOJ, Pennsylvania PUC and New Jersey BPU
approvals
Exelon s presentation was catered to FERC s a mechanical
approach to merger analysis and asked FERC to approve the
merger without a hearing
FERC obliged, essentially rubber-stamping Exelon s presentation
FERC s quick and uncritical analysis gave the merger s critics a
powerful argument that DOJ and the state commission s needed to
take a closer look at the merger and they did
DOJ conducted an extensive investigation, rejected Exelon s virtual
divestiture proposal and required additional real divestiture
New Jersey held extensive hearings on competition issues - the
BPU staff insisted on even more divestiture and rate relief
70
The Bottom Line
Look before you leap learn the local politics and what buttons
not to push
While nothing may have saved the Babcock & Brown
NorthWestern transaction, an awareness of the PPL experience
in Montana might have given B&B pause
Sometimes it s better to wait wait until the storm clears and the
blame settles on someone else before proceeding with the
transaction
If the FP&L Constellation deal had been proposed this year
instead of 2006, they might be closing today
It may be better to confront competitive and regulatory issues
early and address them
Had Exelon gone to DOJ first or gone through a FERC hearing,
they may have been able to resolve competitive issues early
and secured the credibility that could have helped them achieve
settlement on other merger issues
71
Legal Risks in Energy Trading
Charles R. Mills
202.778.9096
charles.mills@klgates.com
The Challenge to Corporate Compliance Programs
Complex, inter-related markets
Legal uncertainty
Overlapping, complex and inconsistent laws
Vague legal standards
Enforcement actions are principal means of setting legal standards
Agencies assert aggressive legal interpretations to support
enforcement actions
Aggressive turf wars between agencies
Duplicative and competing enforcement actions (e.g. Amaranth
Advisors LLC and Energy Trading Partners)
Severe civil sanctions
Criminalization
73
Energy Markets
Commodities
Crude Oil
Gasoline
Natural Gas
Natural Gas Liquids
Heating Oil
Diesel Oil
Electric Power
74
Energy Markets
Types of Transactions
Energy trading involves a variety of different types of cash
and financial derivatives markets and transactions
Cash and spot transactions for purchase and sale of the
commodity
Forward transactions
Over-the-counter financial derivatives
Regulated, exchange-traded futures (e.g., New York Mercantile
Exchange ( NYMEX ))
Contracts for transportation of energy
Contracts for storage
75
Instrumentalities For Energy Trading
Direct transactions involving direct telephonic
communications between purchaser and seller
Brokers e.g., Amerex, TFS Energy, ICAP Energy
LLC
Privately owned and operated electronic platforms
(e.g., Intercontinental Exchange ( ICE ))
Futures exchanges e.g., NYMEX
76
Overlapping Federal and State Jurisdiction
Commodity Futures Trading Commission ( CFTC )
The Commodity Exchange Act
Federal Energy Regulatory Commission ( FERC )
The Natural Gas Act
The Natural Gas Policy Act
The Federal Power Act
FERC Anti-Manipulation Rules
Department of Justice and Federal Trade Commission
Federal Antitrust Statues
State Attorney Generals
State Antitrust Statutes
77
What Do The Laws Prohibit?
Manipulation and attempted manipulation
Cornering and attempted cornering
Knowingly disseminating false or misleading
material market information
Non-competitive pre-arranged and collusive
transactions (such as wash sales)
Price fixing
Monopolization and attempted monopolization
Tying agreements
78
What Constitutes Manipulation?
There is no clear standard under the Commodity Exchange
Act ( CEA )
A recent Senate Staff Report stated:
Neither the CEA nor its implementing regulations provides a
specific definition of manipulation.
The case law interpreting the CEA s prohibitions against market
manipulation is confusing and contradictory.
Staff Report, Excessive Speculation in the Natural Gas Market, at 47,
Permanent Subcommittee on Investigations, Committee on Homeland Security
and Governmental Affairs, U.S. Senate (June 25, 2007).
79
What Constitutes Manipulation? (cont d.)
The CFTC has obtained many settlements and
hundreds of millions of dollars in fines from energy
companies
Some aggressive, CFTC sponsored theories of
manipulation have faltered in court
U.S. v. Reliant
CFTC v. Delay
But the CFTC does not accept those decisions
80
What Constitutes Manipulation? (cont d.)
FERC recently has adopted general anti-manipulation rules that are
modeled on Securities and Exchange Commission Rule 10b-5
FERC rules lack specificity
At this time, there are no judicial interpretations of them
The language of the FERC rules appear to make fraud a necessary
element of a violation
Yet, FERC has broadly defined fraud for the purposes of its Rules
to include:
any action, transaction, or conspiracy for the purpose of
impairing, obstructing or defeating a well-functioning market
The breadth and vagueness of this standard could invite
indiscriminant applications
81
Conflicting and Varying Legal Standards
Among Federal Agencies
The CFTC s Acting Chairman testified before
Congress on July 12, 2007 that:
[T]he CFTC and FERC now have different legal
standards required to prove a violation of their
respective anti-manipulation provisions.
82
Conflicting and Varying Legal Standards
Among Federal Agencies (cont d.)
To prove manipulation, the CFTC requires proof of
a specific intent to cause an artificial price
FERC claims reckless behavior, even without
specific intent to manipulate, will support a violation
CFTC standards for manipulation appear not to be
consistent in some respects with antitrust law
standards
83
FERC: Expanding its Prosecutorial Jurisdiction
FERC asserts jurisdiction to prosecute any
transactions or conduct that intentionally or
recklessly affect FERC jurisdictional markets
FERC s Anti-Manipulation Rules apply whether or
not the manipulator s principal or exclusive purpose
is the manipulation of the price for physical natural
gas or electricity
Claims its prosecutorial enforcement powers reach
to CFTC regulated exchange-traded futures
contracts
84
CFTC: Expanding its Jurisdiction Beyond
Futures Trading
CFTC aggressively claims powers to prosecute
manipulation claims as to any commodity
transaction in interstate commerce
This takes CFTC beyond regulated futures markets
to reach:
Cash and spot transactions
Forwards
Over-the-Counter derivatives
85
Duplicative Enforcement Actions and
Inconsistent Theories of Liability
Futures markets - Amaranth Advisors LLC
CFTC alleges attempted manipulation and exclusive jurisdiction
that ousts FERC from prosecutorial authority
FERC alleges perfected manipulation and contests that CFTC
has exclusive jurisdiction
FERC-regulated cash markets in natural gas markets Energy Transfer Partners
FERC alleges perfected manipulation
CFTC alleges attempted manipulation and does not allege any
affect on futures prices
86
Reorganizations in the Energy Market
Issues and Opportunities for Energy Investors
Richard S. Miller
212.536.3922
richard.miller@klgates.com
Restructuring Framework is Chapter 11
Why File Chapter 11?
Market conditions change:
Rise in input costs: e.g. natural gas (Calpine)
Price volatility
Excess capacity: e.g. ethanol?
Clean title for direct transfers/dispositions
Long-term and/or fixed-price contracts relief from terms
Credit crunch / Tightened liquidity
Mismanagement / Fraud (Enron)
Need to implement a restructuring agreed to by some, but not
all, interested parties
88
Chapter 11 Asset Sales
Procedure: Usually debtor motion to sell, or make sale part
of Chapter 11 plan of reorganization
can accelerate process if widely marketed pre-Chapter 11
Bid procedures: Normally used to obtain bids and support
marketing for required highest/best offer
Stalking horse bidders: Often used with break-up fees &
expense reimbursements
Auction: Normally used; followed by bankruptcy hearing to
approve sale
89
Chapter 11 Asset Sales (cont d)
Advantages for creating enterprise value:
Provides the ability to cleanse assets i.e. free and
clear of existing claims and liens, which attach to
proceeds (excluding debts/obligations expressly
assumed by the buyer)
Auction process can provide upside to previous sale
efforts, or ratify/protect low ball price
90
Chapter 11 Asset Sales (cont d)
Issues / Risks:
Unpredictable negotiated bids may be trumped or
market conditions leveraged for low bid
Creditors and creditor and equity committees might
challenge deal terms
Sales within Chapter 11 plan can be delayed by plan
confirmation procedures/other issues
Combination of required court/regulatory approvals
can delay closing
91
Chapter 11 Contract Assumption & Rejection
Procedure: Debtor files motion to assume or reject contract
Assumption: Debtor must cure all defaults, provide adequate
assurance of future performance
Rejection: Usual standard is the Debtor s business judgment
Create enterprise value:
Allows the Debtor (or purchaser) to revamp/rationalize its
business: to shed or renegotiate burdensome contracts
Rejection option can be leverage to negotiate contract
amendments
92
Contract Assumption & Rejection (cont d)
Issues / Risks:
Regulators may challenge a motion to reject
Contracts tied to other deals might be difficult to
reject
Large rejection damage claims against the Debtor
Possible lengthy litigation over valuing contract
and/or damages claims
Excludes contracts with statutory safe harbors
e.g., certain commodity contracts, forward/future
contracts, repos, swaps
93
Watch for Tax Benefits
Difficult to structure; existing facts must be favorable
Procedure: Reorg plan used to preserve net
operating losses (NOLs) for post-Chapter 11
utilization
Advantages: Allows the Debtor to maximize use of
accumulated NOLs from the pre-bankruptcy period to offset
post-bankruptcy taxable income
Issues / Risks:
Ownership change may preclude use of NOLs
Can obtain bankruptcy orders restricting trading in securities prior
to completion of Chapter 11
Reorg plan structure used to preserve NOLs
94
Distressed Debt Investing
Money to be made?
Purchase existing claims against the Debtor before
or during Chapter 11
Advantages for extracting value:
Existing creditors may want a prompt exit and sell at
discount at first sign of distress
Recoveries can exceed the purchase price for claims
Try for control over business sale/restructuring
watch the rules
Control through capital structure
position?
Control reorg plan and voting
95
but
do you have blocking
Distressed Debt Investing (cont d)
Issues / Risks:
If out of court:
No protection against delay or litigation
Lack of control over process
Insufficient information to accurately judge risks/rewards
In court (pre-negotiated or freefall)
can be safe and quick, but:
Plan recoveries may be delayed by other constituencies
Evaluating probable plan recoveries requires estimation and
monitoring esp. for rejection claims
Implementing reorg plan may be difficult regulatory changes may
affect plan structure
96
Another Approach - Debtor-in-Possession Financing
Procedure: Offer shortly before/after the Chapter 11
case is filed document the deal
Advantages for extracting value:
Court-approved, priority lien & superpriority claim on assets.
Can influence reorg plan outcome and protection of existing
claims seat at the table
Loan to own plus fees
Issues / Risks:
Unpredictable timing
Underlying collateral/assets must have value to repay loan or
apply alternative strategy
Possibly expensive to negotiate/monitor esp. if Chapter 11
case becomes too contentious and/or lengthy
97
A Comparison of Major Energy Policy Provisions
House-Passed H.R. 3221 and Senate-Passed H.R. 6
Last Updated: August 24, 2007
Kirkpatrick & Lockhart Preston Gates Ellis LLP
1601 K Street N.W.
Washington, D.C. 20006-1600
202.778.9100
DC-948050 v1
A Comparison of Major Energy Policy Provisions
House-Passed H.R. 3221 and Senate-Passed H.R. 6
Last Updated: August 24, 2007
ISSUE
Equipment
Standards
Vehicle
Transportation
House-Passed HR 3221
Renewable Energy and Energy
Conservation Tax Act
Senate-Passed HR 6
The CLEAN Energy Act
Action: Passed 241-172 on August 4, 2007
Action: Passed 65-27 on June 26, 2007
Passed legislation combines HR 3221 (energy
Passed legislation derived primarily
policy) and HR 2776 (energy tax)
from S. 1419
ENERGY EFFICIENCY
* Sets new efficiency standards for residential * Permits DOE to establish regional
clothes washers, dishwashers, dehumidifiers,
variations in standards for heating and air
conditioning equipment. (Title IX, Subtitle A,
refrigerators, refrigerator freezers, freezers,
electric motors, and residential boilers. (Title
Part 1)
IX, Subtitle A, Part 1)
* Provides support for federal-aid highways.
* Promotes high-efficiency vehicles,
Increases the federal share for congestion
advanced batteries, and energy storage.
mitigation and air quality (CMAQ) projects up
Authorizes DOE to fund an R&D program
to 100% of project and program cost. (Title
on light-weight materials. Creates loan
VIII, Subtitle B)
guarantee program for facilities that
manufacture fuel-efficient vehicles.
* Establishes a loan guarantee program for
Authorizes funding awards for qualified
advanced battery development, grant
investments to refurbish manufacturing
programs for plug-in hybrid vehicles,
facilities that produce advanced technology
vehicles. (Title II, Subtitle C)
incentives for purchasing heavy duty hybrids
for fleets, and credits for various electric
vehicles. (Title IX, Subtitle E)
* Authorizes 10-year R&D program to
support U.S. competitiveness in global
energy storage markets, and a five-year
R&D program for electric drive technologies.
Directs DOE to establish a competitive grant
program for state, regional, and local
government entities to demonstrate electric
drive vehicles. (Title II, Subtitle C)
* Directs DOE to establish a program to
deploy technologies that would achieve
near term oil savings in the transportation
sector. (Title II, Subtitle C)
DC-948050 v1
NOTES
The President is threatening to
veto HR3221/HR2776.
Additionally, the President is
threatening to veto the Senatepassed HR 6 if the bill contains
price control language.
Issue
House-Passed HR 3221
* Encourages stronger state building codes.
(Title IX, Subtitle A, Part 3)
Buildings
* Creates an Office of High Performance
Green Buildings at DOE. Sets a national goal
to achieve zero-net-energy use for new
buildings after 2025. Allows certain green
building renovations to be eligible for loan
guarantees under §1703 of EPACT. (Title IX,
Subtitle A, Part 4)
Federal Renewable
Energy Portfolio
Standard (RPS)
* Allows electricity savings from energy
efficiency measure to compose a maximum of
25% of the standard in any given year. The
energy efficiency share would rise to a peak
of 4% in 2020, of the 15% total.
Notes
* Creates a green schools program. (Title IV
Subtitle C, Part 2)
* Creates a federal revolving fund that would
make loans for combined heat and power
projects at public institutions. (Title IX, Subtitle
A, Part 6)
RENEWABLE ENERGY STANDARDS
* Establishes an RPS administered by DOE
No Senate provision (a Senate floor
for retail suppliers (electric utilities). For each
amendment calling for a 15% RPS by 2020
retail supplier that sells more than one billion
failed to clear procedural hurdles).
kilowatt-hours (kwh) per year, the RPS would
set a minimum electricity production
requirement from renewable resources. The
standard would start at 2.75% in 2010 and
then rise annually until reaching a peak of
15% in 2020. (Title IX, Subtitle H)
* Renewable resources that qualify for the
RPS include solar, wind, ocean, tidal,
geothermal, biomass, landfill gas, and
incremental hydro.
DC-948050 v1
Senate-Passed HR 6
* Directs the Department of Housing and
Urban Development (HUD) to update
energy efficiency standards for all public
and assisted housing. (Title II, Subtitle E)
The Administration opposes the
addition of a narrow federal RPS
for power generation.
Issue
House-Passed HR 3221
No House provision
Renewable Fuel
Standard (RFS)
Senate-Passed HR 6
* Extends and increases the renewable fuel
standard (RFS) set by PL 109-58. The RFS
requires minimum annual levels of
renewable fuel in gasoline. (Title I, Subtitle
A)
Notes
The Administration strongly
supports improving the Senate
RFS provisions.
* While the current standard is 4.7 billion for
2007, the modified standard would start at
8.5 billion gallons in 2008 and rise to 36
billion gallons in 2022. Starting in 2016, an
increasing portion of the requirement would
have to be met with advanced biofuels,
defined as cellulosic ethanol and other
biofuels derived from feedstock other than
corn starch. (Title I, Subtitle A)
No House provision
Corporate Average
Fuel Economy
(CAFÉ)
* Allows fuel produced from biorefineries
that displace more than 90% of the fossil
fuels used in a biofuel production facility to
qualify for additional credits under the RFS.
(Title I, Subtitle A)
FUEL STANDARDS
* Establishes a single CAFÉ standard for
combined passenger car and light truck
fleet, beginning in model year (MY) 2011.
The existing standard is 27.5 miles per
gallon (mpg) for passenger cars and 22.2
mpg for light trucks in MY2007. HR 6 would
set a CAFÉ target of 35 mpg for the
combined fleet by MY2020. (Title V)
The Administration strongly
opposes Senate bill provisions
including mandatory standards for
medium-duty and heavy-duty
trucks.
* CAFÉ standards during each of the interim
years (MY2011-MY2019) would be required
to be 4% higher than the previous model
year, or at “maximum feasible” levels. (Title
V)
Continues Next Page
4
Issue
Corporate Average
Fuel Economy
(CAFÉ)
(cont.)
Loan Guarantees
for Energy Facilities
Price Gouging
Advanced
Biofuels/Biomass
House-Passed HR 3221
No House provision
Senate-Passed HR 6
* Requires that a percentage of automakers’
new vehicles be alternative fuel-capable
starting in 2012, and that CAFÉ fines be
used to develop alternative fuel
infrastructure. (Title V)
LOAN GUARANTEES
* Amends EPACT05 Title XVII to specify that
* Amends EPACT05 Title XVII to specify
loan guarantees must be large enough to
that up to 100% of a project’s debt may be
ensure financing for a project (up to 80% of
guaranteed and that the loan guarantee
project costs), that DOE may not establish
program is not subject to annual limits
regulations limiting guarantees to less than
established by appropriations acts when
100% of project debt, and that workers on
non-appropriated funds are used.
such projects must be paid prevailing wages
under the Davis-Bacon Act. (Title IX, Subtitle
* Extends loan guarantee authority to
C)
renewable fuel facilities and production
facilities for fuel efficient vehicles or parts.
* Establishes new loan guarantee authority for (Title I, Sec. 124 and 242)
biofuel plants, rural renewable energy
systems, vessels for short sea transportation,
advanced battery manufacturing facilities, and
green building retrofits. (Title IX, Subtitle C,
Sec. 5003, 5006, 8401, 9401, and 9052)
PRICE GOUGING
No House provision (Although on May 23, the * Criminalizes price gouging in fuel markets
during an energy emergency. (Title VI)
House passed a similar provision on a stand
alone bill, H.R. 1252)
RESEARCH
* Provides loan guarantees for up to 90%
($250 million principal) of project cost for
biorefineries and biofuel production plants.
(Title V)
AND DEVELOPMENT
* Provides loan guarantees for up to 100%
($250 million in principal) of project cost for
advanced biofuel (new technology) pilot
plants. (Title I)
* Authorizes funding for R&D, bioenergy
research centers (5), and biodiesel fuel quality
standards. (Title V)
* Authorizes funding for R&D, bioenergy
research centers (11) and biomass
transportation. (Title I)
Notes
The Administration strongly
opposes provisions in the House
bill that would expand the
application of Davis-Bacon Act
prevailing wage requirements.
The Administration also strongly
opposes the Senate changes to
the existing loan guarantee
program, which the White House
believed should be given a chance
to be implemented.
The Administration strongly
opposes the price gouging
provision because it could result
in gasoline price controls.
The Administration strongly
opposes the “implicative” R&D
bureaucracy in the House bill.
Continues Next Page
5
Issue
Advanced
Biofuels/Biomass
House-Passed HR 3221
* Authorizes almost $1 billion in production
incentive payments on new biofuels
production. (Title V)
Senate-Passed HR 6
* Includes grants to states with low ethanol
production rates. (Title I)
Notes
The Administration strongly
opposes the “implicative” R&D
bureaucracy in the House bill.
* Directs DOE to create an R&D program
focused on “marine energy” technology that
produces electricity from waves, tides,
currents and ocean thermal differences.
(Title II, Subtitle G)
The Administration strongly
opposes the “implicative” R&D
bureaucracy in the House bill.
* Authorizes more funding for R&D on
biomass production, harvest, transportation,
storage and forest bioenergy. (Title V)
(cont.)
* Directs DOE to study the feasibility of
constructing dedicated ethanol pipelines.
(Title IX)
Marine Energy
* Authorizes DOE funding support for grants
to diversify feedstock and locations for
cellulosic ethanol production facilities. (Title
IX)
* Authorizes funding for DOE to conduct R&D
programs on marine energy. The bill supports
programs of research, development,
demonstration, and commercial application to
expand marine renewable energy production,
research, develop, and demonstrate
advanced marine renewable energy systems
and technologies. (Title IV, Subtitle B)
* Directs the National Renewable Energy
Laboratory to award grants to institutions of
higher education for the establishment of 1 or
more National Marine Renewable Energy
Research, Development, and Demonstration
Centers. (Title IV, Subtitle B)
6
Issue
Geothermal
House-Passed HR 3221
* Authorizes funding for DOE to conduct R&D
programs on geothermal energy. (Title IV,
Subtitle C)
Senate-Passed HR 6
No Senate provision
Notes
The Administration strongly
opposes the “implicative” R&D
bureaucracy in the House bill.
No Senate provision
The Administration strongly
opposes the “implicative” R&D
bureaucracy in the House bill.
* Directs development of advanced
geophysical, geochemical, and geologic tools
to assist in locating hidden hydrothermal
resources. (Title IV, Subtitle C)
* Awards grants to institutions of higher
education to establish 2 Centers for
Geothermal Technology Transfer. (Title IV,
Subtitle C)
Solar R&D
* Creates education pilot program to award
competitive grant funding for a geothermalpowered energy generation facility. (Title IV,
Subtitle C)
* Authorizes funding for DOE to conduct R&D
programs on solar energy. (Title IV, Subtitle
D)
* Establishes R&D program to provide lower
cost and more viable thermal energy storage
technologies to enable the shifting of electric
power loads on demand and extend the
operating time of concentrating solar power
electric generating plants. (Title IV, Subtitle D)
* Establishes a competitive grant program to
create and strengthen solar industry
workforce training and internship programs.
(Title IV, Subtitle D)
Continues Next Page
7
Issue
Solar R&D
(cont.)
House-Passed HR 3221
* Establishes R&D program to provide
assistance in the demonstration and
commercial application of direct solar
renewable energy sources to provide
alternatives to traditional power generation for
lighting and illumination, including light pipe
technology. (Title IV, Subtitle D)
Senate-Passed HR 6
No Senate provision
Notes
The Administration strongly
opposes the “implicative” R&D
bureaucracy in the House bill.
No Senate provision
This provision is identical to the HPrize in H.R. 632, which passed
the House before H.R. 3221.
No Senate provision
Similar provision signed into law
as part of the America Competes
Act (PL 110-69).
* Establishes R&D and demonstration
program to promote less costly and more
reliable decentralized distributed solarpowered air conditioning. (Title IV, Subtitle D)
Hydrogen Award
ARPA-E
Electricity
Transmission/Smart
Grid
* Establishes a program of grants to states to
demonstrate advanced photovoltaic
technology. (Title IV, Subtitle D)
* Directs DOE to conduct a competitive
program to award cash prizes (H-Prize) to
advance R&D, demonstration, and
commercial application of hydrogen energy
technologies. (Title IV, Subtitle H)
* Directs that an Advanced Research Projects
Agency – Energy be established at DOE.
(Title IV, Subtitle A)
* Directs DOE to study transmission capacity
in California, Oregon, and Washington to
determine whether it could support new
electricity generation from ocean wave, tidal,
and current energy projects that could
contribute up to 10% of total electricity use
in those states. (Title VII, Subtitle B, Chapter
5)
No Senate provision
Continues Next Page
8
Issue
Electricity
Transmission/
Smart Grid
(cont.)
House-Passed HR 3221
* Creates an electric grid modernization
commission to study and propose policies on
“Smart Grid” technology implementation.
Creates a federal 25% matching grant
program would be created to support
implementation. (Title IX, Subtitle B)
Senate-Passed HR 6
No Senate provision
Notes
* Directs DOE to help deploy technologies
and perform cooperative demonstration
projects with electric utilities. (Title IX, Subtitle
B)
Energy Efficiency in
Transportation
Other Energy
Efficiency Measures
* Requires states to consider regulatory
standards that would allow utilities to recover
smart grid investments through rates and
“decouple” utility profits from electricity sales
volume. (Title IX, Subtitle B)
TAX INCENTIVES
* Sets a $4,000 credit for plug-in hybrid
No Senate provisions (Senate floor
vehicles, establishes a 50 cent per gallon
amendment with similar tax incentives failed
production tax credit for cellulosic ethanol fuel, to get cloture vote).
extends the biodiesel production tax credit for
two years, increases the alternative refueling
stations tax credit, creates a fringe benefit for
bicycle commuters, and modifies depreciation
and expensing rules for gas guzzlers and
makes incentives available for fuel efficient
vehicles. (Title XII, Subtitle A)
* Includes a tax credit bond for community
No Senate provisions (Senate floor
programs to reduce greenhouse gases, a tax
amendment with similar provisions failed to
credit bond for states to provide loans and
get cloture vote).
grants for home improvements and residential
equipment, a 5-year extension of the tax
deduction for commercial buildings, an
extension and modification of the appliance
credit, and the establishment of a five-year
depreciation period for smart electric meters.
(Title XII, Subtitle B)
9
Issue
Renewable Energy
Production
Repeal of Oil and
Natural Gas
Tax Incentives
Carbon Storage
House-Passed HR 3221
* Extends the renewable electricity production
tax credit (PTC) for 4 years and expands it to
include ocean thermal and hydrokinetic
(wave, tide, and current) energy. (Title XI)
Senate-Passed HR 6
No Senate provisions (Senate floor
amendment containing very similar
renewable energy tax incentives failed to
get cloture).
* Extends the 30% business energy
investment tax credit (ITC) for solar and fuel
cell equipment for 8 years, authorizes $2
billion of clean renewable energy bonds
(CREBs), and removes the cap on the
investment tax credit for residential solar and
fuel cell equipment. (Title XI)
* Calls for $16 billion in new taxes on the oil
No Senate provision
and natural gas industry over 10 years by
removing several of the industry’s tax breaks,
such as repealing of the domestic
manufacturing deduction, increasing the
authorization period for drilling costs, and
restricting foreign tax credits. (Title XIII,
Subtitle A)
CLIMATE CHANGE
* Expands the DOE program for carbon
* Directs DOE program to be expanded to
capture to include R&D for carbon storage
include carbon storage and carbon capture
and demonstration. (Title IV, Subtitle F)
demonstration projects. (Title III)
* Directs DOE to conduct 7 initial largevolume sequestration tests, preferably using
carbon dioxide from large industrial or
electricity-generating sources, and conduct at
least 2 large-scale carbon capture
demonstration tests from industrial sources of
carbon dioxide. (Title IV, Subtitle F)
Notes
The Administration strongly
opposes repealing the
manufacturing tax deduction for
the oil and natural gas industry
and restricting foreign tax credits.
* Directs a Department of Interior program
to be established to assess the national
carbon dioxide storage facility. (Title III)
* Directs EPA to conduct a research program
to assess potential impacts of carbon dioxide
storage on the environment, public health and
safety associate with capture and
sequestration. (Title IV, Subtitle F)
Continues Next Page
10
Issue
Carbon Storage
(cont.)
Carbon Neutral
Government
House-Passed HR 3221
* Establishes a program to be conducted by
the US Geological Survey to develop a
methodology for, and conduct an assessment
of, the CO2 storage capacity of the United
States. (Title VII, Subtitle D)
* Requires each federal agency to inventory
its greenhouse gas emissions annually. (Title
VI, Subtitle A)
Senate-Passed HR 6
Notes
No Senate provision
* Allows the EPA to set collective annual
emission reduction targets, with a goal of zero
net annual emissions (carbon-neutrality) by
2050. (Title VI, Subtitle A)
* Allows federal agencies to purchase
qualified offsets and renewable energy
certificates in open market transactions. (The
maximum agency funding for this Subtitle
would be 0.01% of discretionary funds in
FY2009 and FY2010). Does not preempt state
actions. (Title VI, Subtitle A)
Information gathered from HR 3221, HR 6, and CRS Report – Omnibus Energy Efficiency and Renewable Energy Legislation:
A Comparison of Major Provisions in House-Passed H.R. 3221 with Senate-Passed H.R. 6, August 20, 2007
This document can be found at H:\BOONIC\Shared\Energy Legislation
11
Corporate Counsel
The Metropolitan
®
www.metrocorpcounsel.com
Volume 15, No. 4
© 2007 The Metropolitan Corporate Counsel, Inc.
April 2007
Anticipating A Greenhouse Gas
Compliance Strategy
Roger D. Stark
and John F. Spinello, Jr.
KIRKPATRICK & LOCKHART
PRESTON GATES ELLIS LLP
Some observers dispute whether global
warming is actually caused by human activity, or is simply a result of natural climate
cycles, but a political consensus is emerging
that immediate regulation of greenhouse
gases (GHGs), even if ultimately proven to be
unnecessary, is preferable to ignoring an
uncertain risk with potentially catastrophic
results. Leaders in Congress, governors in
many states, as well as some industry CEOs,1
now consider some form of GHG regulation
to be prudent and inevitable. At last count,
there are five different bills pending in Congress and several initiatives advanced by
coalitions of states in the Northeast and on the
West Coast, each proposing their own, potentially different, approach to GHGs and threatening a disjointed patchwork of regulation.
Most proposals thus far include some variation of a “cap-and-trade” approach,2 which
could raise a variety of novel questions,
including the following:
• Which GHGs will be regulated? At
what levels will ambient “baselines” and
“caps” be set? What are the relevant geographic areas for determining compliance
with caps?
• Will the tradable commodity created by
legislation be an “allowance” or “offset”
under the Clean Air Act, or a more generic
form of “carbon credit”?
• How are tradable assets to be docuRoger D. Stark and John F. Spinello, Jr. are
key partners in K&L Gates’ Climate Change
Task Force. Mr. Stark, resident in the Washington, DC office, can be reached at (202)
778-9435. Mr. Spinello, resident in the
Newark, NJ office, can be reached at (973)
848-4061.
Roger D.
Stark
John F.
Spinello, Jr.
mented and what jurisdictions (state, federal
and international) will recognize such assets
(e.g., “global” recognition under Kyoto vs.
regional or local recognition under state/federal law)?
The foregoing questions highlight uncertainties in potential GHG regulation. In light
of contingent liabilities that may arise out of
new legal requirements, and in order for firms
to transition proactively while these and other
issues are sorted out, corporate managers
should implement a GHG compliance program that targets the following objectives:
• Identify and report GHG emissions and
associated material risks in compliance with
applicable securities laws and best practices;
• Mitigate GHG levels by, for example,
improving energy efficiency, using alternative fuels and renewable energy, investing in
carbon capture and sequestration technology,
and considering climate risks in project
finance and corporate transactions;
• Shape public policy by: (1) advocating
federal legislation that harmonizes potentially
inconsistent federal, state and regional
approaches and rewards proactive management of GHG emissions; (2) advocating discussions under the U.N. Framework
Convention to harmonize U.S. and international carbon trading systems and ensure participation by developing economies such as
China and India; and (3) monitoring other
state and federal proposals.
Key aspects of these objectives are discussed below.
Securities Law Disclosure Issues
Effective reporting and management of
GHG risks is responsive to legal obligations
and increases shareholder value. U.S. businesses are confronting at least two categories
of GHG risks: first, the risk that their operations will generate GHG emissions that constitute contingent liabilities; second, the risk
that their assets and personnel may be
adversely affected by climate change events
triggered, in whole or in part, by increased
GHG emissions. Each of these risks has ramifications for “issuers” under the U.S. securities laws.
In general terms, U.S. securities laws
require that an issuer periodically disclose
“material” information regarding its financial
condition in accordance with generally
accepted accounting principles (GAAP). The
U.S. Securities and Exchange Commission’s
(SEC’s) Regulation S-K specifies several of
such disclosure requirements: Item 101 of
Regulation S-K requires disclosure of the
material effects, including contingent effects,
that compliance with federal, state and local
environmental laws may have on an issuer’s
capital expenditures, earnings and competitive position.3 Item 103 requires disclosure of
pending or contemplated material legal proceedings involving the issuer.4 Item 303
requires that the Management Discussion and
Analysis (MD&A) sections of federal securities filings provide a narrative discussion of
any changes in financial condition of the
issuer.5 Item 303 also requires disclosure in
the MD&A of known trends, events or uncertainties that will or are reasonably likely to
have a material effect on the issuer’s liquidity,
capital, sales, revenues or income. Thus, the
MD&A may require disclosure of matters that
are not yet “ripe” for Item 103 or GAAP
financial disclosure.
Recent state and regional initiatives, such
as California’s comprehensive climate legislation,6 the Western Regional Climate Action
Initiative7 and the Northeastern Regional
Greenhouse Gas Initiative,8 make it essential
Please email the authors at roger.stark@klgates.com or john.spinello@klgates.com
with questions about this article.
Volume 15, No. 4
© 2007 The Metropolitan Corporate Counsel, Inc.
that public companies consider their disclosure obligations in the context of potential
GHG liabilities. GHG-specific disclosure
initiatives are also evolving among institutional investors, environmental groups, corporate governance advocates and other
corporate stakeholders (including state pension funds and other institutional investors),
all of whom are forcefully advocating greater
disclosure of potential GHG risks. In October
2006, a consortium of investor groups
released a “Global Framework for Climate
Change Disclosure,” which (among other
things) encourages companies to disclose and
analyze (1) historic and current GHG emissions, (2) climate risk and emissions management initiatives, (3) potential physical
risks from climate change, and (4) risks
related to GHG regulation. These events,
together with pending state and federal legislation, are exerting ever greater pressure on
issuers to identify and report GHG-related
risks and highlight the need for integrated
management of GHG risks.
Mitigation/Remediation Of GHGs
GHG mitigation strategies fall into two
general categories. The first includes technologies and processes that capture or reduce
GHG emissions. The second includes renewable resources that generate energy without
GHG emissions. Both categories of mitigation confront the same challenge: how to
ensure that mitigation results in verifiable
documentation that can be used to demonstrate compliance with applicable laws
(which in the case of GHGs, have yet to be
enacted) and generate value in the form of
“carbon credits” or similar certification of
mitigation efforts.
Remediation generally focuses on reducing the amount of GHGs currently present in
the atmosphere. “Carbon sinks” are perhaps
the most common form of GHG remediation.
Large scale re-forestation projects have the
potential to process and eliminate large quantities of carbon dioxide that presently exist in
the atmosphere. Likewise, carbon sequestration projects (e.g., through underground
injection of carbon dioxide) reduce levels of
ambient carbon dioxide by physically removing carbon dioxide from ambient air.9 GHG
reduction efforts to date have focused on the
use of alternative fuels and renewable energy
sources; technologies for carbon capture and
sequestration are still emerging.
An important element of any mitigation or
remediation strategy includes an assessment
of current GHG emissions. In this regard,
companies should consider the following
steps:
• Audit company operations (e.g., product
manufacturing and distribution logistics) that
may produce GHGs and determine the extent
to which company assets and operations are
exposed to climate change risks;
• Establish company-wide targets for
reducing GHG emissions;
• Prioritize technologies, processes and
projects to remediate existing GHGs or mitigate future GHG emissions; and
• Consider existing GHG risk, remediation and mitigation strategies in complying
with applicable reporting requirements
U.S. law does not currently provide for the
creation of tradable emission “credits” for
GHG reduction. However, under the 1992
Energy Policy Act, the Department of Energy
established a registry to document GHG
reductions achieved through voluntary programs, such as DOE’s Climate Vision and
EPA’s Climate Leaders programs. The registry also tracks progress toward the goal of
reducing GHG intensity by 18 percent by
2012.
Legislation/Policy Issues
As the move toward GHG legislation
accelerates, companies will be under
increased pressure to coordinate their strategies with evolving legal requirements. In this
regard, three types of legislative trends should
be monitored: (1) trends that create legal
benefits and/or risks, (2) trends that affect the
value of tradable assets from mitigation and
remediation efforts, and (3) trends that integrate or rationalize initiatives across state,
regional or national boundaries.
If GHG legislation tracks the “cap-andtrade” model, timely monitoring and analysis
of proposed legislation will be necessary to
ensure that management strategies are
responsive to the proposed cap-and-trade
approach. If an alternative to “cap-and-trade”
(e.g., carbon taxes) is selected, analysis
should focus on whether the approach chosen
by Congress allows firms to tailor GHG initiatives to achieve maximum “credit” for their
early action.
Likewise, federal legislation should
address the challenge of standardizing and
integrating disparate regulatory approaches in
order to facilitate trading in GHG credits
across state, regional, and even national
boundaries. Finally, the overall approach to
“carbon credits” should be addressed with a
view towards harmonizing the emission
reduction attributes of “allowances” and “offsets” with the technology and clean-fuel innovations pioneered by the “renewable” and
“clean-tech” movements, and maximizing the
value of both.
Conclusion
Perhaps more than any other environmental problem, the climate change effects attributed to GHGs transcend local, regional and
national boundaries. However, unlike other
globalization trends, regulation of GHGs
affects a by-product (GHG emissions) previously assumed to have a zero cost to society.
With the advent of global climate change,
there is little doubt that the zero cost assumption is under increased scrutiny. In this context, managers that ignore the global aspects
April 2007
of GHG regulation do so at their own peril.
Companies with significant GHG emissions and those involved in financing GHGintensive projects or corporate transactions
must manage their risks and identify opportunities in a rapidly evolving environment in
which major legal and policy developments
are quickly unfolding in Congress, courtrooms and statehouses across the country.
With more states regulating GHG emissions,
and the prospects of national GHG regulation
seemingly inevitable, corporate managers
should consider a strategic response that mitigates GHG risks and optimizes shareholder
value. Such a response should include, at a
minimum, GHG monitoring in support of
company reporting obligations under applicable law. More broadly, company management
should consider alternatives for making GHG
compliance an asset creation as well as a risk
mitigation function, and should carefully
monitor rapidly unfolding developments in
GHG regulation and mitigation for risks and
opportunities that transcend state, regional
and national boundaries.
The U.S. Climate Action Partnership, a coalition of
ten leading companies, including DuPont, GE, Alcoa
and Duke Energy, together with an array of environmental organizations, issued a report, “A Call for
Action,” in January 2007, calling for federal legislation
establishing a cap-and-trade program and other policies that harmonize federal, state and regional programs, give credit for early action, invest in technology
research and development, and discourage investment in high-emitting power projects.
1
Proposed cap-and-trade programs generally include
capping GHG emissions at current levels, requiring
stepped reductions over time, and allowing GHG emitters to create tradable “credits” reflecting a quantifiable, verifiable reduction that may be traded like other
commodities and used by other GHG emitters to satisfy an obligation to reduce their own GHG emissions.
2
3
17 C.F.R. § 229.101.
4
17 C.F.R. § 229.103.
5
17 C.F.R. § 229.303.
In September 2006, the California Legislature
passed the Global Warming Solutions Act of 2006,
requiring the California Air Resources Board (CARB)
to develop strategies, including a cap-and-trade program, to reduce California’s GHG emissions by 25
percent by 2020.
6
7
In February 2007, the Governors of five western
states (California, Washington, Oregon, Arizona and
New Mexico), announced the formation of the Western Regional Climate Action Initiative to reduce GHG
emissions, pledging to “devise a market-based program, such as a load-based cap-and-trade program,
to achieve targeted emission reductions.”
8
Originally announced in September 2003, the
Regional Greenhouse Gas Initiative (RGGI) is an
effort by the Governors of 9 Northeastern and MidAtlantic states to develop a regional “cap-and-trade”
program with a market-based emissions trading system. The founding states are Delaware, Connecticut,
Maine, New Hampshire, New Jersey, New York, and
Vermont; Massachusetts and Rhode Island signed on
in February 2007. The proposed program will require
electric power generators in participating states to
reduce carbon dioxide emissions.
9
Some remediation strategies (e.g., reforestation) are
recognized as “certified emission reductions” under
the Kyoto Treaty, but the Kyoto status of other remediation methods is less clear.
EPACT 2005
HANDING OFF
THE BATON
Congress has done its job. It’s now up
to FERC and state regulators to answer
the Energy Act’s unresolved questions.
50 PUBLIC UTILITIES FORTNIGHTLY DECEMBER 2005
www.fortnightly.com
A CONTINUING REIGN
OF INCOHERENCE
How EPACT fails
to address key
industry issues.
S. energy stakeholders have for too long been
fooled into believing that patchwork reforms are
a substitute for coherent policies. The Energy
Policy Act of 2005 (EPACT)1 is the latest, and
hopefully the last, example of this tradition.
The key issues confronting U.S. power markets are, for the most part, well-known and generally not in
dispute. Three of the most pressing—the first two are addressed
in the Act—are:
1. Volatile prices and supplies of fuel stock;
2. Insufficient or erratic capital investment in generation
and transmission resources; and
3. Energy commodity pricing that fails to reflect the “all-in”
cost (i.e., including environmental costs) of fuels for thermal
generation.
EPACT fails to advance or resolve these key issues, thereby
presenting yet another opportunity for stakeholders to mistake marginal changes for substantive reform.
U
Volatile Prices and Supplies
BY ROGER STARK
www.fortnightly.com
The price volatility of hydrocarbon fuels, together with the
march toward competitive electric markets over the past 25
years, has caused electric utility stakeholders to focus on the
need to mitigate price and supply risks associated with
imported fuels. (In fact, electric market reforms in the United
States originally were promoted to reduce price risks associated with imported oil.) Without a mitigation strategy, stakeholders are left to haggle in a zero-sum environment, where
one stakeholder group can win only at the expense of another.
Regrettably, although EPACT was said to offer relief for
high energy prices, it does little to address the systemic causes
of these risks. Rather than enhance the efficiency, reach, or
scope of U.S. energy markets, EPACT resembles a policymaker’s “catch-up” strategy, focusing on long-neglected issues
of transmission investment, reliability, and efficiency while
ignoring the potential for expanding the scope and efficiency
of electric markets.
EPACT does almost nothing to improve the coherence or
DECEMBER 2005 PUBLIC UTILITIES FORTNIGHTLY 51
efficiency of markets, or of the legal and regulatory framework
that governs them. In perhaps the best indicator of this shortcoming, the Federal Energy Regulatory Commission (FERC)
continues to struggle with the application of regulatory tools
that have not been amended substantially since passage of the
Federal Power Act (FPA)2 in 1920.
In a wide variety of contexts ranging from the imposition
of “equity re-openers” in the 1980s to the attempted expansion of its transmission jurisdiction to nonjurisdictional
municipalities, to the recent revocation of market-based rates
of more than 100 companies, there is little doubt that FERC
has struggled to adapt an old statute to a much changed commercial environment. Despite these and other challenges, the
act makes few changes to the basic FPA framework, thereby
missing a key opportunity to advance FERC’s ability to influence the operation or efficiency of U.S. electric markets.
That said, EPACT does contain a variety of research and
other incentives to encourage the development and deployment of nuclear energy and alternate resources such as renewable energy technologies. Also included are a wide variety of
energy-efficiency provisions that increase the energy efficiency
of federal buildings, offer incentives for energy-efficient appliances, study the potential benefits of using “intermittent escalators,” and extend the duration of Daylight Saving Time by
approximately three weeks.3
In the absence of reforms that improve markets, utility
executives and other stakeholders are left to consider commercial initiatives that may lessen risks of future oil price spikes.
Among other things, purchase aggregation, fuel-price hedging,3 and long-term contracting are potential industrywide
strategies (all of which would either require or benefit from
legislative support) that merit consideration in this regard.
On a policy front, market successes to date may be
expanded to create a springboard for additional reform. For
example, a recent decision4 by the Wisconsin Public Service
Commission recognizes investments in energy efficiency as
equivalent energy generation. In effect, according favorable
regulatory treatment for demand-side reduction and energy
efficiency investments should create additional space in utility
reserve margins and may facilitate resource planning. However, as discussed below, it remains to be seen whether utility
resource planning decisions will be guided by market pricing
signals or by command-and-control regulation.
Insufficient and Erratic Capital Investment
Investment is the lifeblood of a capital-intensive industry, yet
restructured (i.e., disaggregated) generation and transmission
companies have yet to demonstrate that they can raise private
capital on a sustainable long-term basis. Though EPACT was
52 PUBLIC UTILITIES FORTNIGHTLY DECEMBER 2005
touted as improving the climate for attracting investments in
transmission reliability, most of its reforms actually are quite
modest and provide little in the way of substantive incentives
for new investment.
The “regulatory compact” that once guaranteed utilities a
return on their investments is in tatters today. Deregulation
has unbundled transmission and generation systems into separate business units, yet markets for generation and transmission services remain inefficient and balkanized.
In its transmission provisions, EPACT reflects an effort to
catch up with changed circumstances. While there are incentives for technology innovation (i.e., research and development), the act adds little in the way of reforms to promote
efficient markets. Of the approximately 70 pages in the act
devoted to transmission matters, fewer than 10 deal with
investment incentives, and even those establish strategic objectives and do not promote structural improvements.
Subtitle D of EPACT sets out “Transmission Rate Reform”
provisions.5 These are intended to “promote capital investment” in transmission facilities, “provide a return on equity
that attracts new investment” in such facilities, and encourage
“deployment of transmission technologies” to increase the
capacity and efficiency of existing facilities.6 Unfortunately,
the act omits any substantive guidance regarding how these
objectives are to be be attained.
Equally important, the act’s provisions generally ignore the
competitive environment in which electric sector participants
operate and fail to confront key problems in financing generation and transmission. The generation sector continues to require
large, economically “lumpy” investments to purchase expensive
equipment that can achieve economies of scale. Financing such
investments requires either a healthy balance sheet or the ability
to demonstrate firm long-term revenues, and most of today’s
independent generation companies have neither.
Transmission companies suffer from similar shortcomings
in their business model and have an added handicap: under
current open-access rules, there is substantial doubt that owners of transmission facilities can exercise control over how their
facilities are used. Incumbent utilities understandably insist
that they should exercise greater control over the transmission
lines funded by their ratepayers, while independent power producers argue that transmission facilities are a “public commons” that must be widely available to facilitate free trade in
power. EPACT provides no path for resolving this tension.
Electricity is a specialized, value-added commodity (in
essence, processed BTUs). The current environment limits
the geographic range of electricity markets and heightens pricing, disposition and regulatory risks. If policymakers want
transmission investment to be driven by the private sector,
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This announcement appears as a matter of record only
United States Power Fund II, L.P.
$750,000,000
October 2005
Investing in the U.S. Electric Power Industry
Energy Investors Funds
B O S TO N • N E W YO R K • S A N F R A N C I S C O
w w w. e i f g r o u p. c o m
Energy and Electric Power Private Equity Portfolios for Institutional Investors
Since 1987
reforms to expand the scope and efficiency of markets will be
necessary to reduce the minimum risk-adjusted return
demanded by private investors. If not, a resurgence of “command and control” alternatives may be unavoidable.
Meaningful reform can be achieved in the area of market
integration and value capture for transmission investors, but
such reform faces substantial hurdles. FERC’s withdrawal of
its standard market design illustrated opposition by incumbents to changes that threatened their economic interests.
Moreover, the current administration increasingly is hidebound by ideological inconsistencies—most notably, its commitment to reduce federal government regulation at the same
time it supports legislation (EPACT) that largely pre-empts
state authority in liquefied natural-gas siting matters.
Budding Consensus?
Nevertheless, there are reasons to believe that a consensus on
market reforms may develop. Competitive markets have broad
support in the industrial sector, where large consumers see it
as the only way to discipline the market power of incumbent
utilities. In fact, some regions (most notably the Northeast)
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appear committed to regional transmission organizations
(RTOs) for the long term.
Stakeholders favoring open access, the RTOs, and the Electric Reliability Organizations mandated by Title XII of
EPACT likely will create additional momentum toward open
access. If this occurs (and barring any California-like market
aberrations), the success of such reforms in facilitating competition and expanding markets will create an end-game in which
the benefits of open access become self-validating, thereby
consolidating public opinion and political support behind the
model. However, the industry may face yet another round of
“stranded-cost” proceedings as transmission owners cede control of their assets to independent system operators.
The evolving investment climate no doubt will reflect the
repeal of the Public Utility Holding Company Act (PUHCA).
Under EPACT, the ponderous and arcane rules governing the
definition of utility holding companies and the exemptions to
those provisions (e.g., the “integrated service territories”
exemption) will be replaced by application of more up-to-date
FERC competition “screens” that focus on market power to
achieve objectives similar (albeit not literally identical) to
DECEMBER 2005 PUBLIC UTILITIES FORTNIGHTLY 53
PUHCA. In simplifying investors’ economic analysis,
PUHCA repeal is a good thing.
However, even this reform is not without nuanced consequences. A substantial consolidation of the industry is likely to
follow in the wake of PUHCA repeal, preceded by substantial
litigation related to FERC implementation of the market
screens. While consolidation will produce larger and more efficient utilities in many respects, the true test of market reforms
will lie in the ability of policymakers to accommodate (and,
occasionally, withstand) the demands of larger and more powerful utility incumbents seeking to bend market reforms to
their own advantage.
Incumbent utilities and institutional investors will have an
enormous advantage in the coming wave of consolidation, and
some may perceive this as an easy road to higher margins. However, without credibly competitive markets to discipline the
unfettered exercise of market power, incumbents must be careful
to avoid aggravating socio-political pressures for “re-regulation.”
Finally, a regulatory end-game seems to be forming around
the emerging consensus that vertically integrated utilities may
not be such a bad thing after all. According to this view, oligopolies can be managed through the proper use of real-time
pricing and incentive-based regulation.
Competition has in some cases led to fragmented spot markets, an absence of forward markets, and a lack of incentives
for long-term investment, while vertically integrated companies (facing less competition) often have operated quite efficiently. While a smaller population of electric companies
might hold prices above marginal cost, they also would carry
surplus capacity to meet demand growth and provide a basis
for long-term investments. As in other matters, the success of
this approach will turn on the creation and maintenance of
efficient markets.
In short, EPACT contains only a few momentous provisions to hasten creation of efficient markets, but it does contain the seeds of additional reforms.
Pricing to Reflect Environmental Costs
Environmentalists have long argued that if pollution costs from
thermal power generation were factored into the price of power
from thermal generation facilities, non-emitting technologies
like solar and wind power quickly would become price competitive with power produced from hydrocarbon combustion.
The run-up in oil prices has only strengthened this argument.
Equally important, the Bush administration’s decision to
reject the Kyoto accords is being superseded by events. Nine
Northeastern states recently announced their voluntary decision to implement a “cap-and-trade” program covering carbon dioxide emissions from more than 600 electric generation
54 PUBLIC UTILITIES FORTNIGHTLY DECEMBER 2005
facilities.7 More broadly, at least one recent survey indicated
that a majority of industry executives believe that Congress
will implement regulation of carbon-dioxide emissions within
the next five to 10 years.8
Oil price spikes stimulate innovation that creates economic
alternatives to hydrocarbon fuels. This effect, combined with
the trend toward internalizing the cost of power plant smokestack emissions, promises to have profound consequences for
the way we produce, transmit, and use electricity.
The growing consensus regarding the link between greenhouse-gas emissions and climate change confirms that this
approach represents a long-term trend and not a passing fad.
It also confirms the central role of efficient markets in reforming the electric sector.
Going Forward
The energy industry is experiencing an extended and chaotic
transition to competitive markets. Some competitive pressures
have been eased by market inefficiencies and regulatory interventions, while others have resulted in significant economic
challenges for a variety of stakeholders. The regulatory framework has been modified to incorporate market forces without
much attention to understanding either the market forces
themselves or the markets in which they operate. Producers
and consumers of all kinds have been insulated from environmental costs engendered by their fuel use, technology and distribution decisions. All of this will evolve as consolidation
intensifies and refocuses competitive pressures.
The entire energy industry has known for 25 years that
change would come, but the biggest changes in the power sector are yet to be felt. Market reforms will work if our policymakers take the time to understand how and where to make them
effective and efficient. Let’s hope that policymakers and industry stakeholders have the perseverance, creativity and wisdom
to usher in timely and constructive change before events again
overtake us. F
Roger Stark is a partner at Kirkpatrick & Lockhart Nicholson
Graham LLP. Contact him at rstark@klng.com.
Endnotes:
1. Pub L. 109-58, Aug. 8, 2005.
2. 16 USC 791a.
3. Energy Policy Act, H.R.6, Subtitle C sec. 137.
4. 2005 Wisc. PUC Lexis 439.
5. Energy Policy Act, H.R.6, Subtitle D, sec. 1241.
6. Energy Policy Act, H.R.6, Subtitle D sec. 1241.
7. Anthony DePalma, “9 States in Plan to Cut Emissions by Power Plants,”
New York Times, Aug. 24, 2005 p. A1.
8. GF Energy 2005 Electricity Outlook, Striving for Certainty in a World of
Change, January 2005.
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