01.26.10Roger Feldman, Counsel, Andrews Kurth LLP

Article Viewed 3738 Times
3 Comments

The end of one year and beginning of another makes one think of the various theories of history. "History" is the human effort to anthromorphize time so as to hold the fear of uncertainty at bay and make interpretable sense out of messy reality. For some historians, the past has moved in cycles. For the optimistic, teleologically toward an even better level of stasis. For the pessimistic, inevitably it is a jagged saw-toothed graph, with the downturn the product of corrupt human nature.

The modern history of energy and environment regulation is somewhat different. It is a pendulum swinging between the pillars of decentralization to centralization, Lawyers call this the issue of Federalism: the countervailing tugs built into our Constitution. After a career of fierce advocacy of various legal positions (depending on whether Federal or state standpoints were more advantageous to particular clients), the net balance of these tugs has been for me a certain skepticism about the possibility of a sustainable (let alone perfectible) national energy/environment policy.

There have been recent tender shoots of Federal-state collaboration in the energy/environment field which are very promising. But it will take more than the American village to nurture them -- even our capital frozen American village. The motion of the pendulum can only be stalled if this premise is adopted: a belief in the value of Federal-state collaboration in fostering private capital investment in infrastructure on a sound basis.

There are two on-going experiments in government which serve to illustrate The Premise. One is a Federal initiative which the U.S. Department of Energy Loan Guarantee Program proposed in collaboration with State Development Finance Organizations. The other is the emergence of programs and strategies designed to meld Federal and state funds ways which promote regional climate action (whether for Clean Air Act conventional pollutants (and/or greenhouse gases.

The principal thing these two unrelated programs have in common is their implicit endorsement of a corollary of The Premise: that a government created market system works only if the activities the "market" is supposed to sustain are backed by identifiable sound credit streams.

The DoE Federal Loan Guarantee Program, as essentially reconfigured by ARRA, represents a helping hand to private project developers to work with private capital sources to develop certain renewable energy related assets. To do this there must be an intense check of the soundness of project cash flows and security. The traditional way to do this was for the government to staff itself as close to being a bank as it can (hard without a profit motive for the participants, and cumbersome). The Loan Guarantee's initial cut at modifying this through the Federal Infrastructure Partnership Program (FIPP) transferred the omus (with mandatory unguaranteed loan attendant risk) to selected, pre-qualified "designated lenders."

It is only the second wave of the effort which has focused on how the states, through their pre-existing development finance organizations or through specifically organized multi-jurisdictional and/or not-for-profit strategic partners ("DFOs"), can step into the private bank role transaction in approving and assessing role in FIPP. Moreover, they can, under the terms of the Loan Guarantee Program reach out to assist private developers in incorporating the additional incentives made available by state incentive programs (including those which were partially Federally-funded.

Traditionally the "partnership" between Federal and state governments effectively has been the Federal tax exemption of public and certain publicly issued conduit securities, backed by the credit of private projects. Federally guaranteed debt of this type is, however, subject to Federal taxation. The new DFO approach, while still resulting in Federally taxable debt issued by the DFO, broadens the role of the states in assuring that Federal and state subsidies can be brought to bear. It has been suggested by some with respect to the proposed new CEDA program that publicly-issued debt could be Federally guaranteed while not remaining taxable. The result would be new Federal-State Public-Private tool in the Federal arsenal, more powerful than the DFO Program.

It appears that a second very different example, of The Premise at work are the state (and regional) Climate Action Plans which sprang up to deal with the climate change issue while the Federal government remained largely dormant. In effect, the "laboratories of democracy" have developed various trading mechanisms derived conceptually in part from the non-attainment criteria pollutant trading programs which have developed to enable those non-Federal units to meet Federal requirements by attracting more private capital into providing necessary pollution control infrastructure. The states helped pioneer auctions of emission reduction credit rights along with the Federal government. And, most pertinent here, they pioneered the possibility of using securitized credit streams from the sale of such credits as a partial basis for financing the types of infrastructure improvements necessary and fostering voluntary activities to create the emissions reductions on which the tradable credits were based. Regional governance bodies have also focused on the revenue stream from emission reduction credit auctions as a source of potential financial incentives for private project developers to develop publicly-needed infrastructure.

Current proposed Congressional legislation would, of course, Federalize in some form many of these state and regional mechanisms, but not without measures sensitive to the requirements of Federalism. The possibility is now emerging that state and regional governments will be the leader in innovation in the encouragement of privately financed energy efficiency programs as well. Efficiency and net pollution control will inevitably converge, in the hands of private developers, with the production of environmental reduction credits as well.

Programs like these illustrate that the pendulum of energy/environment regulation need not mechanically swing from side to side, jerked by the pulls of Federal-state tensions. The swings can be rationally grooved to a narrower band width, within which the encouragement of private capital formation is the common denominator. What began as a movement away from "command and control" to "markets-based" forms of government regulation, has begun to morph and needs to morph further into a form of governance which is more stable precisely because it enlists the dynamics of private finance in the sense of public objectives.

Technology changes may still alter the application of The Premise to the energy and environment regulation. The pendulum swings of "Federalism" will be stopped completely. But the width of the area of it swings and counterswings can be narrowed to a workable band, in which the interests of Federal and state governance are better aligned, around a sustaining principle: making the system "work" through privately managed development initiatives. Historians of the energy scene (if not the legal professions) may, at least, begin to see on-going rational patterns emerge within the large microism which is the energy world. The real point of loan guarantees and credit is not to mechanically build better pseudo markets or faster price transparency for its own sake. It is to provide a framework in which necessary new infrastructure can be financed and technology cross the "valley of death" of commercialization without being tripped up by the Federal-state controversies which impair the success of many efforts. There are few better New Year's wishes that can be reasonably hoped for. For a green year, let's hope the promise of the premise can be realized.

We know you have something to say!

There is an immediate need for articles on the hot topics in the Power Industry! EnergyPulse, like no other publication, also provides a means for our readers to immediately interact with experts like you.

Contribute Today!

Please view our Author Guidelines and send submissions to the editor.

Reader's Comments

Date	Comment
joseph smith 2.5.10	I'm a science guy, not a law guy or money guy. I was just wondering, what do you think would happen if the Fed and State govt's kind of backed off,cut taxes and subsidies and regulations to a minimum, and just let the energy companies compete? I know that didnt work with the financial industry. They gambled with reckless abandon, thinking "if we win, we keep the dough; if we lose, the politicians on our payroll will make the taxpayers bail us out." But finance is largely imaginary; no one is shipping 1,000 tons of gold from the US to China, or from GM to Toyota. it's all electrons in people's computers. Energy is a bit more concrete; either you have X number of megawatts to sell at Y dollars, or you don't. Do you think deregulation would help or hurt? Not that the politicians would do it.
Don Hirschberg 2.5.10	Perhaps I should honor/ recognize the old adage that fools walk in where wise men fear to tread and withhold comment. But I happen to believe that regulation had a lot to do with our present dilemma. A classic case of unintended consequences. The federal government regulations almost forced bad loans to be made and venal lenders said if this is the game then we can find ways to play too. It became a venal game. Where were the heroes who said this is crazy? Heroes and any potential Jack Armstrongs were priced out of the market – not slightly but by hundreds of millions of dollars apiece, When I hear economists debate I confess I learn almost nothing. One will make a long statement including the phrase “fiscal policy.” The other will respond with a long statement including the phrase “monetary policy.” I don’t connect policy in either’s statement to the production of economic products or services. I would like to see regulators as being analogous to the officials on the football field. Enforcing the rules (which might have to be adjusted from time to time) but having no agenda and not doing any steering.
Len Gould 2.9.10	Don: I personally would have worded your observation differently than you did, as "The federal government REMOVAL OF regulations almost forced bad loans to be made" Gramm–Leach–Bliley Act - Wikipedia "The banking industry had been seeking the repeal of the 1933 Glass-Steagall Act since the 1980s, if not earlier"... (all 3 sponsors were republican, though the act was passed during Clinton's second term with a magority sufficient to have overridden his veto had he tried) ... "Economists Robert Ekelund and Mark Thornton have also criticized the Act as contributing to the crisis. They state that while "in a world regulated by a gold standard, 100% reserve banking, and no FDIC deposit insurance" the Financial Services Modernization Act would have made "perfect sense" as a legitimate act of deregulation, under the present fiat monetary system it "amounts to corporate welfare for financial institutions and a moral hazard that will make taxpayers pay dearly"

Do you agree or disagree with this article? Send in your own article.

Add your comments:

Please log in to leave a comment!

back to top