NY-#562642-v1-10-24 Energy Investor Seminar TofC · Contents Speaker Bios 1 Sandy K. Feldman Donald...

Contents Speaker Bios 1

Sandy K. Feldman

Donald A. Kaplan

Richard S. Miller

Charles R. Mills

Roger D. Stark

Andrew B. Young

Powerpoint Presentations 2

A Comparison of Major Energy 3 Policy Provisions

K&L Gates presentation on House-Passed H.R. 3221 and Senate-Passed H.R. 6, August 2007.

Anticipating a Greenhouse Gas 4 Compliance Strategy

The Metropolitan Corporate Counsel, Roger D. Stark and John F. Spinello, April 2007.

A Continuing Reign of Incoherence: 5 How EPACT Fails to Address Key Industry Issues

Public Utilities Fortnightly, Roger D. Stark, December 2005.

Sandy K. Feldman

AREAS OF PRACTICE

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

NEW YORK OFFICE

212.536.4089 TEL

212.536.3901 FAX

sandy.feldman @klgates.com

WASHINGTON, D.C. OFFICE

202.661.6266 TEL

202.331.1024 FAX

[email protected]

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.

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


EDUCATION

J.D. Harvard Law School, 1970 (cum laude) A.B. Rutgers College, 1967 (summa cum laude)

Richard S. Miller

AREAS OF PRACTICE

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.

NEW YORK

212.536.3922 TEL

212.536.3901 FAX

[email protected]

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 tax-efficient 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.


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

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 de-listing 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.


Commodity Futures Trading Commission, Attorney, Office of the General Counsel and Office of Hearings and Appeals, 1977 1983

WASHINGTON D.C.

OFFICE

202.778.9096 TEL

202.778.9100 FAX

[email protected]

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

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 non-conventional 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

WASHINGTON, D.C. OFFICE

202.778.9435 TEL

202.778.9100 FAX

[email protected]

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.


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.


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


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

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.

WASHINGTON, D.C.

202.778.9125 TEL

202.778.9100 FAX

[email protected]

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 market-based 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 long-term contract for a wind-powered generating facility with the California Department of Water Resources during the California energy crisis.


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.


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, 2007New York, NY

2

Program Agenda

Overview of Energy Sector TrendsLegal and Regulatory FrameworkTransactional Issues

Energy Sector Trends and Paradigm Shifts

Roger Stark

[email protected]

4

Overview of Presentation

Background: Mega Trends in the Energy SectorKey Paradigms/Paradigm Shifts Affecting ValueConclusions

5

Mega Trend No. 1 Deregulation/possible re-regulation

Policy goals of deregulation:Impose cost discipline through competitionIntroduce rational price signals to alleviate evils of average cost pricingFacilitate trade between states with less industry/low-cost power and states with more industry/high-cost powerAchieve energy security

6

Deregulation The Past

Bumps in the road (2000-03)Legacy effects (circa. 2003-06)

Extraordinary loss of shareholder value for companies in the power industrySignificant overcapacity in generationNo significant rate reliefWidespread need for capital investment in transmission sectorWidespread mistrust of deregulation

7

Deregulation The Present

Current policy focus is on energy security and conservationEnergy productivity as a major component of energy security policiesClimate change as a driver for the allocation of environmental externalitiesUnclear how these trends will affect regulatory policies

8

Deregulation The Future

Currently, regulated markets use average cost pricing, resulting in prices that are wrong all the timeIn 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 everywhereIn 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)

9

Avg. Cost (NY)

Avg. Cost (System)

Avg. Cost (KY)

Marg. Cost (KY)

Marg. Cost (System)

Marg. Cost (NY)

$ / mWh

MW

Anticipated/Actual Benefits of De-Regulation

10

Avg. Cost (NY)

Avg. Cost (System)

Avg. Cost (KY)

Marg. Cost (System)

$ / mWh

MW

Anticipated/Actual Benefits of De-RegulationMarg.

Cost (NY)

Marg. Cost (KY)

11

Avg. Cost (NY)

Avg. Cost (System)

Avg. Cost (KY)

Marg. Cost (System)

$ / mWh

MW

Anticipated/Actual Benefits of De-Regulation

12

Deregulation: The Take-Away

Oligopolies may be OK after allPolicy framework and market models likely to remain uncertain for some time potential for re-regulationFiercely competitive merchant power and fuel marketsTransmission improvements likely FERC Order 890 will enhance competition

13

Mega Trend No. 2Mitigation of environmental effects

Pricing and allocation of environmental externalitiesGenerally de-carbonize the economy to mitigate climate change effects

14

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. Actionsooner 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/

15

Climate Change Wildcard Vectors Existing Trends

Allocating costs of environmental externalitiesQuest for energy securityGreen energy and Cleantech

Energy efficiency/conservationState and Federal Energy market reforms (e.g., deregulation/re-regulation; FERC Order 890)Private capital investment in public infrastructure

16

Collision of Politics and Economics?

Renewable energy tax credits vs. nationwide renewable portfolio standardsInvestor returns/ratepayer costs vs. greenhouse gas mitigation and market pricing policiesClean/Green energy technologies vs. incumbent

energy sources required for energy security

17

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)

18

Proposed Federal Legislation

HR 6 Binghaman BillLieberman-Warner Senate Cap and Trade OutlineHR 3221 (efficiency standards) and HR 2776 (energy conservation tax)See attached side-by-side comparison of pending legislation

19

Carbon Tax vs. Cap & Trade

Potential for bureaucratic mismanagement.

Government spending of tax proceeds will be subject to political influence.

Disadvantages

Integration necessary/ desirable to achieve market efficiencies.

Allowances awarded or auctioned? Additionality

issues, types of projects, locations, verification?

Likely to focus on "upstreamtransportation and downstream

power & industry.

Unclear which sources/sectors will be covered, how caps per annum will be calculated, and whether based on nominal emissions or carbon intensity.

Economically efficient and environmentally effective.

Cap & Trade

Possible credits for sales taxes, but no need to integrate with state, national, Kyoto or other international programs.

N/APotentially more comprehensive than cap and trade.

Tax on Co2

emissions, probably based on fuel use.

Predictable, simple to administer, and easy to plan for.

Carbon

Tax

Integration Requirements

Allowances / OffsetsCoverage

Basis for Tax or CapAdvantages

20

Mega Trend No. 3 Energy Security Through Energy Efficiency

Increased energy efficiency supports dual policy goals of mitigating climate change and fostering energy securityEfficiency measures are low hanging fruit likely to attract rare bi-partisan support

21

Key Paradigm Shifts Affecting Value

22

Structure of Electric Companies

Paradigm: Many integrated electric utilities combining generation, transmission and distribution were disaggregatedParadigm 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)

23

Utility Financing/Cost of Capital

Paradigm: Balance-sheet financing for IOUs; project financing for IPPSParadigm 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

24

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 demand-side management/efficiency measures

25

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

26

Role of Government in Utility Sector

Paradigm: Public power limited to vestigial role in well-defined markets; primary governmental role is in rate regulationParadigm 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)

27

FERC Regulation of Utility Securities Holders

Paradigm: Aggregation of affiliate holdings with a 5% aggregate cap on own/hold/controlParadigm 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

28

Legal Counsel

Design Engineer

Investment Banker

Revenue Modeler

Accountants

Rating Agency(ies)

Interconnection/GasDistribution Services

Provider

Parent Guarantor

O&M Provider

Sponsors Senior LendersTerm Notes

-Banks-Public-Institutional Investors

Bank Revolver/LC Facility

Subordinated Lenders

Subcontractors

Equipment and Material Suppliers

EPC Contractor

Parent Guarantor

WarrantiesPerformance Guarantees

Typical Energy Project Financing

Equity InvestmentShareholders Agreement

Fuel Supply ContractFixed PriceEPC Contract

Offtake AgreementO&M Agreement

Guarantees orSupport

PayingAgent

CollateralAgent

Funding Company

Passive EquityInvestors

Insurers

Fuel Supplier

Legal Counsel

Independent EngineerPower and Natural GasConsultantInsurance Consultant

Project Company

Power Marketer*

Power Purchaser(s)

ParentGuarantor*

ParentGuarantor

Transmission/ Services Agreement

Interconnection/Transmission Ag t**

*Project company power marketer and its parent guarantor may be affiliated.

**May be provided by power offtaker in tolling (energy conversion) agreement.

29

Idealized PPP StructureProcuring Authority

Project Company sShareholders

Project CompanyProject Company s

Lenders

D&BContractor

OperatingContractor

Lender s DirectAgreement

Loan andSecurityDocuments

Key: = contract= flow of money

Project Agreement

30

Conclusions

Multiple trends vectoring the energy sector suggest market volatilitySame trends are also affecting the ongoing evolution of the electric utility business modelPotential effects on policy may shift costs, displace value and create new challenges for analysts and investors alike

Federal Regulatory Developments

Andrew B. Young

[email protected]

33

Energy Policy Act (EPAct) of 2005

Qualifying FacilitiesPublic Utility Holding CompaniesMandatory Reliability StandardsElectric Transmission InfrastructureMergers & Acquisitions (R. Stark and D. Kaplan) Anti-Manipulation Rules (C. Mills)

34

Qualifying Facilities

PURPA Put - right to a long-term QF contract at host utility s avoided cost rateEPAct of 2005 - permits utilities to avoid the mandatory purchase obligation if:

QFs have non-discriminatory access to competitive wholesale marketsDoes not apply to QFs that are 20 MW or smallerDoes not apply to existing QF contracts

35

Renewable Portfolio Standards

26 States and the District of Columbia Have Adopted RPS Requirements

Federal Legislation - 15% by 2020 (H.R. 3221)

Washington 15% by 2020Maine 40% by 2017

Oregon 25% by 2025Delaware 20% by 2019

New York 25% by 2013Connecticut 27% by 2020

Nevada 20% by 2015California 20% by 2010

Minnesota 25% by 2025Arizona 15% by 2025

36

Public Utility Holding Companies

Holding CompanyCompany 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 JurisdictionIntegrated utility system (limits on geographic scope

and non-utility businesses)Two bite rule on approval for utility acquisitions

37

PUHCA 2005 Requirements

PUHCA 2005 Created FERC JurisdictionNotification of holding company status Holding companies must retain books and records and provide accessService companies must keep accounts per FERC s Uniform System of Accounts and file annual reportFERC review of service company cost allocations

38

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 FUCOsPassive investorsPublic utilities without captive customers

Waiver (Form 65B) of Regulation Available for:Single-state holding companiesInvestors in independent transmission companiesPublic utilities that own less than 100 MW

39

Mandatory Reliability Requirements

FERC Adopted Mandatory Reliability Requirements Effective June 18, 2007Rules Apply to All Bulk-Power UsersFines for Violations from $1,000 to $1,000,000Rules Enforced through NERC and Regional Reliability Organizations Appeal of Violations/Penalties to FERC

40

Compliance Process

NERC Registry Created for All Bulk-Power UsersNERC Proposed 107 Requirements

FERC approved 83 requirements; 24 pending

No Trial PeriodDiscretion in imposing penalties before December 31, 2007

Risk Violation FactorsHigh Risk - could directly cause bulk-power system failureMedium Risk - directly affects bulk-power systemLow Risk - administrative in nature

41

National Interest Transmission Corridors

Department of Energy (DOE)Transmission congestion study every three yearsDesignated 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 conditionsFederal permit and eminent domain authority to acquire rights-of-way

42

Transmission Rate Incentives

Incentive-Based Rate Treatment for TransmissionIntended to promote reliability and reduce congestionRequires nexus between incentive and investmentExcludes routine investments to meet existing standards

Eligible Incentives Include:ROE incentive 100% construction work in progress (CWIP) in rate baseHypothetical capital structureAccelerated depreciationRecovery of costs for cancelled projects

Biomass Energy Production Tax Credits: Law and Structures

Sandy K. Feldman

[email protected]

44

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:

WindClosed-loop biomass (purpose-grown plants)Open-loop biomassGeothermalSolarSmall irrigation powerMunicipal solid wasteRefined coalQualified hydropower productionIndian coal

45

Open-Loop Biomass PTC

Adjusted annually for inflationReduced by up to 50% of amounts received in grants, tax-exempt financing, subsidies, and other creditsAvailable to owner, lessee or operator of power facility for the following periods:

10 years from PIS date8.8.05

5 years from PIS date10.21.04 8.8.05

12.31.09Before 10.22.04

End of PTC PeriodPlaced-in-Service Date

46

What is Open-Loop Biomass?

Any agricultural livestock manure and litterAny solid, non-hazardous, cellulosic waste or lignin material which is segregated from other waste materials and is derived from:

Forest-related resourcesSolid wood waste materialsAgricultural sources

47

What Is Not Open-Loop Biomass?

Manufacturing or construction wood waste that has been pressure treated, chemically treated, or paintedMunicipal solid wasteGas derived from the biodegradation of solid wastePaper products that are commonly recycledClosed-loop biomass Biomass cofired with fossil fuel in excess of the minimum amount of fossil fuel necessary for startup and flame stabilization

48

What Is a Biomass Facility?

Courtesy of

49

What Is a Biomass Facility?

50

Qualified Open-Loop Biomass Facility

Placed in service before January 1, 2009Except livestock waste facility - after 10.22.04 and before 1.1.09 with a nameplate capacity of at least 150 KwH

51

Sample Monetization Transaction

Industries Inc. (DE)

Baker Inc. (DE)Charlie Inc.

(DE)Delta Inc.

(DE)

Echo Inc. (ME)

Holdings, LLC (DE)

Adam Inc. (DE)

Facility

Facility Facility Facility

Facility

Operations Inc. (DE)

HoldingsInc. (DE)

Hydro Facilities Legend

= corporation

= partnership= disregarded

entity/assets

Pre-Transaction Organization Structure for Open-Loop Biomass Facilities

52

Objectives

Transfer ownership of five biomass facilities to Tax Investor (a major commercial bank) in manner sufficient to accomplish both parties objectives:

Producer ObjectivesSignificant cash at closing on account of future PTCsAdditional cash from PTCs generated during PTC periodRetention of cash flow from biomass facilitiesRetention of operational control of biomass facilities and receipt of O&M feesReturn to status quo ante upon expiration of the PTC periodAvoid structure risk

53

Objectives

Tax Investor ObjectivesObtain PTCs at discount (pay less than $1 per $1 of PTC)Minimize financial risk

54

Operating and Management Agreements and Services Agreements

O&M AgreementsServices Agreements

Biomass Operations Inc.

(DE)

Industries Inc. (DE)

Facility Facility Facility Facility

Biomass Holdings GP

LLC (DE)

0.1% GP

99.99%

Adam LP

Baker LPCharlie

LPDelta LPHoldings

LP

Echo LP

Facility

Holdings LP

0.01%

99.9% LP

$68M Note Fund LLC (DE)

$14.5M Note and$12.8M Contingent Note

Biomass GP LLC (DE)

Holdings Inc. (DE)

55

Post-Transaction Structure

Fund I LLC $12.8M

Contingent NoteIndustries Inc.

(DE)

Facility Facility Facility Facility

Biomass GP LLC (DE)

0.01%99.99%

Adam LP

Baker LP

Charlie LP

Delta LPHoldings

LP

Echo LP

Facility

Holdings LP0.1% GP 99.9% LP

$68M Note

Fund LLC Biomass Holdings GP

LLC (DE)

Holdings Inc. (DE)

Biomass Operations Inc.

(DE)

Tax Investor Bank(Limited Member)LLC

NY Hydro LLC

0.01% 99.99%

56

Sample Development Structure Pre-Construction Phase

Cash EquityCash EquityInvestorInvestor

Tax EquityTax EquityInvestorInvestor

Construction Construction LenderLender

Equity Capital Contribution

Commitment

Member Interest

Construction Financing

PROJECT CO.

57

Sample Development Structure Commercial Operation Date



LenderLender

Managing Member Interest100% Cash Benefits

Non-Managing Member Interest100% Tax Benefits

100% Cash Benefits(until loan repaid)

Back Leverage Financing(25 30% of Total Project Cost)

Upfront Equity Capital (30 40% of Total Project Cost)

Upfront Equity Capital (60 70% of Total Project Cost)

PROJECT CO.

58

Sample Development Structure FLIP 1 and FLIP 2



0% Cash and Tax Benefits(Flip 1)

100% Cash and Tax Benefits(Flip 1)

90 95% Cash and Tax

Benefits (Flip 2)

5 10% Cash and TaxBenefits (Flip 2)

PROJECT CO.

NOTE: Cash Equity Investor may have purchase option on Tax Equity Investor s interests after Flip 2.

59

Current Legislative Developments

House Bill/Senate Bill are likely to pass this Congress with some tax-incentive provisionsLikely extension of program (placed in service date) from end of 2008 to:

End of 2010 (House); orEnd of 2013 (Senate)

Perhaps parity or greater parity for open-loop biomass (up to $0.02/KwH)

60

Legal and Regulatory Framework

Questions?

The Pitfalls Of Electric Utility AcquisitionOrHow To Screw-Up An Otherwise Good Multi-Billion Dollar Transaction

Donald A [email protected]

63

Once upon a time utility mergers were relatively simple...

All you had to worry about was falling into the PUHCA trapSince all rates were regulated, the Federal antitrust enforcement agencies generally did not careFERC 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

64

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 electricityFERC began to recognize that mergers that eliminated competitors and potential competitors could undermine the move toward market-based regulationFERC began to hold hearings in significant merger filings:

Pacific Power & Light Utah Power & LightNortheast Utilities Public Service of New HampshireSouthern California Edison San Diego Gas & Electric

Competitive Open-Access conditions were occasionally imposed

65

The Mid-1990s brought significant change

Order No. 888 instituting open access transmission opened up the electric grid to true generation competitionFERC 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 applicationsStates began to restructure electricity markets to permit retailcompetitionFour Regional Transmission Organizations were formed greatly enlarging, at least initially, the relevant geographic market in which the competitive effects of mergers would be evaluated

66

The trends actually should have made utility mergers easier.

So why have three recent high profile transactions failed?

Exelon PSEGFPL ConstellationBabcock & Brown NorthWestern

67

All three got through FERC, but failed at the state level. Why?

The buyers failed to do their homeworkIn 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 oppositionMoreover, in each case the market (or more accurately the arbitrage community) was equally capable of anticipating the problems that ultimately derailed the proposed acquisitionsLet s talk about them in reverse order

68

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 obligationAs a result, the Montana PSC loses jurisdiction over sales of power from MPC s former generation to FERCOver the next 8 years the price of power sold back to MPC and then to NorthWestern increased to almost double the pre-sale cost-based ratesThese 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

69

FPL Constellation ( Timing is everything )

When retail competition was introduced in Maryland, BG&E was allowed to spin-off its generation to its affiliate, ConstellationPart of the deal was that Constellation would supply BG&E subject to a rate reduction and freeze followed by a competitive solicitation in 2006BG&E went out for supply offers and not surprisingly Constellation was the major winning bidder, only this time at market, not cost-based pricesThe cost of the new supply contract would result in a 72% increase to BG&E s retail customers2006 was a state gubernatorial election year in MarylandAlong comes FP&L proposing to buy Constellation (including BG&E) and effectively move control of the utility out-of-state

70

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 approvalsExelon s presentation was catered to FERC s a mechanical approach to merger analysis and asked FERC to approve the merger without a hearingFERC obliged, essentially rubber-stamping Exelon s presentationFERC 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 didDOJ conducted an extensive investigation, rejected Exelon s virtual divestiture proposal and required additional real divestitureNew Jersey held extensive hearings on competition issues - the BPU staff insisted on even more divestiture and rate relief

71

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 achievesettlement on other merger issues

Legal Risks in Energy Trading

Charles R. Mills

[email protected]

73

The Challenge to Corporate Compliance Programs

Complex, inter-related marketsLegal uncertainty

Overlapping, complex and inconsistent lawsVague legal standards

Enforcement actions are principal means of setting legal standardsAgencies assert aggressive legal interpretations to support enforcement actionsAggressive turf wars between agencies

Duplicative and competing enforcement actions (e.g. Amaranth Advisors LLC and Energy Trading Partners)

Severe civil sanctionsCriminalization

74

Energy Markets Commodities

Crude OilGasolineNatural GasNatural Gas LiquidsHeating OilDiesel OilElectric Power

75

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 commodityForward transactionsOver-the-counter financial derivativesRegulated, exchange-traded futures (e.g., New York Mercantile Exchange ( NYMEX )) Contracts for transportation of energyContracts for storage

76

Instrumentalities For Energy Trading

Direct transactions involving direct telephonic communications between purchaser and sellerBrokers e.g., Amerex, TFS Energy, ICAP Energy LLCPrivately owned and operated electronic platforms (e.g., Intercontinental Exchange ( ICE )) Futures exchanges e.g., NYMEX

77

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 CommissionFederal Antitrust Statues

State Attorney GeneralsState Antitrust Statutes

78

What Do The Laws Prohibit?

Manipulation and attempted manipulationCornering and attempted corneringKnowingly disseminating false or misleading material market informationNon-competitive pre-arranged and collusive transactions (such as wash sales)Price fixingMonopolization and attempted monopolizationTying agreements

79

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).

80

What Constitutes Manipulation? (cont d.)

The CFTC has obtained many settlements and hundreds of millions of dollars in fines from energy companiesSome aggressive, CFTC sponsored theories of manipulation have faltered in court

U.S. v. ReliantCFTC v. Delay

But the CFTC does not accept those decisions

81

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 violationYet, 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

82

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.

83

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 priceFERC claims reckless behavior, even without specific intent to manipulate, will support a violationCFTC standards for manipulation appear not to be consistent in some respects with antitrust law standards

84

FERC: Expanding its Prosecutorial Jurisdiction

FERC asserts jurisdiction to prosecute any transactions or conduct that intentionally or recklessly affect FERC jurisdictional marketsFERC 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 electricityClaims its prosecutorial enforcement powers reach to CFTC regulated exchange-traded futures contracts

85

CFTC: Expanding its Jurisdiction Beyond Futures Trading

CFTC aggressively claims powers to prosecute manipulation claims as to any commodity transaction in interstate commerceThis takes CFTC beyond regulated futures markets to reach:

Cash and spot transactionsForwardsOver-the-Counter derivatives

86

Duplicative Enforcement Actions and Inconsistent Theories of Liability

Futures markets - Amaranth Advisors LLCCFTC alleges attempted manipulation and exclusive jurisdiction that ousts FERC from prosecutorial authorityFERC alleges perfected manipulation and contests that CFTC has exclusive jurisdiction

FERC-regulated cash markets in natural gas markets -Energy Transfer Partners

FERC alleges perfected manipulationCFTC alleges attempted manipulation and does not allege any affect on futures prices

Reorganizations in the Energy Market Issues and Opportunities for Energy Investors

Richard S. Miller

[email protected]

88

Restructuring Framework is Chapter 11

Why File Chapter 11?Market conditions change:

Rise in input costs: e.g. natural gas (Calpine)Price volatilityExcess capacity: e.g. ethanol?

Clean title for direct transfers/dispositionsLong-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

89

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

90

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

91

Chapter 11 Asset Sales (cont d)

Issues / Risks:Unpredictable negotiated bids may be trumped or market conditions leveraged for low bidCreditors and creditor and equity committees might challenge deal termsSales within Chapter 11 plan can be delayed by plan confirmation procedures/other issuesCombination of required court/regulatory approvals can delay closing

92

Chapter 11 Contract Assumption & Rejection

Procedure: Debtor files motion to assume or reject contractAssumption: Debtor must cure all defaults, provide adequate assurance of future performanceRejection: 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 contractsRejection option can be leverage to negotiate contract amendments

93

Contract Assumption & Rejection (cont d)

Issues / Risks:Regulators may challenge a motion to rejectContracts tied to other deals might be difficult to rejectLarge rejection damage claims against the DebtorPossible lengthy litigation over valuing contract and/or damages claimsExcludes contracts with statutory safe harborse.g., certain commodity contracts, forward/future contracts, repos, swaps

94

Watch for Tax Benefits

Difficult to structure; existing facts must be favorableProcedure: Reorg plan used to preserve net operating losses (NOLs) for post-Chapter 11 utilizationAdvantages: Allows the Debtor to maximize use of accumulated NOLs from the pre-bankruptcy period to offset post-bankruptcy taxable incomeIssues / Risks:

Ownership change may preclude use of NOLsCan obtain bankruptcy orders restricting trading in securities prior to completion of Chapter 11

Reorg plan structure used to preserve NOLs

95

Distressed Debt Investing Money to be made?

Purchase existing claims against the Debtor before or during Chapter 11Advantages 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 but watch the rules

Control through capital structure do you have blocking position?Control reorg plan and voting

96

Distressed Debt Investing (cont d)

Issues / Risks:If out of court:

No protection against delay or litigationLack of control over processInsufficient 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 constituenciesEvaluating probable plan recoveries requires estimation and monitoring esp. for rejection claims

Implementing reorg plan may be difficult regulatory changes may affect plan structure

97

Another Approach - Debtor-in-Possession Financing

Procedure: Offer shortly before/after the Chapter 11 case is filed document the dealAdvantages for extracting value:

Court-approved, priority lien & superpriority claim on assets. Can influence reorg plan outcome and protection of existing claims seat at the tableLoan to own plus fees

Issues / Risks:Unpredictable timingUnderlying collateral/assets must have value to repay loan or apply alternative strategyPossibly expensive to negotiate/monitor esp. if Chapter 11 case becomes too contentious and/or lengthy

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

Kirkpatrick & Lockhart Preston Gates Ellis LLP1601 K Street N.W.

Washington, D.C. 20006-1600202.778.9100

DC-948050 v1

ISSUE House-Passed HR 3221Renewable Energy and Energy

Conservation Tax Act

Action: Passed 241-172 on August 4, 2007

Passed legislation combines HR 3221 (energy policy) and HR 2776 (energy tax)

Senate-Passed HR 6The CLEAN Energy Act

Action: Passed 65-27 on June 26, 2007

Passed legislation derived primarily from S. 1419

NOTES

The President is threatening to veto HR3221/HR2776. Additionally, the President is threatening to veto the Senate-passed HR 6 if the bill contains price control language.

ENERGY EFFICIENCY

Equipment Standards

* Sets new efficiency standards for residential clothes washers, dishwashers, dehumidifiers, refrigerators, refrigerator freezers, freezers, electric motors, and residential boilers. (Title IX, Subtitle A, Part 1)

* Permits DOE to establish regional variations in standards for heating and air conditioning equipment. (Title IX, Subtitle A, Part 1)

Vehicle Transportation

* Provides support for federal-aid highways. Increases the federal share for congestion mitigation and air quality (CMAQ) projects up to 100% of project and program cost. (Title VIII, Subtitle B)

* Establishes a loan guarantee program for advanced battery development, grant programs for plug-in hybrid vehicles, incentives for purchasing heavy duty hybrids for fleets, and credits for various electric vehicles. (Title IX, Subtitle E)

* Promotes high-efficiency vehicles, advanced batteries, and energy storage. Authorizes DOE to fund an R&D program on light-weight materials. Creates loan guarantee program for facilities that manufacture fuel-efficient vehicles. Authorizes funding awards for qualified investments to refurbish manufacturing facilities that produce advanced technology vehicles. (Title II, Subtitle C)

* 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)

A Comparison of Major Energy Policy Provisions House-Passed H.R. 3221 and Senate-Passed H.R. 6

Last Updated: August 24, 2007

DC-948050 v1

Issue House-Passed HR 3221 Senate-Passed HR 6 Notes

Buildings

* Encourages stronger state building codes. (Title IX, Subtitle A, Part 3)

* 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)

* Creates a federal revolving fund that would make loans for combined heat and power projects at public institutions. (Title IX, Subtitle A, Part 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)

* Creates a green schools program. (Title IV Subtitle C, Part 2)

RENEWABLE ENERGY STANDARDS

Federal Renewable Energy Portfolio Standard (RPS)

* Establishes an RPS administered by DOE for retail suppliers (electric utilities). For each retail supplier that sells more than one billion 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.

* 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.

No Senate provision (a Senate floor amendment calling for a 15% RPS by 2020 failed to clear procedural hurdles).

The Administration opposes the addition of a narrow federal RPS for power generation.

4


Renewable Fuel Standard (RFS)

No House provision * 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)

* 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)

* 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)

The Administration strongly supports improving the Senate RFS provisions.

FUEL STANDARDS

Corporate Average Fuel Economy

(CAFÉ)

No House provision * 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)

* 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

The Administration strongly opposes Senate bill provisions including mandatory standards for medium-duty and heavy-duty trucks.

5


Corporate Average Fuel Economy

(CAFÉ)(cont.)

No House provision * 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

Loan Guarantees for Energy Facilities

* Amends EPACT05 Title XVII to specify that loan guarantees must be large enough to ensure financing for a project (up to 80% of project costs), that DOE may not establish regulations limiting guarantees to less than 100% of project debt, and that workers on such projects must be paid prevailing wages under the Davis-Bacon Act. (Title IX, Subtitle C)

* Establishes new loan guarantee authority forbiofuel 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)

* Amends EPACT05 Title XVII to specify that up to 100% of a project’s debt may be guaranteed and that the loan guarantee program is not subject to annual limits established by appropriations acts when non-appropriated funds are used.

* Extends loan guarantee authority to renewable fuel facilities and production facilities for fuel efficient vehicles or parts. (Title I, Sec. 124 and 242)

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.

PRICE GOUGING

Price GougingNo House provision (Although on May 23, the House passed a similar provision on a stand alone bill, H.R. 1252)

* Criminalizes price gouging in fuel markets during an energy emergency. (Title VI)

The Administration strongly opposes the price gouging provision because it could result in gasoline price controls.

RESEARCH AND DEVELOPMENT

Advanced Biofuels/Biomass

* Provides loan guarantees for up to 90% ($250 million principal) of project cost for biorefineries and biofuel production plants. (Title V)

* Authorizes funding for R&D, bioenergy research centers (5), and biodiesel fuel quality standards. (Title V)

* 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 (11) and biomass transportation. (Title I)

Continues Next Page

The Administration strongly opposes the “implicative” R&D bureaucracy in the House bill.

6


Advanced Biofuels/Biomass

(cont.)

* Authorizes almost $1 billion in production incentive payments on new biofuels production. (Title V)

* Authorizes more funding for R&D on biomass production, harvest, transportation, storage and forest bioenergy. (Title V)

* Directs DOE to study the feasibility of constructing dedicated ethanol pipelines. (Title IX)

* Authorizes DOE funding support for grants to diversify feedstock and locations for cellulosic ethanol production facilities. (Title IX)

* Includes grants to states with low ethanol production rates. (Title I)


Marine Energy

* 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)

* 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)


7


Geothermal

* Authorizes funding for DOE to conduct R&D programs on geothermal energy. (Title IV, Subtitle C)

* 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)

* Creates education pilot program to award competitive grant funding for a geothermal-powered energy generation facility. (Title IV, Subtitle C)

No Senate provision The Administration strongly opposes the “implicative” R&D bureaucracy in the House bill.

Solar R&D

* 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


8


Solar R&D(cont.)

* 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)

* Establishes R&D and demonstration program to promote less costly and more reliable decentralized distributed solar-powered air conditioning. (Title IV, Subtitle D)

* Establishes a program of grants to states to demonstrate advanced photovoltaic technology. (Title IV, Subtitle D)


Hydrogen Award

* 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)

No Senate provision This provision is identical to the H-Prize in H.R. 632, which passed the House before H.R. 3221.

ARPA-E* Directs that an Advanced Research Projects Agency – Energy be established at DOE. (Title IV, Subtitle A)

No Senate provision Similar provision signed into law as part of the America Competes Act (PL 110-69).

Electricity Transmission/Smart

Grid

* 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 usein those states. (Title VII, Subtitle B, Chapter 5)

Continues Next Page

No Senate provision

9


Electricity Transmission/

Smart Grid(cont.)

* Creates an electric grid modernization commission to study and propose policies on “Smart Grid” technology implementation. Creates a federal 25% matching grantprogram would be created to support implementation. (Title IX, Subtitle B)

* Directs DOE to help deploy technologies and perform cooperative demonstration projects with electric utilities. (Title IX, Subtitle B)

* Requires states to consider regulatorystandards that would allow utilities to recoversmart grid investments through rates and“decouple” utility profits from electricity salesvolume. (Title IX, Subtitle B)

No Senate provision

TAX INCENTIVES

Energy Efficiency in Transportation

* Sets a $4,000 credit for plug-in hybrid vehicles, establishes a 50 cent per gallon production tax credit for cellulosic ethanol fuel, 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)

No Senate provisions (Senate floor amendment with similar tax incentives failed to get cloture vote).

Other Energy Efficiency Measures

* Includes a tax credit bond for community programs to reduce greenhouse gases, a tax credit bond for states to provide loans and 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)

No Senate provisions (Senate floor amendment with similar provisions failed to get cloture vote).

10


Renewable Energy Production

* 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)

* 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)

No Senate provisions (Senate floor amendment containing very similar renewable energy tax incentives failed to get cloture).

Repeal of Oil and Natural Gas

Tax Incentives

* Calls for $16 billion in new taxes on the oil 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)

No Senate provision The Administration strongly opposes repealing the manufacturing tax deduction for the oil and natural gas industry and restricting foreign tax credits.

CLIMATE CHANGE

Carbon Storage

* Expands the DOE program for carbon capture to include R&D for carbon storage and demonstration. (Title IV, Subtitle F)

* Directs DOE to conduct 7 initial large-volume 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)

* 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

* Directs DOE program to be expanded to include carbon storage and carbon capture demonstration projects. (Title III)

* Directs a Department of Interior program to be established to assess the national carbon dioxide storage facility. (Title III)

11


Carbon Storage(cont.)

* 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)

Carbon Neutral Government

* Requires each federal agency to inventory its greenhouse gas emissions annually. (Title VI, Subtitle A)

* 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)

No Senate provision

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

Corporate CounselThe Metropo l i tan

Volume 15, No. 4 © 2007 The Metropolitan Corporate Counsel, Inc. April 2007

®

Some observers dispute whether globalwarming is actually caused by human activ-ity, or is simply a result of natural climatecycles, but a political consensus is emergingthat immediate regulation of greenhousegases (GHGs), even if ultimately proven to beunnecessary, is preferable to ignoring anuncertain risk with potentially catastrophicresults. Leaders in Congress, governors inmany states, as well as some industry CEOs,1

now consider some form of GHG regulationto be prudent and inevitable. At last count,there are five different bills pending in Con-gress and several initiatives advanced bycoalitions of states in the Northeast and on theWest Coast, each proposing their own, poten-tially different, approach to GHGs and threat-ening a disjointed patchwork of regulation.

Most proposals thus far include some vari-ation of a “cap-and-trade” approach,2 whichcould raise a variety of novel questions,including the following:

• Which GHGs will be regulated? Atwhat levels will ambient “baselines” and“caps” be set? What are the relevant geo-graphic areas for determining compliancewith caps?

• Will the tradable commodity created bylegislation be an “allowance” or “offset”under the Clean Air Act, or a more genericform of “carbon credit”?

• How are tradable assets to be docu-

mented and what jurisdictions (state, federaland international) will recognize such assets(e.g., “global” recognition under Kyoto vs.regional or local recognition under state/fed-eral law)?

The foregoing questions highlight uncer-tainties in potential GHG regulation. In lightof contingent liabilities that may arise out ofnew legal requirements, and in order for firmsto transition proactively while these and otherissues are sorted out, corporate managersshould implement a GHG compliance pro-gram that targets the following objectives:

• Identify and report GHG emissions andassociated material risks in compliance withapplicable securities laws and best practices;

• Mitigate GHG levels by, for example,improving energy efficiency, using alterna-tive fuels and renewable energy, investing incarbon capture and sequestration technology,and considering climate risks in projectfinance and corporate transactions;

• Shape public policy by: (1) advocatingfederal legislation that harmonizes potentiallyinconsistent federal, state and regionalapproaches and rewards proactive manage-ment of GHG emissions; (2) advocating dis-cussions under the U.N. FrameworkConvention to harmonize U.S. and interna-tional carbon trading systems and ensure par-ticipation by developing economies such asChina and India; and (3) monitoring otherstate and federal proposals.

Key aspects of these objectives are dis-cussed below.

Securities Law Disclosure IssuesEffective reporting and management of

GHG risks is responsive to legal obligationsand increases shareholder value. U.S. busi-nesses are confronting at least two categoriesof GHG risks: first, the risk that their opera-tions will generate GHG emissions that con-stitute contingent liabilities; second, the riskthat their assets and personnel may beadversely affected by climate change eventstriggered, in whole or in part, by increasedGHG emissions. Each of these risks has ram-ifications for “issuers” under the U.S. securi-ties laws.

In general terms, U.S. securities lawsrequire that an issuer periodically disclose“material” information regarding its financialcondition in accordance with generallyaccepted accounting principles (GAAP). TheU.S. Securities and Exchange Commission’s(SEC’s) Regulation S-K specifies several ofsuch disclosure requirements: Item 101 ofRegulation S-K requires disclosure of thematerial effects, including contingent effects,that compliance with federal, state and localenvironmental laws may have on an issuer’scapital expenditures, earnings and competi-tive position.3 Item 103 requires disclosure ofpending or contemplated material legal pro-ceedings involving the issuer.4 Item 303requires that the Management Discussion andAnalysis (MD&A) sections of federal securi-ties filings provide a narrative discussion ofany changes in financial condition of theissuer.5 Item 303 also requires disclosure inthe MD&A of known trends, events or uncer-tainties that will or are reasonably likely tohave a material effect on the issuer’s liquidity,capital, sales, revenues or income. Thus, theMD&A may require disclosure of matters thatare not yet “ripe” for Item 103 or GAAPfinancial disclosure.

Recent state and regional initiatives, suchas California’s comprehensive climate legisla-tion,6 the Western Regional Climate ActionInitiative7 and the Northeastern RegionalGreenhouse Gas Initiative,8 make it essential

Anticipating A Greenhouse Gas Compliance Strategy

Roger D. Stark and John F. Spinello, Jr.

KIRKPATRICK & LOCKHART

PRESTON GATES ELLIS LLP

www.metrocorpcounsel.com

Please email the authors at [email protected] or [email protected] with questions about this article.

Roger D. Stark and John F. Spinello, Jr. arekey partners in K&L Gates’ Climate ChangeTask Force. Mr. Stark, resident in the Wash-ington, DC office, can be reached at (202)778-9435. Mr. Spinello, resident in theNewark, NJ office, can be reached at (973)848-4061.

John F.Spinello, Jr.

Roger D. Stark

Volume 15, No. 4 © 2007 The Metropolitan Corporate Counsel, Inc. April 2007

reducing GHG emissions; • Prioritize technologies, processes and

projects to remediate existing GHGs or miti-gate future GHG emissions; and

• Consider existing GHG risk, remedia-tion and mitigation strategies in complyingwith applicable reporting requirements

U.S. law does not currently provide for thecreation of tradable emission “credits” forGHG reduction. However, under the 1992Energy Policy Act, the Department of Energyestablished a registry to document GHGreductions achieved through voluntary pro-grams, such as DOE’s Climate Vision andEPA’s Climate Leaders programs. The reg-istry also tracks progress toward the goal ofreducing GHG intensity by 18 percent by2012.

Legislation/Policy IssuesAs the move toward GHG legislation

accelerates, companies will be underincreased pressure to coordinate their strate-gies with evolving legal requirements. In thisregard, three types of legislative trends shouldbe monitored: (1) trends that create legalbenefits and/or risks, (2) trends that affect thevalue of tradable assets from mitigation andremediation efforts, and (3) trends that inte-grate or rationalize initiatives across state,regional or national boundaries.

If GHG legislation tracks the “cap-and-trade” model, timely monitoring and analysisof proposed legislation will be necessary toensure that management strategies areresponsive to the proposed cap-and-tradeapproach. If an alternative to “cap-and-trade”(e.g., carbon taxes) is selected, analysisshould focus on whether the approach chosenby Congress allows firms to tailor GHG ini-tiatives to achieve maximum “credit” for theirearly action.

Likewise, federal legislation shouldaddress the challenge of standardizing andintegrating disparate regulatory approaches inorder to facilitate trading in GHG creditsacross state, regional, and even nationalboundaries. Finally, the overall approach to“carbon credits” should be addressed with aview towards harmonizing the emissionreduction attributes of “allowances” and “off-sets” with the technology and clean-fuel inno-vations pioneered by the “renewable” and“clean-tech” movements, and maximizing thevalue of both.

ConclusionPerhaps more than any other environmen-

tal problem, the climate change effects attrib-uted to GHGs transcend local, regional andnational boundaries. However, unlike otherglobalization trends, regulation of GHGsaffects a by-product (GHG emissions) previ-ously assumed to have a zero cost to society.With the advent of global climate change,there is little doubt that the zero cost assump-tion is under increased scrutiny. In this con-text, managers that ignore the global aspects

that public companies consider their disclo-sure obligations in the context of potentialGHG liabilities. GHG-specific disclosureinitiatives are also evolving among institu-tional investors, environmental groups, cor-porate governance advocates and othercorporate stakeholders (including state pen-sion funds and other institutional investors),all of whom are forcefully advocating greaterdisclosure of potential GHG risks. In October2006, a consortium of investor groupsreleased a “Global Framework for ClimateChange Disclosure,” which (among otherthings) encourages companies to disclose andanalyze (1) historic and current GHG emis-sions, (2) climate risk and emissions man-agement initiatives, (3) potential physicalrisks from climate change, and (4) risksrelated to GHG regulation. These events,together with pending state and federal legis-lation, are exerting ever greater pressure onissuers to identify and report GHG-relatedrisks and highlight the need for integratedmanagement of GHG risks.

Mitigation/Remediation Of GHGsGHG mitigation strategies fall into two

general categories. The first includes tech-nologies and processes that capture or reduceGHG emissions. The second includes renew-able resources that generate energy withoutGHG emissions. Both categories of mitiga-tion confront the same challenge: how toensure that mitigation results in verifiabledocumentation that can be used to demon-strate compliance with applicable laws(which in the case of GHGs, have yet to beenacted) and generate value in the form of“carbon credits” or similar certification ofmitigation efforts.

Remediation generally focuses on reduc-ing the amount of GHGs currently present inthe atmosphere. “Carbon sinks” are perhapsthe most common form of GHG remediation.Large scale re-forestation projects have thepotential to process and eliminate large quan-tities of carbon dioxide that presently exist inthe atmosphere. Likewise, carbon sequestra-tion projects (e.g., through undergroundinjection of carbon dioxide) reduce levels ofambient carbon dioxide by physically remov-ing carbon dioxide from ambient air.9 GHGreduction efforts to date have focused on theuse of alternative fuels and renewable energysources; technologies for carbon capture andsequestration are still emerging.

An important element of any mitigation orremediation strategy includes an assessmentof current GHG emissions. In this regard,companies should consider the followingsteps:

• Audit company operations (e.g., productmanufacturing and distribution logistics) thatmay produce GHGs and determine the extentto which company assets and operations areexposed to climate change risks;

• Establish company-wide targets for

of GHG regulation do so at their own peril. Companies with significant GHG emis-

sions and those involved in financing GHG-intensive projects or corporate transactionsmust manage their risks and identify opportu-nities in a rapidly evolving environment inwhich major legal and policy developmentsare quickly unfolding in Congress, court-rooms and statehouses across the country.With more states regulating GHG emissions,and the prospects of national GHG regulationseemingly inevitable, corporate managersshould consider a strategic response that mit-igates GHG risks and optimizes shareholdervalue. Such a response should include, at aminimum, GHG monitoring in support ofcompany reporting obligations under applica-ble law. More broadly, company managementshould consider alternatives for making GHGcompliance an asset creation as well as a riskmitigation function, and should carefullymonitor rapidly unfolding developments inGHG regulation and mitigation for risks andopportunities that transcend state, regionaland national boundaries.

1 The U.S. Climate Action Partnership, a coalition often leading companies, including DuPont, GE, Alcoaand Duke Energy, together with an array of environ-mental organizations, issued a report, “A Call forAction,” in January 2007, calling for federal legislationestablishing a cap-and-trade program and other poli-cies that harmonize federal, state and regional pro-grams, give credit for early action, invest in technologyresearch and development, and discourage invest-ment in high-emitting power projects. 2 Proposed cap-and-trade programs generally includecapping GHG emissions at current levels, requiringstepped reductions over time, and allowing GHG emit-ters to create tradable “credits” reflecting a quantifi-able, verifiable reduction that may be traded like othercommodities and used by other GHG emitters to sat-isfy an obligation to reduce their own GHG emissions.3 17 C.F.R. § 229.101.4 17 C.F.R. § 229.103.5 17 C.F.R. § 229.303.6 In September 2006, the California Legislaturepassed the Global Warming Solutions Act of 2006,requiring the California Air Resources Board (CARB)to develop strategies, including a cap-and-trade pro-gram, to reduce California’s GHG emissions by 25percent by 2020.7 In February 2007, the Governors of five westernstates (California, Washington, Oregon, Arizona andNew Mexico), announced the formation of the West-ern Regional Climate Action Initiative to reduce GHGemissions, pledging to “devise a market-based pro-gram, such as a load-based cap-and-trade program,to achieve targeted emission reductions.”8 Originally announced in September 2003, theRegional Greenhouse Gas Initiative (RGGI) is aneffort by the Governors of 9 Northeastern and Mid-Atlantic states to develop a regional “cap-and-trade”program with a market-based emissions trading sys-tem. The founding states are Delaware, Connecticut,Maine, New Hampshire, New Jersey, New York, andVermont; Massachusetts and Rhode Island signed onin February 2007. The proposed program will requireelectric power generators in participating states toreduce carbon dioxide emissions.9 Some remediation strategies (e.g., reforestation) arerecognized as “certified emission reductions” underthe Kyoto Treaty, but the Kyoto status of other reme-diation methods is less clear.

www.fortnightly.com

EPACT 2005

HANDING OFFTHE BATONCongress has done its job. It’s now upto FERC and state regulators to answerthe Energy Act’s unresolved questions.

50 PUBLIC UTILITIES FORTNIGHTLY DECEMBER 2005

How EPACT fails to address key industry issues.

A CONTINUING REIGNOF INCOHERENCE

S. energy stakeholders have for too long beenfooled into believing that patchwork reforms area substitute for coherent policies. The EnergyPolicy Act of 2005 (EPACT)1 is the latest, andhopefully the last, example of this tradition.

The key issues confronting U.S. power mar-kets are, for the most part, well-known and generally not indispute. Three of the most pressing—the first two are addressedin the Act—are:

1. Volatile prices and supplies of fuel stock;2. Insufficient or erratic capital investment in generation

and transmission resources; and3. Energy commodity pricing that fails to reflect the “all-in”

cost (i.e., including environmental costs) of fuels for thermalgeneration.

EPACT fails to advance or resolve these key issues, therebypresenting yet another opportunity for stakeholders to mis-take marginal changes for substantive reform.

Volatile Prices and Supplies

The price volatility of hydrocarbon fuels, together with themarch toward competitive electric markets over the past 25years, has caused electric utility stakeholders to focus on theneed to mitigate price and supply risks associated withimported fuels. (In fact, electric market reforms in the UnitedStates originally were promoted to reduce price risks associ-ated with imported oil.) Without a mitigation strategy, stake-holders are left to haggle in a zero-sum environment, whereone stakeholder group can win only at the expense of another.

Regrettably, although EPACT was said to offer relief forhigh energy prices, it does little to address the systemic causesof these risks. Rather than enhance the efficiency, reach, orscope of U.S. energy markets, EPACT resembles a policy-maker’s “catch-up” strategy, focusing on long-neglected issuesof transmission investment, reliability, and efficiency whileignoring the potential for expanding the scope and efficiencyof electric markets.

EPACT does almost nothing to improve the coherence or

DECEMBER 2005 PUBLIC UTILITIES FORTNIGHTLY 51www.fortnightly.com

U

BY ROGER STARK

efficiency of markets, or of the legal and regulatory frameworkthat governs them. In perhaps the best indicator of this short-coming, the Federal Energy Regulatory Commission (FERC)continues to struggle with the application of regulatory toolsthat have not been amended substantially since passage of theFederal Power Act (FPA)2 in 1920.

In a wide variety of contexts ranging from the impositionof “equity re-openers” in the 1980s to the attempted expan-sion of its transmission jurisdiction to nonjurisdictionalmunicipalities, to the recent revocation of market-based ratesof more than 100 companies, there is little doubt that FERChas struggled to adapt an old statute to a much changed com-mercial environment. Despite these and other challenges, theact makes few changes to the basic FPA framework, therebymissing a key opportunity to advance FERC’s ability to influ-ence the operation or efficiency of U.S. electric markets.

That said, EPACT does contain a variety of research andother incentives to encourage the development and deploy-ment of nuclear energy and alternate resources such as renew-able energy technologies. Also included are a wide variety ofenergy-efficiency provisions that increase the energy efficiencyof federal buildings, offer incentives for energy-efficient appli-ances, study the potential benefits of using “intermittent esca-lators,” and extend the duration of Daylight Saving Time byapproximately three weeks.3

In the absence of reforms that improve markets, utilityexecutives and other stakeholders are left to consider commer-cial initiatives that may lessen risks of future oil price spikes.Among other things, purchase aggregation, fuel-price hedg-ing,3 and long-term contracting are potential industrywidestrategies (all of which would either require or benefit fromlegislative support) that merit consideration in this regard.

On a policy front, market successes to date may beexpanded to create a springboard for additional reform. Forexample, a recent decision4 by the Wisconsin Public ServiceCommission recognizes investments in energy efficiency asequivalent energy generation. In effect, according favorableregulatory treatment for demand-side reduction and energyefficiency investments should create additional space in utilityreserve margins and may facilitate resource planning. How-ever, as discussed below, it remains to be seen whether utilityresource planning decisions will be guided by market pricingsignals or by command-and-control regulation.

Insufficient and Erratic Capital Investment

Investment is the lifeblood of a capital-intensive industry, yetrestructured (i.e., disaggregated) generation and transmissioncompanies have yet to demonstrate that they can raise privatecapital on a sustainable long-term basis. Though EPACT was

touted as improving the climate for attracting investments intransmission reliability, most of its reforms actually are quitemodest and provide little in the way of substantive incentivesfor new investment.

The “regulatory compact” that once guaranteed utilities areturn on their investments is in tatters today. Deregulationhas unbundled transmission and generation systems into sep-arate business units, yet markets for generation and transmis-sion services remain inefficient and balkanized.

In its transmission provisions, EPACT reflects an effort tocatch up with changed circumstances. While there are incen-tives for technology innovation (i.e., research and develop-ment), the act adds little in the way of reforms to promoteefficient markets. Of the approximately 70 pages in the actdevoted to transmission matters, fewer than 10 deal withinvestment incentives, and even those establish strategic objec-tives and do not promote structural improvements.

Subtitle D of EPACT sets out “Transmission Rate Reform”provisions.5 These are intended to “promote capital invest-ment” in transmission facilities, “provide a return on equitythat attracts new investment” in such facilities, and encourage“deployment of transmission technologies” to increase thecapacity and efficiency of existing facilities.6 Unfortunately,the act omits any substantive guidance regarding how theseobjectives are to be be attained.

Equally important, the act’s provisions generally ignore thecompetitive environment in which electric sector participantsoperate and fail to confront key problems in financing genera-tion and transmission. The generation sector continues to requirelarge, economically “lumpy” investments to purchase expensiveequipment that can achieve economies of scale. Financing suchinvestments requires either a healthy balance sheet or the abilityto demonstrate firm long-term revenues, and most of today’sindependent generation companies have neither.

Transmission companies suffer from similar shortcomingsin their business model and have an added handicap: undercurrent open-access rules, there is substantial doubt that own-ers of transmission facilities can exercise control over how theirfacilities are used. Incumbent utilities understandably insistthat they should exercise greater control over the transmissionlines funded by their ratepayers, while independent power pro-ducers argue that transmission facilities are a “public com-mons” that must be widely available to facilitate free trade inpower. EPACT provides no path for resolving this tension.

Electricity is a specialized, value-added commodity (inessence, processed BTUs). The current environment limitsthe geographic range of electricity markets and heightens pric-ing, disposition and regulatory risks. If policymakers wanttransmission investment to be driven by the private sector,

52 PUBLIC UTILITIES FORTNIGHTLY DECEMBER 2005 www.fortnightly.com

reforms to expand the scope and efficiency of markets will benecessary to reduce the minimum risk-adjusted returndemanded by private investors. If not, a resurgence of “com-mand and control” alternatives may be unavoidable.

Meaningful reform can be achieved in the area of marketintegration and value capture for transmission investors, butsuch reform faces substantial hurdles. FERC’s withdrawal ofits standard market design illustrated opposition by incum-bents to changes that threatened their economic interests.Moreover, the current administration increasingly is hide-bound by ideological inconsistencies—most notably, its com-mitment to reduce federal government regulation at the sametime it supports legislation (EPACT) that largely pre-emptsstate authority in liquefied natural-gas siting matters.

Budding Consensus?

Nevertheless, there are reasons to believe that a consensus onmarket reforms may develop. Competitive markets have broadsupport in the industrial sector, where large consumers see itas the only way to discipline the market power of incumbentutilities. In fact, some regions (most notably the Northeast)

appear committed to regional transmission organizations(RTOs) for the long term.

Stakeholders favoring open access, the RTOs, and the Elec-tric Reliability Organizations mandated by Title XII ofEPACT likely will create additional momentum toward openaccess. If this occurs (and barring any California-like marketaberrations), the success of such reforms in facilitating compe-tition and expanding markets will create an end-game in whichthe benefits of open access become self-validating, therebyconsolidating public opinion and political support behind themodel. However, the industry may face yet another round of“stranded-cost” proceedings as transmission owners cede con-trol of their assets to independent system operators.

The evolving investment climate no doubt will reflect therepeal of the Public Utility Holding Company Act (PUHCA).Under EPACT, the ponderous and arcane rules governing thedefinition of utility holding companies and the exemptions tothose provisions (e.g., the “integrated service territories”exemption) will be replaced by application of more up-to-dateFERC competition “screens” that focus on market power toachieve objectives similar (albeit not literally identical) to

DECEMBER 2005 PUBLIC UTILITIES FORTNIGHTLY 53www.fortnightly.com

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PUHCA. In simplifying investors’ economic analysis,PUHCA repeal is a good thing.

However, even this reform is not without nuanced conse-quences. A substantial consolidation of the industry is likely tofollow in the wake of PUHCA repeal, preceded by substantiallitigation related to FERC implementation of the marketscreens. While consolidation will produce larger and more effi-cient utilities in many respects, the true test of market reformswill lie in the ability of policymakers to accommodate (and,occasionally, withstand) the demands of larger and more pow-erful utility incumbents seeking to bend market reforms totheir own advantage.

Incumbent utilities and institutional investors will have anenormous advantage in the coming wave of consolidation, andsome may perceive this as an easy road to higher margins. How-ever, without credibly competitive markets to discipline theunfettered exercise of market power, incumbents must be carefulto avoid aggravating socio-political pressures for “re-regulation.”

Finally, a regulatory end-game seems to be forming aroundthe emerging consensus that vertically integrated utilities maynot be such a bad thing after all. According to this view, oli-gopolies can be managed through the proper use of real-timepricing and incentive-based regulation.

Competition has in some cases led to fragmented spot mar-kets, an absence of forward markets, and a lack of incentivesfor long-term investment, while vertically integrated compa-nies (facing less competition) often have operated quite effi-ciently. While a smaller population of electric companiesmight hold prices above marginal cost, they also would carrysurplus capacity to meet demand growth and provide a basisfor long-term investments. As in other matters, the success ofthis approach will turn on the creation and maintenance ofefficient markets.

In short, EPACT contains only a few momentous provi-sions to hasten creation of efficient markets, but it does con-tain the seeds of additional reforms.

Pricing to Reflect Environmental Costs

Environmentalists have long argued that if pollution costs fromthermal power generation were factored into the price of powerfrom thermal generation facilities, non-emitting technologieslike solar and wind power quickly would become price com-petitive with power produced from hydrocarbon combustion.The run-up in oil prices has only strengthened this argument.

Equally important, the Bush administration’s decision toreject the Kyoto accords is being superseded by events. NineNortheastern states recently announced their voluntary deci-sion to implement a “cap-and-trade” program covering car-bon dioxide emissions from more than 600 electric generation

54 PUBLIC UTILITIES FORTNIGHTLY DECEMBER 2005 www.fortnightly.com

facilities.7 More broadly, at least one recent survey indicatedthat a majority of industry executives believe that Congresswill implement regulation of carbon-dioxide emissions withinthe next five to 10 years.8

Oil price spikes stimulate innovation that creates economicalternatives to hydrocarbon fuels. This effect, combined withthe trend toward internalizing the cost of power plant smoke-stack emissions, promises to have profound consequences forthe way we produce, transmit, and use electricity.

The growing consensus regarding the link between green-house-gas emissions and climate change confirms that thisapproach represents a long-term trend and not a passing fad.It also confirms the central role of efficient markets in reform-ing the electric sector.

Going Forward

The energy industry is experiencing an extended and chaotictransition to competitive markets. Some competitive pressureshave been eased by market inefficiencies and regulatory inter-ventions, while others have resulted in significant economicchallenges for a variety of stakeholders. The regulatory frame-work has been modified to incorporate market forces withoutmuch attention to understanding either the market forcesthemselves or the markets in which they operate. Producersand consumers of all kinds have been insulated from environ-mental costs engendered by their fuel use, technology and dis-tribution decisions. All of this will evolve as consolidationintensifies and refocuses competitive pressures.

The entire energy industry has known for 25 years thatchange would come, but the biggest changes in the power sec-tor are yet to be felt. Market reforms will work if our policymak-ers take the time to understand how and where to make themeffective and efficient. Let’s hope that policymakers and indus-try stakeholders have the perseverance, creativity and wisdomto usher in timely and constructive change before events againovertake us.

Roger Stark is a partner at Kirkpatrick & Lockhart Nicholson Graham LLP. Contact him at [email protected].

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.

F

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