Goodwin Procter: Thought Leaders In Carbon Emissions Regulation

Tuesday, April 1, 2008 - 01:00

Editor: Would you please tell our readers about your practice group?

Zoli: Our energy practice group is known nationally for work in both the nuclear work and renewable energy (or Clean Tech) space. In the context of the latter, we historically focused on waste-to-energy facilities, with a 25-year legacy of having represented the industry leaders in their acquisition, development and operation of waste-to-energy facilities. More recently, with respect to renewables, we've focused on wind and solar work from project-development, through capital investment and financing, to operations and utility integration.

On the nuclear side, we've been dominant in nuclear transactional work from the first privatization of a nuclear facility in the U.S., and been involved in virtually every privatization or facility transfer since. We also handle what are widely regarded as "bet-the-company" operational issues for nuclear facilities throughout the country, typically based on perceived operational impacts to resources or human beings. We're also leaders in new nuclear facility development.

Linking these two areas of practice, we represent the carbon-free electricity sector. This dovetails well with our Climate Change practice.

Editor: Are nuclear transactions conducted as project financings?

Zoli: Not in the traditional sense. Most nuclear facility acquisition is typically done outside of the traditional financing markets by the companies themselves. In the past, this may have limited the buyers in these acquisitions to knowledgeable nuclear operators with substantial cash reserves. Also, when nuclear companies started to look at purchasing these facilities, the nuclear sector was experiencing closures, especially in the Northeast. In 1999, when Entergy first acquired Pilgrim Station, there was a prevailing belief that nuclear power was not the future. That's not the case today.

As a result, there is increasing interest in the nuclear sector from the traditional and not-so-traditional financial markets. The "nuclear renaissance" has implicated new financial dynamics, particularly venture capital. Last year we represented, among others, the global venture capital firm Advent International in its acquisition of the Nukem companies, a leader in the nuclear fuel supply chain and nuclear services sectors. That transaction arguably represented a shift from the historic private equity markets, focus on fossil fuel and, later, renewable facilities to the nuclear sector. Its movement into the nuclear sector is a powerful indicator of just how robust the nuclear renaissance actually is, and how fluid and innovative the capital markets are able to be.

Editor: How has the face of the nuclear sector changed?

Zoli: Historically, the nuclear sector was largely comprised of regulated utilities throughout the U.S. that mostly owned single units. Until recently, there was no substantial consolidation of the industry, a limiting factor in terms of the nuclear success story. With the privatization of these facilities in restructured electric systems, companies have been able to consolidate, bringing about fundamental changes in the sector: Capacity factors have gone up, and costs have gone down (with continued dedicated commitment to safe operations), a result which, in part, has motivated a reassessment of nuclear power plants as commercially viable.

At the same time, there has been increasing concern about portfolio diversity in the energy sector. My colleague Jim Woolsey, the former director of the CIA, has spoken eloquently on what security means in terms of power supply. The role of nuclear facilities in meeting baseload supply - in other words, turning on the lights when we want them to be turned on - has increasingly come to the forefront, and many people now understand that, in terms of cost-effective, reliable and safe power production, nuclear facilities are key.

Lastly, nuclear facilities are carbon-free emitting facilities in their core nuclear production. Not only do nuclear facilities provide a baseload supply that stabilizes the market favorably for electricity consumers, but nuclear facilities generate that electricity without carbon emissions. Thus, they're a prime mover in resolving climate change

Editor: What about renewables such as wind?

Zoli: Much of our work on behalf of the wind industry over the last five to seven years has been in developing master strategies for siting wind installations, in private equity investment and in project finance. For instance, we assisted UPC Wind Partners with their master strategy for regional installations of small-scale wind turbines. Why master strategies? Because renewable installations tend to be small, an overarching strategy for addressing investment, access, permitting and siting concerns on a state-wide or regional basis simplifies the process.

Our solar work ranges from corporate work for component manufacturers through large-scale project development, utility integration and attribute (credit) trading. Our work for hydroelectric, ocean and geothermal efforts is, likewise, solidly on behalf of developers, and investors in bringing their products to market.

What this work gives us is a long view of a dynamic sector that is testing energy, environmental, project-finance and development traditions, putting a premium on innovative business and legal strategies. In particular, innovative utility-integration efforts are increasing competitiveness, reducing access hurdles and improving the renewable stake.

Editor: Tell us more about your work with Entergy and Massachusetts v. EPA.

Zoli: Entergy, a leading national integrated power company that is widely regarded as a Climate Change pioneer, developed a "first in class" voluntary carbon reduction program. As part of that initiative, we represented Entergy in Massachusetts v. EPA, filing a brief on their behalf before the U.S. Supreme Court ("USSC"), urging that the EPA be required to regulate carbon emissions. Entergy's involvement demonstrated to a skeptical audience - the USSC - that industry could and would be supportive of carbon regulation. Interestingly enough, the first line in our brief - "This case makes for strange bedfellows" - became the tagline for the case in the media, underscoring the public perception of the importance of Entergy's departure from historic industry opposition to regulation.

Editor: Can you tell us about the Regional Greenhouse Gas Initiative ("RGGI")?

Zoli: RGGI is a consortium of 10 Northeastern and mid-Atlantic states - Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont - that have implemented a system to limit carbon emissions by the electric-generating industry. We have been involved in RGGI on behalf of stakeholders since its inception, which has allowed us to see starkly the evolution of carbon regulation in the U.S. We also have been involved in particular states that have been implementing the RGGI initiative, e.g., New York, Massachusetts, New Hampshire and Vermont.

RGGI began as a "cap-and-trade" program that envisioned allocating allowances, but currently RGGI is shifting to a program that will distribute allowances via auctions. Historically, "cap-and-trade" systems were implemented in a way that gave allowances to those facilities that needed them, under the theory that a market system would evolve as caps tightened. The markets evolved, but slowly. The shift from traditional "cap and trade" through allowance allocation to auction systems is a milestone in environmental regulation. If auction proceeds are, in fact, dedicated to carbon-free production, it will be a truly transformative environmental initiative. It also may give us a transparent system in terms of what it means for all participants in electric generation, isolating the real cost of carbon in the shorter term.

As always, though, the "devil is in the details," and much remains to be seen about how auctions will be allowed to function. Our own experience on behalf of our clients has been that the goals are laudable, but the agency action has not been invariably in line with those aspirations. I nonetheless remain optimistic, despite some worrisome indicators.

Editor: Who administers the auctions?

Zoli: It varies by state, but the question underscores comments we've made on behalf of our clients. We've commented that, because carbon decisions represent the unique confluence of the environmental and energy concerns, it is inappropriate for the decisions to be made by environmental regulators without the active participation of energy regulators. Several states have taken those comments to heart, and these programs are no longer seen as strictly environmental programs. So, the long answer to the question is that auctions increasingly are administered by non-environmental regulators.

The value of having energy regulators actively involved, because carbon decisions may well translate into how the lights go on and at what price, cannot be overstated. As energy attorneys like to say, the electric system isn't about widgets, but an essential service - one that has direct public health and safety, as well as economic, consequences. For these reasons, energy regulators responsible for managing the electric system need to have a full understanding of what the effects may be, and we're pleased that our comments may have helped to get them more involved.

Editor: Have state members of RGGI been able to cooperate?

Zoli: Despite a few hiccups, including in Massachusetts (which exited, then re-entered, RGGI), there has been a very high level of coordination and cooperation among the RGGI states.

Editor: What about a federal program?

Zoli: The RGGI and California initiative proponents have been trailblazers, but I would expect to see a national program that will build upon the inherent success of these two initiatives, likely, including auctions. In the interim, I see no reason for the states not to continue to be thought and action leaders.

Editor: What do you see as major issues in the future?

Zoli: There are two issues that keep me up at night: First, twelve years ago, I worked on the creation of one of the first green-stamping and Renewable Energy Credits ("RECS") programs. Then, renewable portfolio standards ("RPS") and RECs were a fledgling effort to manage carbon. We have, since, seen the development of an active voluntary REC trading system and increasingly stringent, frequently mandatory, RPS. That has been positive in terms of jumpstarting renewable investment and development.

Because the RPS/REC programs were surrogates for carbon trading, however, they are likely to be eclipsed by carbon programs. This transition may create significant legal issues, particularly in terms of satisfying legal standards and contracts. How will that transition work, and what will it mean for RPS/RECs, is an unanswered and important question, one that could - absent careful treatment - destabilize the renewable sector.

The second issue is the existence of increasing governmental interest, typified by state-issued subpoenas, relating to carbon disclosure. Certainly, it may become increasingly difficult - and increasingly risky - to be at the back of the pack. Investors understandably, are also trying to grapple with carbon risk, without a legal structure to do so. Both the effort to grapple with disclosure, and to come up with interim standards, are responsible measures by business, but the areas of uncertainty remain significant. Hiccups should be expected, and we should anticipate continuing disputes about what is appropriate disclosure.

Please email the interviewee at with questions about this interview.