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<title>May 2002: "Men in Black - Get Shorty"</title>
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<p align="left"><font face="Arial"><strong><small>About The Author:<br>
<br>
</small></strong><span lang="X-NONE" style="color: black"><font size="2">
ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon
Markets Group has practiced law related to the finance of environmental and
energy projects and companies for 40 years. In particular, he has analyzed
and executed a wide variety and substantial value of project financings. He
chairs the American Bar Association’s Committee on Carbon Trading and
Finance, serves on the Board of the American Council for Renewable Energy,
and has been a senior official in the Federal Energy Administration. He is
a graduate of Brown University, Yale Law School and Harvard Business School.</font></span></font></p>
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<img src="../images/feldman.gif" alt="Washington Viewpoint by Roger Feldman" border="0" width="375" height="75"><p><b><u><br>
May 2002</u><br>
</b></p>
<p><font size="6">"Men in Black - Get Shorty"</font></p>
<p><strong>by Roger Feldman -- Bingham, Dana L.L.P.<br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine Magazine:
2002</em>/05/21)<br>
</font><span style="font-size: 10.0pt; font-family: Palatino; color: black">
</span></p>
<font FACE="Times New Roman" SIZE="1"><i></i></font>
<font SIZE="3"><i>
<blockquote>
<blockquote>
<p ALIGN="JUSTIFY">It is a well-known fact, most recently reported in
the movie "Men in Black," which is about a top-secret, anti-alien strike
force maintained by the Federal Government, that the best source of
accurate information about intrusion into our domestic tranquility can
be found in the supermarket tabloids, as in "Lonely Space Squid
Terrorizes Las Vegas Lounge Lizards." Consequently, this energy reporter
was moved to research the superficially dubious item that appeared last
week in an obscure corner of the Business Section of <u>The Spurious
Star</u>: "Office of Homeland Defense Assumes Management of FERC: Threat
to National Security Averted." My findings of the facts, pried
principally from now publicly-available information, <u>should</u> <u>be</u>
<u>alarming</u> to readers of this publication.</p>
</blockquote>
</blockquote>
</i>
<p ALIGN="JUSTIFY">When the Administration first learned of the California
energy crisis through clippings from the <i>Sacramento Bee</i>, it dismissed
the problem as a product of faulty ISO system design (you know how flaky
those Californians are) and a failure to face up to the sturdy supply and
demand lessons of the marketplace (they NIMBYed too long, and they deserved
it). There followed a series of seemingly non-related tragedies: 9-11 and
Enron. California faded into the background as weather cooled and cooler
heads at FERC prevailed regarding interstate price caps.</p>
<p ALIGN="JUSTIFY">Then, however, came the revelation that Enron may have
manipulated the California power market by creating artificial shortages,
which led to spiked prices – and real shortages – using highly technical
algorithms for application of game theory to energy markets named, for
example, "Get Shorty" (based on the sobriquet applied to Robert Oppenheimer
at Los Alamos, no doubt). Even that would not have galvanized a high level
of policy concern in the Administration ("Kenny Boy screwed the pooch this
time, didn’t he? Good thing we had nothing whatsoever to do with him…" an
unidentified senior official offhandedly remarked), except that it came to
the attention of a staffer of the Real Intelligence Board (RIB), which is
the top secret panel in Ripley, VA (near McLean), that actually tries to
figure out what is going on. It is comprised of some of the leading
futurists with an edge in the U.S.: Michael Crichton, George Lucas, Elmore
Leonard, Tom Clancy, and is presided over by the Vice President. The Board
spends its time trying to figure out what real terrorists might do on a
given day to cripple American morale and jeopardize the country. It is they
who recognized that the grounding of Air Jordan of the Wizards was actually
a code signal for events to come.</p>
<p ALIGN="JUSTIFY">Here is what the Administration put together, as reported
in a top secret wireless communication intercepted on my cell phone. The AQ
people had a bloodless as well as a bloody plot for America. In the
bloodless plot, without firing a shot, the largest economy in the United
States would be brought to its knees by depriving it of electric power. Not
only would Silicon Valley be closed (which could suggest a Redmond,
WA-inspired plot) but also Hollywood would be silenced, and the ability of
the U.S. to communicate with the world stilled (<i>i.e.</i>, international
inspiration was more plausible). In addition, this would be effected in a
way that would produce huge "legal" cash flows to AQ, which then could be
made available to fund more nefarious activities. Moreover, more subtly,
U.S. public confidence in the institutions supposed to guard the integrity
of the capital markets would be sapped as, following their immediate
self-interest, one by one, the accountants, securities analysts and rating
agencies would each be found to have sold their public interest for some
portion of a mess of pottage. U.S. capital markets would founder and a
self-fulfilling prophecy reaction would be triggered: there would, in fact,
be no capital for the needed new power infrastructure; it would not be
built; and the substantive basis for future shortages (and attendant,
adverse economic consequences) would be laid. Further constricting growth,
the industry would be thrown into a paroxysm of re-regulation as political
fear of deregulation flew from state to state. Meanwhile, both to make
further profit and also to accentuate the trend, AQ operatives would be
actively shorting the securities of utilities and turbine suppliers (not to
mention California public debt).</p>
<p ALIGN="JUSTIFY">RIB instantly recognized the pattern: it was of the old
Iran/Contra school of the illegal act, fueling the funding of the
unacceptable adventure. Because, however, the events comprising it were
ordinary enough, it would be readily understood (and cynically dismissed) by
the public as falling within the band of acceptable market behavior ("Energy
trading is a football game. It ain’t bridge…" a leading trader observed), it
could continue on a replicable basis for a while: a veritable capitalist
virus. In Texas, for example, the $20 million contingency fund for
compensation for clearing congestion in that state’s deregulated market was
run through in two weeks – not the 18 months it had been budgeted to serve.</p>
<p ALIGN="JUSTIFY">AQ also had anticipated that its window for market
mischief would be protracted by spinmeister legerdemain. There was plenty of
fresh precedent reeking already, of how PR gurus advised institutional
integrity guardians. Expected events included prematurely-launched reform
legislation (such as the commodities regulation field closing off online
power trading loopholes) already had been beaten back; interagency task
forces; Congressional hearings; scapegoating; proposed codes of conduct and
voluntary guidelines (zero tolerance); protracted rulemaking proceedings;
editorials in <i>Business Week</i> and <i>The New York Times</i>; pundit
profundity and neo-populist broadcasting.</p>
<p ALIGN="JUSTIFY">A significant period would therefore elapse while the
recessional of the deregulation gambit – and with it the prospect of rapid
additions to power industry generating and transmission infrastructure stock
– was played out, sapping the economy and the affected power consumers. The
re-regulated system that followed seems likely to compound the system
verification and investment confusion.</p>
<p ALIGN="JUSTIFY">RIB noted that against this devilish strategy conceived
by the AQ forces of evil – was to be inserted by AQ into the unknowing
brains of a few master capitalists and hubris-ridden academics and
regulators by opinion-making techniques already perfected in the U.S. by
them.</p>
<p ALIGN="JUSTIFY">Against the prospects of this bloodless coup, would stand
only a thin blue line of Keystone Cops. At the Federal level, an agency
inexperienced in trading, understaffed and underempowered, flanked by two
experienced trading agencies with their own problems, a limited knowledge of
energy, a stated desire not to be dragged into the fray (and, some might
say, an inclination to be "kinder and gentler" to purported market force
representatives). At the regional level, would stand mostly newly-organized
(or, in some cases, not even formally sanctioned) RTOs. At the State level,
would stand only balkanized power regulatory bodies, some of the largest of
which had already publicly admitted that they were no match for the trading
manipulations of which the private sector was capable, and a few State AGs
seeking new targets with activities as publicly comprehensible as those of
the securities industry.</p>
<p ALIGN="JUSTIFY">Faced with this situation, RIB decided extraordinary
action was necessary. It was Clancy who suggested the use of something like
Navy "red cells" – faux terrorist units to test the strength of system
markets as the only way trader raids and hackers could be controlled –
Federal agencies work on checklists, not real-life system gaming innovation
he pointed out. It was Crichton who suggested that the power of technology
was such that Federal monitoring of all energy trading markets to prevent
hacking was feasible. It was Leonard who said, "…but these guys are crooks,
as well as part of an evil axis…" and suggested that RICO-type police work
rights and capabilities were necessary to effectively follow up against the
evil malefactors. It was Lucas who had the insight to see that all of the
firepower needed to deal with the Death Star (another algorithm) would be
acceptable to the public only if the equivalent of Jedi knights believing in
"The Force" were put in place. And it was then that the Vice President –
anxious, among other matters, to protect the rest of his Energy Plan and to
avoid unfair indirect linkage to the AQ plot because of his previously
stated views on why the energy crisis in California was happening – had the
masterly suggestion of transferring the issue to THE Office of Homeland
Security. (Hey, it works for everything else so far, he was reported to have
shrugged.)</p>
<p ALIGN="JUSTIFY">The above news report is – in case you missed it –
fiction. The broad-ranging ramifications of the energy trading/deregulation
issue could not be more real and imminent. High-powered attention to the
options for enabled, private self-governance (with governmental oversight)
of the national power system is needed now. Back to the future re-regulation
solutions will not address the future needs of a nationally price
competitive and operationally secure energy production, management,
transmission and distribution system. We need the Men in Black to Get Shorty
now in the public interest.</p>
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text-align:left"><font face="Arial" size="2">
<span lang="X-NONE" style="color: black">ROGER FELDMAN, Co-Chair of Andrews
Kurth LLP Climate Change and Carbon Markets Group has practiced law related
to the finance of environmental and energy projects and companies for 40
years. In particular, he has analyzed and executed a wide variety and
substantial value of project financings. He chairs the American Bar
Association’s Committee on Carbon Trading and Finance, serves on the Board
of the American Council for Renewable Energy, and has been a senior official
in the Federal Energy Administration. He is a graduate of Brown University,
Yale Law School and Harvard Business School.</span></font></p>
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