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<title>December 2004: Dis-Extrapolationism</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>
</u></b><u><b>December 2004</b></u></p>
<p align="center"><font size="6"><b>Dis-Extrapolationism</b></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: 2</em>005/01/08)<br>
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<p>It is the time of year when forecasts are made for the coming year. This
is particularly appropriate for the energy industry which is all about
markets and forecasts about markets: betting on them or hedging against
them. In the world of the hockey stick projections, the man with the
facemask is king. Also, the energy industry is a source of convenient
aphorisms, the most convenient of which (most recently cited when natural
gas prices soared way above projections, destroying the IPP market) was “Our
projections were based on the best available data.”)<br>
<br>
Unfortunately, energy projections, like most projections in the producer
world, may not be assumed to take place in a vacuum. Some of the most
obvious “exogenous variables” are the impacts of the economy on commodity
and money costs, the swings prompted by geopolitical developments, the
uncertainties of energy audited corporate accounting data. (Enron books,
Shell anyone?), and (most recently acknowledged to the trumpets of Nobel
prizes) the fact that “actual man” (whether consumer or speculator or
investor) does not, when taken as a herd, behave the same as “individual
economic man” is supposed to, depending on what actual man believes future
economic reality will in fact, be).<br>
<br>
To these caveats in evaluating forecasts - are three discovered in the
otherwise eventless year of 2004:</p>
<ul>
<li>the Law of Election Interpretation (“winner takes all” on policies not
even discussed in elections)<br>
</li>
<li>the “Law of Statistical Blas�,” (all things will return to some prior
mean at some prior time, like the legendary momentary accuracy of stopped
clocks)<br>
</li>
<li>the “Law of Accelerated Disintegration,” (the unforeseen by
policymakers rapid logarithmic disappearance of policies found to have
been placebos or at least non-instantaneous solutions</li>
</ul>
<p>So the guiding principle apparently should be “disextrapolate” -
<br>
<br>
Here’s how some key forecasts can duly disextrapolate by the foregoing Laws:<br>
<br>
<b>ITEM<br>
</b>“Bernard Kerik, former New York City Police Commissioner named head of
Homeland Security.” Surely this reflects the Bush administration’s renewed
get-tough intention to get to the real root of American insecurity - energy
dependence - color it - NYPD Blue and create an integrated technology review
and development program (the moon landing project of the ‘00s.<br>
<br>
However, this assumption would conflict with the aforementioned Law of
“Election Mandates”: Dick Cheney is the Minister Plenipotentiary of Energy,
and the plan the USA will follow is already written (subject to the
realities of the law of supply and demand). First ANWR, then LNG, some coal
gasification maybe a little wind power - or maybe that’s just the dry wind
over Mosul.<br>
<br>
<b>ITEM<br>
</b>“Oil prices take Another Deep Drop: Higher Heating Fuel Inventories,
Mild Winter Prod. Decline” (Washington Post December 2, 2004). How did this
happen? Well, forget all of that stuff about tight supplies, fear of
disruption, impact of hurricanes -- that's so - well October! The new news
is that the Energy Department has mistakenly underestimated the amount of
natural gas in storage; that OPEC is likely to keep production levels (at
its next meetings) and that milder weather has leveled requirements. In
response to which news a noted financial analyst blandly was quoted “It does
not surprise me, to be honest.” This contretemps highlights that any
extrapolation of this headline should be ignored: it is subject to the Law
of Statistical Blas� in energy industry evaluation.<br>
<br>
. . . Which leads us to the power industry.<br>
<br>
<b>ITEM<br>
</b>“Others Watch Ohio’s Power Bill” (Wall Street Journal), Nov. 19, 2004.
It now seems that “Despite Deregulation, States’ Electricity Rates May
Rise”. Among other little observations: while deregulation proponents had
counted on supplier-switchers to drive rates down, in the case of First
Energy the largest potential source of change, more than half the customers
moved to First Energy Solutions, its unregulated unit Ohio utilities
received surcharges to pay down the cost of investment on assets potentially
stranded by competition. Meanwhile, even though the (Ohio) utilities haven’t
built new plants in many years; they desire to be free to raise their power
prices in step with those in neighboring states where expensive new
gas-fired plants have been built. Or as a utility spokesman put it. “If the
market hasn’t developed, then now can you test the reasonableness of power
prices charged by a utility going to market.”<br>
<br>
Don’t bank on headline extrapolation to the effect that a mild winter in the
Midwest, coupled with a summit meeting of M150 will result in downward
movement of electric prices (or a surge of new IPPs, either, for that
matter). Not for help from the Cheney Plan.<br>
<br>
So then, one forecast (which I may be able to markup and use next year as
well): There will be a progression toward concentrated production or
importation of all types of energy, by a more concentrated group of players
to accommodate the current perceived market status quo; unless and until and
to the extent the cage of that status quo is so rattled by futures market
price speculation that seams appear (or are created by regulators) where
opportunities are created for new players not subject to the current system
of traditional regulations. In other words, there’s plenty of hope for 2005.
Be anti-disextrapolationist and have a great new year!</p>
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<p class="MsoBodyText" align="left" style="margin-bottom:0in;margin-bottom:.0001pt;
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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