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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 align="left"><b><u><br>
May 2008</u></b></p>
<p align="center"><font size="6"><b>For the Center to Hold</b></font></p>
<p><strong>by Roger Feldman --
</strong><b>Andrews Kurth, LLP</b><strong><br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine
Magazine: 2008/06/01</em>)<br>
</font><span style="font-size: 10.0pt; font-family: Palatino; color: black">
</span></p>
<div>
<p class="BodyText05DS">As oil prices soar and power prices threaten to
follow, it is past time to consider how our republic of diverse cultures
(as well as economic interests) can cope in a globalizing world.
Specifically, there are four main cultures at play in energy in the
United States. They are policy, corporate, finance, and technical
innovation. Each culture’s members see each other at meetings, hearings
and “summits”; they know the lingo that the others speak; they all
crave control of the levers of political power; they litter the
landscape with calculated languages. Unfortunately, their collective
dialogue is leaving on the table the main tools for American energy self
reliance.</p>
<p class="BodyText05DS">Some observations, first, on the four cultures:
</p>
<ul>
<li>
<h1 style="text-indent: -.5in; margin-left: 1.0in"><font size="3">
<span style="font-style:normal; font-variant:normal"> </span>
<span style="font-style:normal; font-variant:normal; font-weight:normal"> </span></font><span style="font-weight: 400">Policy analysts seek
optimal holistic solutions consistent with the intellectual model
(conservative or liberal) of the policyholder. It seems conservative
solutions must always defer to markets, and liberal solutions frequently
must take into account previously unaccounted for social costs.
Specialists in “policy” are generally (certainly at the working level)
not trained to think like corporate managers. They rely on assumptions
as to the unswerving merit of quantitative analysis to bend the
“mindless” self-serving motivation of the populace to the public good
for whatever their politics. They are all, one way or the other,
diviners of the Invisible Hand.</span></h1></li>
<li>
<h1 style="text-indent: -.5in; margin-left: 1.0in">
<span style="font-weight: 400"> <span style="font-style: normal; font-variant: normal; "><font size="3"> </font></span>Corporate managers have been trained to understand the
febrile machinations of policy makers as the muddled public “business
environment,” with which, like the Environment, they must cope, while
being about the business of profit maximization. Industry leaders have
long demonstrated that astute shaping of public policy can create
business winners. The “public affairs industry” in Washington and state
capitals stands as a monument to this understanding. And the vast
pyramids of corporate staff below them, while often capable of
sophisticated engineering and financial analysis equal or better than
that of their policy-analyst counterparts, are, for the most part, loyal
team players who share a healthy skepticism, bordering on disrespect, of
what those with political authority think, can do, and will do.<span style="font-style: normal; font-variant: normal; "><font size="3"><br>
</font></span></span></h1></li>
<li>
<h1 style="text-indent: -.5in; margin-left: 1.0in">
<span style="font-weight: 400"> Finance Industry specialists, of necessity, are like
policy analysts and corporate managers in many ways, but have a more
comprehensive and objective perspective; they see how the business
picture moves the bottom lines of those with whom they deal. There is
frequently an implicit attitude that whatever “they” in government come
up with, or however foolish the strategies of “them” in business are,
“we can finance something, because for every loser there is somewhere a
winner.” And ever increasingly, this view is backed by unprecedented
access to liquidity to make bets, and sophistication to tie those bets
to assumed-to-be-correlated variables and, as we have seen, to take
unhedgeable risks, with the result that their mistakes, as well as their
insights, are writ large.</span></h1></li>
<li>
<h1 style="text-indent: -.5in; margin-left: 1.0in">
<span style="font-weight: 400">
<span style="font-style: normal; font-variant: normal; ">
<font size="3">
I</font></span>nnovators in the energy business, while knowledgeable
about what they do best to achieve technical breakthroughs, frequently
(and sometimes with some reason) view the other established cultures at
best as necessary, and at worst as either anti-innovation, having
institutional views as to what it takes to develop a new idea, or simply
too immediate-yield oriented to provide a firm foundation for their
technical efforts.</span></h1></li>
</ul>
<p class="BodyText05DS">Consequently, different cultures sometimes
assign different meanings to the same terms. Concepts like “invest,”
“short term vs. long term,” “risk management” and “mutually shared
objectives” mean different to them. Our soundbite culture blurs the
meanings even more.</p>
<p class="BodyText05DS">This Tower of Babel in our national energy
policy-making decision-making ranks has this basic practical
implication: unless there are ongoing points of real understanding
between these cultures, while elected politicians may come and go, a
sustainable center for American energy self-reliance cannot be reached.
If each culture is out to get “theirs” -- whether respectively measured
in public policy benefits, ROE, ROI, or IPO multiple, it will be hard to
sustain a center which can hold. For the current situation ever to
change: </p>
<p class="MsoBodyText" style="margin-left: .5in"> (1)
there is a need for commitment to the alignment of incentives for a
sustained time period, to achieve the national objective of self
reliance, without reference to who the economic beneficiaries are; </p>
<p class="MsoBodyText" style="margin-left: .5in"> (2)
the only results justifying such a “sustainable imperative” must be ones
measured in terms of their technological breakthrough, high self
reliance, yield potential; and</p>
<p class="MsoBodyText" style="margin-left: .5in"> (3)
positive half-way measures to achieve such imperatives, which satisfy
multiple constituencies and meet legislative trade-off objectives,
seldom meet the major goals at which they are targeted; they serve only
to satisfy a thousand pork-fed appetites.</p>
<p class="BodyText05DS">This does not mean that government should be
empowered to pick technology winners and losers. It means that there is
an overriding need to set up a competitive marketplace for innovation
where, over the realistic period of time recognized for the process of
technical innovation to work it out, necessary sectoral advances can be
achieved. The motive of unshackling innovation, which sparked
deregulation of parts of our economy was not wrong; in most cases the
flaw lay in the methodology -- not adapted to the realities of the
energy environment -- which succumbed to violation of the principles
articulated above. </p>
<p class="BodyText05DS">This type of thinking may lead the country in
unanticipated directions. Without disparaging the potential role of
renewables technology breakthroughs (which should definitely continue to
receive the tax incentives they are in danger of losing), it is clear
that generic sectoral advances need to occur, in three other more
traditional technology areas, for the U.S. to return to a position of
self reliance:</p>
<ul>
<li>
<h1 style="text-indent: -.5in; margin-left: 1.0in">
<span style="font-weight: 400">the use of domestic coal in
a manner compatible with concerns about GHG impacts;</span></h1></li>
<li>
<h1 style="text-indent: -.5in; margin-left: 1.0in">
<span style="font-weight: 400">the expansion of the power/storage grid to support hybrid
or all-electric cars; and</span></h1></li>
<li>
<h1 style="text-indent: -.5in; margin-left: 1.0in">
<span style="font-weight: 400">the optimization of fuel efficiency usage through the
promotion of cumulative energy efficiency breakthroughs.</span></h1>
</li>
</ul>
<p class="BodyText05DS">Consequently there are three innovations which
merit a sustained government “investment” to attract private innovation
and capital and stay the commercialization course.</p>
<ul>
<li>
<h1 style="text-indent: -.5in; margin-left: 1.0in">
<span style="font-weight: 400">clean coal: IGCC and sequestration;</span></h1>
</li>
<li>
<h1 style="text-indent: -.5in; margin-left: 1.0in">
<span style="font-weight: 400">installation of the infrastructure for electric cars; and</span></h1>
</li>
<li>
<h1 style="text-indent: -.5in; margin-left: 1.0in">
<span style="font-weight: 400">broadened development in smart grids and internet-based
energy efficiency platforms.</span></h1></li>
</ul>
<p class="BodyText05DS">Interestingly, there is one unifying theme with
respect to these three areas: they require encouragement of strong
affirmative electric utility involvement from the related perspectives
of concern with the marketing and production of the electric product in
innovative ways, and receptiveness to both smaller scale innovation and
strategic partnering with other industries. Utilities need incentives
to not only defend existing franchises, but generate rewards by
establishing new competitive businesses. And there is one unifying
theme in figuring out how this realistically ought to be: it must
reflect not just the cool calculus of policy makers, the guile of
corporate finance vice presidents, the greed of venture capital
investors, or the dazzling dreams of scientists. It must offer
opportunities for all of the participants who engage in the process to
participate in realistic joint problem solving.</p>
<p class="BodyText05DS">If this conclusion is correct, perhaps a new
model is in order -- not a conference, and not a Manhattan Project --
but a very focused problem-solving institution with a very specific
charter of objectives, assigned deliverables, and authorization to think
(and recommend spending) to fight the other “war” which our country
really finds itself in. It would not be a governmental agency: not a
sprawling hodgepodge like DHS, nor a funder of multiple-technology
projects like DOE. It would be a National Center whose sole objective
is to develop approaches to incentivize the private sector to produce
the results needed for energy self reliance. A Center that would
include utility and energy executives, rather than treat them either as
the subject of a social laboratory experiment (as key legislation and
regulation sometimes has), or as entitled (and requiring) a secret cabal
for national energy planning—whose very discovery recently became the
subject of Congressional investigation.</p>
<p class="BodyText05DS">For better or worse, our country is at a turning
point in the historical position that it has increasingly occupied
during the past century. We need the center to hold. If we do not pool
into a single Center the sophisticated subsets of management and
investment cultures which have evolved, our national policies will all
become increasingly quotidian as our nation shrinks in relevance. In
short, we need to center our energy strategy by bringing the four
cultures together to implement a new approach based on the way the
American system operates and the flexibility with which it can be
adapted to changing realities.</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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