"Men in Black - Get Shorty"
by Roger Feldman -- Bingham, Dana L.L.P.
When the Administration first learned of the California energy crisis through clippings from the Sacramento Bee, 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.
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.
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.e., 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).
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.
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 Business Week and The New York Times; pundit profundity and neo-populist broadcasting.
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.
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.
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.
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.)
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.
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.