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.

Some observations, first, on the four cultures: 

•           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.

•            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.
   

•            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.

•            Innovators 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.

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.

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: 

            (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;

            (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

            (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.

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. 

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:

• the use of domestic coal in a manner compatible with concerns about GHG impacts;

• the expansion of the power/storage grid to support hybrid or all-electric cars; and

• the optimization of fuel efficiency usage through the promotion of cumulative energy efficiency breakthroughs.

Consequently there are three innovations which merit a sustained government “investment” to attract private innovation and capital and stay the commercialization course.

• clean coal: IGCC and sequestration;

• installation of the infrastructure for electric cars; and

• broadened development in smart grids and internet-based energy efficiency platforms.

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.

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.

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.

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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.