This may seem like an under the radar issue, but it's a big deal.

In Carter administration, the US decided that civilian spent nuclear fuel should not be recycled. Instead, it was to be stored and buried in deep geologic repositories.We can have some fun criticizing Carter's decision, but there were reasons for making the disposal decision. The decision paved the way for the construction of Yucca Mountain, which is funded by utilities (not taxpayers).

I'm in favor of recycling. Burying spent nuclear fuel in a cave is like burying a car because the battery died. As a car can be recycled after a new battery installed, nuclear fuel can be recycled after the fuel has been processed.

In the end, recycled fuel will need disposal. However, the volume is dramatically reduced (from a car to a used battery), and the ultimate disposal becomes less costly.

Recycling is an expensive process. Facilities cost billions to build. But, Yucca Mountain has already cost $12 billion, and the project is far from finished.

George Devaux writes: 

From Policy Options for Nuclear Waste Management:

Sustainable Solutions for Expanded Nuclear Energy

"Reprocessing technology has the ability to decrease the volume of HLW by a factor of 4 while at the same time decreasing the required storage timeframe from hundreds of thousands of year to less than 1,000 years. The HLW produced from reprocessing is also vitrified in glass, to produce a stable, homogenous waste product. Reprocessing and recycling SNF could require only one Yucca Mountain-sized repository this century and decrease the amount of fresh uranium fuel required by 25 percent."



 Why are we at war with Canada? According to the Trump Administration, there's a net trade surplus between US and Canada (goods and services):

"The U.S. goods trade deficit with Canada was $17.5 billion in 2017, a 59.7% increase ($6.5 billion) over 2016."

"The United States has a services trade surplus of an estimated $26 billion with Canada in 2017, up 8.0% from 2016."

Stefan Jovanovich writes: 

1. Cars and Auto Parts.

Canada manufactures 4 million cars. It buys 3 million and exports 1 million to the United States. It is also the largest auto parts exporter to the United States.

2. Marketing Boards

Canada uses the agricultural marketing board mechanism for controlling production and prices of domestic dairy and other "grocery" farm products. To support this mechanism the marketing boards restrict all imports by tariff and by quota while allowing Canadian "surplus" production to be exported at foreign market prices.

Question: Who would profit most from the shift of car and auto parts production to the United States? Whose domestic production of "grocery" farm products would be boosted by the exclusion of "surplus" Canadian production?

Answer: Agricultural and car and auto parts producers in the Great Lakes States of the Mid-West

Ain't the study of actual political economic events much more interesting than further refinement of marginal utility theory?

Geoge Zachar writes: 

The reports I've seen indicate Canadian dairy protectionism is driven by Quebec…something the the anglophone provinces deeply resent, as they're forced to pay up for dairy products.

So, in addition to being seen supporting important US constituencies, Trump is deepening political divisions north of the border.

Stefan Jovanovich writes: 

The Canadian Parliament decided to "stand with Canadian workers" when President Trump announced the steel and aluminum tariffs.

I doubt very much that they have examined their own history with regard to trade "wars". If they had, they might have been tempted to take President Trump at his word about the need for "reciprocity".

In the Elgin-Marcy Treaty, signed in 1854, the U.S. and London entered into a free trade agreement. As the Wikipedia article notes, the Canadian business interests threatened to ask the U.S. for annexation if Britain did not work to open the U.S. markets to Canadian exports. Under the Treaty timber and wheat and coal were admitted to the U.S. without duties or quotas; the existing 21% tariff was eliminated by the U.S. The reward for the Americans was open navigation on the Great Lakes and St. Lawrence and access to the Grand banks fisheries. The arrangement was broadly popular and hailed as the Canadian-American Reciprocity Treaty.

Within 4 years the Canadians decided that they needed to protect their manufacturers. The Cayley tariff of 1858 and the Galt tariff of 1859 raised the duties on imported manufactured goods 20 per cent. For the new Republican Party, this was an absolute Godsend. In 1860, as now, the United States had the lowest tariffs and least restrictive trade rules of any country. Why, Congressman Morrill asked, should American producers have to accept foreign competition but be shut out of foreign markets? Morrill shifted the discussion on tariffs from being a question about protecting Northeastern manufacturers to one for the nation as a whole. He introduced his bill by announcing this change: "In adjusting the details of a tariff, I would treat agriculture, manufactures, mining, and commerce, as I would our whole people—as members of one family, all entitled to equal favor, and no one to be made the beast of burden to carry the packs of others." The "free trade" Democrats did not have an answer.

By 1861 the U.S. had increased overall tariffs from 17% to 26%; by the end of the Civil War the average rate had increased to 38%. It was to stay there until the Underwood tariff (the Revenue Act of 1913).



There is an article circulating on Twitter. I'm sure it's selling ink for Forbes. It plays into the politics of providing additional government supports for higher-priced coal and nuclear. But it's based on faulty analysis.

There is no debate among industry participants. Wind and solar have had a significant impact on power markets (energy markets). Market-clearing prices in Europe, United Kingdom, the United States have declined. As more wind and solar resources are added, prices decline further. This phenomenon explains why independent power producers struggle for margin. It also explains why coal and nuclear plants are seeking additional government supports to stay in business. They will tell anyone willing to listen, coal and nuclear are not competitive without new subsidies (their initial capital costs were fully subsidized).

Here's the author's trickery. He completely ignores power market dynamics. He jumps to the end of the utility value chain, focuses on the final retail price of electricity, and falsely concludes the villains are wind and solar.

What the author doesn't tell readers is that electricity prices (not energy prices) are heavily regulated all over the world, including Europe and the United States. When deciding on the price of electricity, regulators include the market price of energy and add much more (state and local taxes, fees, reliability costs, infrastructure costs, bad debt, line maintenance, operations, management costs, union costs, pension costs, guaranteed utility margins, and so on). While energy prices have been declining, regulated costs have been increasing.

It turns out the villain is not the market; it's the regulators. The other villain is the publication of faulty analysis.



 Chart of USPS annual mail volume from the USPS website.

Carder Dimitroff writes: 

I'm wondering if it makes sense to sell US Postal System assets. 

anonymous comments: 

There are basically three different theories on what to do with the post office.

Theory 1: The post office is dying. The solution lies in free markets which means privatizing it which may or may not mean ultimately the sale of many of its assets and properties.

Theory 2: Yes first class mail is dying, but package delivery is increasing. We can't privatize the post office because nobody will ever be able to put together this package of assets/distribution again. The post office just needs to re-purpose it's assets the way it has already started to do and get into same day package delivery. This of course is supported by the postal union and its political allies.

Theory 3: (This was once the position of the postal union, and is now relegated to weird, out of touch leftists): The postal union is an American institution that connects us all into a society. Yes, you don't know anybody who hangs out at the post office, but believe me, if we close a lot of post offices it will devastate small communities where people hang out at the post office. Again, you don't know anybody who hangs out at the post office, but millions of people do.

It's an interesting debate between theories 1 and 2, but unfortunately the debate is always mixed up with a bunch of people lobbing Theory 3 stuff into the conversation.

anonymous adds: 

New Zealand's experience: "history of new zealand post".



It appears New Jersey's governor will sign a bill subsidizing the state's nuclear power plants:

"One bill would provide two Public Service Enterprise Group nuclear power plants with subsidies costing ratepayers about $300 million per year."

While friends at American Nuclear Society and Nuclear Energy Institute may be celebrating, those invested in the power markets may have a different view.

The issue is "market response." When a state pays an owner to run their plant independent of regional market signals, the owner will run his plant. In fact, the owner will happily run their plant when their production costs fall below market prices.

That's fine for the nuclear plant. It's not fine for other participants. When large assets ignore market signals and continue to produce, market-clearing prices for everyone crashes. The nuclear owners win, other producers lose. Those other producers include coal, natural gas, oil, hydro, wind, solar, and storage.

FWIW: Consumers win with lower energy costs (yes, they could get some of their $300 million back). State and local governments win with SIP programs and tax bases.

The power market may adjust bids in the attempt to offset state subsidies. While adjustments help, they would not address the behavior.

This is not a new problem. In US, EU, and other deregulated power markets, nuclear plants frequently ignore market signals. When they do, market-clearing prices frequently cross $0.00. With added incentives to "must-run", zero-priced energy may appear more frequently.

To be candid, I'm being a bit ornery. I believe it's in the nation's best interests to keep existing nuclear plants running. For free-market proponents, there are no perfect solutions. For New Jersey (and Illinois and New York), this is one of the policymakers' least bad options.

IMO, there's another choice. It relies on markets. It would reside at the wholesale level (multi-state). The grid could offer a two-tier pricing system for capacity. One tier would be for baseload plants, which would capture nuclear, large coal, large hydro, and large natural gas. The other would be for non-base load plants, which would include small gas, oil, small hydro, wind, and solar.



 My wife's family experienced severe flooding. They did not live in a flood plain. It took the community over a decade to recover.

Their most challenging issue was silt. It got into everything. It found its way into walls, insulation, floors, and ceilings. To restore a flooded home, walls and insulation had to be removed. In many cases, it was easier to level the house and build a new structure on the existing foundation.

The problem with silt is its composition. While the flood originated with fresh water, it found its way into sewer systems, oil storage, and everything else. When the water receded, bacteria and oil-laden silt was left behind.

As you can imagine, some attempted to "fix" their homes without removing the silt. A decade later, you could still smell an odor inside the home, particularly when it rained. They paid when they attempted to sell the home. The lesson is you'll pay me now, or you'll pay me later.

The community included the corporate headquarters for Corning Glass. They used their technical, financial, and political resources to help rebuild the community. It did not matter if you were employed by the company or owned the local florist shop, the company was there for you. Their sense of community was never forgotten.



 Nuclear construction plant abandoned. About 5,000 highly skilled jobs were suddenly lost today.

South Carolina decided to walk away from their nuclear construction project. Called V. C. Summer, the project was a two-reactor commercial nuclear power plant. SCANA spent/committed about $10 billion, which is down the drain.

The decision was a direct result of the Westinghouse bankruptcy. As a result of Westinghouse's financial woes, utilities were exposed to unacceptable levels of financial risk.

Utilities looked to Washington for help. They needed a tax credit extension. All they got was rhetoric. Nice talk from Congress. Happy talk from the Administration.

In the power industry, SCG's decision to quit the V. C. Summer project is a big deal.



 Batteries will become increasingly important actors in the future. This opinion is shared by many managers in the utility industry. As evidence, there are massive R&D public/private partnerships already underway, involving government laboratories, universities, and corporate participants. There are at least five separate centers of innovation in the United States, Europe, and China. Already, there have been interesting breakthrough technologies announced, including lithium ion II batteries.

For our conversations, I believe it might be important to have a common understanding of the term "battery." For me, a battery is an energy storage mechanism. In most cases, it's a chemical.

In my opinion, a fuel cell is not a battery any more than a car engine is a battery. A fuel cell does not store energy; it converts energy. The fuel tank stores energy.

If you chose to combine the fuel tank with the fuel cell and call the combination a battery, that's fine. Personally, given where we are today, I don't believe there are many opportunities for fuel cells in the transportation sector.

A problem with fuel cell economics is how proponents set up the question. They usually begin the argument with, "given I have hydrogen," fuels cells are amazing. I might agree; fuel cells can be amazing little power plants if sourcing hydrogen were not a substantial challenge.

Unfortunately, that's not reality. If fuel were free, oil-burning power plants could also be amazing.

Fuel Cell Electric Vehicle (FCEV) serves to make a point. What is an FCEV? It's an electric car with a fuel cell, and a hydrogen tank bolted on. Like a Tesla, an FCEV needs a motor and a bank of batteries. However, FCEV's battery capacity has to be reduced to accommodate added weight and space needed for the fuel tank, fuel management system, and the [hot] fuel cell. To make concerns more challenging, the fuel tank in an FCEV has to be larger than normal because compressed hydrogen is a relatively low-density fuel and it can be hazardous.

The first macro question that should surface is basic. Specifically, what is accomplished by toting around hydrogen?

I will save time. If there's something to be gained, it's not substantial. Compared to a combustion engine, a fuel cell is more energy efficient. It's more energy efficient.

However, hydrogen is not economically efficient. If the objective is to compete with electricity, I doubt hydrogen could ever be a cost competitor anytime soon.

In many ways, hydrogen and electricity are similar. One is about protons, and the other is about electrons. Both are secondary fuels. Both are manufactured from primary fuels. Most important, both require vast investments in infrastructure to be useful.

They differ economically. The electric infrastructure is already built. Electricity already has a comprehensive infrastructure in place. It was developed incrementally over several decades. It cost hundreds of billions of dollars to build and more to maintain.

The hydrogen infrastructure does not exist. As a redundant fuel, to compete with electricity economically, any hydrogen infrastructure would be scaled, vast and costly.

As Western utilities move towards natural gas as their primary source of fuel, electric cars store natural gas' energy in their batteries. FCEVs store the same energy in hydrogen tanks. Why not deploy natural gas vehicles (NGVs)? You'd save several energy conversions.


Approximate energy densities MJ/L:

Coal:        34-43
Diesel:        36
Gasoline     34
Fat:             34
LNG:           22
Wood:         13
H2 (comp):    9



 If American Enterprise Institute's numbers are correct and if the Trump Administration is serious about their promise of creating jobs, Trump should immediately give up on coal and focus on solar. Unfortunately, AEI's presentation is wrong.

AEI put their thumb on the solar scale. For solar, they included employees dedicated to the construction and installation of new solar assets in addition to operating employees. They did not do the same for coal. They didn't do it for coal because almost no one is building a new coal plant.

Instead of comparing apples with oranges, AEI compared apples with orange trucks. Nevertheless, on the jobs front, the conclusion is the same: Trump should give up on coal.

Stefan Jovanovich writes: 

When Milton Friedman was shown a construction project in The Third World where the earth moving was done by people using shovels, he was told that this was helping with employment. Friedman is said to have replied: "Then why not take away the shovels and give them trowels." The output for solar remains trivial - .04 billion MWH vs. 1.24 billion for coal and 1.38 billion for natural gas. Even the most optimistic projections of the DOE don't have solar producing even 10% of the present output of either coal or natural gas before 2025. Perhaps the solution to the employment problem is to abolish the long-wall mining equipment and bring back the shovels.

Leo Jia writes: 

It is alive and well here in China. At my building complex on the east side of Shanghai, which was an early 1990s series of lux buildings, they'll send a ground crew of 10 to trim hedges all day. I could have easily done the same with a trimmer in an afternoon during my summer odd jobs.

Other bizarre aspects of town– even in some of the most posh areas with the latest buildings, there are a dirth of street lights and almost none of the bicycles, runners, and electric mopeds, even the newest, have lights and/or reflectors.

Another thing I wince at is workmen of all kinds not using safety glasses which cost all of a couple of USD equivalent. The ones I see wearing are the supervisors well away from the dangers.



 Westinghouse Electric filed for bankruptcy protection a few weeks ago. Westinghouse is the prime contractor, original equipment manufacturer, and financial guarantor of approximately $40 billion worth of nuclear construction. That construction is underway in Georgia and South Carolina. Depending on how it's measured, construction is approximately 50 percent complete. More than 50 percent of the money has been spent or committed.

Owners of these projects represent every utility operating in Georgia and South Carolina. Owners include every cooperative utility, municipal utility, and investor-owned utility operating in each state. By extension, every consumer living or working in either state will assume their pro rata share of construction liabilities.

Georgia utilities are also liable to the federal government for $8 billion in loan guarantees. These loans are in addition to any exposure to $2 billion in federal tax credit clawbacks.

Utilities and state regulators will be forced to make some tough decisions. Do they proceed with construction, do they abandon, do they defer, or do they implement some combination? There's no right answer.

Either way, it appears the states' captive customers will pay the price. If utilities proceed with construction, customers will face higher utility bills. In the first several years, those monthly invoices could be painful. However, over time, they will become palatable.

If utilities and regulators abandon construction, consumers will pay for all utilities' costs to date (this requirement is due to state Construction Work In Progress - CWIP policies). Unfortunately, captive consumers will gain nothing in return for their involuntary contributions.

Stakeholders are beginning to understand the depth of their predicament. Some are deeply concerned:

Unless there's a sovereign bailout, it's looking grim for utility stakeholders. It's difficult for the 10,000 or so highly skilled construction workers at both construction sites. It's sour for shareholders, communities relying on the plant's tax base, utility employees, state agencies, regulators, and consumers.

I take no delight in the Westinghouse meltdown. For me, nuclear power is an elegant solution to power industry challenges. It's clean, it's reliable, and, over the long term, it's economic. But, make no mistake. Nuclear power plants are sovereign assets.



 If data matters, coal miners should worry. It appears another round of layoffs is in the making. Reducing regulations won't help. While regulations are an issue, they are not the industry's greatest challenge.

Here's some data to consider:

National power production increased year over year since 1949. It wasn't until 1982 before the first decline was recorded. Growth resumed in the subsequent years until production reached its peak in 2006. Since 2006, production ceased growing.

For 60 years, coal enjoyed between 44 percent and 57 percent of the power industry's market share. From a percentage point of view, the worst years were between 1971 and 1978 when market share hit their low near 44 percent. The best years were 1955, 1985, 1987, and 1988. The peak year occurred in 1988 when coal hit 56.97 percent

Since 1988, coal's market share has been in decline. In 2011, the percentage punched through 44 percent. In 2016, it sank below 30 percent. The trend is lower.

Percentages are one consideration. Raw production is another. Since 1949, the amount of power produced from coal (coal power) increased year over year. While there were minor declines, the general trend was upward from 1949 until 2005. Since 2007, the year-over-year trend has been in a steep decline. From 2005 to 2016, 20 years of growth had been erased leaving the industry at 1980 levels.

Politicians have it wrong. Most coal industry jobs were lost in the 1950s. Peak employment occurred in the 1920s. By 1970, 80 percent of the industry's jobs were lost. In 2003, employment numbers fell below 100,000. By 2011, 40,000 new jobs had been added; the industry was restored to 1992 levels. Today, it's returned to 2003 levels.

It wasn't regulation that killed employment. It was economics and efficiency. In 1950, the industry required 3.2 employees for each gigawatt-hour (GWh) of coal power produced. By 1955, that number dropped to less than 1 employee per GWh. By 1978, the number sank to 0.25. By 2003, it had bottomed out at 0.05 employees per GWh.

Here's a surprise. Since 2003, employee counts have been increasing. Today, counts are almost 50 percent higher than 2003 lows (.073 employees per GWh). As such, it appears the cost may be too high.
It appears the coal industry is gambling on the power industry. Specifically, employers may be gambling that wholesale power prices will increase. With higher power prices, utilities might be willing to buy more coal or pay more for coal. Either way, miners might earn more.

If the industry's gamble is wrong, there could be a problem. Either mining companies will cut fat or the power industry will do it for them. If higher labor costs percolate into a constrained power market, more power plants will be idled or retired. More plant retirements mean less coal consumed. Less coal consumed means fewer jobs.

Finally, it's important to appreciate that most members of the energy industry want government interference and regulations. The coal industry wants the government to force consumers to pay more. The power industry wants the same. The only stakeholder not wanting regulatory interference is the consumer, unless it's about regulating power plant emissions.


Energy Information Administration (EIA), Mine Safety and Health Administration (MSHA) were the source of most data and analysis used in this discussion.  Their data appears to have an error rate near five percent.

Reliable power production data for 1948 or earlier was neither available nor relevant. Production for 1949 was approximately 290 GWh. Today, it's almost 4,100 GWh. Pre-1949 data had to be insignificant.

In earlier years, coal was used for heating. Heating coal was not considered in this discussion. That omission represents a flaw that could represent an error that's greater than five percent, particularly in pre-1960 discussions.



 I rarely have erudite thoughts. Occasionally I have some pedestrian views.

First, oil has made a fool out of me. Nevertheless, I believe oil prices will revert to $80 and beyond. Unless there's a geopolitical event, oil prices should remain low for the next 24-36 months as the market rebalances and works down excessive inventories. However, I believe one or more geoplotical events will take place. It will likely take place within the 24-36 month timeframe. It could be severe enough to cause crude oil and LNG prices to spike.

Second, Mexico will become an important energy partner for US and Canada. Energy powerlines, pipelines, and unit trains will cross borders to facilitate trading, blending and shipping commodities. By merging Canadian, US, and Mexican resources, North America can become energy independent and energy secure.

Third, here are different views about North American electric and gas.

One trend underway today is for producers to exit from commodity markets and migrate towards regulatory assets. In some cases where the migration isn't possible, producers want to force consumers to pay above-market prices for electricity and natural gas. For example, nuclear power producers have convinced New York State, Georgia, and South Carolina regulators to force consumers to buy their electricity at above market prices. Coal producers argue that consumers should be paying above market prices and, at the same time, regulators should allow their customers to pollute air, land, and waters so the state can save mining companies and jobs. In addition, companies like Dominion, Duke, Exelon, PPL, and NextEra are dumping market assets and buying regulated assets (or hedged assets). It turns out, traditional utilities dislike free markets. These "conservative" companies prefer being regulated.

Industry leaders describe other trends. You may find some of these ideas interesting - or not:

1. America can no longer build large nuclear or coal-fired power plants. Yes, there are five nukes under construction. One is scheduled to reach commercial operations shortly. However, capital costs far exceed any financial benefits, and government subsidies are necessary to finance construction.

2. The only profitable option for those needing large-scale power producing assets is high technology gas turbines (combined cycle gas turbines). While capital costs are low, there are substantial [financial] risks in owning gas turbines. If fuel prices leap, generating assets depending on that fuel could become marginalized and unprofitable. Also, gas turbines need to be built near interstate gas pipelines with surplus capacities. Profitable locations are rare. As such, geographic limitations have become substantial barriers to widespread development.

3. Thermal coal consumption will continue to decline in North America. As more coal-burning power plants' production costs drift towards the markets' margins, owners will throw in the towel and retire uneconomic units. Like renewable energy, coal burners have been granted substantial government supports, which are slowly dissolving. Without government supports, coal burning costs increase and energy production becomes uneconomic.

4. Investors and regulators will continue to favor [new] wind and solar assets. Returns on these assets are substantial and financial risks are comparatively minimal. Compared to other alternatives, wind and solar are winners because they are frequently the markets' cost leaders.

5. The biggest winner is energy efficiency. It is the cost leader. It requires minimal investments in new infrastructure. Companies like Exelon are exploiting energy efficiency with success. Most expect energy efficiency programs will grow. As more technology is introduced and merged with energy infrastructure, investments in energy efficiency could explode.

6. You guys like might like one trend. It's called transactional energy. Instead of buyers and sellers transacting bulk power deals at the wholesale level, transactional energy will allow retail buyers and sellers trade electricity at the local level. Transactional energy is currently limited by policy. Those limits may change as regulators struggle with increasingly difficult choices.

7. A precursor to transactional energy is distributed energy, which is gaining traction. Distributed energy turns the current utility system upside down. Instead of spoke and wheel system centered around a single central power station, small generating assets are moved closer to consumers. High costs associated with spoke-and-wheel systems provides growing economic incentives for locally-owned fuel cells, batteries, solar panels, wind farms, and energy efficiency. It also eliminates the need for more transmission lines and associated costs.

8. Local electric and gas utilities will likely migrate to a different business model. They will keep their monopoly status, but they will likely change their core activities to the simple business of renting wires and pipes. After they change their model, they will likely allow customers to hang approved equipment off their distribution systems for a fee. Presently, California and New York State are heading in this direction; others will follow.

9. Motivation to change the current model will likely come about by consumer frustration. Today, wholesale regulators are piling on costs that reward power producers at the expense of consumers. At the same time, retail regulators are adding costs that must be borne by consumers. Taken together, the cost of electricity is substantially less than the cost of renting wires and related equipment to deliver that electricity. In some areas the ratio is 2-to-1. In other areas, it's 4-to-1. As the ratio grows, consumers will be motivated to self-generate or build distributed energy systems. The first to exit will likely be large business and government [military] consumers, followed by small consumer groups. In fact, the exodus has already begun. It will accelerate should natural gas prices jump above $5.00, because that price will be ripple through the value chain and amplify electricity prices.

Some trends are in progress and may accelerate in the near future. Others could take decades to gain traction. The underlying assumption is that all things will remain equal. Of course, all things will not remain equal. A recession will slow change. A recovery will accelerate change.



 Mr. McGuire: I want to say one word to you. Just one word.

Benjamin: Yes, sir.

Mr. McGuire: Are you listening?

Benjamin: Yes, I am.

Mr. McGuire: Batteries

Benjamin: Exactly how do you mean?

Mr. McGuire: There's a great future in batteries. Think about it. Will you think about it?

"A new proposal shows how the gas shortage may accelerate storage's integration into the bulk power system"



 Disclosure: I'm not an expert in this topic. However, I met with my physician. I took the test. The results suggested one critical deficiency. I'm currently on a 12-week prescription of Vitamin D (50,000 IU).

Dylan Distasio writes: 

Based on the fact it's a script and that dose, I am guessing your doc put you on D2 versus D3. Not a biggie, but there is a fair amount of evidence D2 is inferior to D3. D2 needs to be converted by your body to D3. I would recommend just picking up a quality D3 supplement OTC once your script is done. My doc did the same thing as yours when my levels came back low. I don't think your average one is familiar with the nuance.

It's an incredibly important vitamin, the RDAs for it are way too low, and it is one of the few vitamins you are probably not getting near enough of especially during our winters. I don't take a multi but I am taking 12,000IUs of D3 a day divided in two doses. I'm not recommending that as your circumstances may vary.

Carder Dimitroff writes: 

I checked. You are right!

Next visit I'll ask about D3.

Thank you.

Do you have recommendations for sourcing high quality D3? 

Dylan Distasio writes: 

I should add that the best source of D is the sun, and that monitoring blood levels regularly is really the best way to know what is going on (not that I am currently doing so). Regardless of D2 or D3, be sure to take them with some food that has fat in it, as neither is water soluble. In terms of a source, I use Kirkland but a lot have good test results.

anonymous writes: 

Vitamin D follow up from a n of 1…

As mentioned, I had not been monitoring blood levels regularly, but have been religiously taking 4,000 units of D3 a day for a year+ as a conservative dose since I really don't get much sun, and was deficient even by conservative standards on my last physical.

I just got bloods done for a physical tomorrow, and even with 4,000IU a day, I am just barely at the low end of the normal range (>0 ng/mL) at 31 ng/ml.

I should add that through genetic testing, I've discovered I am likely prone to Vitamin D deficiency due to an issue at this SNP rs2282679:

This gene encodes for the vitamin D binding protein which affects the delivery of 25-hydroxyvitamin D (precursor to vitamin D hormone) and activated vitamin D (1,25-dihydroxyvitamin D) to target organs, as well as clearance of vitamin D metabolites from the circulation.

This genotype, rs2282679(A;C), is associated with an increased risk of vitamin D deficiency.

It is known that supplementing with 1,000 IU of vitamin D3 per day generally raises serum 25-hydroxy vitamin D levels by around 5 ng/ml. This may not be the case for people with the affected genotypes, rs2282679(A;C) and rs2282679(C;C), which may require higher vitamin D supplementation doses to achieve the same serum levels as individuals without these polymorphisms.

Blood levels of 25-hyroxyvitamin D below 20 ng/ml are considered deficient, less than 30 ng/ml is inadequate. Individuals with levels between 30-60 ng/ml are considered adequate. Meta-analyses have shown that people with serum levels between 40-60 ng/ml have the lowest all-cause mortality. Regardless of an individuals genotype for this particular SNP, a 25-hydroxy vitamin D blood test available from most health care providers can be useful for providing insight in how to optimize overall vitamin D levels.



In the gas and electric industries, deregulation began in the early 1990's. For electric utilities, New England was the first region to restructure utilities and create an independent wholesale market. California followed and faltered. MidAtlantic learned from New England and California and they created the most sophisticated wholesale power market in the nation. The MidAtlantic market was called PJM, which referenced their Pennsylvania, Jersey, and Maryland footprint. Over the years, PJM's territory expanded to serve parts of North Carolina, Virginia, Maryland, Deleware, New Jersey, Pennsylvania, Michigan, Ohio, Kentucky, Indiana, and Illinois.

Since the 1990's, new markets formed, old marketed expanded and new players emerged. In addition, physical trading was replaced by financial trading.

The transition from physical to financial created new opportunities for the financial community. Trades have become complex, sophisticated, and fascinating. Some of the most impressive shops create financial packages that combine transmission rights, fuel options, generation assets, and power (one of the nation's most sophisticated operations is owned by Exelon). The result is big players can profit by delivering bulk power at prices below generating costs.

Up to now, federal regulation in this space has been relatively light. One area where federal regulators intrude is market power abuses. After the Enron debacle, regulators have been motivated to monitor markets to assure that no single entity can influence or control a market.

One example is Duke. Some may recall that the Federal Energy Regulatory Commission (FERC) delayed Duke Energy's acquisition of Progress Energy over the issue of market power. The FERC believed that unless there were changes, the combined utilities could dominate and control prices paid by small utilities.

In recent times, market power concerns continue as new players emerge and grow. New players have grown through acquisitions and mergers into large holding companies. Previously small utilities are now part of huge holding companies, which are largely unknown to most Americans.

One such utility has become so large that the FERC has developed concerned about their "horizontal and vertical market power" in the Western United States Concerns have reached a point where the FERC is in the process of revoking the company's authority to sell their power into the wholesale markets.

That large utility holding company is Berkshire Hathaway. You can bet they are reconsidering every option possible to resolve FERC's concerns.

For more, see Law360.



 This is a nit in the world of markets, but today might represent a continuation of an interesting trend. In short, the market and DC's utility regulator see the same world differently.

Twice before, DC regulators spurned EXC's attempt to gobble up POM. Twice before, the market guessed wrong. Moments before DC's regulators announced their decision, equity markets projected an approval.

The markets were right. The regulators were wrong. Moments after DC's announcement, POM crashed. Consumers were denied the benefits of a stable utility.

Today, DC regulators plan to announce their new decision. For the first time, the market is pricing POM with an ~ 80 percent probability that DC regulators will reject EXC's proposal.

This is supposedly EXC's last attempt. If DC's regulators reject EXC's third offer, EXC will either appeal to the federal courts or take their toys and go home.

Are the markets right? Are regulators foolish? Will POM jump?

I don't have answers except to point out the obvious: At midday there will be volatility around EXC and POM.

If DC rejects the merger again, POM is a dead company. No utility will attempt to acquire them. Their regulators will prevent growth. Shareholders could lose dividends. Consumers could lose reliability.

Enjoy the entertainment. Enjoy the day. DC's cherry blossoms are out in full bloom



A good article on regulatory capture is here.  

Carder Dimitroff writes: 

Some observations.

First, regulatory capture is frequently discovered at the state level. State regulators may have built-in conflict of interests that can benefit the regulated. In some cases, state regulators approved questionable investments that appear to harm constituents.

Second, regulatory capture is not a digital issue. It's an analog that is represented by degrees of capture that change over time.

With regard to the second observation, consider fee-for-service agencies such as the Federal Aviation Administration (FAA), the Food and Drug Administration (FDA), the Nuclear Regulatory Commission (NRC) and others. Today, many might say these agencies appear to be free from capture. In fact, they are captured at a macro level. Without customers to pay regulatory fees, their agencies will shrink or they may go out of business. As such, regulatory decisions are often framed in terms of what "the industry" will tolerate.

Keep in mind that "the industry" represents a portfolio of regulated interests. Industry and regulators may allow a few of the regulated may experience difficult regulatory interactions as long as the overall portfolio is unharmed. This is why we see industry associations carefully take on regulators. This is also why we also see revolving doors between regulators and associations.

The art of regulating requires an understanding of timing, incrementalism and return on investment. Regulators can increase regulation incrementally and over time as long as the industry can tolerate (or profit) from changes. In some cases, courts step in and force regulators to speed up the process (Mass v. EPA - https://en.wikipedia.org/wiki/Massachusetts_v._Environmental_Protection_Agency).

A fascinating scenario is when industry interacts with two or more regulators at the same time. In the Mass v. EPA case where the US Supreme Court required EPA to act, industry went to state regulators and asked for rate increases.

Guess who won in that deal? The regulated and the regulators!



 On January 27, shareholders of Royal Dutch Shell will vote on the company's plan to buy BG Group PLC (the upstream remnant of Margret Thatcher's privatized British Gas).

If you are a merger arbitrageur, you are praying that the RDS shareholders will shoot themselves and vote yes, as the deal spread is very wide.

If you are a shareholder in RDS and have carefully studied the assets, forward prices, and assumptions, you have concluded that this deal is likely to be remembered among the largest destructions of shareholder value in the history of the world. I reached this conclusion several weeks ago. Today, Standard Life, RDS' 11th largest shareholder concluded the same thing and said they will vote "no."

Perhaps if you are the analyst at Institutional Shareholder Services (ISS) who recommended that shareholders vote in favor of the deal, you might be assured of a future job at Goldman Sachs, JP Morgan or Rothschilds after the deal closes — as the investment banking success fees will likely be extraordinary.

But — where are the activists? They can easily and rightly point out that there are numerous other assets around the world that RDS can buy at much better prices ; with a better risk/reward…


Are we witnessing the downside of billions of dollars of passive index money blindly following the ISS pied piper over a cliff?

Carder Dimitroff writes: 

This deal is complicated. Most shareholders lack enough information to form an opinion. While I'm on record as being concerned about the liquefied natural gas industry as an investment, I have no opinion on this deal.

This deal is about BG and RDS's natural gas portfolios and forward values of any combination. To know future values requires a full understanding of their book of contracts, their hedges and their speculative accounts. It also requires the analyst to be certain about future market conditions.

Here's what I know:

1) By definition, liquefied natural gas is an international commodity. There are few to zero domestic markets for this commodity.

2) RDS will likely become the <production> cost leader in Western Pacific's liquefied natural gas markets.

3) BG could become a cost leader in the Atlantic liquefied natural gas markets. BG bought 20 years of supply in the US market and must sell in another market. Those markets are not correlated. It's likely BG's 20-year purchase agreement is unhedged. Nevertheless, the deal currently has a substantial gross margin. If oil prices increase, their margins will likely increase.

4) Combining portfolios can sometimes offer surprising results (good or bad). Combining Pacific and Atlantic portfolios could create substantial value. It also could create interesting hedging opportunities, which in turn create value. Without understanding details of RDS's portfolio strategies, it would be difficult for most shareholders to correctly value the combined portfolio.

5) Liquefied natural gas can be used as a substitute for coal. Under current market and political conditions, natural gas is currently an economic alternative to coal.

6) Finally, there is a speculative element to liquefied natural gas industry. Consider the pressure to reduce coal consumption. Also, consider desperate gas markets. If Europe and Asian markets can replicate UK and US markets, indexing natural gas to oil prices could be defeated. If defeated, international natural gas markets could open up with RDS as the clear leader.

Apparently, people looked at portfolio details and they have concluded the BG-RDS merger is a good deal. Other experts looked at the same data and concluded the merger is a bad deal. I don't know. 



 California is leading the way. There you'll find the next big idea is not solar panels or wind turbines. It's batteries.

The motivation is not what many believe. The interest in batteries has little to do with storing wind or solar energy. The interest has a lot to do with displacing standby generators.

Today low performing power plants are on spinning reserve to respond to changing demand by supplying incremental energy. Historically this was the only method available to grid managers. The result was wasted fuel and unnecessary pollution.

Batteries can do it better, faster and cheaper. Consequently, grid managers are shifting revenues from old generators and directing funds to battery owners, including SolarCity.

One of the biggest players in the battery space is AES. Yes, SolarCity and Tesla are involved, but IMO their products are toys.

AES is an owner operator. Duke Energy is another owner operator. LG is a manufacturer. Pick your position: Manufacturer or buyer.

Here are "11 innovative companies giving energy storage a jolt".



Current wholesale prices for power and natural gas are at historic lows. In many areas, power and natural gas prices are correlated. In addition, in many states, wholesale energy prices flow into retail markets with modest multipliers.

For those in deregulated states, the next several days may be a good time to lock in prices for retail natural gas and electricity. Consider long positions and be careful about terms.

For most consumers, this opportunity is about commodity prices. It is not about delivery charges, which is a separate issue.



October 1st will be the day a new power market appears. It will be the product of a merger between two existing systems. The "Integrated System" (IS) is a emerging power market for Northern states. The "Southwest Power Pool" (SPP) is a more mature market for southern states. The merger will be called SPP.

The new SPP will cover 575,000 square miles from northern Texas to the Canadian border. It will serve all or part of Arkansas, Iowa, Kansas, Louisiana, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Oklahoma, South Dakota, Texas and Wyoming.

Not everyone is happy. The City of Lubbock will have none of it. They plan to jilt SPP and join Texas' closed system, which is called the Electric Reliability Council of Texas (ERCOT).

Also a neighboring market seems upset. SPP finds itself squabbling with the Midcontinent Independent System Operator (MISO) over territory and market rights. Perhaps MISO had grand plans to eat SPP or IS, but did not move fast enough or provide good enough offers.

SPP's new market footprint will serve a large portfolio of coal generators. While emission compliance is not their responsibility, SPP may price coal resources near the margin.

This merger is part of a grander plan. The Federal Energy Regulatory Commission (FERC) wants the entire nation to use markets. Many states resist. In particular, states located in the southeastern portion of the country hate FERC's idea. South Carolina, Georgia, Alabama, Mississippi and neighbors currently resist free markets.

It's not just the states. It's also utilities regulated by the states. Southern and Duke would prefer to have FERC stay out of their business.



 I thought the specs would find interest in this given past discussions on coal. Japan is decreasing LNG use in favor of Coal.

Carder Dimitroff writes: 

This is interesting. Thank you for posting.

Not mentioned in the article is nuclear. Japan is restarting some of their nuclear units. Nuclear displaces LNG, even at $7 per MMBtu.

From NEFTE Compass:

Baltic Republics Get to Grips With First LNG Terminal

The new LNG vessel moored in Lithuania's Klaipeda harbor represents for millions of Baltic consumers the end of a quarter-century of Russia's natural gas monopoly.

It appears European demand may be increasing as Japan's demand falls. Helpful news for $D and $LNG



There is an interesting transition underway. According to the WSJ, investors are attempting to acquire Oncor and form a REIT out of an ordinary electric utility.

Here is some background:

1. The Electric Reliability Council of Texas (ERCOT) is a regional Independent System Operator (ISO) that manages transmission systems within the state of Texas. It is the largest of four ISOs currently operating in Texas. Its operations do not cross state lines (no electric power ever moves in or out of ERCOT). It is not engaged in interstate commerce. It is a non-profit organization.

2. Oncor is a local distribution company (LDC) that operates within the State of Texas. It is a wires-only utility. It owns no power plants. It is not engaged in interstate commerce. It's assets are regulated by the Public Utility Commission of Texas. Oncor is one of the nation's ten largest LDCs.

3. Oncor also owns transmission line assets (a transmission line company is not a LDC). Those transmission assets also operate exclusively within ERCOT's system. ERCOT feeds wholesale power into Oncor's retail distribution system.

4. Dallas-based Hunt Utility Services (Ray L. Hunt family) pioneered REITs for transmission and distribution utilities. They received a private letter ruling from the IRS in 2009 and approval from the FERC. Their transmission and distribution REIT is called InfraREIT. It was formed in
2010. InfraREIT operates within Texas and within ERCOT.

5. To my knowledge, no other regulated transmission or LDC company outside of Texas has formed a REIT. Many would like to use the REIT structure. However, most non-Texan electric utilities are engaged in the interstate commerce of electric power.

6. The Hunt family and others (see WSJ's article http://tinyurl.com/przszn6) are attempting to buy Oncor from Energy Future Holdings. If successful, they intend to move Oncor's assets into a REIT. Since they are replicating actions taken by Hunt Utility Services to the letter, they should be successful on the REIT front.

It is reasonable to assume other companies would attempt to form REITs out of regulated utility assets (this may include natural gas systems). Intrastate systems are likely to be the early adopters. Interstate systems could face the most scrutiny by federal and state regulators.

One challenge for regulators could be rate setting. There is potential overlap in regulatory interests that can be resolved within Texas as intrastate issues. In the rest of the country, those issues may not be resolved without new challenges.



 That Sugar Film just opened in DC in small theaters.

This film may be of interest to those concerned about diet and health. It is an excellent packaging of existing science. It leaves viewers with a better understanding of the sugar issue.

Scientifically, this film offers nothing new. Similar information was presented in the book Salt, Sugar, Fat.

In my opinion, it's 20 minutes longer than needed. However, as educators know, an important message must be repeated at least three times before most viewers comprehend.



Calpine is an independent power producer. Most of their generating assets are gas turbines. Until today, Calpine was considered a near pure play on gas-to-electricity.

Champion is an energy service provider. Their services are limited to providing retail electricity.

Both companies operate in the deregulated energy markets. Calpine is focused in federally regulated wholesale markets. Champion is focused in state-regulated retail markets.

On the surface, Calpine's acquisition makes little sense. Digging a little deeper, it makes a lot of sense.

By owning 2.5 million retail customers, Calpine is able to hedge their generating fleet against a retail portfolio. They are also able to hedge their retail customer base against their generating fleet. After this acquisition is complete, Calpine can go long on natural gas and lock in a margin.

As an aside, 2.5 million retail customers is considered a stable base. On its own, Champion should be profitable.

Here is the announcement.



From my limited experience, assessing equity from balance sheet information can be a non-trivial exercise. An issue is the company's assets. Specifically, what are those assets? How were they acquired? What was the accounting treatment?

I've been involved in situations where companies debated the merits of expensing capital costs and capitalizing expenses. Accountants tend to see this question as a black and white issue. Financial officers tend see it as a strategic issue.

The issue frequently arises in project finance. In particular, long-term capital improvement projects tend to finish with complex cost structures. In my experience, capitalized costs can represent half expenses and half assets (bricks and sticks). Some of those expenses include officer salaries, professional fees, corporate allocations and other distributables. In the end, retirement accounts prorate those costs according to the strategic need of the parent company. Once the accountants retire the plant (that is, allocate final costs across company retirement accounts), the asset capex strategy is locked in.

The issue also appears in operations and maintenance. Sometimes replacing expensive equipment is expensed. Sometimes it is capitalized. Often, there is a combination. Again, accountants tend to see this as a black and white issue. Financing, legal and regulatory people understand it as a strategic issue.

The issue pops up in special cases. It is common for utilities to create regulatory assets out of expenses. They do this with the knowledge and approval of their respective state regulators.

I've found the accounting of assets is not consistent within the utility industry. Policies change over time and by geography. They change as economic conditions change. They also change as corporate administrations change.

Finally, there are the subsequent issues of asset depreciation and mark-to-market values. While depreciation appears simple, it is not. How depreciation schedules are developed and used is complex and difficult [impossible] for third parties to analyze. In addition, the depreciated value of the asset is often uncorrelated to the asset's mark-to-market value.

For me, assets can be fuzzy numbers. Any analysis using asset values as a critical component can also be fuzzy.

Ed Stewart writes: 

All good points Carder.

Another issue is when a company clearly has very valuable intangible assets that are almost completely unrepresented on the balance sheet. Consider Nathan's Famous, best known for its flagship hotdog restaurant and sponsorship of the eating contest. They build on top of that brand value to create a licensing business. Last year (ending march 31) they did 18M of this business, which is almost pure pre-tax profit as they just get a % of sales, renting the brand to a manufacturer/distributor. Capitalize that at a reasonable rate (licensing revenue streams usually valued at a premium) u see it is worth quite a bit of money. Yet, on the balance sheet intangible assets is only something like 1.4M, which is absurd from an economic perspective. 

Stefan Jovanovich writes: 

Accounting was developed to catch internal fraud; the whole point of double-entry was that it required two different people to keep track of every transaction. As long as enterprises were family businesses, single-entry worked just fine (as, for example, in the Rothschilds' books well into the 19th century). In that sense, all "book" numbers will be maddeningly disappointing in terms of their economic logic.

Rocky Humbert writes: 

S-man makes an excellent point. To wit, some of my worst investments have been in insurance company stocks that were trading at significant discounts to their stated tangible book value. What seems to happen (with annoying regularity) is that the company "discovers" that they under-reserved for claims and they write-off massive amounts of tangible equity — leaving the stock at a premium to book value. Hence I view a substantial discount to book value as a warning sign of impending bad news rather than a blue plate special. Mr. Market may go through bipolar episodes, but he's quite astute most of the time.

Ed Stewart writes:

Ive seen another situation beyond unforeseen markdowns that can cause trouble for an investor looking at book value to find undervaluation. The issue occurs when an investor marks book value assets "to market" and finds a supposedly huge undervaluation. The first problem I have seen is that it is very easy for a bad or even mediocre business with a good asset to somehow encumber or use that asset in a way that is not helpful to shareholders - feeding a lousy "growth initiative" or simply mortgaging an asset to fund continued operations. It's amazing how many "value bloggers" write about truly crappy, sketchy businesses because they think they spot this type of situation.

In the case where the business is decent, that by no means the business is going to realize the value of the asset over any reasonable time frame, which means that the value must be discounted far off into the future. So far and so uncertain it might be impossible to assign much value to it at all. In this second case, it might add some positive option value to a decent business that is otherwise worth considering, nothing more. My conclusion is that without an activist situation or change of heart by the CEO or some similar circumstance, undervalued assets are not always what they are cracked up to be.

Gary Rogan comments: 

A bet on undervalued assets IS a bet on an activist situation and/or if not "change of heart by he CEO" change of the CEO. Undervalued assets will not of course suddenly start performing by themselves. That's why "undervalued" cash on the books or undervalued assets combined with a substantial cash flow are so much better than an "undervalued" steel plant or similar: cash is easy to understand and reuse and attracts activists, acquirers, and CEO replacement.

Andrew Goodwin writes:

Not sure why the talk on ratios attracted so much interest. In a group that favors scientific modeling, why no thoughts on finding the significance of each industry valuation ratio through regression studies? 

Charles Pennington writes: 

Stefan, what's your definition of "soft jobs"? Do you have an opinion about which companies out there are wasting their money on "soft jobs" and which are acting more wisely?

Stefan Jovanovich replies:

This is a feeble answer to your question, Charles, but it is all I have. Cantillon wrote that nations got into trouble when their tastes for what he called "luxury" outran their capacities to make enough money to pay for them in foreign trade. He was not a mercantilist, but he thought that nations had to accept the verdict of the foreign exchange market when it went against them. They could not use "Chinese paper" (Singleton's phrase for puffed-up securities) when their counter-parties expected coin. As Cantillon put it, nations cannot use use finance as a substitute for commerce and they cannot indefinitely leverage their credit so that rich men's wives could continue buying more lace. For at least some of the time, even the wealthy have to endure being less rich until trade once again comes into something approaching balance.

It seems to me that many, many companies are now like Cantillon's luxurious nation. David's drug companies are one set. Their profits are projected to continue to grow enormously even as the savings and earnings of the hospitals and governments and individual paying customers have stagnated and even begun to fall again. The drug companies' happy futures are based on the assumption that the centrally-banked remedies to the world's savings "glut" can somehow be transmuted into continuing demand without anyone having to endure even temporary insolvency. There is no arguing that the plan has worked up to now (cue John Hussman's explanations of why he has missed the last 5+ years). But, as the Orioles and other clubs regularly demonstrate, the last innings can be very rough even when the guys coming in from the bullpen have had such sterling records.

P.S. Ignore all monetary puns; this is not a recommendation to buy gold.



 I thought some might find this clip interesting "Remarkable HD Footage of Berlin from July 1945".

The video quality is astonishing. Fascinating HD color video shows the situation of the city in summer 1945, just after the Second World War and the capitulation of Germany.

Daily life after years of war. Pictures from the destroyed city, the Reichstag, Brandenburger Tor, Adlon, Führerbunker, Unter den Linden, rubble women working in the streets, the tram is running again.



This is a big deal: US Supreme Court agrees to hear case about FERC's Order 745.

FERC Order 745 is about regional grids' ability to offer market-based incentives to reduce demand. In a word, it's about demand-response.

Generating utilities hate demand-response. It represents new competition. It dramatically alters supply-side economics. It reduces generating revenues and margins.

To fight expansion of demand-response programs, generating utilities argue that the federal government (FERC) lacks authority to regulate demand. They argue that demand represents retail consumers, which are traditionally within the domain of individual states.

It's a rich question. It touches many other issues, including new authorities granted to NERC. It affects the future value of batteries (TSLA) and transmission lines (ITC, AEP)

It's also an academic argument. If the Supreme Court knocks down FERC's presumed authority, many states will implement demand-response programs on their own. In fact, some already have.



 In the US, coal is on the ropes for several reasons. First, the strong dollar is making exporting coal [and LNG] relatively uneconomic.

Second, coal has become uneconomic. Coal burners are turning to lower-cost natural gas or renewable energy. In fact, no US utility is seriously considering building a new coal-fired power plant. To make matters worse, most utilities who own coal-burning assets are seeking exit plans.

Then, there's this:

"Recent report reveals dramatic decline in number of active W.Va. miners"

The article describes declining mining activity in WVA. They report that 2,596 WVA miners lost their jobs in the first quarter. It should not be a surprise. What they do not say is more jobs will be lost in 2015 as dozens of uneconomic power plants exit from the nation's deregulated power markets.

The article is exaggerating when it suggests the root cause of WVA's mining woes is a federal war on coal. There's no federal war on coal. There is federal [and state] war on carbon.

Just ask the natural gas burners. Ask oil burners. Ask nuclear burners. Ask state regulators. But, don't ask the media. And, for heaven sakes, don't ask a politician.

Victor Niederhoffer asks: 

If all this supply is coming off the market, isn't that bullish? 

Carder Dimitroff writes:

Interesting question. The answer is not simple.

Coal mining will struggle. Coal transportation will struggle. Gas boilers will struggle. Manufacturers supporting these types of assets will also struggle.

Turbine manufacturers are gaining. General Electric, Siemens and other turbine manufacturers are seeing growth in high technology turbine sales (combined cycle gas turbines). They offer turbines that are 60 percent fuel-efficient (coal burners are approximately 20 to 30 percent fuel-efficient). The combination of high fuel efficiency, low fuel costs and low labor costs offers buyers a significant competitive advantage.

Energy prices are unlikely to improve. Market-clearing prices for wholesale power are challenged as low-cost gas turbines enter the market. Ohio alone expects six new gas turbines (the equivalent of four new nuclear power plants). These turbines will likely lower average market-clearing prices by displacing less competitive sources (coal).

Energy prices are also challenged as renewables and energy efficiency programs take hold and grow. As California demonstrates, it only takes a small amount of renewable energy (or energy efficiency and demand-response) to shave off average market-clearing prices.

Nuclear power is winning on the carbon war argument. The State of Illinois recently passed a carbon bill, which helps existing nuclear power plants (Exelon) and renewable energy sources.

While existing nuclear power is a winner, new nuclear plants are losers. It appears no new nuclear plants will be built for a long, long time. Yes, there are nuclear construction projects underway. Yes, nuclear power displaces carbon and other air pollutants. However, it's not enough. After watching TVA, SCG and SO struggle with spiraling nuclear construction costs, it's unlikely other utilities [or state regulators] will repeat their mistakes. In fact, it appears most other applicants have put their nuclear ambitions on the shelf.

Capacity markets are improving. Old and inefficient plants cannot compete. Some assets are failing to clear auctions. As such, it shouldn't be a surprise that the market's losers are forced into permanent retirement. They can blame the "war on coal" if they want, but it's mostly operating economics that are driving retirement decisions. Those decisions are also capturing other types of plants; not just coal plants.

In the spirit of markets, there appears to be clear winners at the expense of losers.

Stefan Jovanovich writes:

Thanks to another part of my misspent youth, when the U.S. Navy wasted its money teaching me about marine propulsion systems, turbines continue to fascinate me. So, any pretense of knowledge here is restricted to that subject only. The inefficiency of what Carder calls "coal burners" comes from the fuel, not the gas that moves the turbine blades. Steam is actually slighty more efficient than natural gas in its isentropic efficiency because it is easier to capture the residual heat energy from steam after it passes through the first (and second) turbines. (Note: "isentropic efficiency" is the ratio of a turbine's actual power output to those of theoretical turbine with perfect physics with the same inlet conditions and discharge pressures. Or, to put it in engineering speak - actual enthalpy drop divided by the isentropic enthalpy drop).

So, "coal burners" - i.e. plants that burn coal to generate steam - are "inefficient" only because coal has a much lower energy density than other fuels. (This why the British Navy switched from coal to bunker oil; the same ships could go much farther without refueling using the same fuel storage spaces.)

As to how prices for fuels will arbitrage the energy density differentials, beats me; but List members should not take the relative electrical generating efficiency numbers to be a statement about the obsolescence of steam turbines. This is not a repeat of the fate of the railroad steam engine.



 We're talking about watch sales around here. Rolex apparently sells 650 million in watches each year. Susan says that wearing a watch these days is like jewelry for men, and that it's useless since everyone has a smart phone. We're thinking about Apple's watches. They'll have to compete with all the other watches. Supposedly they forecast it to use up 1/2 of all the gold production in the world. I wonder when Apple will stumble and launch a product that doesn't set the world on fire. Samsung wearable watches apparently didn't do that great. What do you think, and how will it affect the price of Apple. We just bought some on the news that they had to pay 600 million out of 150 billion in cash on a patent suit, which will probably be reduced to 10 or 30 million.

Stefan Martinek writes: 

I agree with the view that watches = jewelry, but then it is more about IWC Portuguese watches in platinum having an unassuming steel look and simple elegant design. Apple is not a competition here. Apple watch will need a phone for core applications + daily charging. Some people probably like to carry two devices when one is enough. Some people probably disagree with Diogenes "who wanted to be free of all earthly attachments — on seeing a boy drinking with his hands from a stream he threw away his drinking bowl, his last remaining possession".

Pitt T. Maner III writes: 

Given the popularity of the "Quantified Self" and Fitbit, why not a watch that monitors all your physiological parameters (via implanted sensors) and provides feedback on the optimal things to do next.

An early example might look something like this: "a new digital wellness and telemedicine platform which helps patients live a healthier lifestyle and connects healthcare providers to patients using telemedicine and wearable mobile technologies, today announced that its platform will be fully integrated with Apple Watch products. Or this: "Apple Watch wearers with diabetes will be able to use an app to monitor their glucose levels."

Carder Dimitroff writes: 

I believe the iWatch will be an ongoing success. Like they've done with the iPhone, Apple will convert the old watch into amazing and useful technologies. As such, the iWatch will likely become less of a watch and more of something else.
In my family, we seldom call each other. It's either an email, text or FaceTime. Phone calls are the last option. Our iPhones are not used much for phoning home.

Like the iPhone, each iWatch upgrade will pack in more technologies on less real estate. We will likely learn new tricks, become mindful of health issues and live a better life.

You can sign me,

Dick Tracy

anonymous writes: 

My son asked me why he has to go to school? "Why can't all this learning simply be uploaded into my brain?", he asks.

anonymous writes: 

The question becomes:

1. Will it ever have a cam?

2. Will it ever be independent of an iPhone?

3. What body sensors can be built into it?

4. Perhaps it will be the base for iHome?

Just some questions.

Duncan Coker writes: 

A watch is a perfect accoutrement for a man as it is rooted in a practical function. The form and design however vary greatly. They can be showy and expensive or simple, like the Timex my father had. Men like things that have a purpose. Watches are handed down from fathers to sons or daughters for generations. The Tank watch is one of my favorites though I don't own one. Fountain pens are in the same category as would be certain sporting gear like classic hunting rifles, bamboo fly rods, Hardy reels, or Swiss pocket knives that every man used to carry. For Apple I know design is very important along with function which is a good start for continuing this tradition.

Jim Sogi writes: 

A Swiss army pocket knife with can opener, screw driver, wine bottle opener and blade, a simple model, is the most handy camping tool. I love mine. I also have a pocket tool with pliers, knife, screwdriver with multiple tips. It's very handy for many things like sports, camping, and skiing. 

anonymous writes: 

I got a very nice waterproof sport watch used at the Salvation Army for $6. The guy at the jewelry store laughed when he saw the price tag and the battery was $15. You can get a real nice casio waterproof sport watch for $20 with alarms, date, stopwatch. I just don't understand some guys desire for expensive watches or computer watches. If the watch were small, had a phone and music and alarm, and GPS and the battery lasted… maybe.



 There is good news in the nuclear patch. The US Nuclear Regulatory Commission (NRC) approved a new nuclear power plant design. It is GE-Hitachi's Economic Simplified Boiling-Water Reactor (ESBWR). Barring a few procedural hoops, GE-Hitachi's design is officially certified.

It's a big deal.

GE-Hitiachi can now sell their reactor to any qualified buyer in the US. Once certified, the design can be used to make unlimited number of reactors without additional regulatory review.

Internationally, NRC's certification is the golden seal of approval. Sovereign buyers know the certification means the design and equipment is safe and reliable.

For all practical purposes, there are only two reactors that have earned NRC's design certification. The other is Westinghouse's AP1000.

Today, utilities can go to the reactor store and buy an off the shelf reactor. They now have a choice between a boiling water reactor and a pressurized water reactor. No matter which they chose, it will seem expensive.

A new ESBWR or AP1000 will cost owners approximately $7.5 billion per copy (this is opinion, not fact; it varies by location). This hefty price tag limits the number of potential buyers.

New regulatory framework.

An easy way to understand NRC's certification process is to consider commercial airplanes. When Boeing or other manufacturers design a new airplane, they must submit their design to the FAA for their analysis and approval. Only after the FAA approves the design can Boeing build planes for unlimited number of airlines.

A decade ago, the NRC changed their regulatory process to mirror the process used by the FAA. Now the industry needs only to seek approval once so they can build many.

Builders must also seek site approval. That process has also been modified. After site approval, a utility can build any reactor they choose as long as it has been certified.

The site process also mirrors FAA's process. For example, FAA must also approve new airports. After approval, any certified plane may use the airport.

Reactor market.

Other than TVA restart project, only two utilities are building new reactors. Four AP1000s are under construction in Georgia and South Carolina. More have been announced. Many more have been shelved.

The current market is not the US or EU - at least not yet. The current market is China, India and oil producing regions. For example, Saudi Arabia is going "all in" on civilian nuclear to displace domestic oil consumption.

Internationally, nuclear power is far cheaper than most alternatives. When a nation is forced to import hydrocarbons, most pay a price that is indexed to oil. When those hydrocarbons (oil, natural gas, coal) are used as fuel for a power plant, the cost of electricity becomes prohibitive.

In Saudi Arabia's case, nuclear can easily pay for itself in five years (plus or minus). If oil prices increases, the payback is even faster.

Here is a bonus. No western nation will criticize another country if they choose to build a nuclear plant using NRC-certified technology. Even Iran could build an ESBWR or an AP1000 without much objection.

Good news today.

There are many winners today. It is hard to find a loser. The regulator delivered as promised. The market has a new choice. It is easier for utilities and nations to buy new nuclear technology.

To add frosting to the cake, ESBWR and AP1000 technologies are neat. Both are next generation designs, which take advantage of passive technologies. There are fewer moving parts. The plants are safer, more reliable and economic. Every backyard should have one.



 One of the nation's largest grids is PJM Interconnection. Pepco Holdings' native territories are exclusively within PJM's borders. Exelon's native territories straddle PJM and a neighboring grid, but most of their assets are located within PJM.

Today, PJM's independent Market Monitor announced a potential problem. If the Exelon - Pepco merger takes place as planned, there could be a market problem.

In a report to the federal regulator, who needs to approve the transaction, Monitoring Analytics, LLC claimed, "The transaction should not be approved based on an incomplete record, or without taking steps necessary to protect the public interest in competition."

IMO, this will be resolved. Exelon will negotiate with the Federal Energy Regulatory Commission. Like Duke Energy (DUK), Exelon will give up something for FERC's approval. But the merger will become more expensive.

This will not be Exelon's last hurdle. In addition, more expenses are likely. If there are too many, the merger will not take place.



 I found this article quite fascinating: "Want to Get Out Alive? Follow the Ants: ants show that emergency exits work better when they're obstructed"

Shiwakoti and his team are experimenting with placing barriers in front of the Melbourne football stadium exits that lead to the train station. The preliminary results look promising. "Just by having small architectural changes in the layout, or the train stations, or stadiums, you can have thmassive improvement in terms of evacuation rate," Shiwakoti says. Perhaps we shouldn't be surprised at the unexpected lessons we're learning. Ants have been learning how to deal with congestion for millions of years. They might just show us the way out.

Carder Dimitroff writes:

This is incredible. There have to be important market lessons here.

Ken Drees writes: 

I keep thinking that an element may be missing in this concept. Ants basically lay flat, like cylinders on legs, and they can climb up and over, lift more than their weight, etc. The blocking strategy may lead to more orderly traffic for their bodies where as the human biped body is almost opposite. I can see the panic happening around the new block in my mind just the same with two packed flows all crowding and then choking at the exit. Plus what usually happens is someone falls down and then there is trampling and bunching, not to mention there are large slow body types. I am not sold on the idea, although it is very interesting.



 If you are responsible for the care of an elderly family member, beware of a new development. Medicare is increasing pressure on hospitals to admit patients under "observation status." It appears their goal is to shift hospital costs onto patients and third parties. According to AARP, when a patient is classified under "observation status," the hospital may provide similar services. However, they are not compensated under Medicare Part A; they are compensated under Part B.

Compensation under Part B means the patient's family could be in for a surprise. Unless they pre-purchased additional insurance, the patient assumes financial responsibilities for hospital charges. Those charges could be significant.

There is more. The decision to admit under "observation status" reaches beyond the hospital. It means the patient will be denied Medicare coverage for any subsequent skilled nursing facility expenses, even if those services were ordered by the the hospital or the patient's doctor. Under these circumstances, patients become financially liable for most of facility's daily rates and charges.

Most thought they thought they were insured for these expenses. They are surprised by by the hospital's admission decisions. They are also surprised by consequential financial obligations.

To learn more, read AARP's bulletin. In addition, google "Observation Status" (keep the quotes).

David Lillienfeld writes:

Back in the early 1990s, 25 percent of all health care expenditures in the US occurred during the last year of life. It is now up to 30 percent.

Medicare and Medicaid was 36% of health care spending in 2011, though the same fact sheet lists government expenditures as 28 percent of spending. Not included in these data are the health care expense coverage for uniformed military personnel, their dependents, those in the VA system, and those in the federal government. If those were included, I'm sure the proportion of health care funded by the federal government would increase.

Of note is that not all of Medicare is spending on the elderly. Medicare also covers those persons with end stage renal disease (ESRD). There are already at 950,000 of such patients in the US, and while the incidence rate has leveled out (probably reflective of better blood pressure control, reduced rates of renal arterial atherogenesis, and better control of early and mid-stage Type II diabetes mellitus (most commonly secondary to obesity but not exclusively so)), the prevalence of the disease will likely continue to increase.

Individuals with ESRD receive regular dialysis treatments. These are time-consuming, sapping of energy, and expensive. The only way to stop dialysis is with a kidney transplant. Medicare will cover the costs of a transplant, but it will not cover the cost of the immunosuppressive medications afterwards. A not uncommon experience is for the patient to receive the transplant but not be able to afford the immunosuppressant drugs, and the transplant is consequently rejected. The patient then returns to dialysis which is—you guessed it—still covered by Medicare, until the next transplant. (If you wonder why DeVita is a low risk stock, at least in terms of demand for its product, this description provides an answer.)

One of the complications of ESRD is anemia, correctable by erythropoietin. Amgen sells this biological and has, courtesy of Medicare coverage, built a $4+ billion product. Unless the FDA allows generic biologicals, that franchise is pretty safe. It's worth remembering that generic biologicals are not as easily produced as pharmaceutical ones, so some caution is in order.

I don't know what proportion of Medicare expenditures are for ESRD care, particularly for those under 65 years of age, but I can't imagine it to be trivial, and it is growing. As with coronary bypass surgery (which at one time Medicare did not cover), however, the projections of likely expenditures has been eclipsed by the actual amounts spent.

One would like to see efforts at identifying best practices funded, but that idea has been repeatedly shot down.

With health care spending at 17-18 percent of the economy, it is a substantial industry. Trying to restrain its continued growth will be challenging on many levels. There is little political will/leadership to do so.



 The Missouri loophole is positioned to spread like a virus to other states.

The issue is about interstate transmission lines. It is positioned as a battle between state and federal regulators. The utility believes interstate commerce is in the domain of the Federal Energy Regulatory Commission (FERC). The state believes it is in the domain of the state's Public Service Commission (PSC). Kansas City Power & Light now seeks clarification from the Supreme Court of the United States.

According to the St. Louis Post Dispatch, "The case is also considered an important test of federal authority over energy policy. It hinges in part on the doctrine that interstate transmission rates approved by a federal agency are considered just and reasonable, the Star reported. Another issue is the U.S. Constitution's supremacy clause, which allows the federal government to trump state authority."

I thought this was a settled matter. Apparently, [many] others disagree.

If this matter goes forward, a SCOTUS decision would impact Entergy (ETR) and ITC Holdings (ITC). It would also impact American Electric Power (AEP), FirstEnergy (FE) and any other company owning t-line assets.

I believe this issue could creep into natural gas.

For more, see the newspaper's article here.



The cold weather created revenue spikes for eastern power grids. According to RTO Insider, PJM's gross billings were $11.2 billion in January, about one third of the total for all of 2013. Collateral calls for the month totaled $2.6 billion, more than six times the total for all of 2013.

This suggests a Q1 boost for NRG Energy, FirstEnergy, AEP and Exelon.



 Today, the DOE is expected to announce a $6.5 billion loan guarantee for Southern Company's new nuclear facility in Georgia.

This guarantee is for the lender, not the borrower.

The borrower benefits in two important ways. First, the guarantee lowers the project's capital costs. Interest during construction is capitalized. Lowering the interest rate lowers construction costs.

More important, the federal involvement forces the state's hand. The state's utility commission cannot easily cancel the project without first considering the federal guarantee's impact on cost recovery.

Georgia has not deregulated or restructured its utilities. Their utilities operate under a cost-plus arrangement. Utilities' operations, maintenance, capital and fuel costs are passed onto the state's commission plus a fee. The state then passes all approved costs plus the utility's fee onto consumers through state-approved tariffs.

The state already approved $14 billion for Southern's new nuclear units. That deal is done. However, cost overruns are not approved.

The state believes cost and schedule overruns are coming. The total cost could be much more than $14 billion.

Prior to the loan guarantee, the state could have cancelled the project. I believe they were considering a delay or a substitution. They could use the same site to construct combined cycle gas turbines. Capital costs for an advanced gas turbine is approximately 15 percent of the estimated cost of a new nuclear unit. Of course, the operating profiles are much different.

Now with the federal loan guarantee in place, the state will find it more difficult to retreat. For a utility earning a guaranteed return on equity, this is good news for Southern.



Bulk power prices unusually high for 23:00. Some prices over $1,000

It is clear the markets are short capacity. Power plant capacity and transmission line capacity. Consumers will be surprised with high electric and gas bills.



 Welcome to New England. This weekend, there was another protest. Approximately 400 people protested a new $800 million combined cycle gas turbine to be built in Salem. Approximately 50 protested in favor of replacing the old coal plant with natural gas. This spectacle after similar protests took place at Seabrook and Pilgrim, Boston area's two nuclear units.

If you add it up, New Englanders want no coal. No natural gas. No nukes. No new transmission lines.

At the same time, New England conducted their annual auction for [power plant] capacity. IIRC, the auction came up short by about 350 megawatts, including Canadian sources.

New Englanders are getting what they want. Major coal plants are exiting. Nuclear plants are retiring decades early. Few people are willing to invest in new natural gas based power plants. No new transmission lines of consequence are being built.

In addition, since no new natural gas pipelines are being built, there is a chronic shortage of natural gas. Boston has to import marginal natural gas from Africa through LNG channels. The practical solution is to burn oil.

Energy costs are becoming a major element in household budgets. I believe New England's energy costs are affecting real estate values. It would be interesting to see any credible studies.

Rocky Humbert writes: 

Carder writes: "I believe New England's energy costs are affecting real estate values. It would be interesting to see any credible studies." Energy costs for people whose income is over $50k have already grown from 5% of after tax income to 9% of after tax income from 2001 to 2012. This is a national statistic (www.americaspower.org).

That the NYC Tri State area has both among the highest energy costs and most expensive real estate challenges Carder's theory. My guess is that this is a long cycle phenomenon and not well suited to short-term studies. The change in real estate prices are primarily a function of the short term change in employment, income, interest rates, taxes ; the costs of energy are (I believe) a much bigger deal for employers than employees.

Over the longer term, companies will presumably locate plants where there is ample energy and employees will follow and in that way real estate prices can be affected. But unless there are regular blackouts and/or reduction in net income/employment I would be surprised to see electricity prices affect real estate prices in a discernible way.



 In case you missed it, there were two interesting developments in the power markets last week.

1. Dominion Resources wants to write off North Anna nuclear unit 3. Dominion invested $600 into this paper power plant. It wants to start over without the burden of carrying these costs.

The implications are three-fold. First, it appears Dominion will have a bad bottom line in Q1. Second, consumers can expect a rate increase. Third, Virginia's legislature wants another nuclear power plant built.

2. Texas plans to do nothing about their capacity shortfall. Again, there are three-fold implications. First, the grid operator [ERCOT] believes future demand growth is lessening. Second, the state is willing to accept rolling blackouts if blackouts are infrequent and for short durations. Third, the state is gambling there will be no major retirements.

I would not want to take the state's gamble. However, it does throw a red herring at federal regulators (NERC).



 From a shareholders' perspective, Solar City Corp (SCTY) could be a disaster. My concern is the company's future is not in Musk's control. States will likely change their energy policies. If those policies go the wrong way, SCTY's shareholders could be left holding the bag. The odds of those policies hurting SCTY are significant.

SCTY discloses risks in their 10-K. Everything seems proper. However, it seems to me the sizzle, Musk's name, the linking of SCTY to TSLA and such could be distorting the public's perception. That perception and other forces have inflated the company's market cap to unwarranted levels. The present value of their future leveraged cash flows is nowhere near their market cap of $6.5 billion.

On the other hand, if Musk can navigate some tricky turns, SCTY could become another Google.

Henry Gifford writes: 

Any analysis of the industry cannot be complete without looking at the economics of the products the industry produces.

I have found that solar electric systems have an ATR of about 20. The ATR is the actual payback divided by the average claimed payback (Average Truth Ratio).

The financial return from solar electric panels can be calculated in a fairly straightforward way.

Systems now cost approximately $7.00 per Watt. That is the price including panels, other parts, and installation, according to Sharp USA, claimed to be the largest or near-largest supplier in the US.

A Watt is a rate, not a quantity. The rate of one Watt of capacity is at noon for an ideal installation. This brings up the question of how many noon-equivelant Watts of power a system will make in a year. The answer, in the 48 states, is about 1,150 to 1,200. The variation is not as great as one might expect, partly because the sunnier locations are hotter, and panels do not work well in the heat.

Producing electricty at the rate of one Watt for 1,200 hours yields a quantity of electricity called 1,200 Watt-Hours.

The numbers above are for DC (Direct current, like a flashlight battery with a + and - terminal) producted by the panel. There are losses when converting to AC (Alternating Current, as used in wall outlets) and in the wires, leaving perhaps 1,000 Watt-Hours per year. The utility companies call 1,000 Watt-Hours of electricity a KiloWatt-Hour.

As of a few years ago, the US average price of a KWH was $0.09 (nine cents). I do not know if it is higher or lower now, but I know it fluctuates.

To find the "simple payback," which is the years for the system to pay for itself, you divide the cost of the equipment and installation by the dollar value of electricity produced in one year. $7.00 divided by $0.09 yields a simple payback of 78 years.

Note that the panels start degrading they day they are installed, and have a useful life of 20 to 25 years. In other words, the payback period is three times the equipment life.

In places where electricy costs more, saytwice as much, or $0.18 (eighteen cents per KWH), the payback would be 39 years.

Note that my analysis is simplified, and a more sophisticated analysis would include the increasing price of electrictiy, while ignoring the future decreasing value of the money used to buy the equipment, which would make the payback unrealistically shorter, as the increasing price of electricity is a combination of the lowering of the value of the money and the expected increase in the value of the electricity.

And it is worth noting that this analysis does not apply to a typical installation, as a typical installation is not mounted at the optimin angle (latitude dgreees from horizontal) or oriented due south, and located where it is never shaded. Typical installations are not optimally angled or oriented, and are often at least partially shaded. Partial shade degrades the output from all the panels in a series, and can permanently damage the panels. With government "incentives" (something the ATM machine calls cash) ever increasing, it is common to mount panels verticaly (mounts are cheaper) where lower incidence of sunlight and increased reflection greatly decrease output, or horizontally, where increased reflection and increased dirtiness decrease output even more, and with disregard to azimuth (North-South orientation), even mounting them facing north on award winning buildings.

Therefore, from a financial standpoint, it is cear to me that the whole industry is a farce, just a taxpayer supported way of making a social statement while supporting many people highly skilled at filling out paperwork.

Solar thermal panels have, I think, a much more favorable ATR of about 10, but it is impossible to calculate the payback, because calculations require simulations of the amounts of hot water used and the times the water was used, and must make assumptions about the very common installation problems that in typical installations seriously reduce the useful production. But as solar thermal systems are usually not the recipients of tax money in nearly the same amount as solar electric, if at all, solar thermal systems are usually ignored in discussions of the solar industry.

If the price of either solar electric (PV) panels or solar thermal panels drops to zero, the economics of the industry would not change much, as the panels are about 1/3 the cost of a solar electric installation, and perhaps the same for a solar thermal installation.




Google Part 1: Framework (January 2, 2014).

Google Part 2: Google Goes Underwater (January 5, 2014).


I apologize. I realize an additional discussion is needed. Without understanding renewable energy, Google’s strategy may be difficult to understand. Unfortunately, renewable energy has acquired baggage in the media, some of which is undeserved. Nevertheless, that baggage clouds objective discussions about energy, environment and policy.

This part may disabuse some of their preconceived notions about renewable energy. It will describe markets few know exist. What may disrupt many is the prime mover is not the federal government.

Most renewable energy connects into the nation’s infrastructure at the distribution level. It is intrastate commerce. As such, most renewable energy is not regulated by the federal government. It is regulated by individual states.


Each state developed unique programs to create, market, and consume renewable energy. No two states have the same program. A renewable energy program in one state may be slightly different from a renewable energy program in a nearby state. In addition, states are reluctant to share renewable resources with one another.

While this may sound odd, most states’ objective is to force their constituents to consume renewable energy certificates. The consumer is generally unaware because most of the process is hidden, but not secret. The state’s energy service providers, not the consumer are the principals who are responsible to assure consumers receive and consume certificates. Motivating energy service providers (load serving entities or local distribution companies) are financial penalties should they fail to deliver enough certificates.

Some may wonder why states focus on certificates, not renewable energy. It turns out, states are interested in renewable energy per se, they are primarily interested in native-born renewable energy. Certificates are evidence that renewable energy consumed by state’s consumers was produced within the state.

In the future, this focus may change. However, there are practical reasons why states have a parochial view of renewable energy. One is jobs. They want new jobs associated with a state’s renewable energy program to remain within the state.

While jobs are important, states’ biggest driver is a concern over their natural capital. States are finding what was once plentiful is now in short supply.

Natural capital is air, land and water. For decades, states limited access to their natural capital through the permitting process. If a new business needs to dump their emissions into the water or air, they need a permit. If they need to dispose of waste products, they need a permit.

Up until recent times, permits were relatively easy to acquire. Governments, companies and individuals saw natural capital as a free economic good.

As populations and economies expanded, states’ natural capital became depleted. Concerned about oversaturating their native environment, states were forced to limit new permits. They found too much pollution was bad for their constituents, their politics and their economies.

In addition, constituents became more informed about chemicals in the air, land and water. As they learned more, they became more concerned. In addition, as medical technologies advanced, the connections between chemical exposures and health outcomes became better understood.

States can no longer issue new permits in or near counties that exceed health standards. They cannot issue permits in or near counties that are nearing those limits. States should not want to issue new permits that will cause neighboring states to incur liabilities.

There is a good reason why states should be concerned about neighbors. Encroached states have and will sue other states. One such case is currently pending at the Supreme Court (http://tinyurl.com/l3wxx8k). This issue is about cross-border pollution. Specifically, the air in some states may meet environmental standards. However, pollutants from their power plants and refineries drift across state lines, preventing neighboring states from meeting their obligations.

No matter how the Court decides, states’ problems will persist. While they have a wide range of options, most will use a smart combination of renewable energy and the newly formed power markets. That combination will automatically displace some of the state’s bad actors.


Here is how it works. It turns out; everything appears correlated. The most polluting sources of energy are typically the most inefficient sources. Inefficient facilities are gas-guzzlers; they require large amounts of fuel to produce small amounts of power. That combination causes them to be technically and economically inefficient. They become economically inefficient because they consume large amounts of fuel to produce small amounts of power. If they consume large amounts of fuel to produce small amounts of power, they must also generate more pollution per unit of energy.

The numbers are huge. In fact, a typical power plant’s primary product is waste. Its secondary product is energy. Incredibly, modern coal and nuclear plants waste 70 to 75 percent of the fuel they use to produce electricity. These are considered the nation’s most efficient plants. Older coal and gas plants can waste up to 90 percent. That difference has to go somewhere. A lot is lost to waste heat. In the case of coal and natural gas, a lot is physical waste. Most of that physical waste consumes the state’s natural capital.

Pollution and efficiency are correlated. Environmentally inefficient plants have high production costs. Therefore, another correlation appears. Environmentally efficient plants tend to be cost leaders. Cost leaders always win in the nation’s power markets.

Many confuse production costs with levelized costs. Levelized costs were important in the old scheme, where utility assets were regulated. Power markets do not care about capital, overhead or other fixed costs. All they care about is the direct costs needed to produce the product, or the unit’s production costs.

This may help explain why investors are interested in renewable energy assets. Renewable energy is a clean source of power and it has very low production costs. In fact, the production cost to produce power from a solar panel or a wind turbine is near zero. That means renewable energy’s gross margins are the highest in the market.

Here is a trick that investors, policymakers and consumers love. Whenever a wind plant or a solar panel produces power, it will always become the market’s cost leader. As cost leaders, solar and wind power will always displace the most expensive producer. As mentioned discussed, the most expensive producer is usually the market’s most polluting producer. Consequently, when dispatched, renewable energy not only reduces market-clearing prices, it reduces pollution at the same time.

Think about this from point of view of the state. If the state offers investors incentives, the state and its constituents will see immediate returns. Those incentives will cause the power market to deliver lower wholesale energy costs. The market will sideline the worst actors in the market, giving the state cleaner air, water and land. The state should see increased economic activity. The state should have happier and healthier constituents. The state will also avoid costly lawsuits from neighboring states.

In fact, the net costs of the state’s renewable energy credits could be zero. It could even be negative. One point is certain; the net cost of renewable energy certificates has been overblown.

As more states think about the possibilities, they are more likely to consider options that include renewable energy. However, each state has unique needs and requirements.

The nation is in the early phases of renewable energy. Huge amounts are already planned. Because the programs are young, it is not a surprise each state might take a slightly different approach. Nevertheless, most states have been using a common feature of renewable energy certificates.

Renewable energy certificates are fungible derivatives of various sources of renewable energy. One big difference between states is their portfolio. Some states prefer more wind. Others prefer other renewable sources. Many really prefer solar.


Some states carve out special certificates. A favorite for 16 states and the District is a special carve out is for solar power (other states offer additional incentives). These certificates are commonly called solar renewable energy credits, or SRECs.

There is a practical reason why states prefer solar. It is about another correlation. It turns out a state’s economic activity is roughly correlated to the sun’s position. As the sun rises and sets, the state’s economic activity rises and sets. As economic activity increases, so does demand for power. Since the sun’s position is directly correlated to solar power production, solar power production is naturally correlated to daily demand curves, making solar a natural peaking asset.

Historically, peaking generators are the least efficient power plants in the fleet. While their capital costs are low, their production costs are high. When dispatched, they set [high] market-clearing prices. They are also the nastiest units when it comes to environmental impact.

If solar is naturally correlated to the grid’s need to dispatch peaking units, solar ends up displacing the dirtiest of plants. Solar also displaces the most costly of plants. Thus, solar power shaves off market-clearing prices while it cleans the air. As wholesale market clearing prices drop, so do consumers’ retail prices for electricity.

When it comes to solar, it seems everything is correlated. The state wins. The economy wins. Consumers win. The environment wins. Taxpayers win. That is the point of view of states. It is an important point of view because they, not the federal government, control the playing field.

Of course, there are losers. Solar has a significant impact on oil, coal, nuclear and natural gas units. By shaving of market-clearing prices, solar reduces gross margins for all market participants. For the marginal generators, solar removes revenues.


There are no federal programs, which create, manage or regulate renewable energy certificates (credits or tags). There have been Congressional attempts to create a national standard. There have been Congressional attempts to create a national product. However, all attempts failed.

What did not fail was Congress’ desire for federal facilities to mimic state programs. Under Section 203 of the Energy Policy Act of 2005 (42 USC 15852), Congress requires federal agencies to use renewable energy as part of their supply of electricity. Each year, the Act ( http://tinyurl.com/7r3l3ct) increased the amount of renewable energy needed by federal agencies until fiscal year 2013. At that point, most agencies were required by statute to use a minimum of 7.5 percent renewable energy. On average, the executive branch met the mandate on time.

At this point, the federal program could seem a little confusing. If no national renewable energy credits exist, if no national standards exist and all states offer different programs, how does the federal government buy renewable energy? The answer is they do it badly.

Good or bad, the federal government is in a pickle. Federal agencies, including the Department of Defense, are reluctant to transgress on states’ environmental policies. As such, most agencies will go to great lengths to avoid adding new pollutants to states’ air, land and water resources.

On a macro basis, it appears the nation is using up natural capital. As populations and economies expand, there is less room for new pollution sources. If the federal government or any other outsider pollutes a host state, arguments will flow. It is about money. It is about local economies. It is about states’ rights.


Google understands the big picture and regional pictures. Their energy strategy is about energy markets and infrastructure. However, their primary focus is connecting their use of energy use with company infrastructure.

As will be discussed in the next part, Google will become renewable energy’s biggest winner. While it will take years to complete, Google is quietly building a competitive advantage. Google's competitors may find this advantage difficult to beat. Better, Google is creating a barrier to entry that some competitors cannot overcome.



 Yesterday, eastern US states ran out of power plants. Today, the challenge is not as daunting, but if you live or work in the DC-to-NYC corridor, please turn off your lights — or we might do it for you.

PJM Interconnection, the electricity grid operator for more than 61 million people in 13 states and the District of Columbia, is extending its appeal for the public to conserve electricity into Wednesday morning. The call for conservation is prompted by the continuing arctic weather across the region PJM serves which is driving electricity consumption to record levels.

Early this morning, market prices for wholesale power ramped up. By 07:00, they reached $400 per megawatt-hour in Mid-Atlantic states. NYC's prices passed $300. Demand will continue grow until the peak arrives, which is normally around 5 PM local time.

From Chicago to Boston, grid operators are making phone calls asking large power users to voluntarily drop load. Grids will offer cash for some consumers to quit consuming. Those with thin tariffs (low cost and low reliability) will find their power automatically curtailed.

In the meantime, power markets are rewarding almost everything in the inventory, including oil. If you have a standby diesel generator, it may pay to run it for a few hours. In fact, it appears that is what may be happening.

Carder Dimitroff adds: 

This will benefit generating companies like Exelon (EXC), NRG Energy (NRG), Calpine (CPN). It will benefit transmission line companies like ITC Holdings (ITC) and AEP. It will also benefit demand-response companies like EnerNOC (ENOC), Comverge (private) and OPower (soon-to-be-public)

It will not help or hurt local distribution companies like Pepco Holdings (POM) or Consolidated Edison (ED). These companies only provide transportation services.

While these numbers are huge, they will not have much impact on Q1 earnings. It is a flash in the pan. Cold weather will clear and low prices will return. Worse for producers, 40 degrees now feels like 60. As a result, consumers' conservation habits have become embedded. Those habits will continue until summer.



I've never seen anything like this. Power prices in the Mid-Atlantic region are normally $30 to $40 this time of day for this time of year. Right now, prices are over $1,800 system wide. The lack of price diversity suggests there are no transmission constraints of consequence. It also suggests "the grid" does not have enough generation.

There will be consequences. Planners will be forced to rethink their reliability models. This could be good news for Exelon, NRG Energy, Calpine, Dynegy and Atlantic Power.



 Here are some personal observations from years working in the nuclear power industry that might be helpful for those interested in energy markets.

1. Since most plants need to produce power 100 percent power all the time, most managers see the power markets as inconsequential.

2. Unlike the gas turbine business, it seems nuke managers are unsure about production costs. Yesterday, I saw a slide where a senior person merged capital costs with operating costs to claim higher production costs. It seems self-defeating.

3. It seems DOE has been captured by industry groups. In particular, NE seems to be captured by NEI. Most of their data seems to come from NEI.

4. It seems DOE's NE thinks their primary role is to be the repository of other peoples' thinking. It appears they are not taking any leadership responsibilities.

After discussing this with some colleagues, we think we know some of the [financially] troubled nukes:






5. As Prof. Richter pointed out, there is no national effort to save the nation's nukes. Most industry activity has been redeployed at the state level. It seems desperate.

6. Industry leaders are mostly old white men who are drawing big salaries. The industry is managed like a country club, not a business. Their dues are too high and too few people are willing to pay the price.



 I'm a bit concerned about the last Apple quarter report—not because of what's going on right now but because the thing that i was hoping to hear was that the company wasn't concerned about margins so much as market share. That was the mistake of the 1980s—Apple focused on keeping margins up. Scully thinks that that was a mistake though not as much as firing Jobs. I think he has it backwards. Amazon is worth a fortune without having worried much about earnings. Apple would be the same—if it focused on market share first.

On the innovation front, Apple has always been about changing the relationship between man and his environment. That's what the iPod was, that's what the iPhone was, that's what the iWatch will be about, ditto for the iTV. What are the next two things in Apple's quiver? Try these two:

1. Apple purchases Nest, creates an iTune interface for all manner of modules to control a house. For instance, it reaches an agreement with Whirlpool to put those modules into Whirlpool's products. The modules cost all of $20-30, but they allow you to control everything in your house remotely. Everything.

2. Apple reaches an agreement with Ford to put an Apple iCar into each Ford auto. The iCar contains a description of what properties you want the car to be optimized for. Speed? Mileage? Handling soft ride? Handling firm ride? and so on. You could even build into the iCar a module, software programmable by an insurance company to monitor driving habits, a la Progressive. You could change the iCar with an iTunes like interface, and each driver in the family could have their own iCar. Junior wants the car? Dad puts the iCar into the car—using a secured compartment that Junior wouldn't have access to. Why? Because Dad's put a special limit on the iCar to keep Junior from going more than 70 for more than 15 seconds every 15 minutes. (Junior may need that momentary spurt to escape an accident.)

Ford would like the device because it could segment the market with it—the more expensive the car, the more capabilities in the iCar, and the iCars could be separated on the basis of the attached device, much as differentiates the iPhone 5 from the 4S.

There's lots Apple could do with such a device.

Strange that I have't heard anything about it—and that would sell quickly. You could even upgrade the iCars with each model year. Apple would have secured built in obsolescence. Upgrading the motor? Upgrade your iCar. Etc.

Now, if I can think of that, why hasn't Apple?

Jeff Watson comments: 

If you don't like what's going on, you can always short the stock.

Ed Stewart comments: 

Tying the aspirational Apple brand to something so lame as a mainstream car company seems like a terrible idea to me.

As for Nest, I think about my smoke alarm or other appliances in the home only once every 3 years or so, if that. It is a non-issue that does not solve any significant need. I can handle my smoke alarm without notes from my iphone. Why apple would want to tie in with such things once again seems a non-starter to me, degrading to the brand's appeal. If anything such features could be done through an app of little significance, a side feature among tens of thousands for those who want it, developed by a third party.

I could be dead wrong, of course. One person's strategic brilliance appears banal and foolish to another.

Good thing we can trade and sort things out.

Carder Dimitroff writes: 

I'm not an expert on Apple. I have no idea what they may be developing. However, I do think David may be offering an interesting idea.

Somebody will offer a simple home management system to manage energy consumption. It would take someone like Apple or Google to figure out a simple, easy to use system. It also could come out of somebody's garage.

Pressure is building for consumers to gain control of their energy consumption. Despite low wholesale prices, retail energy prices continue to increase. Regulators are promoting demand side management policies. Intermediaries are happily removing themselves between the consumer and the [volatile] power markets. Smart meters are being deployed across the nation to help consumers become responsive to market conditions.

The setup is nearly complete. A new day is arriving. Consumers will become fully exposed to the dynamics of the deregulated power markets, which operate 24/7 and change every three to five minutes.

The utility will always own the meter and outside wires. The consumer will own everything behind the meter. Creative developers will begin focusing behind the meter and help consumers manage their purchases of electric, natural gas and water.

Residential and commercial consumers will need programmable sensing and control devices. I have no idea what the technology will look like. However, it needs to be simple, buried and invisible to slow adoption consumers (like automobile computers). It also must manage energy consumption without altering lifestyles.

This is more than managing a thermostat. It is about controlling everything on the consumer side of the meter.

Apple and Google are very aware of energy issues. They are aggressively investing in large-scale alternative energy production facilities (solar, wind, fuel cells). Google invested in high voltage transmission lines.

Combining their energy knowledge with their consumer electronics experience suggests they are in a unique position to offer innovative demand-side management technologies. This would include the opportunity to manage massive amounts of data (Oracle is already trying to claim this space). If Apple or Google takes this path is another question.

Apple and Google have already demonstrated that change usually comes from the outside. One fact we know, consumers cannot expect their plain old utilities to develop innovative technologies. The question for me is whether Apple or Google can still deliver an out-of-the-ballpark product.



 My Mother was an identical twin. Twins often one right and one left handed, and have other differences in thinking. But also one also gets more nutrients in the womb and one is more healthy than the other. I could always identify my Mom in her childhood pictures as the frailer looking one. She died of kidney cancer at 57 and my Aunt is very healthy at 73.

On a lighter note, while Billy may be right that : "Only the good die young". The contrapositive to this, I remind those that dismiss exercise, is: "Only those that died old lived badly". It is not all about the age.

Aerobic exercise is the one proven way to grow brain cells. The new cells can strengthen the neuroplasticity of the brain. This helps the "old" keep learning new ways to think, keeps the brain forever 21.

Carder Dimitroff writes: 

I just returned from my nth trip to visit and help my dad. He is living in a gold-plated senior community with lots of amenities and support staff. Previously, my mother-in-law lived in a similar community.

My stays with my dad are usually 3 or 4 days. He does not want to rush and he has a long list of "must-do's." Altogether, I've spent about 30 or 40 days living on the campus.

I know other list members have had similar experiences. Without personally witnessing the daily life of a senior, nobody could possibly understand the hopes, fears, challenges and life of the nation's elderly.

Let me share some observations. Others may want to comment, so feel free to offer your thoughts.

1. Diet: Most, like my dad are thin. Few are overweight. I saw no one critically obese. While plenty of great food is offered, I suspect many are skipping meals.

2. Exercise: The facility offers a fully staffed and modern gym. They also have outdoor facilities. They are rarely used. Most seniors need core and upper body strength to transfer. They don't see new exercise regimens as an opportunity to restore or maintain their health. Nobody runs.

3. Sunshine: Spend a few hours a week outside and one or two pills can be eliminated.

4. Medicare: Leave it alone. Yes, these are all wealthy people. Most are self-made. Nevertheless, they all believe Medicare is something they earned.

5. Medical care: Left to their own devices, they are not big consumers of medical care. Their attitude is: "If it ain't broke don't fix it, if it is broke, don't tell anyone." Their biggest fear is the facility's medical center (a separate skilled nursing facility). Most will hide medical issues fearing they will be forced into the [gold-plated] medical center.

6. The end: While good health is a requirement for admissions, many realize this is it. They know this is their last stop. It is a sobering thought (even for me). They also know they are no longer significant contributors to society, particularly these residents who are largely hidden from public view.

This is our fifth family member to take this trip. I've concluded the best option is to eat nutritious foods, exercise and get out. Like James Fixx, I want to live well until the end.

Sam Marx writes: 

I am up there in age and would easily fit into one of these seniors communities. I trade stocks and especially options. Financially I'm very succesful. I feel that trading, especially options, has kept me mentally alert and healthy. 

I pay a lot in taxes, it seems more every year, so I guess I would be judged still as contributing to society, whatever that means. 

I live in a gated community in Florida, and the younger residents are always asking me for financial and trading advice. 

A colleague who taught at college with me never trading and seems to be mentally regressing. The "youngsters" don't care for his opinions or to discuss anything with him.

For those of you that trade, don't fear old age. Active trading contributes to mental health and alertness.



 It seems there has been a collective awakening concerning the viability of nation's nuclear power fleet. Bloomberg, Cooper and others argue that many nukes are unprofitable. They speculate which plants might retire early.

I may have been wrong on NextEra's Prairie Island (WI). I was sure these units would be high on the list. Yet NEE just finished a new capax project. It also appears NEE may have long-term power purchase agreements with other utilities. If, it appears NEE found a way to circumvent the markets by locking in a hedge position with unwitting consumers.

I was surprised to see Clinton high up the list. Unlike Prairie Island, Clinton is newer and larger plant. As such, it is relatively economic. Apparently, EXC has significant challenges in delivering Clinton's product to market.

This does not bode well for coal. Compared to most coal-fired power plants, nukes have lower production costs. With rising production costs and more competition from struggling nukes, coal is motivated to exit before nukes. In fact, it is in the nuke's best interests for coal to exit sooner than later.

The problem is the owners. Many nuke owners also own coal. NEE and D are exceptions.

The important point is that coal is not alone in their challenges. In addition, new federal regulations are not the prime driver behind utilities' decisions to exit their coal positions. The prime driver is the market.



Isn't it likely that anything like the current level of prices will cause a slowdown in the economy and soon we will be hearing that the tapering is not imminent?

Anatoly Veltman writes: 

I assume energy prices are meant. Maybe food, too? Any other, "input" prices?

And my second question: ok, suppose "we will be hearing that the tapering is not imminent". Will it necessarily sustain record equity prices? What about cyclical fluctuations? What about economic realities? Will stocks always necessarily go up (from ANY level) due to Fed "hopes" alone? What about fiscal issues around the world? What about geo-political strains? What about currency wars? What about old fashion profit-taking, correction…

Again, the chart looks eerily like 1987 - when a drop of historic proportions proved to be a mere correction

I think the most dangerous for the market situation will arise precisely as described by the Chair: that participants will be given more Fed "hopium"; and we'll get a lot more of them in for the wrong reason and at the wrong levels.

Ralph Vince writes: 


Don't you think that depends on the pace of events though here, doesn't it?

Conceivably, things can fall off very, very rapidly given the political backdrop right now and the history of anemic real GDP growth leading as a reliable prelude to recession (and the fact that YoY real GDP has seen successively lower troughs since 1980, the stage is certainly set for a rapid descent). And if the jawboning (which is likely priced in already) doesn't provide the support it is thought to?

A commenter adds: 

A Fed official has already bandied this idea in the media. On Friday Bullard said that the pace and duration of QE will respond to market conditions.

Gary Rogan writes: 

The costs of the rising rates are already hitting the mortgage refinancing market severely and may soon derail the housing recovery. The cost to the Treasury of higher interest payments and the lack of the profit rebates from the Fed would be enormous, while simultaneously increasing outlays for unemployment and food stamps if the Fed causes a recession. The recovery is tepid and not self-sustaining. Also getting to 6.5% unemployment is a long way off.

It seems likely that the Fed saw a stock bubble building and decided to puncture it. When the first downtrend after the initial attempt started to reverse itself, Ben jawboned some more. He probably has a target level in mind, but he can't afford to to let the rates rise too much so it's a balancing act. What may be best from his perspective is a stock market crash followed by a quick rhetoric reversal from him and perhaps even more QE to lower the rates. He needs to have stocks and bonds to move in the opposite direction by any means necessary.

Scott Brooks writes: 

IMHO, there is no amount of stimulus that ward off the coming demographic shift that is occurring in America as well as most of the rest of the developed world.

In America, the final wave (the 3rd wave) of the baby boomers have exceeded their peak spending years and are refocusing their money. Generation X is not yet ready (nor do they have the numbers) to replace the spending of the baby boomers.

Spending is one of the biggest (if not the biggest) driver of our economy. Spending peaks at about age 47/48.

If one were to look at an immigration adjusted birth index, one would clearly see that the baby boom peaked in 1961 then leveled out (with an ever so slight increase increase) thru early 1964 and then off precipitously after that. Add 48 to 1964 and you get 2012.

Spending will decrease for the boomers. The big index companies that sell to the boomers will see their profits further erode. The secular bear that started in 2000 will continue on for several more years.

It will be a traders market with several bear market rallies and opportunities to make money on the short side. I predict higher than normal volatility.

Old "buy and hold" dinosaurs like myself will have to adjust our portfolios and be more nimble. It will be a great opportunity for the day traders and option/future traders of this list to make profits (that is if you profit off volatility). Smaller more diversified positions, low leverage (you don't want to get burned by big moves in volatility), and hedging will be the hallmarks of the day. The long only crowd may experience more pain they are accustomed too, unless the volatility increases the premiums enough on OTM puts that it makes them worthwhile to sell without getting burned on the downside.

Although the potential exists, I don't see big moves down (like 1987)….I see more of a slow bleed like we saw in 00/01/02.

The combination of statist entitlements based on unrealistic assumptions are going to put excessive pressure on governments to deliver on their promises. The same pressure is going to be put on private pensions, many of which are currently underfunded.

This won't last forever, though. Things will get better. Watch demographic tables for those countries which see their demographic start to move positively and buy there when demographics make their positive move. Don't look at typical "index stock" type companies though. When demographic changes take place and the younger generation starts to move into power, they will innovate. Look at smaller companies for profits.

Of course, I've been wrong many times before so it may be best disregard everything I've said.

Ed Stewart asks: 

Scott, where do productivity increases fit into this type pf analysis? After all, isn't this what boosts living standards over the long run? Rather than think in money terms, what about the creation of real goods and services that improve lives.

If it is just "spending" that is needed, they could just poof cash into everyone's bank account in the same way that today they "poof" cash into the QE programs.

Scott Brooks replies:

Ed, it's more than just spending that drives any economy. Innovations that improve productivity do play a role.

As to real goods and services and improving lives…..I am very excited about that. Difficult times are often the fertilizer needed to cause innovation. As one generation (the baby boomers) moves off into the sunset of their lives, the next generation (GenX) moves into power and gets to apply their new ideas and innovations.

Each generation builds on the work of the last….and even comes up with brand new ideas along the way.

We saw it happen from 1968 - 82, 1929 - 48 (with a hiccup due to the war), and I could go back even further. Generation shifts occur and we are in one now.

Carder Dimitroff writes:

Your argument makes sense. Unfortunately, this is not how the system has been working. Worse, those advocating for the good 'ol days do not realize they are asking for more government guarantees, a la Solyndra.

Utilities love these guarantees. Given the choice of free markets or government controls, utilities pick government controls every time.

Look at the southeastern states. They had several opportunities to create a free market, called "Grid South." They rejected that idea, preferring instead to remain centrally planned by comrades in state utility commissions.

Almost two decades ago, liberal states began implementing free-market systems for New England to Virginia and all points in between. Soon after, California jumped in. Late to the game was the Midwest. Even later was Texas. Of course, utilities operating in these states were not pleased when their generating assets exit the state's rate base.

It gets better. For decades, gas and electric utilities operated a "cost-plus" enterprise. From time to time, utilities would visit their regulators, present their [prudently acquired] costs, seek an adjusted rate to recover those costs and then asked for a modest margin.

It's like milking your neighbor's cow.



 It is true Enron's management was engaged in a series of bad decisions. It is also true Enron offered major contributions to the energy industry. Their biggest contribution was to introduce power markets to the electric utility industry.

Because of Enron, control of the nation's transmission lines was wrestled away from utility engineers and put into the hands of traders and bankers. Physical transactions were replaced with financial transactions. Free options to use assets were monetized and priced in open markets.

One example is firm transmission rights (FTRs). Before Enron, owners gave away rights to use transmission lines to a trusted few. Now, FTRs are auctioned in open markets, where users bid for the right to use utility assets.

Because of Enron, Regional Transmission Organizations (RTO's) gained significance. RTOs are what many believe is the "nation's grid." The truth is North America has many unconnected grids, ten of which are open markets in the form of RTOs (most of the nation's population centers are located in one of those RTOs). Every day, RTOs conduct a series of open auctions for energy. They also conduct other auctions for capacity, FTRs and related products and services.

Enron helped transform a highly regulated government-controlled industry into a loosely regulated market-based industry. Enron went bankrupt before the transformation was complete. Initially, only the Northeastern states and California jumped into market-based power. Later Midwestern states, Texas and some Southwestern states joined in. But to this day, many Southern states shun power markets, preferring instead a government-controlled regulatory scheme.

It is true that Enron tried to corner the very market they created. It is also true that the financial techniques they introduced were new in the energy industry, they were borrowed from Wall Street, they were transformative, they were sometimes unfair and most were legal at the time.

Today, RTO's operate under Federal Energy Regulatory Commission rules. Those rules include valuable lessons learned from Enron and other actors. They continue to evolve.

On balance, Enron was a positive force for free markets. They were also a negative force for fair markets.

Russ Sears writes: 

 Enron is a good example of what can happen when a company/species goes from a survival of the first strategy into a survival of the fittest as their niche draws competition and does not survive the process. Normally, growth and high profit margins are a sign of strength, but the temptation as the niche gets crowded is to eat the young to support the current generation of leaders so they can grow and have the high profits they were brought up to believe was their birthright. A similar thing happened in the mortgage backed markets.

These are the times that test collaboration and integrity. It is easy to be honest in passing out the pot when it keeps growing fast and furious. I believe Apple may be a case where it survives through a good collaborative environment within. Time will tell. Given Jobs' reputation of being a dictator and his temper, would this have been the case if he was still running things once continued growth became limited? 

David Lillienfeld comments: 

The issue with Jobs isn't what he would have done. It's whether the management team he left leads the company to continued prosperity. It isn't yet clear that they are so doing, but I'll give them another year to show one way or another.

Managements have two responsibilities–place the right people in their jobs and to provide for an orderly succession that allows the company to continue and hopefully better its lot. (Bettering its lot means ultimately bettering the lot of its shareholders.)

The book on Jobs as CEO isn't yet concluded. Many suggest that he was the greatest CEO of all time. I'm not ready to subscribe to that notion–not until his successors provide some demonstration that the company is not adversely impacted by his departure–no man being indispensable (that great Churchill comment about the cemeteries of Europe being filled with supposedly indispensable men). From my limited perspective, I think the title of the greatest CEO remains a tie between Alfred P. Sloan and John D. Rockefeller. One can argue about what they did, but its hard to argue with the results–both during their tenure and afterwards. J. P. Morgan, too. I suppose one could put George Washington in that league too, but I'll defer to others on this list who can speak to that idea–pro or con–better than I can.

Jobs was an SOB, but the man performed. So was Bob "get rid of the olives" Crandall. And Henry Frick. They all performed, they were all considered magnificent CEOs. The latter two hardly qualify as among the greatest CEOs, and the book is still out on the former.



 I believe the Prime Minister backed off his statement about restarting Japan's nuclear plants. In all likelihood, some of their nuclear units may return to service, but now seems too soon.

Japan's commercial nuclear power plants can produce bulk power for approximately $12 per megawatt-hour. Importing Liquefied Natural Gas (LNG) to fuel gas turbines produces power at approximately $144 per megawatt-hour (assuming ~ $18/MMBtu for delivered natural gas and an average heat rate of ~ 8,000 Btu/kWh).

With 48,000 megawatts of undamaged nuclear capacity in Japan's fleet, the difference between $12 and $144 is significant. Assuming a 85 percent capacity factor, the simple difference adds up to approximately $50 billion per year.

In fact, the cost difference is greater than $50 billion. First, utilities must continue paying operations, maintenance, capital and fuel management costs even if their nuclear plants are idled. Idled plants produce no revenue to offset costs.

Second, the power market is punishing. The $144 would be a base bid in any power auction. Market-clearing prices would start at $144 and shoot up to higher heat rates, depending on hourly demand. (Higher heat rates suggests higher production costs)

The economic pain associated with high energy costs should cause Japan's policymakers to think hard about practical options. In all likelihood, Japan will restart some of their newer units, but not right away. Any restart will likely be slow, deliberate and sequential.

In the meantime, Japan will invest heavily in renewable energy. Production costs for wind, solar and demand-response are near $0 per megawatt-hour. More importantly, power from renewable power displaces the market's costliest fossil-fueled plants watt for watt.

The world seems to be betting Japan will continue to shun nuclear power production. Australia, Qatar, Indonesia and the US are eyening Japan as their prime customer for new LNG production. It appears their collective bet may not fully consider Japan's options of renewable energy and nuclear restarts. But that is another topic for another thread.

As an aside, Japan's power grid has an unusual design. Half of the nation is 60 Hz (because it was designed by Americans). The other half is 50 Hz (because it was developed by Europeans). Japan cannot easily move bulk power between 50 Hz and 60 Hz systems. The fact the grid is not homogeneous means the energy flowing within the grid is not fungible. It also means Japan's power markets are not efficient.

Carter Dimitroff writes: 

From a market perspective, the near zero production costs of wind and solar are reached without government subsidies. Government subsidies drive production costs into negative numbers or they reduce capital costs. Some nations use feed-in tariffs, which subsidies capital expenditures, production costs and margins.

Many in the utility industry are befuddled by production costs. For decades, utilities in the US have been regulated. Regulated assets need not respond to market forces, because there appears to be no market in regulated regions.

The fact is that where there are no formal markets, utilities create virtual markets. Responsible utilities dispatch regulated power assets using market principles. First, they dispatch low production cost assets, then they dispatch progressively expensive assets. The virtual market becomes distorted when there is limited liquidity. Small utility regions with few assets will often dispatch "must run" assets even if they are uneconomic.

Production costs are not levelized costs, nor are they operating costs. They are market-based costs. From an energy production perspective, production costs are the incremental costs incurred when a facility changes its state from offline to production. Those incremental costs are mostly made up of fuel and fuel handling costs. They also include additional costs for manpower, operating based maintenance and, in the case of US nuclear, waste disposal costs. But for the most part, fuel is the big driver in production costs (after all, a power plant is just an energy conversion device that wastes two thirds of its fuel in the conversion process).

Wind and solar facilities are largely passive machines. They need no costly fuel as feedstock and no incremental manpower to operate. They just sit passively and wait for sun or wind to manufacture energy.

Carder Dimitroff adds: 

First, the US has no feed-in tariffs for solar or for wind. There are negotiated power purchase agreements scattered about, but no formal feed-in tariffs exist like we see in Europe.

Second, no grid has an over abundance of solar power needed to spark the imagination suggested. At best, solar acts as a peaker. It is difficult to imagine a case where solar could supplant base loaded production. It is also difficult to magically arrive at a point where there is no cash flow. Investors would have throttled back before reaching this point.

Third, the case you cite for solar is extreme and hypothetical. But it has happened for wind. The locational marginal price has blown past zero on several occasions. But that was a signal there was a problem with transportation, not production. It was also a signal that higher cost producers refused to respond to market signals and as such, they refused to exit.

What does "h" mean?

Anonymous comments: 

Japan's fossil-fueled generation remains high because of continuing nuclear plant outages. Because Japan's thermal energy is imported, solar is beginning to look cheap.

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Beware the Ides of March. They come to demonstrate, not to legislate.

As damages are tallied, cash becomes king.

Opportunities abound as rubble is cleared. Swept away will be demonstrators, who rue the day they forced a great nation to the edge of the abyss.



 Pilgrim Nuclear Power Plant, near Plymouth, Massachusetts was forced into a cold shutdown, due to a loss of offsite power (LOOP). This is not a big deal, but I'm sure some of the FUD folks will make hay out of Pilgrim's situation.

First, the need for power in New England is diminished. Current load is off by the equivalent of three nuclear plants right now. Projected load at New England's hub was supposed to be 16,980 megawatts and the actual load is 14,240 megawatts. So the temporary loss of the nuclear plant affects price, but not supply.

Second, when a nuclear plant loses offsite power, it is supposed to shut down. Usually, it shuts down without operator assistance.

Offsite power is used to power the plant's internal lights and equipment. Station service power comes from the grid, into the local switchyard, to the station service transformers and into the plant's power distribution systems. I'm guessing the LOOP problem is in the nearby switchyard, which is a huge substation and the origin of major transmission line(s). If there is a problem in the switchyard or in the transmission lines, then there is no transportation available for plant's produced power.

When there is a LOOP, diesel generators automatically activate. In US nuclear plants, there are three diesel generators, any one of which can handle the station's full load. One generator feeds the "Train A Circuit," which serves all critical loads, including battery chargers. Another generator feeds the "Train B Circuit" which feeds the redundant system of vital loads. The third generator is the swing - it can switch between Train A and Train B circuits. The Train A and B circuits are color coded, physically isolated, electrically isolated and the swing generator is a "break-before-make" swing (to maintain integrity of electrical separation).

Generators are frequently tested and test results are reported to the NRC. There is adequate amount of fuel available on site to power the generators for days (I forgot how many days are required under 10 CFR).

Currently, Pilgrim's diesel generators are operating as planned. As the nuclear plant finalizes its cold shutdown procedures, the load on the diesel generators becomes less critical. Depending on the design, vital systems needed to cool the primary system and to assure cold shutdown.

In the unlikely case where all three diesel generators fail, there are at least two banks of redundant batteries. These are massive lead acid batteries, which are hard wired into the redundant systems. Diesel generator failure will cause the batteries to supply energy without even a second of delay. Batteries are downstream and they feed four redundant vital circuits. Vital circuits are designed for instrumentation and control and they are color coded, physically isolated and electrically isolated.

Now the FUD folks (Fear, Uncertainty and Doubt) will argue that Pilgrim is a lot like Fukushima. There is enough truth to the statement to make the comparison seem valid. But the comparison is completely bogus and fear is unwarranted.

Like Fukushima, Pilgrim:

   1. Was designed by General Electric
   2. Is a Boiling Water Reactor (BWR) Mark I design.
   3. Is 40+ years old
   4. Has an ocean-facing site.
   5. Had a LOOP incident

Unlike Fukusima, Pilgrim:

   1. Has an upgraded BWR design
   2. Is designed to manage LOOPs
   3. Has access to unlimited amounts of fuel oil
   4. Didn't experience an historic earthquake
   5. Didn't experience a historic tsunami
   6. Didn't experience a historic earthquake, THEN a subsequent tsunami,
   AND a LOOP, THEN a loss of fuel oil
   7. Didn't incur any physical damage to any part of the facility

If you can keep objective distance from the Fukushima incident, you might appreciate that their plant's design. Their 1960-era design withstood an historic earthquake and it kept on tickin'. It withstood a subsequent tsunami of historic proportions and it kept on tickin'. It withstood a subsequent LOOP, and it kept on tickin'. Later, and only after the subsequent loss of fuel oil, did some units at Fukushima fail. It took four simultaneous failures before some units became crippled.

Keep in mind; some other units at Fukushima remain largely undamaged. Those undamaged reactors could technically return to service and provide electric power to the region. For policy and practical reasons, it isn't going to happen, but from an engineering perspective, it is technically possible.

Before memories fade and fear media takes over, it should remain clear that Fukushima did not cause the original earthquake, or the tsunami or the LOOP. There was a massive earthquake and massive tsunami, which damaged an entire coastal region, including local nuclear, coal and gas power plants.

Don't let the FUD folks make you go loopy over Pilgrim. While the station experienced a LOOP, a far more serious incident happened nearby. There was a 17-car pileup on one of Boston's highways. Pilgrim's LOOP will be reported nationally. The pileup will be relegated to page four of the local paper.



 On Thursday, February 6th, at the Junto, Ivan Eland delivered a talk about the misplaced fears about oil shortages and how it has led to bad economic and political positions and interventions. He talked about 11 myths taken from his book "no war for oil".

1. no viable market exists for oil
2. Big oil colludes with OPEC to stick consumers with high prices.
3. Global oil production has peaked and the world is running out of oil
4. Oil is a special product of great strategic importance.
5. A strategic petroleum reserve is needed in case of emergency.
6. The us should become independent of oil, foreign oil or overseas energy
7. Oil price spikes cause economic catastrophes.
8. Us policy is to maintain the flow of oil at the lowest possible price.
9. Possession of oil means economic and political power.
10. The US must defend autocratic Saudi Arabia because of oil
11. Dependence of Europe on Russian energy is a threat to us security.

The gist of the argument was that high prices lead to increased supply and substitution of cheaper fuels and more drilling activity. And that oil producers were often the beneficiary of us policies which were designed to help them rather than the consumer. I believed that the talk was sadly needy of some scholars who knew something about oil that could have presented counter arguments or facts to the debunking of the myths that Eland presented. It was the kind of talk that needed some energy experts in the audience to present the opposite case if there was any. And I felt that the arguments made would not have persuaded anyone, except the vast majority that believed in the myths already. I wonder if any of the people knowledgeable about energy on this site could comment on the veracity and verisimilitude of these myths.

David Lillienfeld writes: 

Was any reference made to the West African oil fields or the Eastern Med fields (they may be as big as the Qatari natural gas fields) or even the new North Sea fields? (I won't get into the Brazilian or Mexican oil activities (Pemex is supposedly shedding some of the featherbedded/political spoils jobs it has), though they may be significant in the future.) Few analyses seem to factor these sources into the discussion, and while there are lots of geopolitical issues in play (Israel-Turkey-Cypress is but one potential flashpoint), the economic ones haven't been pushed to the side (witness some of the political stability emerging in West Africa (relatively speaking, of course)).

I don't know the book, but from these 11 points, it sounds remarkably US-centric. I gather no mention was made that the agreement between FDR and the Saudis was as much about the US-UK rivalry as it was about access to oil (which the US didn't need at that point–and didn't think it would need for some time to come. If I recall correctly, much if not most of the Allied effort in WW2 ran off of US oil. (One of Churchill's major accomplishments as First Lord of the Admiralty was moving the HRH Navy off of coal. The result was faster, more maneuverable ships able to stay at sea longer. But to do that change, the British needed a secure source of oil, which it had in the Persian Gulf. That's one of the reasons that Britain's 1970 decision to withdraw its troops from bases in Kuwait was significant.)

Stefan Jovanovich writes:

In 1904 - 7 and a half years before Churchill was appointed First Lord of the Admiralty - the Journal of the American Society of Naval Engineers was publishing the Report of the Liquid Fuel Board of the U.S. Navy. (You can find the Journal as an eBook in Google Books - search Journal of the American Society of Naval Engineers, Inc, Volume 16.) The conversion from coal to oil was already taken for granted. What people were struggling with were the very real technical challenges that had to be met in dealing with a liquid fuel that burned much hotter than coal - the shapes of the boilers themselves, the design and metallurgy of the boiler tubes, the advantages and problems of the super-heated steam that oil could produce, etc. What the same volume of the Naval Engineers journal also has a is a brief note detailing how many problems the British were having in their fleet exercises with the conversion and how many of those problems could be attributed to the inferiority of their metallurgical skills. The business about Churchill would be a bad joke if it were not representative of how much "history" has now become the endless copying of self-promoting gossip and rewritten press releases from the newspapers of the period. (It does, however, remind one of why it was around this time that Mencken decided he had had enough with newspapers and looked for somewhere else to write the truth.) .

This is not a rip on David. It is, however, another of Stefan's rants about the corruption of historical scholarship in modern academia. When a profession becomes nothing but an endless retelling of secondary sources, it develops the idiocy that medicine had when it was only practiced by reference to what Aristotle and Galen wrote. Churchill's taking and receiving credit for converting the British Navy from coal to oil is absolute nonsense. It is nonsense that is dutifully repeated in all the current discussions on the topic of oil, and it is a pure example of the peer-reviewed lie.

David Lilienfeld responds: 

Since the Royal Navy didn't function off of its subs and destroyers, I don't think one could use the use of oil in those ships as a proxy for the navy overall.

The problems the British were having with their metallurgy around 1920 (+/- 5 years or so) had impact beyond the Royal Navy. Wasn't there the suggestion that the brittleness of the rivets in the Titanic's hull when the Titanic struck the iceberg rather than a long gash in the hull that was responsible for its sinking?

Stefan Jovanovich replies: 

No Navy in the world had finished abandoning coal for oil before WW I because they had not worked out the problems. What I questioned was the assertion that Churchill or Fisher, for that matter, had somehow shaken the Admiralty out of its lethargy; that is part of the Churchill myth, and it is complete and utter crap.

The British submarines were not oil-fired; they ran on what the Brits called petrol (our name for it would be diesel). It was the same technology in basic design now used on every modern railroad locomotive -diesel to electricity to motive power.

It was not beyond the metallurgical skills of Harland and Wolff to have used different rivets. The alternatives were well-understood by them and by the Board of Trade. Tim Foecke's analysis is that "the builders used stronger steel rivets where they expected the greatest stress and weaker iron rivets for the stern and the bow, where they thought there would be less pressure, he said. But it was the ship's bow that struck the iceberg."

The questions about the rivets have nothing at all to do with the metallurgical problems everyone faced with the conversion from coal to oil.

Pitt T. Maner III writes: 

Taking on one of the myths.

On #3. Global oil production has peaked and the world is running out of oil

1)  from (a nice overview report) the BP Energy Outlook 2030 (January 2013)

"The world has ample proved reserves of oil and natural gas to meet expected future demand growth. At the end of 2011, global proved reserves of oil were sufficient to meet 54 years of current (2011) production; for natural gas that figure is 64 years."

2) The USGS has a good page on the latest publications related to ever changing assessments.

3) A slide presentation with interesting graphs showing how predictions were made and have varied over time. Basic idea:

"The conventional (or static) approach to exploration is rapidly changing to the dynamic (petroleum system) approach, and this transformation is the most profound shift in the petroleum business in a century. "

Henry Gifford writes:

I do know a little about oil and boilers. Some of what I've been hearing makes little sense, which could be one clue to how much to believe other things someone says on a topic.

I have never heard of a metallurgical challenge to burning oil vs. coal in a boiler. When heated they both (and natural gas and gasoline and wood) pyrolyse into a soup of Hydrogen and Carbon molecules, which then combine with Oxygen in the air. Same as any hydrocarbon. They also contain a little Sulfur, which produces Sulfuric acid which eats the boiler if it is cooled below the dewpoint temperature, which is about 400F. Same problem with modern fuels and modern boilers or furnaces or water heaters, as found in most basements today.

The story that oil burns hotter than coal is nonsense. All Hydrocarbons produce a soup of Hydrogen and Carbon which produce a fixed quantity of heat when burned. The temperature is a function of how quickly that process takes place in how small an area. You can today pay $15 at Home Depot for a propane torch or $60 for a propane torch. The $60 torch makes a hotter flame from the same fuel by mixing it with air better. Same fuel, very different temperature, same amount of heat of course from a given quantity of fuel. Ships burning oil make less smoke, and because the machinery and fuel and handling equipment take up less space, can go further and faster.

The story that oil is necessary to produce superheated steam is also not accurate. "Superheated" means heated to a temperature higher than the boiling temperature at that pressure. The Freon returning from the cold side of your air conditioner is "superheated," despite being very cold at that point. The old steam locomotives superheated the steam, as do steam engines powering turbines, this to prevent liquid steam impinging on the turbine blades.

As for oil being strategic, I think access to Middle Eastern oil had a lot to do with WW1. The German navy adopted oil sooner than the British did, both on the eve of WW1, both gradually with many dual-fueled ships built. The British had to import oil by tanker, the Germans started building a pipeline. A straight line on a map from Berlin to Baghdad goes through all the countries that fought on the German side, except one in the Balkans, where one day a prince was shot, soon there was an unbroken chain of allied or occupied countries stretching from Baghdad to Berlin.

As for WW2, Roosevelt was quoted on the cover of the NY Times as saying the US embargo of oil to Japan "was tantamount to a declaration of war" 6 months before the surprise at Pearl Harbor. The fighting in Burma was not over access to coconuts. The German invasion of Russia had a Southern thrust aimed at oilfields, and there were very heavy allied attacks on the German controlled oil fields in Romania. In the middle of the war US and German fighter pilots both went into battle with about 300 hours of training (except the Tuskegee Airmen, who were black, therefore considered mentally inferior, thus returned for additional training, twice, or maybe nobody wanted them to fight, and so they ended up the best trained pilots around, which helped very much with survival rates and proficiency), soon the German hours were dropping because of fuel shortages, and ended up well under 100
hours with the classroom ratio constantly increasing, while the US training
hours increased for the rest of the war. The Germans fought with the ME-262, a very real and very practical jet fighter, and reportedly towed it to the runway with horses to save fuel. But, I think the horse story is not true. I heard the air force used cows because the army had all the horses. The Japanese built the largest battleships in history, and sent them out without enough fuel for a return trip (but with thousands of young men on board).

Or parents' and grandparents' generation came to control the world through, in significant part, access to oil.

Do I think oil is a strategic material?

I don't think the US military is in the middle east for a shortage of falafels or for women's rights.

The reports that there is 50something or 60something years of supply so we don't have to worry sound to me like good reason to worry, if true. Toward the end, or even near the end, things will get very expensive, and probably scarce - those numbers are for today's production, with a constantly increasing population and with more and more people buying cars and air conditioners.

The US military runs on one fuel: diesel. Also called jet fuel or #2 fuel oil. The difference between diesel and #2 fuel oil is taxes, and a dye -thus the clear plastic fuel tube on every diesel car. The same stuff, or virtually the same stuff, drives all tanks, planes, jeeps, ships (other than large nuclear ships and subs), subs, trucks, etc. There are reasons for this.

Oil of one sort or another (gasoline or diesel) has a Watt-Density far in excess of anything else by either weight or volume. Compressed Hydrogen has only 1/5 the Watt-Density of diesel by volume even after being compressed to 300 atmospheres (4,400 PSI), which of course requires a spherical tank, which won't conveniently fit into an airplane wing or between the muffler and tailpipe of a car. Far in excess of batteries or anything else. Batteries can power a car for a while, but that volume and weight of gasoline or diesel would power a vehicle much, much further. And forget planes with batteries. And the military is not giving up planes. Nor tanks or other vehicles, and they want them to travel far and fast - they will burn diesel until or unless something with more power is discovered.

Is oil scarce? How much is left? I have no idea, but I don't think BP was drilling 5 miles deep in the gulf of mexico because it was easy.

The President of the Old Speculator's Club writes:

This thread reminded me of a book I read years and years ago and which became a classic of sorts. The book is "Delilah" and the author, Marcus Goodrich. It's a huge book, a lengthy and, at times, a difficult read as it goes into minute detail on the men and operations of a pre-WWI destroyer…coal devouring monsters that make some of Aubrey's accommodations look luxurious.

The book was published in 1941 and was the first of two that were to complete the story. Over the next 50 years (until his death in '91) Goodrich labored over the second book - sometimes spending an entire day "perfecting" a single sentence. The second manuscript, reportedly incomplete has never been made available to the public.

How big a deal was it back in '41. Goodrich became a minor celebrity, and good enough and popular enough to write the original "treatment" for "It's a Wonderful Life." He later married Olivia DeHavilland. Little was heard from him after that - he once stated that if he couldn't finish the second book he'd "probably burn it."

Carder Dimitroff writes: 

I'll give it a shot. You can write a book on any one of these statements

*1 no viable market exists for oil*

This is a partially true statement. There are several markets for oil. There are two major markets (WTI and Brent) and several dozen regional markets. Most are not pure markets. Some are manipulated markets.

Complicating the issue is the fact that crude oil is not a physically fungible commodity. There are attempts to address physical inconsistencies using normalizing techniques to achieve a financially fungible commodity.

The challenge is refineries. Refineries are designed to process specific types of crude oil. For example, many refineries cannot accept some of the heavier oils. As such, the refineries often set their own bid for a specific type of oil delivered to their facilities, but they will not bid other oils. This complicates markets' handling of basis differentials.

Under these circumstances, the so-called market price is only a broad indicator.

*2. Big oil colludes with OPEC to stick consumers with high prices.*

This is an inflammatory comment that misdirects issue. The comment assumes there is only one market for oil. It assumes producers are only interested in the public good. It also assumes OPEC producers have a lot of flexibility in setting prices. These are all incorrect assumptions

Of course, producers want higher prices. It's a business. But if OPEC and the majors collude (with other producers) and force significantly higher prices, demand will decline and revenues could be compromised.

*3. Global oil production has peaked and the world is running out of oil*

This is a tricky question. First, there has to be consensus on the definition of oil. It may surprise consumers to learn oil production figures often slip in production for ethanol and natural gas liquids. It's not a dirty trick. Petroleum is used primarily for transportation fuels. Ethanol is also used for transportation fuel. Some, but not all natural gas liquids are used for transportation (and that is why their price is often indexed to oil, not natural has).

It's a tricky because the question links two unrelated issues. The question suggests production has peaked because the world is running out of oil.

It's also a tricky question because it assumes production is currently limited by drilling constraints.

It is true new production can take time to respond to market signals. It is not true that the world is close to running out of oil.

*4. Oil is a special product of great strategic importance.*

In general, this statement appears to be true. But adding context would be helpful.

*5. A strategic petroleum reserve is needed in case of emergency.*

In general, this statement appears to be true.

*6. The US should become independent of oil, foreign oil or overseas energy*

Again, this statement is packed with three, mutually exclusive ideas. It is true, the US and all other nations should become independent of oil. So far, no practical substitute has been found.

It is true that the US should become independent of foreign [crude] oil. Assuming this independence includes Canada and Mexico, there is no practical option for the US to go it alone.

With respect to other primary fuels, the US is already energy independent, or almost energy independent. We are completely independent when it comes to renewable energy (hydroelectric, ethanol, biomass, wind, solar and others). We are energy independent when it comes to energy efficiency. We are net exporter of coal. We are virtually energy independent with respect to natural gas.

We import over 90 percent of our nuclear fuels. We can and should produce our own. But market forces favor international sourcing.

*7. Oil price spikes cause economic catastrophes.*

This may or may not be true. By definition, a spike is a short term event. As such, it may have greater political consequences than economic impact.

*8. US policy is to maintain the flow of oil at the lowest possible price.*

This is both true and false. US domestic policy is generally indifferent towards flow or price. Military policy is to assure unimpeded flow in vital areas (Middle East and Indonesia). Federal energy policy seems generally indifferent towards world crude oil prices.

From time to time, administrations do respond to political pressure to reduce prices. The fact is their options are limited.

*9. Possession of oil means economic and political power.*


*10. The US must defend autocratic Saudi Arabia because of oil*

True. But it does not matter if they are autocratic or not.

*11. Dependence of Europe on Russian energy is a threat to US security.*


Finally, there is a fundamental element of the crude oil business that many cannot seem understand. Sometimes I think they don't want to understand.

The simple concept is that oil wells deplete. This idea seems elusive to many. Further, in order to replace depleting wells, market forces will motivate producers to (or should) seek the next marginal well. The next marginal well usually has higher production costs than the production costs associated with exiting wells. But decisions from sovereign producers are not always economic.

Production costs mean levelized costs, not lifting costs. It includes transportation costs to get product to market. It also includes market adjustments needed to financially normalize oil quality.

When you put it all together, the world is not running out of oil. The world is running out of cheap oil.

These are two important points:



With respect to Point 1, there has been significant volumes of credible work by intelligence analysts to confirm this statement. Yet politically, our leaders don't seem to believe the fact-based evidence. Most intelligence analysts will argue that that the Islamists don't hate us for who we are, they hate us for what we do. Yet you hear the opposite story on capital Hill.



 Have any of you been to Argentina lately. What is the situation on the street. I am thinking of going there on the way to Antarctica later this year. Is it safe?

Vince Fulco writes:

One thing to seriously consider even though it sounds like you are going thru mostly modern areas, Amex has an extremely affordable medical expense insurance while traveling. For a few hundred bucks, as I recall < $250 for my wife and I when we traveled to South Africa, they'll airlift you out of spots and take care of many extraordinary medical expenses. Considering you'll probably never use it but if you do, fees can run tens of thousands of $ depending on what your normal health insurance covers, brought us piece of mind. Everything can be done online.

Larry Williams writes:

Careful on med-evac policies

I just lost my best buddy here; heart issues. We tried med-evac but the reality is 1) you need a local doctor to agree to release, which they will not do unless stable and 2) before the plane/jet wheels up they must have admitting dr and hospital at the other end.

That takes a long time to arrange

Best is to charter. Don't tell anyone of medical issues-get aboard and then go to closest emergency room to airport.

Carder Dimitroff writes: 

I'm sorry for your loss.

I would like to add to your thoughts. Once in the air and within US control, request the pilot use the LIFEGUARD call sign. This will notify the FAA to give the plane priority handling, direct routing and airport priority.

In addition, here may be a helpful link.

A commenter adds: 

First: LIFEGUARD has recently been changed to MEDEVAC to conform with ICAO international standards.

Second, and most important: If you are in ANY WAY fearful that your medical situation may be life threatening, communicate this CLEARLY to the crew and they will declare an EMERGENCY.

MEDEVAC flights get priority handling when they request it. But EMERGENCIES — well, let's just say that controllers will move heaven and earth and every airplane in the way to get that aircraft on the ground at the airport of the pilots choosing.

Most domestic airlines subcontract to a company that has professional medical staff on call 24/7 that assists them in determining the best course of action for the patient. They will get a doctor on the radio directly with the flight crew to assess each situation. 



Country                       Oil Production               Rigs

Saudi Arabia              10 million barrels/day         50
United States              6 million barrels/day          1,400

Source: Georgia Tech Strategic Energy Institute



 This week, New England ran out of natural gas. Supply cannot meet demand because New England didn't invest in appropriate infrastructure. Mid you, there's plenty of natural gas nearby. It just can't get to any of the New England states. As a result, Boston City Gate blew past $30/MMBtu. Today, thanks to LNG from Yemen, it fell to around $15.00.

At the same time, bulk power prices skyrocketed to the stratosphere. This morning bulk power at New England's hub traded in the $400 to $500 range (400 to 500 cents per kilowatt-hour) on normal volumes. Nearby in New Jersey and Pennsylvania, it was in the $20 to $35 range (2 to 3.5 cents).

New Englanders have been protesting coal plants. New Englanders have been protesting nuclear plants. New Englanders have been protesting hydroelectric plants. New Englanders have been protesting transmission lines. So,in response, companies are withdrawing investment and retiring perfectly good energy assets.

If you are wealthy and living in New England, you're paying through the nose for state taxes, local taxes, fuel oil, natural gas and electricity. If you are not wealthy, you're freezing in the dark.

Today, Massachusetts wants to increase taxes on her citizens while they are distracted protesting yet another critical fuel. It turns out New Englanders don't want cheap Canadian oil shipped to Philadelphia through Maine's ports, so they spent the day "rallying against a proposed pipeline from Montreal" (http://tinyurl.com/adn7atf).

Mind you, these protests are not really about a new pipeline. Since World War II, New Englanders didn't fret about shipping foreign oil from Maine's ports through northern New England's pipelines and on to Montreal's refineries. Now, when operators want to reverse the flow on existing facilities, New Englanders suddenly have a conscious.

Nevertheless, when you add it all up, it looks like a collision course in the making. With escalating taxes and skyrocketing energy costs, New England's economy will not be able to attract the jobs it once owned. It will only be able hire teachers for their universities, medical professionals for their insured, busboys for their country clubs and tax accountants to keep everybody straight.

The combination of growing taxes and escalating energy costs is not sustainable. At some point, lunacy has to give way to sanity.

It would seem a movement would develop to address New England's thirst for energy. Once, New England was the nation's capital for commercial nuclear power. The Yankee System included early nuclear plants in Vermont, Maine, Massachusetts and Connecticut. They were supplemented with newer plants in New Hampshire, Massachusetts and Connecticut. Today, only one of the Yankee plants survives. The remaining non-Yankee plants struggle.

From a national energy perspective, New England is an Island. Their only borders are New York and Canada. New York is not an exporter of energy. Eastern Canada is energy challenged with their natural gas wells depleting and their surplus power limited.

New England must move beyond provincial thinking and some seek creative options. Nuclear may no longer be the answer. But solutions are needed and they are needed urgently. It will take leadership at the regional level to bridge provincial interests. Failure to address these issues across all New England states will most certainly cause their economies to deteriorate.

In the interim, the region doth protest too much, methinks.



 This morning I used Amtrak's auto train for the first time. I went from Orlando to DC and I expected the train to be half empty. I was wrong. They kept adding cars until the entire unit was over a quarter of a mile long.

I have to say, I'll never make that drive again. While the auto train does not save time, it does save wear and tear on the car. Also, for the driver it's a lot safer to sleep on the train than sleeping on I-95. As far as cost, car and passenger cost $420. That included two meals, all the fresh fruit you can eat and no sleeper.

I saved 900 miles worth of gasoline and tolls [and speeding tickets]. I also saved one night at a hotel, meals and a lot of I-95 related stress. Amtrak's service was family-friendly and courteous. I also like big trains, so I'm biased.

Because everyone has different needs, I'm not necessarily recommending this option. But I am recommending travelers consider this option. The drive from DC to Orlando is BORING and long. Also, some of those southern boys love to ticket those damnyankees (yes it's one word)!



 Market prices for bulk power are dropping across most regional transmission organizations (RTOs or regional grids). The introduction of wind power, solar power and new demand-side technologies are three key reasons for lower prices.

Lower market-clearing prices mean lower margins for all market participants, including wind, solar, energy efficiency and nuclear power. Commercial nuclear power is particularly threatened because they lost their long-held position as the market's cost leader.

Five conclusions can be drawn from observing the power markets:

1) Because they have zero production costs, wind and solar power affect the market and lower average market prices for wholesale power.

2) Small amounts of renewable energy production can cause significant changes in market prices.

3) Trading energy efficiency products lowers average market prices even further.

4) Power markets are agnostic towards power generation; the market doesn't care how the energy is sourced.

5) Commercial nuclear power may fall out of favor, as they will likely lose significant margins and earnings.

Power markets are punishing generators of all flavors. Companies, such as Exelon (EXC), Entergy (ETR), Calpine (CPN), NRG Energy (NRG) and GenOn Energy (GEN), will see new pressures on their quarterlies. Summers should be good. Springs and falls should be terrible. Winders should be mediocre.

It appears commercial nuclear power in the United States is in for a rough ride. Existing fleets will become less profitable (see Exelon Generating's 10-Q). Except for TVA, new fleets of nuclear power plants will likely face postponement or cancellation.

The bright spot is transportation. Owning transmission lines will become vogue. Interstate transmission lines remain regulated assets and are a cost-plus business. The federal government is the economic regulator (FERC). New FERC rules favor independent and private ownership of transmission lines.Avoid distribution lines. While they also remain regulated, they are local assets. Their financial performance is subject to the [political] whim of state overseers.

David Lilienfeld writes: 

How much more efficient is centralized solar-based generation and then using the grid to deliver it vs decentralized (eg, homeowner/commercial buildings) generation? Are solar and/or wind competitive yet with coal/natural-gas based generation, and if not, what do the trends suggest in terms of parity (non-subsidized)? Are these trends acknowledged by the local regulators?

Carder Dimitroff replies:

Hi David:

I think you are asking about off-grid vs. grid connected. If I'm wrong, please let me know.

Off-grid will always be the most expensive option because more equipment is needed. Specifically, some form of energy storage device is required and two forms of energy conversion are needed. Not only does off-grid cost more to build, it costs more to operate. Every time energy is converted or stored, energy is lost in the process.

Grid connected is the most economic solution. In the utility world, there are two grid-connected options. One is a direct connection tot eh grid using utility-scaled solutions. The other is a net meter arrangement where the consumer pays only for the net amount of energy needed. Most state will not allow consumers to export more energy than they consume.

For most homeowners, net metering is the most practical option. If I were to add an energy storage device, I would not use batteries. If available, I would use water in a pump storage configuration. The benefit of water storage is it is simple, it can be efficient and it has a long operating life.

About economics. Energy analysis is always about point of view. From the point of view of the grid, wind and solar are far more competitive sources of energy than hydroelectric, nuclear, coal or natural gas. This is not a debatable point.

From the point of view of developers, incentives are still required. All forms of power production have incentives. The only incentive the federal government offers wind and solar are cashless tax credits.



 I'm not an expert in biofuels. I am on the board of a non-profit, which focuses on renewables and the Pentagon. There, we separate renewables into two tracks– biofuels and power. Most of my renewable experience is in the power area, including wind, solar and biomass.

I do see a lot in the biofuels area. Frankly, there is a lot of fascinating technology emerging and much of it is over my head (I have a weak chemistry background). One lesson I learned was that biofuel production does not necessarily depend on traditional farms.

One technology used algae as the foundation for biofuel. They combined water, carbon dioxide and a lot of sun to produce massive amounts of algae. They processed the algae to create a bio-diesel, which was later blended with regular diesel. Algae can be produced in a sunny parking lot, a brownfield site, or a cleared lot next to a power plant. The key is capturing carbon dioxide and sunlight.

The military is taking renewable energy seriously. A number of large programs started in the Bush years and most of them rolled over to the Obama years. I can attest this issue has had the full attention of the Pentagon's top leaders; for them it's all about energy security.

If the Army can use wind and solar to reduce the number of fuel convoys, they can save lives. If the Air Force can assure energy security, they can pilot drones in the Middle East with pilots sitting at controls in South Dakota.

Incredibly, if the Air Force or Navy Air can use clean fuels, they can land at more bases. I learned from a fellow member of the non-profit that the Air Force is restricted in landing and takeoffs from several military bases because their planes emit too much carbon dioxide. That member educating me on CO2 limitations was the former assistant secretary of the Air Force under the Bush Administration.

The Navy is upset their bases in Southern California are tied to an unreliable power grid. Twice, they've lost power to naval bases in San Diego, which apparently caused all sorts of unexpected challenges.

The Navy cannot afford to rely on one source for jet fuel, diesel or bunker. They have been funding development to access equivalent fuels from alternative sources, such as biofuels.

This summer, the Navy tested their "green fleet," where all military equipment was fueled by biofuel blends. These blends included jet fuel and bunker fuel.

Several believe the military will ultimately deploy small module reactors (SMRs). They will be used in theater to fuel combat operations and reduce convoys. They will also be used domestically to provide bases with secure energy. SMR technology is already under development by four separate companies and it will likely be deployed within a decade.

The private sector is leading. I'm told several ports, including some US ports, offer priority handling for clean ships.

It's easy to diss renewable energy. I was on of those who snickered at "silly power." I've changed my mind.



 Last night, during our breaking the fast supper, my daughter had an interesting discussion with me and my wife. My daughter is a senior in high school, and she's finalizing her applications for college–early decision application, early decision 2 applications, and regular admission applications. (When we first started talking about colleges last spring, I gave her a book on game theory–intro level; she never read it, unfortunately–too busy with classes.)

She had wanted to go to Wesleyan. It had everything she was after–small liberal arts school with lots of on campus activities, a strong record of graduate/work placements, small size, and a school where parties were not the rule of the day. Oh, and that it was on the other coast, away from my wife and me, only increased her interest in the school. She was also looking at Wellesley, Colby, Bowdoin, Carleton, Grinnell, and so on. Some public ivies too–U Wisconsin Madison, U Washington, and even some of the U of Californias, though the latter is her safety school.

The problem with the liberal arts colleges is that they now cost a fortune. Generally north of $45K a year and often north of $50K. The situation with the ivies isn't much different–they also cost a small fortune. The out-of-state tuitions for many universities (including the public ivies) are in the mid-20K range, and the chances of finishing in 4 years when attending them is diminishing by the semester. Needing to attend a U of Cal for 6 years to finish a major used to be a rarity. Not anymore. And there is no reason to think the status quo will improve any time soon. Here in California, the system developed by Pat Brown (the current governor's father) had the U of California system, the Cal State system, and then regional community college system. Not only are these systems struggling to find some way of increasing their capacity, but they are doing so at a time when the state government is cutting funding for education throughout the state, including these three post-secondary systems. This problem is not limited to California. In the SUNY system, all tuition goes to Albany, and the state legislature decides how much goes back to the individual campuses, rather than looking at each campus as a P&L center (as U of C campuses do).

Why bring all this up? My daughter is now contending with the question of what's the best value for getting a college education rather than what's the "perfect place" for her. So far, so good. This was what we discussed last night at dinner, and it got me thinking about the post-secondary education system here in the US. At the college level, that system has been in place for three centuries or so. At the graduate/professional level, the current system came into being during the mid-to-late 1800s. The problem is that with the current levels of tuition, the cost of a baccalaureate is rapidly becoming (if not already there) out of reach for much of the middle class population. Using loans is rapidly becoming untenable in the face of college grads unable to find jobs and one-in-twelve of the workforce unemployed. (I won't get into the loan fiasco as regards professional grads–the average medical student having debt north of $150K and for more than a third, it's in excess of $200K.) For many of the existing loans, it seems likely that someone other than the college grad will be left paying the bill. That's debt of about $1.2 trillion at risk. The bottom line is that the current system is rapidly becoming–if it is not already–unsustainable.

The question must be asked about what is the value of a bachelor's degree. I ask the question because it is becoming easy to have access online to some of the outstanding courses available at many of America's premiere universities. Will a degree really have much value when an employer is interested in what you have learned somewhere–online or in person? It used to be that the only way to obtain the knowledge was to attend a college or university in a degree program. The degree was a proxy for knowledge. But there are now other sources for obtaining that knowledge–does spending the money on a college degree make sense any longer?

The situation is even more daunting when you consider that during the mid-1970s, when I went to Johns Hopkins, tuition was about $3K a year. That was also the price of a Chevy Nova car at that time. A Chevy Spark now costs under $15K, and has a MSRP of $12K and change. Tuition at Johns Hopkins today? $50K.

All those contributions to one's alma mater are prolonging the day of reckoning for a system that will need to undergo extensive reform, and that reform will need to accommodate other forms of education rather than only in-person class attendance. Western Governor's University (www.wgu.edu) may be one example, but insofar as it is built around actual degrees, I'm not sure that it's the only type of solution.

An educated workforce is a major prerequisite for a competitive United States, yet the education system is in the middle of a crisis about which there is precious little discussion. That has to change.

Richard Owen writes: 

Education is becoming the quintessential branded luxury, taking a commodity input and stamping it with a brand.

Markets are made at the margins: the price driver has been (i) the rising share of wealth located abroad and (ii) the higher percentage of production available to the best paid domestic workers. The West is importing the GINI ratio of the Emerging Markets when it comes to high end property, education, etc.

Take British public schools: fees are now $45k/yr for the full school life, rather than just a terminal three years at college. For three children that's $135k/yr post-tax wage dollars. 7% of the UK is privately educated historically, yet the former figure is well into the 1% income range. Whats made up the marginal demand? Wealthy foreigners with untrammeled, untaxed, EM boom dollars. London is undergoing a reverse colonization. Hence in some bijou streets in the capital, residential is up 40% in two years, (having fallen not at all during the crisis, so that's not a bounce off the lows).

Carder Dimitroff adds: 

I have two daughters in their 20s. Both have Ivy-league degrees. Frankly, I'm not sure Ivy matters.

There are wonderful state and private colleges. Most decent universities offer inquiring minds incredible opportunities. If a student is looking to learn and grow, most "average" universities can dish out more than most students can handle.

A good example is my cousin's daughter. She attended a low profile public college in Florida. She went in with the attitude of learning and developing. She and several of her classmates became Fulbright Scholars. Now she is Ph.D. candidate at Duke.

If you look at Ph.D. candidates at the nation's leading research institutions, you may notice most of them never attended Harvard, Yale or Princeton. The same can be said for many business, political and military leaders.

Each school has its own culture. In my opinion, a key to a parent's success is matching the college with the student's personality. If the student love the place from day one, all is good.



"Mining it More, Burning it Less": 

We're mining more coal in the US, more efficiently than ever, but burning less of it. Domestic consumption of coal is down to its lowest point since 1988. Meanwhile US coal exports have reached their highest levels in 20 years.

Republicans accuse President Obama of waging "war on coal." Coal companies blame over-regulation from Washington. But US coal production has risen substantially over the last half century, from 560 million tons in 1950 to 1.1 billion in 2011.



 Groups make better self interested decisions.

This is confirmed by the process used to judge Olympic and NCAA diving. Judging diving is a subjective process. Actual scores are not important; consistency is very important. So if a judge consistently judges low, it doesn't matter to the diver.

To eliminate favoritism and mathematical fairness, a diver's overall score for an individual dive is calculated in the following way:

Each of the seven judges awards a score to a diver for his or her dive. (Ex: 6-5-5-5-5-5-4) The two highest and two lowest scores are eliminated. (Ex: 6 and 4 and two of the 5s are eliminated.) The remaining scores are totaled. (Ex: 5 + 5 + 5 = 15) This total (15) is then multiplied by the predetermined degree of difficulty rating associated with the particular dive performed to calculate the overall score. These degree of difficulty ratings range between 1.2 to 4.1, in one-tenth increments. (Ex: 15 × 2.0 = 30)

So groupthink generally works if outliers are eliminated.



 A common mistake that stock people do I think is to pay attention to the increase in sales numbers. What does this have to do with future profits? I would think there is zero correlation given the earnings change since sales are so easy to manipulate by such things as discounts, pre-orders, and incentives for early buying, and reducing inventory et al. How did this ridiculous emphasis on the sales increase become as or more important than earnings relative to expectations in affecting stocks after the earnings report? I recently met with a pairs trading outfit and gave them 100 reasons I don't think it works, but it was from the seat of my pants. The main reason was of course that it goes against the drift. It hedges against the 10,000 fold return.

Gary Rogan writes: 

If sales increase while profits are decreasing, that's a bad sign. However when profits increase while sales are decreasing, this may be very good, but it can't go on too long. Sales trends gained influence as a counterbalance to profit growth being fudged. When you have profits, sales, and cash flows all increasing in unison and indebtedness not increasing, that's as good as it gets. 

Jeff Watson comments: 

Profits increasing while sales are decreasing are usually a sign of increased productivity, better inventory management, better management of labor, and better management of capital. Although Gary says this scenario can't go on too long, it really can go on forever. 

Gary Rogan replies: 

Well clearly it's mathematically possible to decrease sales by .1% per year and increase profits by .1% per year close to forever so "too long" was perhaps a bit harsh, but at some point in the real world gross margins become so high as to make further advances impossible due to competition or substitution. My statement was prompted by not being able to recall a real scenario of sustained profit growth and sales decline resulting in a good outcome having looked at hundreds of income statements, but I've never made a study out of it nor have I looked at multi-year trends. When customers are buying less of your stuff year in and year out that usually means they are not excited about your stuff, because they don't like it but perhaps in this case because the price is too high for them to use more of it. When customers get into the habit of using less of your stuff, that's hard to fight. 

Jeff Watson adds:

The Chair is 100% correct. Going back to Sears as an example…their aggressive pricing will only squeeze their retail operation out of business(if continued long enough), as prices this low are unsustainable in the long run. If a store has a 30 percent increase in sales after implementing a big sale, but it's gross profit goes from 22% to 6% or less, is that a good business plan? Even though Sears is not increasing labor to handle the increase in sales, the model is still badly flawed. I understand that one of the most important things in retail is buying right, but I suspect that most of the things Sears is selling is a loss leader. Maybe they are subscribing to the old cliche, "We might be losing a little money on each sale, so we'll make up for that with the increase in volume."

Russ Sears writes:

Coming from the world of insurance, when things sell unexpectedly well the actuaries double check their pricing. The agents and the market will quickly spot when you are selling $1 or risk coverage for 99 cents. When I started, before rate books were online, a printing error cut-off the $1 handle of 70 year old women term life insurance rate per $1,000 (this was highest age we sold term to). The month after the book went out we had more 70 yr. old women apply for insurance than we had in the past several years combined.

In other words sales increases often indicate increase in claims volatility. Sales increases make me wonder if management really knows what they are doing. One wonders if this rule holds for the retail and stocks in general. 

Carder Dimitroff adds: 

I may be naive, but in some sectors I believe the top line could be critical for long term investments. I'm thinking of regulated and capital intensive companies like electric utilities, gas utilities, water utilities, pipeline companies, transmission line companies and MLPs. In a different way, I'm also thinking of non-regulated utilities, such as independent power producers, refineries and REITs.

In all these cases, if the top line falls, the bottom line is plagued by fixed costs, such as interest, ad volerem taxes, depreciation and amortization.

The second derivative of revenues in such cases is capacity factor. Low revenues suggest low capacity factors. Low capacity factors suggest troubled assets and long-term challenges. The assets could be partially stranded by market conditions.

An example is marginally efficient coal plants. With low market prices for natural gas, many coal plants find themselves out of merit and not dispatched (zero earnings for producing energy). When natural gas prices return, marginal coal plants are again deep in the merit order and they are dispatched frequently or continuously.

Julian Rowberry writes: 

An internet marketing equivalent of over valuing sales figures is over valuing social media subscribers. Twitter followers, facebook likes, page views, ad clicks etc are all very easily manipulated.

Leo Jia adds: 

Here is my two cents regarding growth vs non-growth.

The present value of a business without growth is much lower than that of a similar sized growing business. So one obvious question to any business owner is whether he would like to receive more money or not if the business is to be sold today. The answer is obvious. But one may counter: since he is making good profits on the business, why would he sell it today? Well, isn't that the beauty of modern finance produced through Wall Street? To sell it today, the entrepreneur can collect today all his future earnings projected based on the best periods of his business performance, and with that reward, he can move on with his life, rather than be tied up by the business which may turn sourer later and cause him to suffer.

Why would Wall Street care more about growing businesses? Those people who bought out the entrepreneur have an even higher reward outlook than his and would seek higher profit on the investment.

Art Cooper writes: 

An example of this currently in the news is Hormel Foods, described in the article "Spam Sales Boost Hormel's Profit" on p B4 of today's WSJ.

The article notes that Hormel's Q3 earnings rose 13%, led by strong growth in products such as Spam and Mexican salsas, continuing a trend of higher YoY earnings. "Even so, rising commodity costs and shoppers' resistance to higher prices are pressuring its profit margins, which could affect its results in future quarters."

HRL's price has been roughly flat for a year.



 When thinking about the future of Facebook, I believe it could be helpful to consider some context. In particular, it might be helpful to understand FB's evolution, trajectory and emerging substitutes.

My understanding of FB comes from my children and the movie. My children are Mark Zuckerberg's age and my oldest was a classmate's Mark's sister in another college. My youngest had personal insights about the Winklevoss twins though a collegiate rowing community, also in another college.

Initially, FB was aimed at one college, Harvard. Later it expanded to the Ivy and Ivy-like colleges (not graduate schools). Initially FB was intended to network among America's future elite. As time progressed, students from other great colleges were allowed to join, but they had to possess the proper e-mail extension.

As time went on, students from good universities were allowed to join. Finally, anyone with an "edu" extension on their e-mail address could join FB.

During this period, FB was aimed at the 18 to 22 year old college student. It was a symbol of, "I've made it to college and I'm a member of an important network." Because FB was largely confidential, postings were largely about gossip, interesting parties, crazy behavior, linking up and engaging in various college-age discussions. From the perspective of college students, FB was safe because parents, teachers and non-college students were denied access and those older folks had no idea what was being shared.

Then FB took a step that almost ruined its future; it allowed high school students to join. College-age students were devastated. And while privacy settings were limited, college age students began blocking the younger set. In addition, they thought of ways to prevent younger people from viewing certain areas and began to restrain themselves from certain posts and conversations.

Then FB became attractive to cool people in their late 20's and early 30's, primarily college educated. However, FB's culture was changing; it was no longer elitist, unique nor confidential. Online behavior, particularly among the undergraduate age, became formalized and restrained.

Then the worst happened. Mom and Dad signed up. Mom and Dad started posting baby pictures of their college-aged students. They posted obscure discussions about their good 'ol college days (sans the bad stuff they didn't want their kids to know about).

With Mom and Dad watching, a whole new culture evolved, particularly among the college age and recent graduates. They avoided discussions about religion, politics, sex and money. They rarely talked about another person unless it's good news. They tried to blend into the background.

Even though some thought the worst had already happened, the absolute worst hit when Granny got her account. Granny didn't understand the culture and protocols and ranted about this and that, publicly mused about the future of the nation's youth and reminisced about the good 'ol days.

For some, FB's value had been completely diminished. For people in their 20's, online conversations became limited. Posting of pictures had to be Granny-safe. FB, once a private network, had become a family album.

Young people finishing college or recently out of college began to focus on LinkedIn. There they can create a variety of networks, including alumni groups, and focus on professional development. While Granny is unlikely to connect in LI, they don't care. On LI, the language is already sanitized and professional; Granny would be proud if she only understood.

FB's trajectory suggests the site is becoming less relevant for certain age groups. FB started with undergraduates who are now in their late 20's. It appears FB is now losing that age group. In addition, it seems FB's loss is spreading to nearby age groups.

Accelerating FB's downward trajectory are gaffs that violate users' sense of privacy, cultural mistakes that make assumptions about user preferences and reporting profiles to marketers and government policing agencies. FB is becoming more like Microsoft and less like Apple.

In the end, I believe FB will become family oriented, at least for users in the West. LI is becoming more relevant, particularly the 20 to 40 age group.

I don't know what will replace FB, but it certainly isn't twitter. Right now, for the 20 to 30 age group, it seems smart phone texting is de rigueur; it's private, focused, discrete and direct.

It seems to me there's a void developing. It's in the very market Zuckerberg originally identified; a live yearbook.

More directly, FB seems to be losing relevance among its core users at an accelerating pace. I think FB peaked, at least in the West.

Looking forward, I wouldn't be surprised if FB bought Ancestry.com (ACOM).



 Australia is also setting themselves up to displace Qatar and become the world's largest exporter of natural gas. Australia's oil and gas producers are planning massive investments in LNG trains, export facilities and floating LNG platforms. In addition, Shell (RDS.A) is building the world's largest ship that can drill, produce and transform deep-water natural gas into LNG. Shell's mother ship, larger than several aircraft carriers, will be parked off Australia's shores and it will feed Asia's LNG fleet. By 2015, Asia should begin to see lower LNG prices.

For Australia, United States and other coal producing nations, thermal coal production has to endure a difficult transformation. Worldwide consumption is adjusting to a long-term decline in demand as natural gas displaces coal in the power sector. It's not just environmental regulation driving the decision, it's economics. A combined cycle gas turbine is a more efficient consumer of fuel than any coal boiler. Add lower natural gas prices into the mix, and coal becomes relatively uncompetitive.

Nevertheless, coal markets will ultimately reach a baseline level of consumption. As Harvard's Michael Porter argued decades ago, the coal industry's cost leaders will own that baseline.

One key metric for achieving a competitive advantage will likely be dollars per million British thermal units ($/MMBtu), not dollars per ton. Owners of high-ranked coal reserves will likely survive the transformation.



 Last night (very late) I put down my reading and turned to Book TV. The weekend interviews and presentations are usually fairly interesting and highly partisan - generally speaking, both sides are given significant representation. I just happened to catch the middle and end portions of a presentation given by one Dambisa Moyo. She was talking about her latest book, Winner Take All.

It's an overview of China's methods and actions in acquiring the resources it feels will be necessary in the near and very distant future. Its investment rationale, unlike those we're familiar with, have nothing to do with discounted cash flow models, but with perceived need. As a result it will purchase whatever it wants at prices that may seem outrageously high. The government's only concern is remaining in power and that it will do anything to do so. This includes cooking the books, manipulating the currency, and over-building just to keep the labor force content.

Her views are remarkably different from this I hear from either the China bulls or bears. Simply put, the Chinese leadership cares nothing about Western investment models or practices — it does whatever is necessary to secure its future access to vital resources - and, unlike many of our policies, to do so in the least intrusive way, with many carrots and few sticks.

This is a very bright, literate woman who gives a great presentation and, I believe, some fresh insights into the world's most interesting country.

Her website is dambisamoyo.com

You can check your cable listings for her current interview which, as I recall, was recorded on 6/24

While these types of allegations have certainly been made in the past, does anyone close to China have any thoughts on this? Leo?

From the NYT :

As the Chinese economy continues to sputter, prominent corporate executives in China and Western economists say there is evidence that local and provincial officials are falsifying economic statistics to disguise the true depth of the troubles. Record-setting mountains of excess coal have accumulated at the country's biggest storage areas because power plants are burning less coal in the face of tumbling electricity demand. But local and provincial government officials have forced plant managers not to report to Beijing the full extent of the slowdown, power sector executives said. Electricity production and consumption have been considered a telltale sign of a wide variety of economic activity. They are widely viewed by foreign investors and even some Chinese officials as the gold standard for measuring what is really happening in the country's economy, because the gathering and reporting of data in China is not considered as reliable as it is in many countries.

Indeed, officials in some cities and provinces are also overstating economic output, corporate revenue, corporate profits and tax receipts, the corporate executives and economists said. The officials do so by urging businesses to keep separate sets of books, showing improving business results and tax payments that do not exist.

The executives and economists roughly estimated that the effect of the inaccurate statistics was to falsely inflate a variety of economic indicators by 1 or 2 percentage points. That may be enough to make very bad economic news look merely bad. The executives and economists requested anonymity for fear of jeopardizing their relationship with the Chinese authorities, on whom they depend for data and business deals.

The National Bureau of Statistics, the government agency in Beijing that compiles most of the country's economic statistics, denied that economic data had been overstated."This is not rooted in evidence," an agency spokeswoman said.

Carder Dimitroff comments:

I would not focus on one commodity. Coal in China is a complex issue. I believe many coal-fired power plants are running on the margin, and many are privately owned (AES, for one). When a power plant is on the margin, there is no gross margin. No private owner will operate in the face of negative gross margins, so units with high production costs (fuel cost and heat rate) sit idle until prices return.

Coal is on one leg of the dark spread, the consumer is on the other. My understanding is the government placed a cap on electricity prices. I understand they want to curb inflation and keep electricity prices low. That cap keeps the dark spread compressed. Leo may be able to provide insight in this area.

However, I think the overall conclusions might be correct. While I'm an amateur in Chinese economics, I did research publicly traded utilities and found implausible balance sheets. If you believe their quick ratios, the should have been out of business years ago. Colleagues warned that the numbers were meaningless.

I've worked with a number of project developers that were either working on projects in China or were using Chinese money for foreign investments. They warned that Chinese investors don't always care about pro formas and they will buy into projects that others might shun.

One example is their huge investment in new nuclear power plants. It's impressive, it's aggressive and it makes no economic sense if anyone looks at the levelized costs. However, if only production costs are analyzed, nuclear makes a lot of sense. This is confirmation the Chinese are in fact ignoring capital costs to achieve an altered goal.

Others may be in a better position to comment, but overall China's economy seems to be struggling. Combining the coal situation with oil, iron ore, copper, it seems like a slowdown.



 I happened to catch a History Channel re-run about the Bermuda Triangle. They offer some interesting commentary, some farfetched. One person they interviewed observed that "water is water" and the water in the triangle is no different.

Actually, the water in the triangle is very different in two ways. The most obvious is the Gulf Stream; it goes right through the Triangle.

The most interesting is the recent discovery of methane hydrates. The U.S. Geological Survey reports, "A pair of relatively small areas, each about the size of the State of Rhode Island, shows intense concentrations of gas hydrates. USGS scientists estimate that these areas contain more than 1,300 trillion cubic feet of methane gas, an amount representing more than 70 times the 1989 gas consumption of the United States."

It turns out there're methane hydrates more all over the coastal U.S., with huge amounts deposited in the Gulf of Mexico and Alaska. But for the moment let's stick to the Triangle.

Natural gas bubbles in the water will cause some boats to lose buoyancy. The same is true with natural gas and airplane buoyancy.

I'm wondering if there is a connection between the methane hydrate field and the Gulf Stream. Specifically, I'm wondering if the Gulf Stream warms, it "melts" the methane hydrate crystals and releases natural gas. With gas occasionally appearing in the water and air, boats and planes begin to have challenges.

If this is true, then the Bermuda Triangle is more than folk lore.

In any event, it's becoming apparent that the U.S. has a lot more natural gas than has been recently reported. Apparently, there are companies working with the Department of Energy looking for safe ways to harvest and convert methane hydrates.

For your evaluation, here are some references:

USGS map of the methane fields

Museum of Unnatural History's map of the Bermuda Triangle

University of Miami's map of the Gulf Stream

Department of Energy's discussion about methane hydrates (notice the reference to thermogenic sources)



These numbers seem to change all the time, but this is what Bloomberg is reporting today:

$42 - Qatar
$44 - Kuwait
$71 - Saudi Arabia
$84 - UAE

$105 - Algeria
$112 - Iraq
$117 - Libya
$117 - Iran



 I'm involved in some utility-grade solar projects in the US. The ideal size is 4 to 5 MW, which will require approximately 20 acres. With all government incentives combined, solar projects are currently not bankable.

If homeowners are going to take on solar, most shouldn't use their roofs as their platform. Most homes are oriented incorrectly and will their roofs will not produce the optimum amount of power. A better approach is to mount panels on the ground. Ground-mounted panels are cheaper to build, cheaper to operate and will always produce the optimum amount of power.

In most states, net-metered panels cannot produce more power than the customer normally consumes. This is normally not a problem for homeowners because panels only produce power a third of the time and peak consumption tends to occur slightly after the panels are dark.

For U.S. consumers, it is not worth the investment to go off the grid. Energy storage equipment are costly and inefficient; they will consume approximately 20 to 30 percent of all energy produced.

When judging the efficacy of solar, consider the various points of view. If you are a consumer in a deregulated state, you want your neighbor to build a lot of solar. Solar has production costs approaching zero. The market-clearing price of wholesale power is largely based on production costs. If your neighbor's solar facility is producing power, it displaced the marginal generator or most expensive power producer. In deregulated states, solar reduces the cost of wholesale power.

If you are a utility in a deregulated state, you are indifferent about solar. Electric utilities in these states are not regulated power producers.

If you are a policymaker, solar is a winner. It is an ideal peaking generators as it produces power during the peak of the day. It will displace the the most costly generator and, in all likelihood, the dirtiest generator. You have an economic win and an environmental win. Score!

If you are a utility in a regulated state, you are also indifferent about solar. Electric utilities in these states will get a return no matter what assets are deployed.

If you are a consumer in a regulated state, you might have some concerns about solar. The levelized cost of solar is high and you will have to pay that price plus a margin. High prices are offset by lower fuel adjustments, but not a full offset.

If you are an independent power producer such as Calpine, GenOn Energy, Dynegy, Exelon and Entergy you might not like solar. Solar is hitting your gross margins. When solar power facilities are producing, market clearing prices fall and so do your gross margins.

Keep in mind, most power production policies are set at the state level, not the federal level. This might explain why northern states (deregulated states) endorse solar power and why southern states (regulated states) do not.

Bruno comments:

This is what you said. The little guy is making sacrifices for the future.

If you look at the problem only from an energy standpoint, the German look stupid. They are building renewable capacity which is more expensive than nuclear.

But if you look at the whole picture, this is brilliant. They pay more today to have an even more competitive economy in the future.

It is like building autobahns and panzer divisions. Out of the box thinking, a bit of daring going against conventional wisdom, sacrifice for the population, flawless execution (> 26 GW solar installed in less than 3 years, that is no small feat, and they are doing the same with windpower), incredible discipline (they are doing exactly what they said they would do a few years ago).

If you were the little guy, what would you prefer? Consume a bit less today and still have a job in 10 years, or consume more today and have no job in 10 years?

Does it mean that each household is forced to pay for the "their" piece of the renewables infrastructure? If so, is this the new advanced German "invention": let's make the little guy pay for our competitive industry and that's how we'll finance our future competitiveness? Sounds surprisingly old school, if that's the case.

Stefan Jovanovich comments:

A few minor quibbles. The Germans did invest in panzer divisions; what they did not invest in were maintenance and supply corps. The basic logistics of the German Army in the field in WW II were handled as they had been in WW I - by horse-drawn wagons off-loading from rail depots.

When the German General Staff ran the military exercises for Barbarossa, they found that they had to stop in front of Moscow, even if the Russian Army completely disappeared; the forage loads for the horse transport were consuming 100% of the supply chain capacity.

The autobahns were almost entirely a show-piece; the national transport network was rail. The U.S. alone produced nearly 2.4 million trucks in WW II; the Germans made fewer than 350,000. The British built 100,000 more lorries. Using WW II as an example of Teutonic foresight is not - perhaps - the best example.

The local market for power is, as you say, deregulated; but the market for capital has the Federal government's thumb on the scale, along with many of the state's that have deregulated the buying and selling of power itself. It is, as you say, what it is. I may be expressing my bitterness at California's capacity to do everything so badly - slaughter raptors in the name of wind power, adopt the one kind of deregulation that could allow the clowns at Enron to think they were the smartest guys in the room since the ones from Baldwin-United. Happlly, after tomorrow, that is no longer my concern.



 I offer the following question only because I would appreciate some constructive criticism.

Free markets work well for short term investments, such as publicly traded commodities and equities. The free market falls down in long term investments because they lack liquidity and price discovery for investments lasting 5, 10, 15, 20, 30, 40 or 50 years.

How is a utility to finance capital improvement projects under such circumstances? I'm finding every investment organization I've talked to is unwilling to participate in a US deregulated power market asset because they cannot hedge their investment.

Today, few are financing power plants in deregulated regions because there is no bankable offtaker. The result is few power plants are being built in these areas.

What is the Austrian School's take on this challenge?

Henry Gifford responds:

As for deregulated electricity markets, I think what is currently called "deregulated" is different from what I think of as free market. I will use the California deregulation as an example.

When California deregulated the electricity markets, they formed three new state government agencies, one with monopoly power to sell electricity at the wholesale level. I have no idea what the other two did. The agency signed long term sale contracts with local utilities, and bought electricity from both in-state and out of state (California is a net importer) suppliers on the spot market or on short-term contracts. I repeat - they signed short term purchase contracts, and signed long term sale contracts for set prices. The agency made a few billion dollars of profit in a few years, as buyers were barred by law from buying from anyone else (remember, I am describing deregulation), and the state bought for a lower price than they sold for.

The inevitable happened - short term prices rose above the prices they had contracted to sell for. The state government did the inevitable: they passed price control laws, barring their suppliers from selling at a price that would be unprofitable for the state government (remember, I am describing deregulation). Out of state suppliers refused to sell at the lower prices, so the California governor asked the president to pass price controls for suppliers outside of California. The president did not do this. Meanwhile, suppliers went unpaid. I repeat - the state agency did not pay for what they had bought. Instead of paying, the state demanded to first investigate their allegations of "unfair profits" while the bills went unpaid. As out of state suppliers who were owed money were getting investigated, they refused to sell power to the state, and the lights went out. (repeat: I am describing deregulation). This gave deregulation a bad name for a generation, spawned the usual anti-freedom documentaries, and because the arrangement was called deregulation, free markets were also given a bad name. But, I don't think a government monopoly is a free market, and have never met anyone else who does. Instead, people just keep calling it deregulation and saying deregulation doesn't work, and the free market doesn't work, including many people who know the deregulation involved formation of monopolies, price controls, etc.

Now if you reread the description above, and think of the position you would be in if you were a producer of electricity in California, or were considering becoming a producer, or financing a new power plant, your lack of enthusiasm would be understandable, but have nothing to do with failure of what I think of as free markets, long term or short.

The statement that free markets fall down in long term investments is I think inaccurate. Lack of liquidity is priced into investments that are difficult to sell.

 I don't know what "price discovery" is. Real Estate is rather illiquid, but prices for most transactions are a matter of public record, and advertised prices for comparable properties are always available.

I would invest in an electricity producing plant in California if I thought the price was right. With some looking I would tell you what that price would be, which I think indicates there is no lack of price discovery for long-term investments.

Gary Rogan writes:

 It seems in retrospect that combining regulated rate utilities with unregulated power assets is asking for trouble. It's the same kind of trouble as defined benefits pension obligation funders eventually always have to face: when you promise something definite far into the future but the source of funds for your promise is indefinite, this has to blow up sooner or later for many participants. Nothing is ever really guaranteed and some percentage of attempts to make such promises will either run out of money or will have to ask the government for help. Some bonds in the "real world" become worthless, and some insurance companies promising life-time annuities go belly up.

There must be a long and complicated history of how natural regulated monopolies came into existence, but I bet they were accepted too easily. The real cost of energy cannot be projected too far into the future, and in what I would consider a "fair" world nobody would be guaranteed any particular rate of return, and anybody would be allowed to compete for the end customer's business, with property access rights of course being in private hands is so historically determined. Investments in new sources of power would only be made when the benefits were outrageously obvious or the investors were unwise. Even the wise investors would of course sometimes striker out. That's free market, and that's what delivers an ever increasing standard living. That said I will always look for monopolies to invest in where I can find them at reasonable prices. You have to somehow deal with the unfair world.

Tyler Cowen adds:

Maybe political risk is the worry.

If the market is pricing a Monet painting, or a forest, it seems quite well to account for the services yielded decades into the future…


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