October 16, 2008
Below are a few letters we received on topics that appeared in the past few weeks. They capture the essence of how many readers say they feel.
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Buffett Makes Bid for Constellation - September 26, 2008
Good synopsis on the immediate deal to steal Constellation. What wasn't said was that Constellation may have mismanaged themselves into a corner last week. They were big movers and shakers with ventures going in all directions and must have liked that deal mentality. Especially since their CEO came from the street, you would think that they could have protected themselves earlier.
I think it is a good thing overall that Buffet owns them and may actually be a stability factor that supports Constellation actually building new nuclear for example.
G. Neil Midkiff
Booz Allen Hamilton
Fighting Securities Suits - October 03, 2008
This column on securities lawsuits may open another 'Pandora's box' of controversy.
As one Enron victim losing over $15K because I believed the financial statements were GAAP conforming and the auditor had scrubbed them for any discrepancies, numerous 'Financial Analysts' were also unaware of the true non-conformance. I doubt I will see any significant recompense.
The recent collapse of Fannie and Freddie, B.S., Lehman, etc., etc.... are all going to be hotly contested by many legal firms seeking to represent the shareholders in legal actions claiming all sorts of management failures. The two financial disruption events are remarkably similar -- both collapses triggered by a loss of confidence in the counter-party ability to perform their obligations. When what is written on the contract documents is no longer enforceable, our 'System of Laws' collapses into anarchy.
Retrospectives should always be more accurate than contemporaneous estimates. With the clear vision backward, it is obvious the reckless reliance on highly leveraged short term borrowing to lend 'long term' was patently doomed to collapse. It is much more troubling that monies paid for 'Insurance' purchased against credit default merely fed a pyramid scheme without any reasonable reserves against future claims.
The Management Teams responsible for those reckless decisions to forgo accruing reasonable loss reserves for the risky highly leveraged finance operations may not be criminally liable, but surely are personally and corporately liable for their malfeasance and obfuscation of the real risks they were taking.
Keith E Bowers
Wall Street Could Jolt Utilities - October 06, 2008
I agree with your observation regarding insurance...but this may take time. The electric utility industry was pretty shook up from the Enron mess and it took a while to see the final impact on all aspects of the generation and T&D business as we see it today. This impact may also be delayed while the insurance business cleans up the mess to get its own house in order.
The disaster on Wall Street is also likely to slow or stop many ongoing utility mergers and acquisition (M&A) activities, along with perhaps delayed timetables and spending on some important capital projects. Not at all good news to equipment and system suppliers who have already invested in expansion plans to meet the increased demand in capital spending seen over the past several years. In the long run, capital projects will follow increase in electricity demand and increased revenues, but the anticipated growth rate may be slowed for several years.
Conversely on the M&A front, the only ones to potentially benefit from the impact of this mess in our industry will be by takeover of the already weak companies by the likes of Warren Buffet and those with his wealth. And, this may not necessarily be a bad thing.
Another important question to ask is, will the much touted need (particularly from Presidential hopefuls) for all kinds of new financial regulation, spill over into "reregulating" the post "deregulated" electric utility industry? Toot -Toot, all on board the regulation train.
David J. Woodcock
Vice President Strategic Development
Weidmann Diagnostic Solutions
I find it interesting that one could be concerned about insurance premiums for accountants and executives in the midst of the financial mess that we find our country in. If the insurance premiums are truly significant, then it strongly suggests that too much money is being funneled into the executive suites for bad decisions and to accounting firms for flawed reports.
It's hard to believe that the honorable business of keeping the lights on has succumbed to greed in the same measure as the investment banking and securities industries.
George T. Santamaria, P.E.
Encinitas, California
Speculators and Market Volatility - October 10, 2008
Valerie Wood admits that she is in the minority where the speculation vs fundamentals debate is concerned, but even so she believes that she is correct when she says that speculation is the main cause of the very volatile oil price movements that we have experienced lately. She is absolutely correct about being in the minority, and in addition, in academia, she is going up against people like Paul Krugman and James Hamilton. Speculation in 'paper oil' (e.g. futures) does influence the oil price because of its impact on expectations, but as compared to the movement of physical supply and demand, on the average this is a small influence.
Moreover, it is a mistake to provide or to attempt to provide the movers and shakers in Washington and elsewhere with the belief that they can do something about escalating oil prices by passing a law restricting speculation. If only this were so, we would face a very different oil price future, but it is not so. As a result our political masters should focus on a rational response when once again physical demand starts to outrun the supply of oil.
Ferdinand E. Banks
Uppsala, Sweden
Carbon Constraints are Here - October 13, 2008
As I read your article today, I noted some lingo confusion that is becoming embedded in discussions on greenhouse gas emission reductions. People often site renewable energy sources as the way to go, but not all renewable sources are carbon neutral -- for example biomass, bio-diesel, and ethanol. Renewable sources that aren't carbon neutral do at least keep us on today's carbon budget instead of burning yester-year's carbon, but they don't achieve carbon emission reductions.
I would be very interested to see some analysis of the various forms of renewable energy and their relative GHG emissions. I'd offer to write it, but I'm a lawyer, not a scientist!
Yarrow Etheredge
Sr. Staff Analyst
Entergy Transmission Compliance
There are a couple of points worth making with respect to this article.
First, opinions on the cost of carbon controls are likely shaped to a large extent by whether an individual thinks carbon emissions are harmful. Advocates for carbon controls tend to believe the cost of limiting emissions will be relatively small, while opponents believe they will cause substantial economic harm.
Second, even if carbon controls cause energy prices to rise, the trajectory of those price increases is probably more important than their magnitude at equilibrium. A sharp increase in prices at any point will be economically disruptive, while a more gradual increase will provide time for energy consumers to make appropriate adjustments. Moreover, abrupt changes are certain to be politically unacceptable. Therefore, whatever policies are adopted will likely include plenty of time for both ordinary consumers and industry to make adjustments without undue disruption.
Third, all of the evidence I've seen suggests that the short to mid-term costs of carbon control will be substantial. Although the busbar cost of wind is competitive with fossil fuels, moving wind energy from where it is abundant to where it is needed requires expensive transmission facilities, and turning an intermittent resources that is mostly available during off-peak periods into a base load or peaking resource requires still more expensive storage facilities. Other renewable alternatives such as solar are still significantly more costly than fossil-fired energy. In order to displace coal-fired energy with natural gas, carbon prices (or a carbon tax) have to seek a level well above $60/ton, and that assumes sharply higher demand won't put upward pressure on the price of natural gas. Competition and technical innovations will eventually help close the cost gap between renewables and fossil-fired generation, but that's a long-term trend that is unlikely to have much impact in the short term.
Fourth, while there seems to be strong public support for renewable energy, the strength of that support is tempered by the proximity of the infrastructure. The public demands a reliable supply of energy but it wants the wind turbines, transmission lines and solar collectors to be located in someone else's back yard. One unfortunate result will be slower adoption and higher costs.
The cost impact of carbon controls can be determined with more certainty than the economic, social and political consequences of a business-as-usual scenario in which reductions in carbon emissions may or may not influence climate change. It's possible that imposing carbon controls now could avert a worldwide calamity later in this century. It's equally possible that the rise in global temperatures we've seen over the last few hundred years is part of a natural warming cycle and that carbon controls will have no effect at all. However, it seems to me that a desire for clean air and water is a much more rational motivation for shifting away from our overwhelming reliance on non-renewable energy sources.
Jack Ellis
Resero Consulting
Critiquing RTOs - October 15, 2008
I think that it is important to differentiate between the merits of RTOs and electric utility deregulation. The problem with the way RTOs were forced on the industry is that FERC and the proponents of deregulation used them as the mechanism to force a flawed energy market system on the utilities. Region wide management of the bulk transmission system is critical for system reliability and to the extent that RTOs focus on that aspect of operation they should be a benefit. I remember my boss at PG&E Ray Perry, in the 1960s when we were helping plan the Pacific Intertie, saying we were doing it all wrong by not establishing a regionally operated network.
One has to wonder how many times deregulation schemes have to fail before we recognize that all markets have to be effectively regulated to avoid market abuses. There should be no question in the minds of serious observers of the industry that deregulation of electric energy markets have cost ratepayers dearly including the ratepayers of regions resisting deregulation. The heavy development of natural gas fired generation would probably not have occurred absent industry deregulation. The increased demand for NG certainly was a major cause for fuel price increases. The market system that FERC and the proponents of deregulation forced on the nation discouraged investment in generation alternatives that on a life cycle basis would be far more economic than natural gas fired generation.
Our current financial crisis is just another result of forcing flawed deregulation schemes on the American people. Why should we continue to be fooled by the high priesthood of deregulation theory?
Jim Malinowski
Power Utilities Technology Instructor
Clark College
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