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Archive for December, 2013

Fukushima's Spent Fuel Pool

Fukushima’s Spent Fuel Pool

Tokyo Electric Power Company has started a year-long operation to remove more than 1,500 spent fuel rods assemblies from a damaged cooling pool with radiation thousands of times higher than normal:

Fukushima: Dangerous operation of removing fuel rods begins | Nuclear Energy Insider.

Unlike Las Vegas, what happens in Fukushima will not stay in Fukushima, but will affect public perceptions of both nuclear power and nuclear accident remediation everywhere.

Here’s hoping this will go as smoothly as possible.

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Dr. Bernanke, with QE Drip on Left

Dr. Bernanke, with QE Drip on Left

When the patient, Mr. Economy, was wheeled into the ER back in September 2008, he was near the point of Great Depression. Dr. Bernanke ordered intravenous quantitative easing to the tune of $85,000,000,000 in Treasury buybacks each month. This fiscal morphine drip alleviated the patient’s extreme pain while different remedies were considered and triage was performed on other casualties, such as AIG and WaMu (DOA).

Over time, Mr. Economy’s vital signs continued to go up and down, though in general they were improving, even if those improvements were too slow to satisfy many. When Dr. Bernanke said that it might be time to cut back on the morphine, the patient was okay with the idea. Strangely, it was the family members out in the waiting room, S&P 500 and DJIA, who started to go into convulsions.

But today, not so much.

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Fitch Ratings recently published a research report on the utilities/power/gas sector that distinguishes credit outlooks based on business lines. Gas utilities have a positive outlook, electric utilities (regulated) a stable one, and competitive generators (gencos) negative.

Fitch points to the recent trend of declining per-capita energy consumption, which they expect to continue, if not accelerate. Fitch also sees erosion in electricity sales for the foreseeable future due to energy efficiency and demand side management programs fostered by federal and state energy policies, leading to continued ratings pressure on gencos. Read the summary of the report here:

FitchResearch.

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Clinton Nuclear Plant

Clinton Nuclear Plant

The Sparkspread earlier discussed one of ComEd’s main business objectives in the early 2000s, which it largely achieved: Strip the generating assets out of the regulated public utility, which would then become just a “wires” (i.e., transmission and distribution) business, by transferring them to an unregulated affiliate that could sell the power and energy in the open market.

Before 2000, when those generation assets were held by ComEd and subject to state regulatory limits, the utility was unable to take full advantage of higher prices in the wholesale electricity market. The Illinois Commerce Commission approved the transfer of ComEd’s nuclear generating stations to Exelon Genco, n/k/a Exelon Generation. ComEd didn’t get any cash out of that deal, but ComEd’s witnesses testified that the real benefit to ComEd was that it could lay off the entire risk of the generation side of the business on Exelon Generation:

While, as the [Illinois Commerce] Commission notes, the [t]ransfer [of the nuclear generating stations to Exelon Generation] will reduce the level of  “hard assets” on [ComEd’s] books, it is far more significant from a lender’s credit-assessment perspective that the [t]ransfer will greatly reduce ComEd’s generation-related default risk.” (Ill. C.C. Docket No. 00-0244,  Supplemental Direct Testimony of R. McDonald, pg. 4, lines 82-84).

The risks associated with competition are likely to make the default risk of a debt investment in a generation business greater than the default risk associated with a debt investment in a wires business (transmission and distribution). Ill. C.C. Docket No. 00-0244, Supplemental Direct Testimony of R. McDonald, pg. 5, lines 95-97.

In particular, the [credit rating] agencies’ general assessment is that companies electing to focus on generation will need higher cash flow coverages and stronger capitalization ratios (i.e., more equity) to maintain the same debt rating as the generation market becomes more competitive. Ill. C.C. Docket No. 00-0244, Supplemental Direct Testimony of R. McDonald, pg. 5, lines 107-110.

Exelon Generation, nuke plant operator, got the opportunity to make more money for its parent company, Exelon Corp. But as this testimony shows, Exelon Generation knew the job was dangerous when it took it. Selling power in a competitive market is riskier than getting a regulated rate of return on your assets, and that gave Exelon Generation a higher risk of default.

According to Crain’s Chicago Business, at a November 2013 meeting of the Edison Electric Institute in Orlando, Exelon CEO Chris Crane said that Exelon will close its Quad Cities and Clinton nuclear stations, both of which are money-losers in the current, long-running slump in electricity prices, if the price of power doesn’t go up enough to compensate it for running them. That makes perfect sense and demonstrates the market’s power for creative destruction.

What’s more troubling is the alternative that Exelon’s CEO offered as a way to keep Quad Cities and Clinton running. Exelon may try to push another ComEd bill through the Illinois General Assembly that would compel ratepayers to pay an above-market electricity price under a long-term contract with ComEd so that Exelon won’t have to close those two stations.

There’s a problem here. Exelon’s market-based plan from the early 2000s miscarried, principally because of the shale gas revolution and the Great Recession. The former increased supply, while the latter decreased demand. Econ 101 tells us what that does to the price of the commodity being sold.

Contrary to Mr. Crane’s assertions, the continued low price for electricity does not  represent a flaw in the market. Indeed, setting aside manipulation and other externalities, our era’s secular orthodoxy is that the market can’t be wrong because, well, it’s The Market. Its infallibility exceeds that of Pope Francis speaking ex cathedra.

As ComEd’s testimony from 2000 shows, in choosing to go into the power generating business Exelon Generation expressly and knowingly assumed the risk of debt default, a consequence far more grave than the need to close one or two nukes because they’re not profitable. It doesn’t suit Exelon’s CEO to complain about a wholesale electricity market of which his company was the primary author. Had electricity prices gone the other way, Mr. Crane would be defending that same market with equal vigor.

Exelon compounds its offense of questioning the market by suggesting that Illinois ratepayers subsidize its generation business by paying above-market prices under a long-term agreement with ComEd. This is corporate welfare of the first order.

Assuming that Crane does push to get this corporate welfare for Exelon Generation, he’ll find that there’s toothpaste spread all over Illinois that he’ll have to put back in the tube. The Illinois retail electricity market has been competitive for more than ten years. The  vast majority of nonresidential customers are already served under competitive supply contracts, and most of these are in customer classes already declared competitive, meaning that if they did migrate back to ComEd they’d be eligible only for hourly rate supply service. The benefit to Exelon Generation of their return to ComEd would therefore be precisely nil.

As for residential customers, the growth of municipal aggregation over the last two to three years has far exceeded anyone’s expectations when those provisions were written into the law, so much so that the Illinois Power Agency did no electricity supply procurement for ComEd for the 2013 planning year. That may change in the future as ComEd’s current supply contracts wind down, and new ComEd contracts begin to reflect current, lower market prices. But Exelon ought not to discount the determination of the current crop of municipal aggregation suppliers to hold on to their customers, and those suppliers will have access to the same low-price wholesale market.  So, assuming that Exelon and ComEd do eventually execute a long-term, above-market supply contract, there remains a substantial question as to whether the supply volume under that contract would be large enough to make any difference in the net revenues of Exelon Generation. Indeed, Crane’s corporate welfare quest carries within it the seed of its own destruction: The greater the corporate welfare Exelon seeks, the higher above market the proposed long-term contract price will be, and therefore the less likely that customers will migrate back to ComEd.

One suspects that Mr. Crane’s corporate welfare plea was not fully thought out.

But if Mr. Crane is serious about long-term, above-market contracts with ComEd, any legislative package will have to effect some limits, or even reversals, of Illinois’ current competitive retail market. Alternative retail electric suppliers should be watching Exelon like hawks over the next few months.

Apart from the upside-down economics of Mr. Crane’s corporate welfare plea, Exelon will confront another, far more significant obstacle: optics. We’ll be treated to the spectacle of Exelon seeking corporate welfare from the General Assembly within a few months of its vote to cut pensions to retired public employees, and even closer to Congress’s termination of support for the long-term unemployed. Retired schoolteachers in Illinois will not only get less money each month from their reduced pensions, but they will have to pay more of what they do get to ComEd so that its affiliate, Exelon Generation, may be spared the vicissitudes of the free market that Exelon itself ushered in.

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judging by the roiling turmoil in the Ukraine, Russia’s use of the energy weapon may have backfired, undermining some of its foreign-policy goals and sparking a resurgence of Ukrainian nationalism.  – See more at: http://www.foreignpolicy.com/articles/2013/12/12/putins_gas_gambit_backfires#sthash.6KBWYmYT.NuwAoKDU.dpuf
judging by the roiling turmoil in the Ukraine, Russia’s use of the energy weapon may have backfired, undermining some of its foreign-policy goals and sparking a resurgence of Ukrainian nationalism.  – See more at: http://www.foreignpolicy.com/articles/2013/12/12/putins_gas_gambit_backfires#sthash.6KBWYmYT.NuwAoKDU.dpuf

Foreign Policy has an interesting article on Russia’s overuse of its energy weapon, as evidenced by the rise of nationalism in the Ukraine:

Putin’s Gas Gambit Backfires.

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Reports are still sketchy and the extent of damage isn’t clear, but no report yet of any leak of radioactive material:

Arkansas Nuclear Plant: Explosion And Blaze Inside Protected Area – Reactor Remains Shut Down, Extent Of Damage Unknown.

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