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Archive for August, 2014

Cut of natural gas supply to Europe? We'd never do that!

Cut off natural gas supply to Europe? We’d never do that!

 

Now that Putin’s troops are rolling into Ukraine under a Novorossiyan version of Operation Himmler, Western Europe has to consider the prospect of Putin cutting off the natural gas supply as soon as it gets a bit chilly. He can’t do that without a substantial cost to himself because Russia is less a country than it is a petroleum and natural gas field with a government and military perched on top.  Sales of oil and natural gas prop up Russia’s social safety net and keep the price of vodka within reach of the average citizen.

Still, Putin has been willing to pay these costs (e.g., sanctions, travel restrictions on high ranking Russian officials, international opprobrium, etc.) so far, and there’s no reason to believe that he won’t continue to pay them — or make the Russian people pay them. Remember that Dostoyevsky had Russians specifically in mind when he said that the problem with mankind is that it can get used to anything.

 

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Today’s Chicago Tribune reports that Chicago criminal defense attorney Beau Brindley has been indicted on federal perjury charges. According to the Tribune, the indictment alleges that the attorney coached a witness to provide false testimony.

Of course, the old joke is that there are three rules of law practice. First, get the money up front. Second, if somebody has to go to jail, make sure it’s the client, not you. And, third, get the money up front.

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Exelon CEO Chris Crane

Exelon CEO Chris Crane

In our last post, we mentioned the Invisible Hand, an idea brought forth by the patron saint of Free Markets, Adam Smith. As we pointed out, Exelon on its website extols the virtues of the Free Market and anathematizes the very notion of subsidies to players in it — except, of course, when Exelon itself is the intended recipient of that subsidy.

The most common fault among those who claim to be Adam Smith’s intellectual descendants is that they have never actually read his book.  So, with particular regard to Mr. Crane’s insistence that Exelon is entitled to a subsidy for its nuclear plants, we thought it would be worthwhile to go straight to the font of all Free Market Wisdom and see what Smith might have to say about demands such as Exelon’s. Of course, there weren’t any nuclear generating stations in Smith’s day, but that’s an objection that could be raised only by small minds. Smith’s importance and relevance to the present day lies in the principles he developed, not in whether there are still pin manufacturers in Yorkshire. Accordingly, we pass on this excerpt from that Revealed Word of Economics, An Inquiry into the Nature and Causes of the Wealth of Nations, Book I, Chapter 11, Of the Rent of Land:

His [i.e., the labourer’s, as one who lives by wages] employers constitute the third order, that of those who live by profit. It is the stock that is employed for the sake of profit, which puts into motion the greater part of the useful labour of every society. The plans and projects of the employers of stock regulate and direct all the most important operations of labour, and profit is the end proposed by all those plans and projects…. The interest of this third order, therefore, has not the same connection with the general interest of the society as that of the other two. Merchants and master manufacturers are, in this order, the two classes of people who commonly employ the largest capitals, and who by their wealth draw to themselves the greatest share of the public consideration. As during their whole lives they are engaged in plans and projects, they have frequently more acuteness of understanding than the greater part of country gentlemen. As their thoughts, however, are commonly exercised rather about the interest of their own particular branch of business, than about that of the society, their judgment, even when given with the greatest candour (which it has not been upon every occasion) is much more to be depended upon with regard to the former of those two objects, than with regard to the latter. Their superiority over the country gentleman is, not so much in their knowledge of the public interest, as in their having a better knowledge of their own interest than he has of his. It is by this superior knowledge of their own interest that they have frequently imposed upon his [i.e., the country gentleman’s] generosity, and persuaded him to give up both his own interest and that of the public, from a very simple but honest conviction, that their interest, and not his, was the interest of the public. The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens. The proposal of any new law or regulation of commerce which comes from this order [i.e., the third order, that which lives by profit], ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.

(Emphasis added.)

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Exelon CEO Chris Crane

Exelon CEO Chris Crane

As we said, despite Chris Crane’s claim that Exelon will not seek a bailout at the expense of Illinois taxpayers or ratepayers, that’s precisely what he’s doing.  Perhaps he’s taking begging lessons from Richard Fuld, who may have a lot of time on his hands these days.

At the end of July 2014, Exelon told investors that it expects to be compensated for the environmental and economic benefits that its nuclear plants provide in Illinois.  We can thus lay at Mr. Crane’s feet the fault of mendacity.

But Exelon’s scores even higher for hypocrisy. Here’s Exelon’s view of taxpayer and ratepayer subsidies from its website:

Competitive markets, not taxpayer or ratepayer subsidies, are the more efficient and least cost way to incent new generation when it is needed.  Subsidized plants are paid for by consumers who will bear the risks of these plants rather than shareholders by paying more for these plants than they could have obtained from the market.

Exelon begging for subsidies is like the fervent anti-abortion protester who unexpectedly (and inconveniently) finds herself “in nature’s way” and decides to get an abortion. Like Exelon, she licenses freely to herself that which she would forbid to all others. Memo to Mr. Crane: It’s time to update your website with this self-exemption from the rules of The Market.

Exelon’s lobbyists have been busy in Springfield, and on May 29, 2014 the General Assembly adopted House Resolution 1146 to pave the way for Exelon’s state-sponsored subsidy. Exelon covered a lot of its complaints in HR1146, such as:

  • the “premature shutdown risk” affecting at least three of its nuclear stations if it doesn’t get more money somehow;
  • the “failure of competitive wholesale energy markets to recognize nuclear power’s reliability and clean energy attributes”; and
  • the loss of jobs that would attend any “premature shutdown” of these nukes.

We’ll have more to say about these in future posts, but for now it’s enough to know that the compensation Crane’s seeking in Springfield can only come from one place: Illinois ratepayers and taxpayers.

The “flawed” competitive wholesale electricity market that Crane has been complaining about looked just grand to Exelon back in 2002-04. Of course, back then not only were power prices much higher than they are now, it didn’t look like they’d ever get much lower. Fracking in the Marcellus Shale had not started yet, and the energy cognoscenti were universally of the opinion that the U.S. would, sooner rather than later, be a net importer of natural gas. This was a sweet set-up for Exelon. Natural gas generally set the marginal price of electricity, and that price was seen as upwardly mobile. But Exelon’s cost of generation at its nuke plants was not only essentially fixed, it was also much, much lower than the price of natural gas-fired generation. All they had to do was sit back and wait.

Exelon’s present tune is very different from the song it was singing when it joined PJM, whose market structure it praised as the model for the entire electric utility industry. Back in 2002, Exelon said that PJM was the best option for both Exelon and its customers, that it gave ready access to its primary wholesale energy trading partners in the east, where the company’s strongest interconnections lay, and that joining PJM would give ComEd’s customers a mature marketplace more quickly with real choices than if it were to join Midwest Independent System Operator (MISO).

“The PJM Interconnection has a strong presence in key eastern markets, and market structures already in place for the region that are similar to what FERC is proposing in its current standard market design. The company also has a long track record of successfully operating energy markets and is the model for the industry. We will join the PJM organization as soon as is practical.”

Pursuant to a FERC order, ComEd, in concert with other utilities (viz., FirstEnergy Corp. (Ohio), Ameren Corp., AEP, CMS (Michigan), Dayton Power & Light, Dominion Virginia Power and Illinois Power)  spent more than $70 million developing the wholesale market structures that it wanted. Rather than being “flawed,” Exelon and its utility partners called PJM a “robust electricity marketplace that is already up and running,” adding that  “…PJM … has already established the infrastructure, policies and business practices for operating a market.”

ComEd’s first receipt of transmission service from PJM in 2003, another step in integrating ComEd into PJM, “delighted” Exelon.  At that time, a PJM official said that “[W]ith this next step, ComEd and PJM continue to move forward toward bringing the benefits of a successful wholesale market to the consumers of Illinois, and no one at Exelon or ComEd piped up to contradict him and tell him how flawed their market really was.

The real explanation is much simpler than Crane would have the public and state agencies believe. If Exelon’s nukes are dying, it’s not because of the production tax credit (PTC), nor is it because wholesale electricity markets are “flawed.”  Rather, it’s because the price of natural gas, instead of rising, has fallen, and demand for electricity (apart from some unavoidable spikes such as that caused by the Polar Vortex) has also gone down.

If events had moved in the opposite direction, if fracking didn’t work, if the Lehman Brothers collapse and the Great Recession had not occurred, if the housing bubble were still inflating, electricity prices would undoubtedly have gone up instead of down. In that case, instead of complaining about alleged market flaws and the PTC, in the face of complaints about high electricity prices Crane would be grinning like the Cheshire Cat and lecturing Speaker Madigan, the Illinois Commerce Commission and the public on The Wisdom of Market, and how the judgments of its Invisible Hand are righteous all together. And, after all, this is what the state signed on for when it introduced competitive retail electricity markets.

HR 1146’s claim that the PJM wholesale electricity market fails to “recognize nuclear power for its reliability” is a canard. Reliability is the subject of PJM’s capacity auction, which is the main reason PJM calls that auction its Reliability Pricing Model. Exelon wants to elicit sympathy because its nuclear capacity didn’t clear the market in the capacity auction a few months ago, giving the impression that all that capacity will now go unsold. But it will be sold, and at higher prices than what it would have received in the capacity auction. Exelon’s shares actually went up on the news that its nuclear units didn’t clear the auction.

At the most fundamental level there is no difference between the bailouts of Wall Street banks (including AIG, though it’s technically an insurer rather than a bank) and Exelon’s sought-after bailout for its nuclear plants. Those plants are held by Exelon Generation, a private, for profit corporation. If times were good, and if Crane and his lobbyists weren’t t running around Springfield with their tin cups, they would hardly be shipping excess cash out to taxpayers and ratepayers. But when losses occur, that’s when Crane and other Free Market Fundamentalists run to the government for a taxpayer or ratepayer bailout.

Once again, all of this private corporation’s gains will have been privatized, and, if Exelon gets its way, its losses will be socialized.

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