Archive for May, 2015

I don't get any respect.

I don’t get any respect.

Eight hundred years ago this month (May 1215), King John signed Magna Carta at Runnymede in England. But, like Rodney Dangerfield, Magna Carta never got the respect it deserved. A lack of respect caused Dangerfield to drink a lot. It’s been said that the last urine sample he gave to his doctor had an olive in it.

Royal submission al fresco

Royal submission al fresco, ca. 1215

No sooner was the ink on Magna Carta dry than John set about trying to cure his humiliation by the barons. The king wrote to Pope Innocent asking him to invalidate Magna Carta because he’d been forced to sign it under duress.

Now, the guy who thought up the Pony Express evidently stole the idea from King John, because John’s messenger rode at top speed, covering up to fifty miles a day, until he reached Rome. With a turnaround time that would be good even by today’s Vatican standards, Innocent sent back his message quashing Magna Carta before the end of August 1215.

For the English barons, however, Innocent’s message was just so much papal bull. They turned around and, in a precursor to William of Orange’s accession in the Glorious Revolution, invited Louis of France to become King of England. Louis at least had a claim to the English throne. He was married to the granddaughter of Peter O’Toole and Katherine Hepburn – that is, the granddaughter Henry II and Eleanor of Aquitane, who were played by Peter O’Toole and Kate Hepburn in that great flick from the late 60s. Civil War broke out. But the war didn’t last long. Because the right-wing barons had repealed Plantagenet-Care during the last session of Parliament, John didn’t get adequate treatment for his gout. It worsened, and he died before the year was out. Everyone then settled his son, Henry III, effectively ending the war. Louis took the Chunnel back to Paris.

Well, how much credit can you give a document that incites a civil war within weeks of its execution?

Many question whether the detention without trial of terror suspects in Guantanamo Bay is disrespectful of the U.S. Constitution. The problems that Bush the Younger’s Camp X-Ray has under the Constitution have an eery parallel with Lord Protector Cromwell’s problems with Magna Carta. To raise revenues, Cromwell imposed certain customs duties. But, just like the ship money that Charles I tried to raise some fifteen years earlier and which ultimately cost him his head, Cromwell’s customs duties had been imposed without an act of Parliament.

A London merchant named Cony, who was a friend of Cromwell’s, therefore refused to pay the customs duties. (One of Cony’s descendants, Nathan Cony, would later open the New World’s first hot dog and beer stand on a peninsula on the south coast of Brooklyn.) Cony was fined 500 pounds but refused to pay either the fine or the duties. Cromwell tried personally to persuade Cony to pay, but Cony answered that “the subject who submits to an illegal impost is more the enemy of his country than the tyrant who imposes it.” Surprisingly, the Tea Party hasn’t made Cony its patron saint.

Cony then hired three top London lawyers and filed a writ of habeas corpus. These attorneys argued Cony’s case so well that Cromwell got nervous, thinking that if everybody else made the same argument the Exchequer would soon be even emptier than it was. The day after the attorneys argued the case, Cromwell had all three of them arrested and sent to the Tower of London on charges of speaking against the government. Eventually Cony was convinced to drop his suit, and Cromwell released the three lawyers from the Tower on submission of not pursuing the case further.

But Cromwell sent for the judges and excoriated them for allowing attorneys to say such things as they had in open court. The judges replied that Magna Carta allowed it.

“Your Magna Farta shall not control my actions, which I know are for the safety of the Commonwealth! Who made you judges? Have you any authority to sit there but what I gave you?”

No respect. But just out of curiosity, doesn’t that sound like someone we know?

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Exelon CEO Chris Crane

Exelon CEO Chris Crane

We received some interesting comments on the last blog entry regarding Exelon’s nuke bailout bill (Exelon’s Bailout Bill and the Triumph of Newspeak). It’s always good when an entry sparks (no pun intended) some discussion.

Some commenters viewed Exelon’s proposed low carbon emission (LCE) credit as a necessary “targeted adjustment” in a competitive market, which the traditional top-down regulatory regime was incapable of doing to any serious degree. This commenter added that the nuclear units in Illinois, especially in light of their vastly improved performance over the past decade and a half (coincident with retail choice) have helped to deliver enormous value to consumers.

Another said that the real question for Illinois is whether, for want of a modest adjustment to address some temporary market conditions (including some effects of combined surplus wind power and transmission constraints that can cause negative prices during some off-peak hours), the state is willing to incur a permanent loss of these plants that in the long run will be dramatically more costly than preventing their loss through resort to the LCE mechanism, which the commenter viewed as a form of maintenance until the wholesale market improves, price-wise (from the seller’s perspective).

Still others said that the various alternatives might be worse. A low carbon portfolio procurement auction reconciles aggressive wholesale price competition with other policy goals. The situation of the plants is likely to prove temporary given the movement in the direction of carbon reduction requirements and forms of CO2 trading, as well as gradual relief of transmission constraints.

As a general proposition, I don’t think these commenters’ views were per se unreasonable, and in fact there’s merit in their viewpoints. For example, a targeted adjustment that may alleviate some temporary market conditions is not inherently bad or per se unreasonable. If the three plants are shut down, there could be (but won’t necessarily be) long term effects that may lead to higher prices down the line. That may be more costly than a solution that imposes some additional interim costs. Likewise, it may be appropriate to temper aggressive wholesale price competition with the recognition of other policy goals.

But here’s the problem. Exelon, and indeed all of big corporate America, can’t have it both ways: you can’t have your free market cake and eat your subsidy too.

Let’s assume for the moment that since the Great Recession of 2008 wholesale electricity market prices had increased rather than decreased. Around June 2008, forward wholesale market fixed prices hit $68/megawatt-hour, but for much of the recent past the fixed-price forward market has been trading at about half of that or less. So in our hypothetical, market prices would be over $100/megawatt-hour. Prices to retail electricity customers, which are passed through directly under the Illinois Power Agency’s power procurement mechanism, would have increased to reflect that jump, although the way the utilities’ electricity supply purchases are laddered would have softened the impact — softened, but not eliminated. This would cause real hardship to a vast number of people in ComEd’s service territory. Exelon Generation, meanwhile, would be making big bucks because its cost of production is low.

So, taking those facts, we ask the question: if the market price had gone up by half instead of decreasing by half, does anyone believe that Exelon would voluntarily cut its price? That it would sympathize with retail customers whose charges would be well on the way to doubling? ComEd’s ratepayers could expect treatment from Exelon no better than that afforded to young Oliver when he asked for more:

ComEd customer (right) requests rate relief from Exelon's Chris Crane (left).

ComEd customer (right) requests rate relief from Exelon’s Chris Crane (left).

Far from affording any relief to ratepayers, Chris Crane and the Exelon public relations team would be telling us that that’s just how the free market works, that Illinois signed up for that in 1997 when the legislation to open the market was enacted, and it’s all just a question of market forces. Exelon’s answer would be that there’s simply nothing we can do about it. ComEd would have nothing to say in the matter because it’s just wires utility.

But listen to this famous (or infamous) early 2009 clip of CNBC’s Rick Santelli excoriating Obama’s plan for homeowner relief in the Stimulus Bill. Make no mistake. Santelli goes into Exterminating Angel Mode to condemn any assistance to distressed homeowners (and woe betide any displaced workers) as another government effort to “subsidize the losers.” Note that last word: LOSERS.

As a courtesy to our readers we’ve adapted some of the juicier parts of the Santelli Rant and his interlocutors’ responses for Exelon’s Bailout Bill (deletions appear as strike-through text; additions are underlined):

(from start to about 2:33)

Becky Quick, in studio: …. Rick have you been listening (to the previous conversation)?

Rick Santelli, on trading floor: Listening to it? I’ve been just glued to it because Mr. Ross has nailed it. You know, the Illinois government is promoting bad behavior by privately owned merchant generation companies, because we certainly don’t want to put stimulus forth bail them out, and give people them a whopping $300 million a year in subsidieseight or ten dollars in their check, and think that they ought to save it.

And in terms of modifications, I’ll tell you what, I have an idea. You know the new administration’s big on computers and technology. How about this, (Mr.) President and new administration — Why don’t you doesn’t Crane put up a web site to have people vote on the Internet as a referendum to see if we really want to subsidize the losers’ mortgages bad power trades, or would we like to, at least, buy cars and buy houses in Crane’s three nuke plants out of foreclosure and give them to people another operator who might have a chance to actually prosper down the road, and reward people that could carry the water, instead of drink(ing) the water.

Trader sitting near by: What a novel idea! What? Who thought of that!

(traders in the pit start clapping and cheering)

Joe Kernen, in studio: Rick, they’re like putty in your hands. Did you hear —

Santelli: No they’re not, Joe. They’re not like putty in our hands! This is America! (turns around to address pit traders) How many of you people want to pay for your neighbors’ mortgage a privately-owned merchant generator’s losses because it that has an extra bathroom pays its executives tens of millions and now can’t pay their its bills? Raise their hand. (traders boo; Santelli turns around to face CNBC camera) President Obama, are you listening?

Trader (sitting nearby, goes over to Santelli’s mike): How about we all stop paying our mortgage electric bills? It’s a moral hazard.

Kernen: It’s like mob rule here, I’m getting scared. I’m glad —

Santelli: Don’t get scared, Joe. They’re already scaring you. Y’know, Cuba used to have mansions and a relatively decent economy. They moved from the individual to the collective. Now they’re driving ’54 Chevys, maybe the last great car to come out of Detroit.

Kernen: They’re driving ’em on water too, which is a little strange to watch, at times.

Santelli: There you go.

Kernen: Hey Rick, how about the notion that Wilbur pointed out, you can go down to 2% on the mortgage …..

Santelli: You can go down to minus two percent, they can’t afford the house keep the nuke open!

Kernen: ….. and still have 40%$300 million in bailout funds a year not be able to do it, so why are we trying to keep them in the house as the operator of the three nukes?

Santelli: I know Mr. Summers is a great economist, but boy I’d love the answer to that one.

(some cross-talk)

(go to 3:50 mark until almost the end)

Quick: So Rick, are they opposed to the housing Exelon thing, to the stimulus package General Assembly’s bailout, to everything out there?

Ross: Rick I congratulate you on your new incarnation as a revolutionary leader.

Santelli: Somebody needs one. I’ll tell you what, if you read our Founding Fathers, people like Benjamin Franklin and Jefferson, what we’re doing in this country now is making them roll over in their graves.

Well, you get the idea. Six years later, the Santelli Rant brings the argument against subsidies full circle. Santelli has no use for “targeted adjustments” to “address temporary market conditions.” Homeowner relief, extension of unemployment benefits beyond 26 weeks, you-name-it, “that’s just the government subsidizing LOSERS!”

Having said that, you can’t then turn around and rationalize the Exelon bailout as a “targeted adjustment to address temporary market conditions,” a way to “moderate the competitive market to account for other policy goals and accept some slightly higher interim costs to avoid potentially larger long term costs.”

Simply put, Exelon’s Chris Crane has given his message: “Free markets for thee, but not for me.”

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