Carl from Chicago

Business executive interested in history, economics, taxation and energy policy.

The Onion On Renewables

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One of my all time favorite Onion articles is here and titled:

Report: 98 Percent Of U.S. Commuters Favor Public Transportation For Others

In one, simple, pithy sentence The Onion summarizes the reality of renewable energy and of the false enthusiasm for things that are easy to talk about, but hard and difficult to actually implement. People WANT clean air, short commutes, and efficiency; but people aren’t willing to give up their individual cars that drive them from their individual homes to the jobs of their choosing which may be far away.

Being the Onion and completely unafraid to subtly or not-too-subtly jab at the underbelly of elitism behind this sort of claim, they conclude with this paragraph:

The campaign is intended to de-emphasize the inconvenience and social stigma associated with using public transportation, focusing instead on the positives. Among these positives: the health benefits of getting fresh air while waiting at the bus stop, the chance to meet interesting people from a diverse array of low-paying service-sector jobs, and the opportunity to learn new languages by reading subway ads written in Spanish.
“People need to realize that public transportation isn’t just for some poor sucker to take to work,” Collier said. “He should also be taking it to the shopping mall, the supermarket, and the laundromat.”

While this Onion “article” was written in 2000 it completely applies today in the debate cited in a report about a plan to build electricity-generating turbines off the coast of Massachusetts, which has been held up for many years because the wealthy locals and visiting politicians don’t want any inconveniences or impact to their views while demanding that everyone else fall in line on various renewables schemes. This article from the New York Times is titled “Cape Code Residents Don’t Expect One Ruling To End Long Fight“.

“I’m 100 percent for alternative energy, but just not in Nantucket Sound,” Mr. Parent said. “There’s no guarantee that the electricity will be cheaper. And once you put those windmills out there you can never take them away.”

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Market Timing

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In the past I, like many general investors, shied away from the concept of market timing. It was viewed as too difficult, and many investors left the markets when stocks went down and then missed the rally on the way up, essentially “buying high and selling low”. Instead, investors were advised to “stay the course” and keep investing, assuming that, over time, the rising markets would reward continuous faith with high returns.

An article in Sunday’s Chicago Tribune showed in a crystal clear fashion that, in fact, market timing is the ONLY issue for stocks, at least nowadays. This article shows stock performance for the top 50 stocks by market capitalization based in the Chicago region.

EVERY SINGLE STOCK is showing positive performance over the last 12 months! What are the odds of that, assuming that the stock market has its ebbs and flows? Very remote. The ONLY issue in the market over the last few years has been timing; everyone lost in late 2008 when the market cratered, and everyone who bought in at the trough made a lot of money. Likely to see this same article in late 2008 virtually 100% of the top 50 firms would be in negative territory over the prior year.

While I can’t say for certain what is driving stock performance UP (now) or DOWN (2008), I can say that virtually the entire market is extremely correlated with this phenomenon, as indicated by the top 50 stocks all being in positive territory.

Recent articles I have seen point to returns as being closely tied to the P/E level; when you buy into a “cheap” P/E market, you do well; when you buy into an “expensive” P/E market, you do poorly. While no one can say for certain what cheap or expensive really means, that broad theory is one that might be crucial to stock investing post 2000. In modern history (the last 30 years) there hasn’t been a long period where stocks traded in such a narrow range (around the Dow 10,000 level); but we need to decide how to weight the last few decades against the entire history of the stock market.

While I am not a professional stock adviser, the fact that 50 out of 50 of the top Chicago stocks (by market capitalization) are all up has to be a signal of some sort.

Cross posted at LITGM and Trust Funds for Kids

Utility Regulation & The Poor

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When I first started getting into the utility business I remember that I was on an airplane traveling to a client in another city when I started talking with a woman yesterday who had a young son. She asked what I did for a living and I said that I worked with utilities. Her son piped up “Are you the man who turns off the power?” and that killed the conversation (mom was embarrassed and I learned to be careful about too much information).

One of the different elements about utilities is that they serve all customers. Since utilities are a “natural monopoly” (meaning that it doesn’t make sense to have two companies stringing up electric poles side by side) the flip side of giving them monopoly rights is that they must provide for all the customers in their “service territory”. While most of the readers of this blog probably never interact with the utility company unless they move or have an outage, utilities spend a significant amount of time and money on collections and turn-on, turn-off activities for poorer customers. Each of these events is preceded by multiple calls, collection attempts, and then physical visits, none of which make money for the utility.

While a lot of this made sense when utilities were regulated monopolies, now many regions have significantly “de-regulated”, which mainly means that the generators of power are free to charge what they want and the local utility makes its money by passing on power costs and charging more for their profits. In the case of Illinois, where Exelon provides (most of) the power and then their fully-owned subsidiary Commonwealth Edison provides power to residents (and complains about the high cost of power that it passes on), no one is shedding tears for Exelon. However, in other areas where the generation and distribution companies are actually separate, you need to start thinking harder about the cost of poorer residents in your service territory.

This article describes the (sad) case of a disabled resident in Bronzeville (a less affluent area in Chicago) who is complaining to the Chicago Tribune that the local gas utility won’t turn on the fuel in an article titled “Gas Shut-off Leaves Disabled Man in the Cold“. In the article, the man hasn’t paid his bill, so the utility comes and turns off his service in April, and the man is angry and complains to the newspaper.

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Los Angeles Department of Water and Power & The Cost of Renewables

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The Los Angeles Department of Water and Power (LADWP is the most common acronym) is a publicly-owned utility that serves the city of Los Angeles with water and power. LADWP is in the news right now because of a dispute with the city over a transfer that LADWP usually makes in the amount of 8% or so of its revenues. Since the city of Los Angeles is essentially broke (per the article, their reserve fund that should be in the $220M range will be down to $25M or $30M) this delay in transferring funds is putting the city close to the edge. This article is titled “Los Angeles Faces Threat of Insolvency” from the 4/9/10 WSJ.

Background on LADWP:

LADWP is the largest municipal utility in the country. According to their annual report for the year ended June 30, 2009 which can be found here(most municipal entities end their year in June, not December like publicly traded companies), the power entity (not water) had the following key facts:

– annual revenues of $2.8B / year
– $6.6 billion in utility plant assets (net of depreciation)
– approximately 7200 MW of useful capacity, of which the vast majority is coal, hydro, nuclear power, or natural gas (renewables are 270 MW, or about 4% of the total
– in 2009 they transferred $223M to the City of Los Angeles, or 8% of revenues (of $2.8B)
– their pension plan for employees is 70% funded when unrealized investment losses are taken into account (not great, but better than Illinois)
– LADWP acquired natural gas assets in Wyoming in 2005. After the collapse of the California power market (where LADWP performed relatively better than their investor owned peers) they decided to go and get their OWN gas supply – the article from 2005 is here. I find it interesting that a non-profit electrical utility owns their own natural gas supply, but it probably seemed to be a good idea when the cost of natural gas was spiking up to $14 / unit (it is now down nearer to $4 / unit with innovative new exploration techniques)
– LADWP has been “hedging” against the price of natural gas, to ensure that the utility has adequate funds available if there is a price rise. As of June 2008, the value of these hedges was $213M (favorable), and as of June 2009 the value of these hedges is ($168M) unfavorable. This is likely due LADWP “locking in” at the price of gas somewhere above its current price near $4 / unit… this method will result in continuing (unrealized) losses as long as the price of natural gas stays low, which it appears to be on track to do for some time

LADWP is in dispute with the city because LADWP wanted to raise rates. LADWP said it needed to raise electric rates to pay for the new renewable energy commitment for the city of Los Angeles. The city wants to have 20% of electricity from “renewable” resources (this must include hydro, because their “true” renewable level is much lower, although no one can site new hydro plants anywhere due to environmental rules) which will require a massive increase in investment in generation and transmission assets because 1) renewables have a high cost / MW to install 2) most of the renewable generation sites (geo-thermal, solar) are not where the grid goes to today, so costly enhancements to the transmission grid are needed.

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Taxes and the Rich

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On the opinion page at the Wall Street Journal Alan Reynolds of the Cato Institute wrote an excellent article titled “The Rich Can’t Pay for ObamaCare“.

The key concept is what he describes as “the elasticity of taxable income” or ETI. ETI measures how taxable income is impacted as tax rates increase; if you use a rate of 0.5 you assume that an increase in tax rates that would yield $1 if prior behavior held stead would yield 50 cents after the impact of behavioral changes is taken into account. However, instead of an ETI of 0.5, per the article:

For incomes above $500,000, Treasury Department economist Bradley Heim recently estimated the ETI at 1.2 – which means that higher tax rates on the super-rich yield less revenue than lower tax rates.

The article describes, in practical terms, how rich individuals can take action that illustrates this ETI:

– dump dividend paying stocks (you will probably want to do this anyways because they are likely to fall in price because part of their value is tied to the reduced tax rate) when the 15% rate is raised
– avoid selling stocks with capital gains when the rate rises, or sell stocks with unrealized losses at the same time to “net out” any gains owed to the government
– reducing income near the $250k range when “phase outs” raise the MARGINAL tax rate to a very high rate through tax deferral strategies such as 401(k) contributions and the like
– consider becoming a one-earner couple instead of a DINK if the penalty on incremental income becomes too great to make up for the cost of child care and the general decremented quality of life

I really like this paragraph that should be an epitaph for tax policy:

Punitive tax rates on high-income individuals do not increase revenue. Successful people are not docile sheep just waiting to be shorn.

A sound tax policy has two main elements 1) it raises the amount of revenue that it is supposed to raise 2) it provides the minimal distortion of productive economic activity.

Super high tax rates on the rich accomplish neither of these two attributes. They don’t raise the money as planned (in fact you could likely end up with LESS money overall) and they distort the economy by having our most valuable members of the economy step back from working at a time when their entrepreneurial drive is needed most to jump-start the economy.

Cross posted at LITGM