Economics & Finance

Energy “Plan” – No New Transmission

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DECEPTION

The energy industry in the US is complicated and when I write posts I like to provide a decent amount of background for my thesis that we are allowing our energy infrastructure to deteriorate and not doing anything constructive about the situation. One critical element of this is that the greens and left-leaning individuals, who decry “old school” solutions like building new coal plants and promote complicated and unproven alternatives to these known, sensible and cost-effective solutions – are being disingenuous when they counter propose their “solutions”, because in the end they don’t want to do anything constructive at all to re mediate and solve the issues. This opinion article, in the New York Times, neatly encapsulates their duplicity by clearly stating that they don’t WANT to solve the transmission problem, even if someone could wind their way through the rats nest of financing, legal issues, and permitting. Thus it represents an important piece of evidence as a “confession” of their duplicity.

BACKGROUND

The energy infrastructure of the United States consists of three main components:

– Generation (nuclear, coal, gas, hydro, and other)
– Transmission (the lines that connect power stations to cities, and the utilities to each other)
– Distribution (the local electric lines, customer meter, trucks, etc…)

In general, the US has failed to invest in generation and transmission assets over the last 25 years or so. “Base load” generation primarily consists of 1) coal plants (no one is building new ones because of environmental legislation) 2) hydroelectric plants (no one is damming rivers due to the Sierra Club) 3) nuclear plant (they are far too expensive, regulation is uncertain, and Three Mile Island hasn’t gone away). There have been some “peaker” plants running natural gas (more expensive) and some minor “renewable” projects but generally we have just been “running in place” with regards to capacity and utilizing up all the “reserve” capacity that had been built up in previous years, as evidenced by blackouts in places like California.

Transmission consists of the long high voltage lines that crisscross the country. While some of these lines have been rebuilt and capacity upgraded, generally we have NOT built new transmission lines. Transmission lines that cross the country or long distances require permitting and siting and can take decades to build, if you can stomach the endless rounds of negotiating with all parties along the way and an ever changing morass of regulatory issues. Even after a line is permitted and built, the courts can stop them from functioning, such as a famous undersea transmission cable in the East that cost hundreds of millions to build.

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And Then There’s Inflation

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I don’t understand the big issues of economics, so perhaps this is a naive post. And a naive question, perhaps: Isn’t inflation the inevitable result of these policies? Doesn’t that discourage productivity? Besides enabling bad behavior, dissing good, abrogating contracts, and taking property (Kelo), how is the government ensuring a strong economy down the road? As someone who is regularly paying down a mortgage – hoping to pay it off in 5 rather than the original 30 years – I’ve been wondering if that, too, isn’t a chump’s act. Projected inflation is, of course, a good deal higher than the interest. Everyone seems agreed that dollars in, say, 2013, will be worth less than in 2009. Why, then, should we pay it off in 2009 dollars?

Why Did the GSEs Cause Problems Only Now?

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A lot of people arguing against my thesis that the government-sponsored enterprises (GSEs) lie at the heart of the residential mortgage problem ask the obvious question: If the GSEs cause problems, why are we only seeing a problem now? Why didn’t we see problems a long time ago?

Try this analogy on for size: It has been snowing on the mountain for years, yet we’ve never had  an avalanche. It must be caused by something else. Carl’s yodeling must have angered the mountain spirits.  

Look at this graph from Ginnie Mae itself of the buildup of the value of mortgages  guaranteed  by Ginnie Mae. (Ginnie Mae is a behind-the-scenes  GSE that is explicitly backed by the full faith and credit of the U.S. government.)  


See the  avalanche  building?

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The Political-Corporate-Financial Complex

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Eisenhower  famously coined the term “Military-Industrial” complex to describe the way that large military budgets drove rent-seeking behavior in defense contractors. He warned that the economic interest of defense contractors and of those who prospered when they prospered, including politicians, would distort military priorities.  

The same thing happened with the GSEs and the financial industry.  From a  Paul A. Gigot editorial dated July 23, 2008:

Fannie Mae and Mr. Mozilo [of CountryWide] weren’t competitors; they were  partners. Fannie helped to make Countrywide as profitable as it once was by buying its mortgages in bulk. Mr. Raines — following predecessor Jim Johnson — and Mr. Mozilo made each other rich.

This partnership had predictable consequences.

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AIG Bonuses

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Anyone want to talk about the AIG bonus situation?

A few thoughts to start things off:

1)Clearly, AIG has been terribly mismanaged. And the U.S. financial sector as a whole has become too large, in terms of its total size–including employment and employee compensation–relative to the economy as a whole.

2)The fact that a company has been mismanaged does not necessarily imply that everyone in it has done a bad job. Almost certainly, there are people in the bonus pool at AIG who have successfully achieved their individual goals, regardless of the failures of top management.

3)Bonus plans, in my experience, generally have two components: success of the individual in meeting his own goals, and overall success of the business. (“Business” does not necessarily mean the corporation as a whole–for example, an engineering manager at GE Transportation might be bonused based more on the results of the Transportation business than the whole company.) In general, it makes sense for the proportion of the bonus tied to overall business results to go up with the individual’s organizational level. It appears that there wasn’t much tie to the overall results for the people in the AIG pool being discussed.

4)Bonus plans are usually a part of an individual’s compensation package and, as such, are legally enforceable contracts. I believe that in some states, failure by a company to pay compensation that is owed can result in additional damages, above and beyond the payments themselves.

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