Illinois Energy… Still Going Nowhere

Since the energy industry has been deregulated the investment level in new electricity generation has dwindled to almost nothing. Firms do spend money retrofitting existing generating plants and keeping nuclear plants online a greater percentage of the time, but these measures generally only keep our existing capacity running and don’t put new plants on line to meet ever expanding demand.

The barriers against new generation are immense. They include:

1) fanatical resistance from environmentalists
2) a regulatory structure that not only doesn’t encourage new generation to be built but allows current owners to profit immensely from the current shortage
3) half baked government intervention that only further confuses the situation by seeming to help the problem while delivering nothing

I don’t think that there is any way to “bet” on the likelihood that new generating plants will be built but if there was such an opportunity it would be easy money to bet that any given proposal will ultimately be abandoned for one reason or another. I am not saying that nothing will be built anywhere, ever, but the odds of a given project surviving to fruition are close to slim and none.

Some recent ways a project can die…

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Energy In Illinois Intertwined

Over time I have noticed that as a story or trend continues the quality of journalistic reporting tends to rise. This trend is due to the fact that “generic” journalists who just try to tell a fact-based story with the human element thrown in learn about the subtleties of the situation that are not apparent on first glance, and the relations between complex topics that are not obvious. Sunday’s Chicago Tribune moved forward on these fronts today.

The first article is titled “New Energy In Nuclear Power Supply Battle“. This article had a cool graph showing the construction start dates for our nations’ nuclear power plants, which started in the late 60’s, spiked in 1968, and then had a smaller peak in the mid 70’s, before dying out utterly in 1978. Our installed base of power went up until it reached 98,000 MW in the early 1990’s, from where it has stayed fixed (since no new power plants have come on-line since that time).

While this graph is cool, the article totally missed another trend – that the “effective” capacity of these nuclear plants has grown immensely across this time period. 98,000 MW means that you have built reactors that could theoretically generate this much power; but this only happens if the reactors are fueled, on-line and continuously functioning (not breaking down). In the 70’s and 80’s, it would typically take weeks or even months to refuel the reactor; during those times, the reactors were down and not generating power. The utilities didn’t really care, however, since the cost of “purchased power” from other utilities (most companies had interconnections with other utilities and there was spare power around) was just passed on to customers in the form of an immediate rise in monthly rates. The utilities only made money on the capital invested on the plant, a “rate of return” of usually 12-15% / year.

As power became more valuable, however, utilities really picked up the ball and increased the “effective” power capacity by speeding refuelings and limiting down times. Utilities that had maybe 1-2 nuclear power stations sold them off to other operators that ran them far more efficiently – no where more so than Illinois and Pennsylvania where Exelon now runs a whole fleet across two major ex-utility holding companies including plants they bought from others. It is this “effective” power capacity that has been holding the US supply (barely) in line with demand, and operators like Illinois should get credit for this.

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2007 In Review for Chicago and Illinois

2007 ended up with the happiest note for Illinois politics in years. On November 7, 2007 disgraced former “Republican” governor George Ryan reported to Federal prison to begin serving his 6 1/2 year sentence. I put the word “Republican” in quotes because the most prominent events in his tenure include waiving the death penalty in Illinois and continued deterioration of our states’ precarious finances.

When the last governor’s race occurred in Illinois between the Democrat Blagojevich and equally uninspiring Judy Barr Topinka I actually hoped for a Democratic victory (normally anathema on this blog) because I figured that the oozing “snail trail” of corruption could be followed to its logical destination if Blogo remained in power. And, sure enough, on December 21, 2007 the Federal prosecutors formally linked Blogo to the Rezco corruption case with more to come.

As always, the FBI are the only people who fight corruption in Illinois, despite our myriad local police and judicial armies dutifully punching the clock, as I noted in this post (it is from 2006, but some things never change, and likely you could utilize it in 2076). The Chicago Police kicked out their superintendent after a series of shocking events, caught on videotape, including the beating of a tiny female bartender by off-duty cops and the inevitable attempts to cover it up. His name is Weis and he is from the FBI; while I admire his guts for taking on this job (where the locals are already disgruntled that the new top cop comes from outside) I think that his odds of success are about the same as the lone survivor in that new “Justice” movie where he attempts to battle 1 billion zombies.

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Electric Power Industry and Stocks

One of the most intelligent guys in the power industry is named Wayne Leonard. I was told that he started in the plant accounting department at Public Service of Indiana (not usually the starting point for CEO’s) and then PSI merged with Cincinnati Gas and Electric to form Cinergy which was then bought by Duke power. Wayne left when they were still Cinergy and went to Entergy, which is a big southern utility based out of shattered New Orleans. I remember seeing presentations by business unit when I was at Cinergy and Wayne’s stuff was over my head while the other divisions were essentially mouth-breathers. I would always recommend watching Mr. Leonard’s actions to see where the industry is heading.

In parallel, readers of this blog have seen my heckling of Exelon for pretending that their local distribution company was a separate entity from their massively profitable power generation entity, such as this post. Readers have also seen my post recommending that the State of Illinois seize the nuclear power plants from Exelon here at this post (I realize that this is odd coming from a libertarian, but there is a method to this madness) – if you are interested just go to LITGM and type “Exelon” in the search box to see more.

The underlying issue is that power companies should be viewed as two main entities 1) distribution companies that purchase power from someone else and serve cities 2) generating companies that make power and sell this power to distribution companies. The value of #2 electricity companies is ALMOST INFINITE – meaning that since no one is creating new base load plants while demand increases, you can sell power for the highest price the market will bear indefinitely. The only blips on the horizon are the fact that at some point you bleed the distribution companies so badly that they go bankrupt and the states start to look around for more desperate solutions (like seizing the assets, the assets that rate payers paid for originally). The value for #1, however, is negligible – they usually make a return on capital and this return is being hacked away by local politicians and governments because more money is going to the generating companies and they don’t want to raise rates. Usually they received about a 10% return on equity and this is going down into the single digits, around 8%. And this 8% isn’t without risk, either.

The investment issue is that many companies are a mix of #1, highly valuable plants, and #2, virtually worthless distribution companies. As integrated entities, you can’t get the value for #1 because the governing authorities make you give a lot of it back by not letting #2 go bankrupt.

What to do? Watch Mr. Leonard. He is proposing spinning off the super-valuable nuclear plants from Entergy to form a separate company (which raised the stock price about 5%). Current share holders will receive shares of this new entity (called Spin-co for now) and this will be their reward, since these shares are expected to be richly valued by the market (and this value will fall to current share holders).

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