Quick Roundup 158

Monday, March 05, 2007

Five Years!

If you haven't already, stop by and congratulate Diana Hsieh on five years of excellent blogging over at Noodle Food.

Business Columnist Lambastes Power Companies for Building Plants

Business columnist Loren Steffy of the Houston Chronicle offers the following ridiculous criticism of what he implies to be capitalism: It encourages utility companies to build -- Oh, the humanity! -- coal-powered electricity generation plants.

The way deregulation works in Texas, consumer electric prices are set by the free market. Wholesale rates, or the price at which generating companies sell their electricity, are tied to the price of natural gas.

That's because gas-fired plants generate most of the electricity in the state.

TXU, however, shows how a savvy investor can make a killing by playing the spread between natural gas prices and generation costs. Consider this explanation in TXU's annual financial statement, filed last week with the Securities and Exchange Commission:

"One of TXU Power's key competitive strengths is its ability to produce electricity at low variable costs in a market in which power prices are set by natural gas-fueled generation."

In other words, because its nuclear and lignite coal plants have lower generating costs than natural gas plants, TXU is able to make more money from them because it still sells its electricity at the prevailing wholesale rate.


TXU is simply exploiting a flaw in the system, said Tom "Smitty" Smith, director of Public Citizen's Austin office. [Smith is an anti-nuclear environmental activist! --ed] Even though coal plants cost more to build, the long-term profitability makes them more attractive.

"It's encouraging people to build coal and nuke plants," he said.

The lower generating costs for TXU and other coal plant operators aren't passed on to residential customers because the wholesale market remains wedded to natural gas prices.

"We need to look at whether the market is reflecting the real cost of generating electricity," Smith said. "This all brings into question whether deregulation is in the best interest of consumers."


Of course, it's a problem the deregulated market is supposed to solve. If TXU won't build enough generating plants, then, in theory, someone else will step in to meet the demand.

Given the potential profits, I'm sure someone will.

But what type of plants do you think they'll want to build?
It is not clear from this column whether "the system" Steffy implies is capitalism -- but which is really a mixture of freedom and government controls -- forces electricity to be tied to the price of natural gas by legal fiat (in which case, regulation is to blame for the discounts not being seen by customers). On the other hand, it could be that Texas overwhelmingly uses gas power. (In which case, a truly free market would eventually cause a new benchmark to be selected for electricity prices. Read on.)

In either case, since companies are in business to make money, I applaud this kind of creative approach to operating on the Texas market. At worst (if the law forces utilities to index based on natural gas and consumer rates are heavily regulated, which I suspect is the case), we know that utility companies are going to be interested in producing power in Texas. I don't know about Steffy, but even if my bill is a few dollars higher a month, I'll take the reliability of power we enjoy here over California-style brownouts any day. If the system is broken, the last criticism it deserves is that it encourages utility companies to invest in more generation capacity!

And if electricity rates really are determined on an open market, the indexing to natural gas is something that would fix itself as more non-gas plants were built -- if coal and nuclear power were not so heavily regulated. That TXU makes money from coal plants is no secret, so perhaps "someone else will step in", as Steffy says. In a truly free market, this would eventually lead to both reliable power and a decrease in rates as more utilities built coal plants and someone decided to steal customers via lower rates. Even Steffy ought to be able to see this!

But for some reason, the lower rates have not arrived. That would have been an interesting story. Too bad Loren Steffy spent too much time gabbing with an anti-nuclear power activist and less time digging when he prepared to write this Sunday's column.

New Documentary,
Evidence on Global Warming (Hysteria)

Via Matt Drudge is a link to a new documentary on the science of global warming, The Great Global Warming Swindle:
The film brings together the arguments of leading scientists who disagree with the prevailing consensus that a 'greenhouse effect' of carbon dioxide released by human activity is the cause of rising global temperatures.

Instead the documentary highlights recent research that the effect of the sun's radiation on the atmosphere may be a better explanation for the regular swings of climate from ice ages to warm interglacial periods and back again.

The film argues that the earth's climate is always changing, and that rapid warmings and coolings took place long before the burning of fossil fuels. It argues that the present single-minded focus on reducing carbon emissions not only may have little impact on climate change, it may also have the unintended consequence of stifling development in the third world, prolonging endemic poverty and disease.

The film features an impressive roll-call of experts, including nine professors – experts in climatology, oceanography, meteorology, environmental science, biogeography and paleoclimatology – from such reputable institutions as MIT, NASA, the International Arctic Research Centre, the Institut Pasteur, the Danish National Space Center and the Universities of London, Ottawa, Jerusalem, Winnipeg, Alabama and Virginia.

The film hears from scientists who dispute the link between carbon dioxide levels and global temperatures.


The film examines an alternative theory that explains global temperatures, based on research by Professor Eigil Friis-Christensen of the Danish Space Center. The professor and his team found that as solar activity increases, and the sun flares, cloud formation on earth is significantly diminished and temperature rises.

Ian Clark, Professor of Isotope hydrogeology and paleoclimatology at the Dept of Earth Sciences, University of Ottawa explains: 'Solar activity over the last hundred years, over the last several hundred years, correlates very nicely, on a decadal basis, with temperature.' [bold and italics mine]
I'll be on the lookout for this one, but not at that Final Authority on All Matters Scientific, the Motion Picture Academy.

Oh. And speaking of alternate theories on climate change, it was amusing to see that National Geographic had to admit, albeit very grudgingly, that there is new evidence from Mars against the "consensus" theory of global warming that is being used to justify all manner of new ways to strangle the world economy.
Earth is currently experiencing rapid warming, which the vast majority of climate scientists says is due to humans pumping huge amounts of greenhouse gases into the atmosphere. ...

Mars, too, appears to be enjoying more mild and balmy temperatures.

In 2005 data from NASA's Mars Global Surveyor and Odyssey missions revealed that the carbon dioxide "ice caps" near Mars's south pole had been diminishing for three summers in a row. [bold added]
Of course, this coverage tries to make the Russian scientist it cites sound like a lone raving lunatic, but it was still funny to see that shill for global warming hysteria, National Geographic, have to run the story.

What isn't funny are the predictable consequences (as listed earlier) of the political "solution" to global warming we hear from every direction, at full volume, and on a constant basis from such media outlets. Amid cries for Nuremberg trials , like Heidi Cullen's, for "global warming deniers", the news media are themselves denying scientific evidence on that very subject as well as the predictions of well-established economic theory concerning the misguided "solutions" they advocate for this imagined problem.

Thompson on Privatizing Education

Via Amit Ghate is a link about an appearance in Southern California by C. Bradley Thompson, who will argue for privatization of education, a matter I have found myself blogging about quite a bit lately. Ghate's comments on the special harm done by government-run education are worth repeating here:
[I]n some sectors the effects of government social engineering are much more pernicious than in others, and in that sense, if one must choose one's battles, education is a great place to start. For example, though farm subsidies are immoral and harmful to both taxpayers and to the displaced competitors, at least the end result of the subsidies (except when farmers are paid not to produce) is healthy food. In the case of education, however, not only is every taxpayer violated and every would-be private competitor hamstrung, but in the end, children are indoctrinated rather than educated -- and in many cases we are actually paying teachers to argue for our own destruction, whether morally, economically, or most egregiously via violent jihad! ... [my bold]
The talk, free and open to the public, will occur in Costa Mesa, CA on the 27th of this month.

-- CAV


Greg said...

Actually the end result of farm subsidies is much unhealthier food.

Corn is bad for humans with empty carbs and a very high Glycemic Index and because of subsidies it's in everything!

Ever had a Coke sweetened with real suger not corn syrup? Tastes much better too!

Gus Van Horn said...

Actually, the omnipresence of corn syrup as a sweetener is due not just to sugar subsidies, but also tariffs on foreign cane sugar.

Having said that, while Coke is better with cane sugar, I would venture to say that it would fail to qualify as an elixir of health no matter which sweetener it contained if consumed to excess.

Not to defend farm subsidies, but if you are going to assert that they lead to worse food, you need a stronger argument than that. Corn (and corn sugar for that matter) is like any other food. Good, if consumed in proper amounts.

Galileo Blogs said...

You are correct that the price of electricity reflects the price of natural gas due to the large number of natural gas-fired power plants in Texas. Gas is the dominant fuel and the "marginal" fuel. It sets the price of electricity.

As more coal plants are built, coal will begin to set the price. In some other parts of the country, such as parts of the Midwest, electricity prices are set by coal plants, which supply the bulk of the power.

Your conclusion is also correct, that the more plants that are built, the more reliable and cheaper electricity will become.

The price of electricity has been high in Texas for two reasons. Most importantly, natural gas prices have been high, which results in high electricity prices. Secondarily, uncertainty over potential government regulation stifles new power plant development, resulting in declining "reserve margins" in the state. The reserve margin is a measure of how tight the grid is. A smaller reserve margin means there is less slack capacity in the grid, which results in higher electricity prices (and a greater risk of blackouts). Because of uncertainty over future regulation, investors and utilities are reluctant to build new power plants.

Your supposition that whatever problems there are in the Texas grid are due to the mixture of freedom and controls is entirely true. Wholesale prices of electricity are partially deregulated, but they are still subject to myriad controls. These include restrictions on prices, including both a maximum price ceiling on wholesale prices and ex post facto "clawback" provisions if prices are deemed to reflect "market power" which, of course, cannot be objectively defined. Generators are also forbidden by antitrust regulators from establishing significant scale economies by owning a large number of plants. Distribution utilities, who are in the business of selling electricity, have also been driven out of the business of generating electricity. Although they have electricity customers, they are forbidden from building new plants to serve their customers.

Finally, the specter of re-regulation reining in the small portion of the industry that is partially deregulated looms over the industry. Utility executives and investors in Texas saw how the industry was re-regulated in California and effectively re-regulated in Illinois and Pennsylvania. All three of these states, along with Texas, were leaders in the quasi-deregulation of electricity that occurred in the 1990s.

Investors hate uncertainty. The regulatory and political uncertainty hanging over the industry chills investment.

Despite it all, new investment is very slowly coming to Texas, although a good chunk of that investment, the 11 coal power plants that TXU Energy had planned to build, were largely sacrificed to environmentalist pressure. Eight of those plants were scuttled to appease environmentalists and gain their support for the recently announced leveraged buyout of TXU.

One could go on, for example, mentioning "NIMBY" land-use restrictions and environmentalist rules that make building new plants or re-building on existing plant sites very difficult.

The bottom line is: the electric utility industry everywhere (not just in Texas) is one of the most regulated industries in existence. Is it any wonder that prices seem high and volatile and people worry about blackouts?

Gus Van Horn said...

Thank you, Galileo, for adding your knowledge to this post. If Steffy's column had mentioned even half of what you brought up, he would have written a far more valuable piece than he did.

Instead, he's dedicated to spreading the Big Lie that (actual) deregulation is harmful to consumers.

Galileo Blogs said...

Thanks, Gus.

One other point is worth mentioning. The fact that Texas relies so heavily on natural gas, an expensive and volatile fuel, is a consequence of the myriad regulations that prevented the widespread deployment of nuclear energy. Nuclear power is cheap and rock-stable in terms of volatility since the price of fuel is an almost irrelevant consideration in generating nuclear power.

The second-best alternative to nuclear, coal, is also hamstrung by many rules, especially environmental and land-use rules.

Because nuclear and coal (largely) have been precluded, nearly all new plants being built, not just in Texas but around the country, are gas-fired. They are relatively cheap and easy to build and pollute less and can be permitted much more easily, but the scarcity of the fuel makes it a poor choice for 24/7 "baseload" generation of power.

In a laissez faire world, costly gas-generation would most likely be used only as "peaking" power that is deployed during the hottest summer days. Gas power really is best used as "back-up" power. The bulk of electricity in a free market would be nuclear (or from a new technology not-yet-invented). Today, because of all the rules, expensive "backup power" (i.e., gas power) becomes the volatile and costly backbone of the grid.

Gus Van Horn said...

On top of that, since we have to import natural gas, we have the real (but doubtless over-hyped) danger of huge explosions at LNG port facilities.

We will eventually either get to thank overregulation for loss of life or for more environmental hysteria (and probably both), when we could be using cheaper,safer sources of energy.