Michael Giberson

“Buy American sounds great—until you think about it,” said Marc Gunther in “Buy American: Bad for America.”

(Gunther begins by writing: “Congress should have known better,” but I think the truth is that Congress did know better.  It just didn’t matter.)

Michael Giberson

“Ah, the good old days, back before the talkies television video the internet killed the silent movie star the movie business the radio star pop star creativity.”

At least that is the message I took from a speech by Duran Duran bassist John Taylor, “Is the internet stifling new music?,” a question Taylor answers in the affirmative. Are his remarks any deeper than nostalgia for the musical world as he discovered it?

There may be fewer big music stars today because of the internet, for the same kinds of reasons that it is getting harder to get admitted into the best colleges.  Today, talent is more willing to travel. But, again for the same kinds of reasons it is getting easier to get admitted to some college somewhere, it is probably getting easier to get into the music business than ever before.

Creativity is not suffering, just old and familiar ways of doing business.

(HT Marginal Revolution for both links.)

Michael Giberson

From the Texas Energy and Environment Blog, reports that in New Mexico “solar panels on homes can take as little as seven years to pay for themselves in energy savings.”  The post continues:

That’s faster than Texas, where even in the best economic case, solar panels take at least a decade to pay for themselves. New Mexico’s utility, PNM, offers several subsidies to bring down the cost of the installations for homeowners.

[...]

New Mexico remains regulated, meaning the government tells PNM how much it may charge customers and how much profit it may make. That means, if regulators want more solar, customers pay for it.

So, PNM offers two incentives. First, it offers so-called net metering. That means, when a solar customer generates more power than he can use, PNM buys that power back at retail rates, rather than wholesale rates. Second, under state law, renewable generators like solar panels get renewable energy credits. PNM buys those credits from solar customers at a price that’s about ten times higher than the market rate.

Ferland said these offers, along with state and federal subsidies, nearly make installing solar panels economic.

In [the Dallas, Texas area], our regulated power line utility, Oncor, offers some subsidies that have made solar panels more affordable. But the Oncor deal isn’t as sweet at he PNM offer.

Still, Oncor promised not to add the cost of those subsidies to customer rates. North Texans might not install as many solar panels as New Mexicans, but ratepayers don’t have to pay for it, either.

So wait a minute. Who is paying for those New Mexico solar panels?  From the quoted material it looks like other New Mexico ratepayers and state and federal taxpayers are paying for part of those solar panels.

Of course, federal and New Mexico state policymakers put ratepayers and taxpayers on the hook for a part of the solar panel costs because they believe that purchases of solar panels provide external public benefits.

I wonder how long before those external benefits accumulate in value sufficient to payback the investment made by ratepayers and taxpayers.  I don’t think it is reasonable to say that the solar panels have “paid for themselves” until after all of the initial investors – homeowner, utility, ratepayers, and taxpayers – have received a full return on their investment.

Michael Giberson

Today is a day celebrated as the day, 20 years ago, the Berlin Wall fell.

Technically speaking, the wall itself was breached a few days after November 9, but this is the day an East German bureaucratic mix-up inadvertently and briefly allowed East Berliners free movement into the west.  When combined with events of the prior several weeks in Hungary, Czechoslovakia, and East Germany, the brief opening between the two halves of the city soon led to a physical assault on the barrier itself.

The Berlin Wall was perhaps the most potent symbol of the divisions between the capitalist West and the authoritarian East, and its fall has stood as symbol of the collapse of communism.  East and West Germany reunited about a year later, and other countries in the former Soviet sphere continued rapid movement toward open societies.

Many video accounts of the fall of the wall are available on YouTube, both historical looks at the fall and many current 20th anniversary reports.  See, for example: “Fall of the Berlin Wall: The 20th Anniversary of the moment“.  (Google News provides links to many, many news stories on the fall.  See also Lynne’s earlier post on the anniversary.)

UPDATE: The minor flap about when now-French President Nicholas Sarkozy arrived and took a small pickaxe to the Berlin Wall reminds me of the Romanian film 12:08 East of Bucharest, which involves similarly disputed accounts of just when (indeed, whether) one of the characters joined protests against the Ceauşescu regime before the Ceauşescus fled the country.

Films more directly related to the Berlin Wall include Der Tunnel (The Tunnel), Goodbye, Lenin, Das Leben der Anderen (The Lives of Others), or The Spy that Came In from the Cold.  Each film touches on life in East Berlin and the Berlin Wall in some manner.

Any other recommendations?

Michael Giberson

Tom Fowler has more on the ditching of shale gas skeptic Art Berman’s column by World Oil magazine.  Now the magazine’s editor is out too.

Read Fowler’s context, then follow the link to the former editor’s remarks, posted today on Berman’s blog.  Excerpts:

… The next day, the president stopped by to tell me that we had to stop Art from writing about shale plays.

I said, “I’m surprised that there haven’t been at least a dozen complaints. I’ve seen worse on other topics.”

It was no use arguing. Ironically, I had already decided that Art should take a break from the shale plays for a while anyway, just because he was running out of new things to say, having written 8 (I’m guessing) columns on that one subject. …

Immediately after I hung up the phone with Art, the Publisher walked in, slapped down a fax from DS, and said, “We’ve got to stop Art from writing about these shale plays, we’re getting too many complaints!”

Michael Giberson

A few years ago Lubbock’s municipal electric utility was in a tight financial spot that threatened to put it and the city into bankruptcy.  When the utility pushed through a rate increase, customers started switching to competing electric utility Xcel.  The dwindling customer base forced the municipal utility to find another way out of their difficulties.  The utility reorganized management, negotiated some complex deals to reduce wholesale power costs, and made their rates competitive again.  It worked, Lubbock Power & Light is financially secure today and still offering competitive rates.

Austin Energy, the municipal utility for the Texas capital, foresees tough times ahead and the need to either “significantly raise electric rates” or “start losing millions by 2011.”  Fortunately for the utility, Austin Energy is a monopoly and its customers cannot escape rate increases so easily. (See Marty Toohy’s article, “Electric utility proposes major rate increase,” in the Austin American-Statesman.)

Michael Giberson

I was interested when one of the local news shows  ended their 6 o’clock news segment yesterday on the proposed purchase of Xcel’s Lubbock electric system by Lubbock Power & Light by saying, “Coming up tonight on NewsChannel 11 at ten we hear from an economist and teacher who tells us the other side of the issue and how citizens and taxpayers could be affected.”

“Good,” I thought to myself, so far we’ve heard what the city and the utility think, so let’s see “the other side of the issue.”  I anticipated they would talk to one of my colleagues across campus at the economics department, but there are a few other economists in town.

Here is what we saw on the 10 o’clock news:

“To have everything in one hand is scary to some,” says former stock broker and Lubbock High School AP economics teacher….  She says this deal is all about efficiency.

“But what we do know is this type of monopoly is present in almost every city in America. It is so expensive to build infrastructure of electric company that it’s best to put it one place,” adds Moore.

The efficiency of monopoly?  Huh?  The news segment then jumped to quoting from the president of the regional Xcel operating unit, who said the biggest change will be the elimination of the two sets of power lines.

Other side of the issue???  No, this is the city’s official story.  What happened to “how citizens and taxpayers could be affected”?

I guess I’ll go see what news the morning newspaper has to offer.

Michael Giberson

Seeking Alpha has begun publishing transcripts of quarterly corporate earnings calls. Typically these calls are discussions presented by the CEO and other corporate officers followed by Q&A with financial analysts.  The calls offer a more “inside look” at company operations than you get from reading newspaper or magazine stories or even trade press.  What’s more, the calls provide insight into the markets that the company participates in.  The FPL Group Inc. 3Q 2009 call provides several insights into the electric business in Texas, where FPL participates in both the wholesale and retail markets.

FPL, through its NextEra Energy Resources subsidiary, owns both fossil-fueled and wind power plants in Texas and several other places.  Currently the company is the second-largest operator of wind power plants in the world behind Iberdrola.  FPL owns Gexa Energy, a energy retailer in Texas serving about 172,000 customers (according to Wikipedia).

The earnings call spanned the range of FPL Group activities and interests.  There is much here of interest in Texas: FPL has recently completed a 200-mile self-funded transmission line linking four of its wind power plants in ERCOT’s west region directly to the higher-priced ERCOT south region, they’ve added both wind power and natural gas generation in Texas, and they are constantly trying to balance their risk exposures for their wholesale and retail obligations in the state.

I thought the call was particularly interesting for what it implied about retail market profit margins during the current low-wholesale power prices in Texas (and most other places).  Earnings from their merchant generator fleet are down:

Although we were pleased with the $0.11 year-over-year improvement in NextEra Energy Resources’ quarterly earnings per share contributions, the financial performance did not meet our internal expectations. Two factors primarily drive this: the Texas merchant gas fleet and the wind resource. Let me explain a bit further.

On the former, contributions from the Texas gas fleet were approximately $24 million or $0.06 per share below our quarterly expectations. Both spark spreads and ancillary revenues were much lower than we expected.

As for the latter, as I mentioned a moment ago, the wind resource in the third quarter was well below normal or roughly $0.06 per share below our expectations. … For the year, the poor wind resource has reduced per share results by nearly $0.13.

Elsewhere in the call:

Meanwhile, our retail business in Texas … added about $0.04 per share incrementally given favorable margins. The remaining contributions from the existing merchant fleet amounted to negative $0.02 per share, but there is nothing notable in any one category worth calling out.

Later in the call:

Just one last comment: As I’ve said before, we’re certainly not happy that ancillary revenue is down at our gas plants in Texas, but one of the reasons that [inaudible] retail business is up $0.04 quarter-over-quarter is because they didn’t have to pay the ancillary cost to our gas assets and other gas assets.

A couple of comments:

First, the ownership of both wholesale and retail assets in the Texas competitive market provides a sort of natural hedge against fuel price movements. When wholesale power revenue or ancillary service revenues are low, as currently, the wholesale business suffers but the retail side benefits. (See related discussion on wholesale-retail combination in Texas, and earlier here.)

Second, while retail prices have fallen in Texas, they haven’t fallen as far and as fast as wholesale prices, so retail margins are higher for FPL.  The call doesn’t fully clarify the reasons here.  The most straightforward explanation is that FPL likely has many customers on one- or two-year fixed price contracts, with prices that relatively high now (but presumably competitive one or two years ago.) Also, as noted in the call, costs for ancillary services were unexpectedly low, which reduced expenses for the retail side.

But margins may be higher, too, if retail prices are slow to adjust to dropping wholesale prices.  I wonder whether there is an asymmetric price adjustment phenomenon in competitive retail electricity? Do consumers shop around more and switch companies more when prices are going up as compared to when prices are falling?  Probably, and that should be enough of a force to produce a “rockets and feathers” effect on prices.

Finally, and I don’t think the call made this connection, but I wonder whether there is a link between the lower-than-expected wind resource and the low revenues/costs associated with ancillary services.  To some degree, variable wind power output increases the demand for energy balancing and other ancillary services required by the transmission system for reliable operations.  Possibly with less wind power coming on the system, fewer ancillary services were required.  Of course low natural gas prices and on-average slightly lower electric power demand would also reduce the cost of ancillary services, so the explanation may not be wind-output related.

NOTE: FPL’s 200-mile self-funded transmission line, dubbed the “Texas Clean Energy Express,” raises a host of interesting issues worthy of examination.  One of these days…

ALSO: Of course FPL Group Inc. isn’t the only company with an interest in the Texas electric power market.  Search “Texas AND electric” at Seeking Alpha’s Transcript Center for much much more.  If you find anything interesting, let me know.

Michael Giberson

The city of Lubbock Texas has had two competing electric power companies since 1917.  If a just announced deal goes through, competition will be eliminated.

The new “official story” is that competition produced inefficiency, but this view is in stark contrast to old “official story” as told in the “The History of Lubbock Power & Light” posted on the LP&L website.  That historical review makes the case that competition has been a good thing for the city.

Here’s the first paragraph from the historical review, with some emphasis added:

In the electric utility industry, retail competition for electric customers is a relatively new concept. Not so in Lubbock, Texas. The good people of Lubbock have benefited from retail competition for electricity since 1916.

The short version of the story is that city officials were unhappy with an early electric utility supplying Lubbock, so started a municipal utility to provide more reliable service and reasonable rates.  The private utility tried to sell its distribution system to the city at the time, but the city refused to buy it.  (Various dates are mentioned here: 1916, 1917, and, below, 1942.  See a note below explaining these dates.)

According to the existing LP&L history, competition began paying off right away:

The effort by those early Lubbock leaders was realized a success on September 28, 1917 as the municipal power plant began producing electricity priced at only ten cents a kilowatt-hour. The other utility cut its rates accordingly soon after. Imagine that!

The private utility had been charging 20 cents per kilowatt-hour and under pressure from the city had previously only reduced its rates a few pennies.  Competition brought down rates.

Today, the vast majority of Lubbock remains dual-certified and customers still have a choice of electric utility providers. Customers whose account balances are current are allowed to switch from one company to the other at their discretion. The competition for the electric dollar in Lubbock has resulted in some of the lowest electricity costs in the state of Texas and in the nation. Another major benefit of competition is that customers enjoy increased levels of customer service than would be found in cities this size with only one electric provider.

Lubbock Power & Light’s mission is to provide low cost, reliable electric service. We feel we’ve been successful in that mission. All electric customers in Lubbock have benefited from the decision of those early pioneers to begin retail competition.

I’m guessing the official story is about to change. These remarks clearly may be seen as inconvenient given the recent agreement between LP&L and Xcel. (As mentioned here earlier, the municipal utility has agreed to acquire Xcel’s distribution assets in the city and take over retail power service to current Xcel customers.)

The new story, as explained in the LP&L news release :

Since 1942 Lubbock has been served by both companies, resulting in duplication of electric power services, lines, poles and substations. Both companies have determined this to be an inefficient and intrusive way to provide electricity to the community.

Here is the viewpoint from the Xcel representative, also in the LP&L news release:

“The duplication of retail electric service in Lubbock has not been efficient, and we believe we can best serve Lubbock and our other Texas retail customers by only providing the low-cost wholesale electricity to LP&L,” said David Eves, president and CEO of Southwestern Public Service, an Xcel Energy company.

Lubbock’s mayor, also from the LP&L news release:

“It’s natural for LP&L to pick-up the Xcel retail electric service, since the City of Lubbock already provides utility service to all the properties in Lubbock,” Mayor Tom Martin said.

Some questions based on the LP&L history:

• If the duplication of facilities has not been efficient, why did rates drop in 1917 after a duplicate system was built?
• If this system is inefficient, why is it that electric rates are comparable to other systems in the area and relatively low compared to elsewhere in the state?
• If the existing system is inefficient, and the new system is better, they why isn’t LP&L promising to lower rates after the wasteful, duplicative system are consolidated? Are they planning to reduce costs and not pass the savings along to consumers?

According to the now inconvenient history on the LP&L website, a “major benefit of competition is that customers enjoy increased levels of customer service than would be found in cities this size with only one electric provider.”

If this deal goes through, we will become one of the “cities this size with only one electric provider.” LP&L’s message is that we should expect customer service to suffer if the deal goes through.

NOTES ON DATES: The decision to start the utility was made in December 1916, but the system didn’t go into service until September 1917.  The “1942″ reference above is to the date that Southwestern Public Service bought the Lubbock distribution utility from Texas New Mexico Utilities. Southwestern Public Service is now a unit of Xcel Energy.  TNMU was a successor company to the private utility that the city was unhappy with in 1916/1917.

Michael Giberson

This morning, November 4, municipal utility Lubbock Power & Light and local regulated utility Xcel/Southwestern Public Service announced that the city utility will buy out the Xcel distribution system within the city and LP&L would become the monopoly retail power provider.

The press conference hosted by the city emphasized the costliness of maintaining duplicate distribution system. The announcement didn’t explain why it made more sense for LP&L to buy out Xcel than for Xcel to buy out LP&L.  A press release (reproduced below) contains more details.

(Oddly, the press conference held by the city seemed mostly focused on the redevelopment of Lubbock’s downtown area.  Apparently the costs of moving two sets of wires was a significant problem for the company in charge of redeveloping the downtown area; with that problem resolved the redevelopment should be cheaper to manage.  Will the developer be refunding the savings to the city?  As part of the deal Xcel will donate its downtown building to Texas Tech University and consolidate its activities at a southwest Lubbock location.)

One local commenter observes this will mean an end to the big advertising spending by LP&L and Xcel, to the detriment of local media companies.  A radio show host said on his blog:

Good bye Xcel Energy (at least in Lubbock) and good bye competition! Today Lubbock announced it was spending $87 million dollars to buy out the Lubbock customer base of Xcel Energy. According to the city, this is great for downtown redevelopment. OK, great.Mayor Tom Martin was quick to say at the presser that your rates won’t change because of this. Really? Does anyone buy this? LP&L has no competition in Lubbock (for the most part) and we shouldn’t expect rates to change? We shouldn’t expect customer service to change?

I’m sorry but the only people who will benefit from this buy out are the people in charge at City Hall. And how about the timing? The city keeps this whole thing quiet until after the bond election.

I can imaging that I’ll have updates once more information is available.

MORE DETAILS: From the LP&L press release:

Electric Companies Move to Benefit Lubbock

(Lubbock, TX) – Representatives from Lubbock Power & Light (LP&L), Xcel Energy and the City of Lubbock made an announcement today that will lay the foundation for the future of power in Lubbock.

LP&L and Xcel Energy have reached a mutually beneficial agreement that will allow LP&L to purchase Xcel Energy’s electricity distribution system within the city and to serve all of Xcel Energy’s Lubbock retail electric customers. Since 1942 Lubbock has been served by both companies, resulting in duplication of electric power services, lines, poles and substations. Both companies have determined this to be an inefficient and intrusive way to provide electricity to the community.

“The duplication of retail electric service in Lubbock has not been efficient, and we believe we can best serve Lubbock and our other Texas retail customers by only providing the low-cost wholesale electricity to LP&L,” said David Eves, president and CEO of Southwestern Public Service (SPS), an Xcel Energy company. “Xcel Energy customers in Lubbock will be served by LP&L, but Xcel Energy will continue to supply the wholesale power and transmission services.”

Currently LP&L provides power to more than 77 percent of households in Lubbock but purchases its power wholesale from Xcel Energy.

“It’s natural for LP&L to pick-up the Xcel retail electric service, since the City of Lubbock already provides utility service to all the properties in Lubbock,” Mayor Tom Martin said.

Because LP&L will use its solid financial position and bond ratings to fund the purchase through electric revenue bonds, electric rates for their customers will remain some of the lowest in the state.

“We want all our customers to know that your electric rates will not increase as a result of this new relationship. LP&L electric customers will continue to see low electric rates,” W.R. Collier, LP&L Electric Utility Board Chairman, said.

Electric customers in the Panhandle and South Plains enjoy some of the lowest electric rates in Texas because of Xcel Energy’s low-cost power generation system and abundant renewable resources. Xcel Energy will remain a significant part of the Lubbock community and will continue its civic involvement in Lubbock as a regional hub of operations and as a wholesale electricity provider for LP&L and retail provider in other areas of the South Plains.

Xcel Energy has received approval from the Xcel Energy Board of Directors to proceed with the sale of these assets, and the company is expected to gain regulatory approvals within the next nine months. LP&L will be seeking approval from the LP&L Electric Utility Board and the Lubbock City Council.

“This decision was made in the best interest of the citizens of Lubbock as well as in the best interest of dozens of Texas and New Mexico communities where Xcel Energy will remain the sole retail provider. This will not be an immediate change, and we will do everything we can to make this transition as smooth as possible for our customers,” Eves said.

LP&L and the City were advised by RBC Capital Markets with respect to financial matters, R.W. Beck with respect to operational matters and Vinson & Elkins with respect to legal matters.

Customers with questions regarding their service are encouraged to contact their current electricity provider.
***

Xcel Energy (NYSE: XEL) is a major U.S. electricity and natural gas company with regulated operations in eight Western and Midwestern states. Xcel Energy provides a comprehensive portfolio of energy-related products and services to 3.4 million electricity customers and 1.9 million natural gas customers through its regulated operating companies. Company headquarters are located in Minneapolis, with Amarillo serving as the headquarters for Xcel Energy’s regional operating company, Southwestern Public Service Company. More information is available at www.xcelenergy.com .

Lubbock Power and Light (LP&L) is the municipally owned electric utility of the City of Lubbock. LP&L provides electric service to over 70% of the electric market in Lubbock Texas and offers consolidated billing for City of Lubbock Utilities. LP&L has provided the lowest electric rates and most reliable electricity in Lubbock for more than 90 years. For more information, visit www.lpandl.com.