Tuesday, September 24, 2013 - Give Me Energy

Give Me Energy

by Sinclair Noe

DOW – 66 = 15,334
SPX – 4 = 1697
NAS + 2 = 3768
10 YR YLD - .05 = 2.65%
OIL - .30 = 103.29
GOLD + .80 = 1324.10
SILV + .10 = 21.84

The big unknown this week is the possibility of a government shutdown Sunday night. A few moments on that and then I'll get to my main topic here, which deals with energy. The shutdown could happen; with Congress, anything could happen. I've been trying to figure out the likelihood, and I don't think it is likely, although it could still happen. Of course the battle is over defunding Obamacare. And I remember the old rules for how a bill becomes law, and the checks and balances of our democratic republic.

The Affordable Care Act was duly enacted by a majority of both houses of Congress, signed into law by the President, and even upheld by the Supreme Court. The Constitution of the United States does not allow a majority of the House of Representatives to repeal the law of the land by defunding it. If that were the case, no law is safe. A majority of the House could get rid of unemployment insurance, federal aid to education, Social Security, Medicare, or any other law they didn't like merely by deciding not to fund them. If that were the case, then you could control everything in government with a simple majority in the House of Representatives; it would render every other branch of government superfluous.

There is a process for repealing a law; both houses enact a bill that repeals the old law, which must then be signed by the President. In the event of a presidential veto, the new bill can become law by over-riding the veto with a two-thirds vote of the House and Senate.

That's not going to happen, and so all the talk about a government shutdown is moving on a wrong path, and technically there should be no shutdown. We could still have a shutdown, but it's unlikely, or at least it would have to happen in a manner not yet laid out.

The Clinton Global Initiative is holding its annual meeting in New York this week. With demand for everything from food and water to rare earth minerals expected to continue to rise, companies and governments are increasingly undertaking a variety of efforts to develop a more sustainable supply chain, one of the topics highlighted at this week's meeting. Corporate leaders give themselves a lousy grade on their efforts to develop sustainable supplies of natural resources strained by a growing global population and a rapidly expanding middle class of consumers.

A recent survey conducted for the UN Global Compact found that more than two-thirds of CEOs of global corporations surveyed do not believe we are on track to meet the demands of a growing population. There are plenty of excuses for short-term complacency but looming in the not-so-distant future is resource scarcity, as in no water; no energy. Important stuff. Big challenges, and what many people overlook is even bigger opportunities.

There are 3,200 utilities that make up the US electrical grid, the largest machine in the world. These power companies sell $400 billion worth of electricity a year, mostly derived from burning fossil fuels in centralized stations and distributed over 2.7 million miles of power lines. Regulators set rates; utilities get guaranteed returns; investors get sure-thing dividends. It’s a model that hasn’t changed much since Thomas Edison invented the light bulb. And it’s doomed to obsolescence.

What’s afoot is a confluence of green energy and computer technology, deregulation, cheap natural gas, and political pressure that poses a mortal threat to the existing utility system. Just as 30 years ago, almost nobody had cell phones – just a few, big brick-like devices; today the cell phone has supplanted the land lines in most US homes. Likewise, the grid will become increasingly irrelevant as customers move toward decentralized homegrown green energy. Rooftop solar, in particular, is turning tens of thousands of businesses and households into power producers. Such distributed generation, to use the industry’s term for power produced outside the grid, is certain to grow.

Some utilities will get trapped in an economic death spiral as distributed generation eats into their regulated revenue stream and forces them to raise rates, thereby driving more customers off the grid. Some customers, particularly in the sunny West and high-cost Northeast, already realize that they don’t need the power industry at all.

A report issued earlier this year by the Edison Electric Institute (EEI), the utilities trade group, warned members that distributed generation and companion factors have essentially put them in the same position as airlines and the telecommunications industry in the late 1970s. “U.S. carriers that were in existence prior to deregulation in 1978 faced bankruptcy,” the report states. “The telecommunication businesses of 1978, meanwhile, are not recognizable today.”

Worldwide revenue from installation of solar power systems will climb to $112 billion a year in 2018, a rise of 44 percent, taking sales away from utilities, according to analysts at Navigant Research, which tracks worldwide clean-energy trends. A July report by Navigant says that by the end of 2020, solar photovoltaic-produced power will be competitive with retail electricity prices—without subsidies—“in a significant portion of the world.” Green-thinking communities such as San Francisco and Boulder, Colo., are starting to bypass local utility monopolies to buy an increasing portion of power from third-party solar and wind providers. Chicago recently doubled the amount of power it buys from downstate wind farms.

The solar and distributed generation push is being speeded up by a parallel revolution in microgrids. Those are computer-controlled systems that let consumers and corporate customers do on a small scale what only a Consolidated Edison or Pacific Gas & Electric could do before: seamlessly manage disparate power sources without interruption. Microgrids have long been used to manage emergency backup power systems. A 26-megawatt microgrid completed in 2011 kept the power on at the US Food and Drug Administration’s White Oak research center in the aftermath of Hurricane Sandy last year. It also saves the federal government an estimated $11 million a year in electricity costs. The microgrid’s ultimate potential, however, is in turning every person, company, or institution with a renewable energy power system into a self-sustaining utility. Imagine your house switching from power it generates itself to power from the grid the way a hybrid car switches from battery power to gasoline.

Businesses are adopting solar and smart microgrids at an escalating rate to beat rising power costs and burnish their green cred. Verizon is investing $100 million in solar and fuel-cell projects that will directly supply 19 offices and data centers in three states. Wal-Mart, with 4,522 locations in the US, expects to have 1,000 solar-powered stores by 2020. MGM Resorts International’s Mandalay Bay resort convention center in Las Vegas hired NRG to install a 6.2-megawatt solar system—enough to meet as much as 20 percent of Mandalay Bay’s demand. Wal-Mart US President Bill Simon extolled the virtues of the company’s solar program in March when he told an analyst at an investor meeting that solar was often cheaper than grid power. Besides, Wal-Mart has a lot of roofs.

The grid continues to shrink—US power use actually peaked in 2007—as distributed generation captures an increasing share from utility-generated power. There won’t be much need for new large-scale transmission lines after that, except perhaps to gather and distribute power from remote wind farms. 

There will always be a need for utilities to provide what’s called the “base load”—the minimum amount of power to keep essential services running—but no need for as many utilities as there are now. Most coal- and oil-fired plants are destined for extinction. Natural gas is already wiping out coal, and it’s going to wipe out most nuclear. This is going to set off the scramble for market among existing utilities that the EEI report anticipates. There’s going to be a strong fight to preserve share.

The utility industry is big, powerful, and well connected, and it won't just roll over. The big complaint from the utilities is about subsidies. Somebody has to keep the wires intact for solar users to send electricity back into the grid. In other words, people who don’t want or can’t afford to install solar are paying for those who do. And that ends up shifting a lot of the costs of maintaining the system to those who do not have means.

The quick growth of solar has surprised many, and the subsidy arguments aren’t necessarily unreasonable, but the tide has turned. And the direct generation model now exists and with technological advancements, we won't just be talking about solar in a few years; soon, we'll see major new breakthroughs. Utilities hold their own fate in their hands. They can do nothing but complain or moan about technological change or they can try to adapt.

Renewable energy has distinct advantages over the fossil fuel energy. You don’t need large amounts of capital to build it, you don’t need to produce it all in one place and use high-voltage transmission lines to transport it somewhere else. The idea that we would continue to have a centralized form of ownership and control of that system is really inconsistent with what the technology enables. The parity of unsubsidized solar and conventional electricity is soon going to change the energy dynamic; it is inevitable, and the only question is timing. The technology and energy sectors will no longer simply be one another’s suppliers and customers; they will be competing directly. For the technology sector, the first rule is: Costs always go down. For the energy sector and for all extractive industries, costs almost always go up. Given those trajectories, the coming tussle between sustainable, renewable, direct generation energy and conventional energy is not going to be a fair fight.

Now back to familiar territory. Bank of America heads to trial this week over allegations its Countrywide unit approved deficient home loans in a process called "Hustle," defrauding Fannie Mae and Freddie Mac, the government enterprises that underwrite mortgages.

This would be the government's first financial crisis case to go to trial against a major bank over defective mortgages, barring a last-minute settlement.

The Justice Department filed the civil lawsuit in 2012, blaming the bank for more than $1 billion in losses to Fannie Mae and Freddie Mac, which bought mortgages that later defaulted. Since then, new evidence and pre-trial rulings by US District Judge Jed Rakoff have pared the case back. Bank of America has said the lawsuit's claims are "simply false".

The government lawsuit stems from a whistleblower case brought by former Countrywide Financial executive Edward O'Donnell. It centers on a program called the "High Speed Swim Lane" - also called "HSSL" or "Hustle" - that government lawyers say Countrywide initiated in 2007 as mortgage delinquency and default rates began to rise and Fannie and Freddie tightened underwriting guidelines. Countrywide pushed to streamline its loan origination business through the program, eliminating loan quality checkpoints and paying employees based only on the volume of loans they produced, according to the lawsuit.

The Justice Department say the Hustle resulted in "rampant instances of fraud and other serious loan defects," in the mortgages sold to Fannie and Freddie, despite assurances Countrywide had tightened underwriting guidelines.

Fannie and Freddie's estimated "gross loss" on loans in the Countrywide program was $848 million, according to court papers. The "net loss" - the loss caused by the portion of loans the Justice Department says were materially defective - was $131 million. While the jury will determine if the bank is liable, any penalty would be up to Rakoff, a judge well-known for his rulings in financial crisis cases.

In 2010, Rakoff rejected a $33 million settlement between Bank of America and the SEC over claims it did not properly disclose employee bonuses and financial losses at Merrill Lynch, which it acquired at the end of 2008.

The bank ultimately agreed to a renewed settlement paying $150 million in an accord Rakoff "reluctantly" approved. In November 2011, he rejected a $285 million settlement between the SEC and Citigroup, challenging the long-standing practice of settlements without admissions of wrongdoing.

Meanwhile, a US credit union regulator has sued 13 banks over alleged manipulation of LIBOR, claiming credit unions lost millions of dollars in interest income as a result of rate-rigging.

LIBOR, which stands for the London Interbank Offered Rate, is the benchmark interest rate for trillions of dollars of credit cards, mortgages, student loans, variable interest-rate notes and other lending products. The banks are accused of artificially manipulating LIBOR between 2005 and 2010 by falsely reporting the interest rates at which they were able to borrow. A couple of banks have already settled with some regulators; you know, without admitting wrongdoing.

The complaint, filed in US District Court in Kansas, says the credit unions held tens of billions in investments and other assets that paid interest streams pegged to LIBOR. The lawsuit says that as a direct result of the conspiracy, which violated state and federal anti-trust laws, the credit unions received less in interest income than they were otherwise entitled to receive.

The National Credit Union Administration brought the lawsuit against JPMorgan Chase, Credit Suisse Group, UBS and 10 other international banks on behalf of five failed credit unions. For JPMorgan, this is just part of an ongoing and seemingly endless stream of lawsuits.

Why are we not surprised that nothing has been done to break up the too-big-to-fail banks, the biggest now being Dimon's? Don't be fooled by the occasional fines; the banks have used the interest-free money to grow ever larger and more unaccountable in their behavior.

Even last week's nearly $1 billion SEC settlement over the London Whale trading debacle, while mentioning the despicable behavior of JPMorgan's chief executive, fails to utter Dimon's name, and the whole issue of misinforming investors and the public is conspicuously absent from the SEC findings and settlement.

After the SEC condemnation of JPMorgan's "egregious breakdowns in controls" and conclusion that "senior management broke a cardinal rule of corporate management" to honestly inform the board of directors, Dimon promised to beef up the compliance department. This was just the sort of commitment Dimon made in 2006 when he hired Stephen M. Cutler, who had been head of the SEC Division of Enforcement, to be JPMorgan's general counsel. Yes, the same Stephen Cutler who was in charge of legal and compliance activities worldwide at the time of the London Whale fiasco.