What do Willie Nelson, An evangelical with poor grammar in Wichita, a sustainable-everything store in Austin, and a pump and drilling supply company in Golden CO have in common? Read the rest of this entry »
Archive for November, 2006
In today’s issue of Peak Oil Review, I wrote a commentary on how to use the financial markets to hedge your peak oil risks. These risks include not only the cost of energy, but possible job or income losses due to a slowing economy. I include some discussion of securities which pay dividends based on income from renewable energy, or may do so in the future.
Peak oil is key to my belief that investing in renewable energy and energy efficiency companies is not only the right thing for the planet, but also the right thing for your pocketbook. Peak Oil Review is an excellent source for staying up with events and commentary related to peak oil. It’s on my weekly reading list.
You can read my entire commentary here (pages 4-5.)
UPDATE: Jan 2009: Here’s a more recent look at the (now 13) available green energy exchange traded funds
In January, index investors will have a second Clean Energy Index fund to chose from. First Trust Advisors L.P. has licensed the NASDAQ Clean Edge U.S. Liquid Series Index, for clean-energy investors, in order to launch a new exchange traded fund (ETF). (See full article on Renewable Energy Access.)
The new ETF will trade on NASDAQ as CELS, and joins the Powershares Wilderhill Clean Energy Portfolio,which trades on AMEX as PBW, and was launched in March of 2005, as well as Powershares’ recent launches of PowerShares Cleantech Portfolio (PZD) and PowerShares Progressive Energy Portfolio (PUW), and Market Vectors Environmental Services ETF (EVX).
With so many new “Green” ETFs popping up, Richard Kang rightly asks “At what point do we have so many ETF offerings that we call this an “ETF bubble”?” on SeekingAlpha. I agree with him that we’re not there yet
For investors interested in clean energy, who do not have the time or expertise to pick stocks in the field, the question is which ETF to use, or should we use a little of each for diversification?
Criteria to consider are:
- Expense ratio.
- Index composition.
- Index weighting.
- Availability and liquidity of exchange traded options.
The ETF structure provides assurance that all are liquid; that is an investor can be reasonably assured of getting near the market price even for very large orders.
His speech was widely reported in the press because he called for national regulation of greenhouse gas emissions. The AP story emphasized Kelly’s shift from being an environmental skeptic to calling for national Carbon emissions regulation. This is a big shift, and a giant step for a utility, but Kelly is not so much of an environmental advocate as he might sound.
I had a short conversation with him before dinner. After we introduced ourselves, I told him I’d been making his life harder recently at the Colorado PUC. Like anyone who’s been successful in business, he didn’t miss a beat, and told me that it was great, and the more people’s input we had, the better.
He said that Xcel had been opposed to Amendment 37 because of the cost of the solar set-aside, a position I’m actually sympathetic with. After all, is it better to have 1 MW of solar photovoltaics on people’s roofs, or 20 MW of Wind? When you look at the subsidies needed to get people to install PV (which is an Amendment 37 requirement), we could probably get 20x as much wind energy onto the grid for the same cost. It’s not that wind cost 1/20 as much as solar, but since the price of electricity from wind is comparable to the price of coal, it does not take much to get a lot of wind, while solar needs to be heavily subsidized.
What I really would have liked in A37 was an allocation for Demand Side Management (DSM) and energy efficiency. If the same incentives could have gotten us 20 MW of wind or 1 MW of solar, it could also have gotten us 40 MW of DSM and energy efficiency. (none of these numbers are precise… it’s hard to tell what an incentive will accomplish until it is implemented, but we do know that DSM is cheaper than wind is cheaper than solar.) But energy efficiency was not on the table when A37 was being written… polling data said that adding “energy efficiency” to the bill dropped popular support by so much that we couldn’t have gotten it passed.
Dick Kelley also told me that Comanche 3 (a new 750 MW coal plant) would be the last conventional coal plant that Xcel would build. I told him Comanche 3 would be fine with me, if they’d just shut down Comanche 1 and 2 (a couple old, less efficient plants at the same site.) That was an option that’s clearly off the table, but he did say Xcel needed to find a way to clean up the emissions of those plants. I suggested wood chips, like Aquila is doing at their Clark Generating Station in Canon City. By co-firing wood and pine needles from necessary forest thinning, Aquila is able to reduce net CO2 emissions, as wel as NOx, SOx, and Mercury.
I mentioned the option of hybridizing concentrating solar thermal power (CSP) with existing coal plants. He didn’t really understand the concept, and thought I was talking about photovoltaics. I’m not sure I was able to explain myself well. Put simply, when heat is available from the sun, it can be used to displace heat from coal (or natural gas) in an existing generator.
Kelly also said he’d like to raise wind to 20-25% of generation, but after that they’d have to see what the effect on reliability of the grid would be. I brought up the idea of Pumped hydro or CAES. He didn’t seem familiar with the fact that Colorado’s Big Thompson Project could be adapted for pumped hydro fairly easily. As he said, new big hydro is not going to happen. Which is all the more reason for adapting out existing reservoirs for energy storage with pumped hydro.
I was encouraged that he has recognized that Carbon Emissions are a massive problem, and that the utilites, who are the biggest emitters of carbon, are going to have a big part in the solution, but discouraged that he knew so little about several pieces of the solution that have great potential to be quickly viable.
Xcel likes wind, but is not looking at new ways to increase how much they can put on their system… they’ll just go to 20-25% and see what happens. They’re pursuing IGCC (Internal Gasification Combined Cycle a.ka. “Clean Coal”) with carbon sequestration in a pilot plant, which many environmentalists feel is just a distraction from renewable energy, pointing out that no one has ever done any sort of sequestration on a large scale. To me, that is an argument for IGCC with Carbon Sequestration, on a small scale: let’s give it a try and see if we can make it work or not.
IGCC is a lot better than one of the other ideas that Kelly brought up in his speech: he thinks that part of the solution will be nuclear power. Nuclear power is indeed carbon neutral, but it requires diminishing uranium supplies, or the use of breeder reactors which make plutonium, an element which is not only extrememly toxic, but also an excellent material for making nuclear bombs. We still haven’t figured out what we’re going to do with the waste from our existing reactors… until we do that, I think it’s crazy to look into building more. And considering the real threat of terrorism, a nuclear reactor or wastepile makes a much better target than a solar array or wind farm.
When it comes to Kelly’s call for national regulation of carbon emissions, it’s a great step in the right direction, but it was a far cry from calling for a carbon tax (which economists think would be the most effective method of carbon regulation.) Kelly knows global warming is real, and he knows that our politicians are going to do something about it. By calling for national mandatory regualtion (but not a tax) he’s trying to shape the debate to come out in a way that Xcel will find easier to deal with.
With a little more education about alternatives such as CSP, and ways to make the grid able to accept more intermentent resources (Time of use pricing, DSM, and energy storage), he may come to realize that Xcel has lots of ways to live in a carbon taxed or carbon limited world. And he seems willing to listen; so if you get his ear for five minutes, try to make the most of it.
I’ve been reading Russell’s Dow Theory Letters since 1990. When I spoke of Jim Cramer, I concluded that he represented the triumph of intelligence over wisdom. Russell’s strength is his wisdom, his depth of experience, and his instincts.
Russell has a long history of great market calls, calling the major market turns since the 1960s. I wasn’t even born when he first started writing the Dow Theory Letters, but since I began reading them around 1990, he was skeptical about the late 1990’s stock market boom beginning in around 1997, was advising his subscribers to be cautious for the entire period 1997 through 2000. In late 1999, he called the bull market top, advising all his subscribers to get out of the market.
In 2002, he became excited about gold, soon after the gold price started heading up. I was initially skeptical, because he is a long term gold bug, and constantly harps about hoe the Federal Reserve Board is devaluing the dollar (He condescendingly calls former Fed Chairman Alan Greenspan, “Greenie”), and had gotten me interested in gold for a short time in 1996… I got cold feet after about six months at a small profit, but his predictions of a new gold bull market at the time proved to be illusory. However, in 2003, a combination of his constant harping on gold, combined with my own growing conviction that the world was becoming (and still is) a more uncertain and unstable place, led me to finally follow his advice after gold had climbed from $220 to the mid $300’s. Considering that it is now over $600, I certainly don’t regret following that advice, any more than I regret being out of stocks (partly due to him) in 2000, and getting heavily into foreign bonds in 2001. While none of these have been one way tickets, they have all produced excellent long term returns.
Russell is often hard to pin down to one particular opinion about the market, so attributing any particular “call” to his can sometimes be a stretch (however, he does come out and say “This is it!” as he did at the bull market top in November 1999… but calls like this are few and far between. Since I started reading him in 1990, the 1999 bull market top and the start of the gold bull market in 2002 were the only definitive calls I remember.) Most of the time he rambles about how the market looks like it might do one thing, but on the other hand, something else might happen. For instance, he’s been worried about the housing market for years, but even though it now looks like that bubble is popping (or deflating gently, according to the optimists), he never “called” the top. Admittedly, given the lack of good data for the US housing market, I don’t know how anyone could make that call definitively, even in hindsight. With hindsight, all we can definitively say is that it happened sometime probably early in 2006, and the precise time depends on your particular housing market.
Russell shares his insight, but if he isn’t certain about something, he’ll hedge until he may not have said anything at all. For instance, on 11/9/06 he worries about the Dow Jones Transports’ failure to “confirm” (follow to the upside) the Dow Jones Industrials to two successive new highs. “Either the Industrials will pull the Transports higher to a new record high — or the Transports will pull the Industrials and rest of the market down.” If you think about that too much, you’ll realize that he has not said anything. But then he goes on to say: “My experience tells me that the Transports will have their way. In such situations, the Average that refuses to confirm is usually the winner.” So he feels that these recent record highs for the Dow won’t last… but he’s not willing to stick his neck out.
I respect Russell for his unwillingness to make definitive predictions. As he says, the market is smarter than any of us. Forecasting the stock market is an art, not a science, and anyone who makes precise, definitive predictions is going to be definitively wrong—a lot. Russell knows this, and knowing his limitations, he gives us a more accurate picture of the market.
I met Russell (and his wife Faye) in 2003 at a hedge fund conference in
San Diego, which is a rare treat, since he never travels. I most likely would not have attended the conference at all if it had not been for the fact he was attending. In person, he does not strike a personally impressive figure, and compared to some of the extremely insightful other analysts on hand, in particular Martin Barnes of Bank Credit Analyst, who struck me at the smartest man in a large room of highly intelligent men (yes, they were practically all men.)
At the time, Martin was short-term optimistic for the stock market at the time, and his arguments were penetrating and insightful. In hindsight, Martin was also right on the money. Russell, however, maintained his long-term bearish stance, which he has held since late 1999. I recall Martin challenging him, asking “What would it take to get you to change your opinion?”
Russell, in response said, “I base my opinion on human nature, and I’ll change it when human nature changes.” What Russell meant by that are that long-term secular market cycles arise from a fact of human nature: We cycle from periods of extreme optimism to extreme pessimism and back over periods of several decades. Now, we are moving away extreme optimism, which peaked in 2000, and we have a while to go before extreme pessimism is fully here.
I think both Russell and Barnes were right that day in April of 2003. We saw the stock market have a very good year in 2003, just as Barnes predicated, but Richard Russell does not tend to focus on short term movements of the market (He talks about them endlessly, in terms of what they might mean, but I’ve never heard him make a definitive prediction.) We may not know if Russell was (and is) right or not for another five to ten years. If extreme euphoria emerges again, without a period of extreme pessimism in between, then we will be able to say he was wrong. If, on the other hand, we see what he calls “Great Values” (P/Es below 10, 5+% dividend yields, and extreme pessimism) before we again see euphoria, we’ll know he was right.
It may be a long wait, but investing is not for the impatient. There are smarter guys than Russell, and he can’t pick a stock out of a paper bag, but if you’re looking for a great feel for the long term trends of the market, I don’t know anyone who is better.
I’ve noticed I’ve been getting a lot of hits from search engines looking for information about stocks they’ve gotten spam stock tips on, so as a public service, I’m publishing a list of stocks that I’ve gotten tips to buy from spammers recently.
Do not buy any of these stocks because you got an email saying to they’re about to go to the moon, or making any sort of prediction of quick gains. Spamming stocks does work (for the spammers, not the buyers.) If you buy right after a “tip,” you’ll be rushing in with a whole bunch of other buyers at the same time, and pay too high a price. If you get a spam, research the company, and think you must buy a bit of the company, do yourself a big favor and wait a week or two for the spam-induced frenzy to die down. You’ll end up paying a good deal less, because when the promised gains do not materialize, many of the people who initially fell for it will sell, and drive the price down, often below where it might have been without the initial spamming.
These may be great companies, and they may be dogs, but right after you get a spam is always the wrong time to buy.
Companies about which I have received spams:
Received from 10/16 to 11/11 EGLY; FCTOA; GSNH; EQTD; MXXR; TXHE; GDKI
Received from 11/12 to 12/14 HTLJ; VSUS; AGHG; USBO; FPMC
12/14-12/17 DIAAF;VGYI; FPMC.pk; USBO
12/17-12/24 FPMC.pk; SORD; DKGR; TTEN; and (an encore from early November) GDKI.
12/25/06-1/8/07 GCME, VMCI, LITL
1/8/7 to 1/13/7 CBFE
2/22/07: Things seem to be slowing down, but I got a blizzard of “tips” for PHYA.PK yesterday and today.
A few months ago, I wrote a blog comparing the number of negawatts you could produce by giving away Compact fluorescent Light bulbs (CFLs) to the amount of electricity you can produce with a rooftop photovoltaic system. The CFLs had photovoltaics beat six ways from Sunday, and I concluded that you could do better by putting the money you were considering investing in a PV system in a Bank CD, and using the interest to give away CFLs. Since I actually believe my own calculations, I set out to do just that.
I offered a $2 a bulb rebate (up to $5) for anyone who bought CFLs and sent me a receipt. Apparently, $5 is not enough money to get most people off the couch, and I did not get a single receipt sent to me (the offer is still on, by the way.) However, I also give away CFLs (usually something interesting like an outdoor spot or a candelabra bulb… most of my prospects have already replaced everything they can with the twisty type) to potential clients who come by my office, and the blog started making the rounds of the internet, eventually making it to Marc Dreyfors, who is on the board of the Environmental Educators of North Carolina (EENC). EENC was planning their annual conference, and they usually offset the carbon from their conference by giving away CFLs, and Marc had the bright idea of asking me to fund it.
They calculated (with the help of Clean Air Community Trust) of
Asheville, that they needed to replace 51 60-watt incandescents with CFLs to offset the 16.7 tons of Carbon their conference was expected to produce. My thought was: “we need to think bigger than that!” because I wanted to offset some of my own carbon as well. They were fine with that, they just didn’t want to be greedy.
In the end, I funded the replacement of 320 60-watt bulbs (with 11w CFLs) and 80 100-watt bulbs (with 25w CFLs). After the tax deduction, that cost me about $600, and EENC was able to use my grant to persuade Progress Energy (their local utility) to stump up a $500 donation to expand the program further.
I arbitrarily decided that EENC would get half the carbon offsets from my donation for their work, and I’d get the other half for coming up with the cash. Assuming the bulbs we gave away are used just 1 hour a day, that means that all my CFL giveaways are saving someone over 12 kWh of electricity each and every day, which is more than my wife and I use. With the help of a programmer-friend, I’m tracking the progress on my website. (on the right hand side.) Note that the offsets cost only about half a cent per kWh over the lifetime of the bulbs, about a third of the cost of buying green tags from someone like Sterling Planet. If I tried to produce 12kWh a day with a PV system here in Colorado, it would cost about $12,000 after all the rebates, and I’d save about $170 a year on my electricity bill.
Now I just have to do the calculations to figure out how many bulbs I need to give away to offset my use of natural gas, gasoline for my wife’s Prius, and biodiesel for my Jeep.
I wrote a blog a couple months back talking about how environmentalists should avoid lumping all ethanol together as “bad” renewable energy because the Energy Return on Energy Investment (EROEI) is very low. First of all, new ethanol plants being built today do have a net energy gain on a well-to-wheels basis (the critics are using decade old data), and so long as the energy inputs come from renewable sources, ethanol looks like a decent way to turn other forms of renewable heat energy into something we can put into our tank and drive around with.
E3 Biofuels is doing just that with a 25 million gallon “closed loop” ethanol plant in Mead Nebraska. The distiller’s grain byproduct of the ethanol production is fed to cattle at an adjacent feedlot. This saves energy by avoiding having to dry the grain and transport it to where the cattle are. The manure from the feedlot is passed into an anaerobic digester which not only produces 100% of the energy necessary for the ethanol distillation process in the form of methane, but it also helps solve the nasty environmental problems caused by the massive supply of manure feedlots produce. It was runoff from cattle manure that caused the problems with our spinach supply recently.
Other benefits are that by running the manure through the digester, odor is reduced, and methane from the manure decomposition does not escape into the atmosphere. Methane is a much more potent greenhouse gas than is CO2.
If you believe the promoters that “This plant will make ethanol more than twice as energy-efficient as any other method of producing ethanol or gasoline,” I estimate that the well-to-wheels EROEI is between 2 and 4 (probably closer to 2.) It’s not the great EROEI’s we get from Wind and geothermal, but it’s a liquid fuel we can use in our existing vehicle fleet (either as E85 in Flex-Fuel vehicles, or as E10 or E20 in standard gasoline engines.)
Without liquid fuel, we’re in great danger of economic disruption due to peak oil, but unless we get that liquid fuel in a manner less carbon intensive than conventional corn ethanol, we’ll be up to our ears in melted icecaps.
Obviously, what we really need is much more energy-efficient cellulosic ethanol which does not compete with our food supply for feedstock, and it will be great if that process is powered by renewable heat (methane form digesters, or solar thermal) but given that we’re unlikely to stop eating beef anytime soon, this is an elegant, closed process.
I just testified on Friday in the Colorado Public Utilities Commission rate case for Xcel Energy. The case has been going on since April, and is in its last stages. I only recently got involved (Who pays attention to rate case hearings, anyway?)
To be clear, a rate case is not a Least Cost Planning (LCP) process, which is when the regulators decide if the utilities plans to meet future needs of consumers are prudent. That is, when they decide what sort of generation they need. This is somewhat relevant because much of the opposition to this rate case is really opposition to the new coal plant being built by Xcel in
Pueblo, Comanche 3.
Given the reality of global warming (which many people are just now starting to realize is a real and immanent threat), the fact that coal is our most carbon-intensive fossil fuel (not to mention all the other emissions associated with coal), and the fact that the planned life of a coal plant is 50 years, the opposition is understandable. Unfortunately, this rate case is not the proper forum to oppose construction of new generation.
A rate case, is about how Xcel is allowed to charge for their electricity, and how much they are allowed to charge. When it comes to how much they are allowed to charge, this is determined by setting an allowable Return on Equity (ROE) for shareholders, as well as a Debt/Equity mix. Because debt is cheaper for a company to raise, a higher ratio of debt to equity will be cheaper for ratepayers, but the more debt to equity there is, the less stable a company will be, and the higher return both debt holders and equity holders will demand in order to take the risk of owning the debt or stock.
I made three basic arguments.
- In order to avoid perverse incentives, it is best that in any situation, the parties should share risk in proportion to their ability to take action to reduce that risk.
- The return on equity allowed under the settlement agreement was higher than is necessary to induce shareholders to own the stock under current market conditions,
- The rate mechanism, as envisioned in the settlement, contained several perverse incentives which would lead to behavior by Xcel that will likely place costs on ratepayers which would likely be prudently avoided if Xcel has an incentive to do so.
The first point about perverse incentives is important mainly for future planning. If Xcel bears the risk that costs will exceed their projections, they will be much more conservative about their cost projections. In this case, that means that cost projections will be higher, and take more of the unpredictability of fuel costs into account. In addition, holding Xcel accountable for unexpected environmental costs will lead them to be much more conservative about their assessments of future environmental costs. This better information both of these effects will lead renewables to be seen in future least cost planning cases much more favorably, because many have zero fuel cost (and hence zero fuel cost risk), while their lower environmental impacts will lead to lower future environmental costs.
Energy efficiency measures, demand side management, time of use pricing, and investments in large scale energy storage, all of which lower fuel costs by reducing or shifting fuel use will also be more likely to be pursued by a company that bears modeling risks, because these measures all reduce risk by reducing fuel use or shifting it to lower cost times.
Widespread adoption of demand side management, time of use pricing, and energy storage also all favor intermittent renewables such as wind and solar by shifting usage to times when these resources are available.
Basically, energy efficiency and renewables are excellent way of addressing both the price and environmental risks that are currently borne by ratepayers for utilities. Shifting some of these risks to the utility will lead the utility to take more proactive action to address these risks, both through renewables and through other mechanisms we may not yet have thought of. That is the beauty of incentives rather than mandates: they inspire creative thinking, and usually come up with cheaper and more effective solutions to the same problem.
I’d like to be clear here that I don’t think that Xcel is the problem; I see Xcel as the solution. What I hope to accomplish is to provide carrots and sticks will induce Xcel to be much more responsive to environmental and energy cost concerns. With those properly designed incentives, I expect that Xcel will be able to accomplish more than many environmentalists could ever hope to win in mandates. And Xcel shareholders should be well compensated for the risks of these investments; I want them to be able to do well by doing good. My second point, that the return on equity (ROE) allowed under the settlement agreement hinges on weaknesses on the various methods of calculating appropriate ROE. ROE is the compensation that shareholders demand and are entitled to for taking on the risks involved in operating a public utility. These calculations are inherently tricky: the formulae are fairly simple, but actually getting good numbers to put into the calculations can be very tricky. The essence of the problem is that financial markets, and the formulas are all forward looking. To really know what ROE is appropriate, we would have to know about future growth and risks of the company. This information is unknowable, and in practice, the calculations are based on past information, and stock prices.
There were three calculation methods used, two of which depend on estimating the risk premium (Risk premium and Capital Asset Pricing model or CAPM) that shareholders demand in order to hold the stock, and the other (Discounted Cash Flow model, or DCF) of which depends on analyst predictions of future growth rates. The Risk premium and CAPM use historical market data to derive those risk premiums, and the results of those calculations from those methods led to almost uniformly higher estimates of ROE than the DCF method. I believe this is because the markets are currently demanding much lower risk premiums than they have in recent years. These lower risk premiums are partly a function of the market run-up since 2002, and partly a function of the run-up of the late 1990s, which, in my opinion and in the opinion of many other market analysts whom I respect. I bring up Alan Greenspan, the former fed chairman in my testimony, but I also include Richard Russell, Nouriel Roubini, Pimco’s Bill Gross, and Yale’s Robert J. Shiller in that. I chose Alan Greenspan because he has the most kudos and is most likely a recognizable name. I note that when Xcel’s witnesses were trying to trash my testimony, they convieniently chose not to mention Greenspan.
However, if I’d been able to travel a week into the future, I would have probably tried to include Bill Gross’ November Investment Outlook column in my testimony as an exhibit. As allways, Bill leaves me in awe with his depth of research and clear reasoning.
The DCF method is also flawed in its reliance on analyst estimates, since analysts can easily be caught up in the market mood as well, but they are often a much more sober lot, and so based my recommended ROE on the low range of the DCF calculations of other analysts. If you look at the confidence index graphs at the International Centerfor finance at Yale, you will note that institutional and individual confidence tend to follow the same long term ternds.
Finally, in reference to the perverse incentives in the Electric Commodity Adjustment (ECA) primarily concern two parts of the ECA: the Baseload Energy Benefit (BLEB) and time of use (TOU) pricing.
With regard to the BLEB, this is an incentive for Xcel to keep their coal plants running as much as possible, under the assumption that coal is the cheapest form of electricity generation that is dispatchable (i.e. that they can turn on and off at will.) I have serious problems with a lot of the assumptions that go into the BLEB. I had problems with the form of the equation they used, given that it was based on annual average prices for natural gas, as opposed to real time prices, but that was a minor point compared to the things which the BLEB left out. Carbon Intensity of various fossil fuels, lb Carbon/MBtu.
The BLEB left out of the costs of coal all the environmental costs of its use, thereby giving coal a great incentive than it deserves. Also, only natural gas an coal were had reference at al. Xcel’s explanation of this is that only gas and coal are dipatchable, yet part of what they say the BLEB is designed to encourage is improved maintenance of their coal plants to ensure that they are always available. All forms of generation can benefit from improved maintenance. Using their logic that the form or generation with the cheapest fuel cost should be incentified, there should clearly be strong incentives for improved maintenance of renewable resources such as wind and solar. Finally, while wind and solar power are not now dispatchable, with the addition of energy storage such as pumped hydro or CAES, they can be made dispachable. Incentives for coal will only delay investments which improved the dispatchability of other forms of generation.
Xcel did me the honor of spending several hours of the hearing trying, with various degrees of success, to tear apart my arguments. I almost didn’t get any chance at all, but Ratepayers United Colorado’s attorney Gina Hardin managed to get me about 5 minutes to respond to multiple comments from several other witnesses. Thank you, Gina!
Here is my take on what they had to say (from my notes.) Frederic Stoffel – Testifying in his former capacity as VP Energy Policy development for Xcel. Stoffel totally misinterpreted my testimony, by saying that he felt that I wanted Xcel to take on all environmental risks, and the price risk of any deviation from projections. Note that while this blog makes it clear, I’m not sure if he didn’t get it because I was unclear, or because he simply chose to misinterpret what I was saying to make it easier to defend against. I feel I managed to counter this argument effectively in my five minutes on the stand the next day.
I did not fare so well at the hands of George Tyson, Xcel VP and Treasurer. In my analysis of appropriate ROE, I glossed over a major salient point, saying Public Service of Colorado had a “high” bond rating from S&P. I had gotten this impression reading other testimony in the case, but in fact, PSCo’s senior unsecured debt rating is BBB-, one tiny notch over junk status. Oops! This makes a lot of my arguments about risk premiums irrelevant, because a debt downgrade (which might indeed follow if the commission were to assign my recommended ROE of 8.9%) would seriously impinge on PSCo’s ability to operatate, even if shareholders at the moment are not worried about such an event. (In fact, shareholders shouldn’t be worried about this case, because the realistic chances of this settlement being thrown out are nil. The main reason we were doing what we were doing is to demonstrate that there is real ratepayer unhappiness, so, when we have a more sympathetic PUC with one or two new appointments from Bill Ritter, who we hope and expect to win the election Tuesday – If you have not voted yet, do it! – then we can go back and appeal this.)
But Xcel did feel that they needed to counter what I had to say, since for both Tyson and Robert B. Hervert spent much more time attacking my testimony against the settlement than they did on any aspect of the settlement itself. Considering how little they said about the settlement agreement, I get the feeling that they probably would not have even taken the stand under other circumstances. Hervert is a CFA charterholder, and economic and financial consultant for Xcel. He took me to task for my conclusions about risk premiums. His points were basically that he sees no indication that investors are currently asking lower risk premiums, and that analysts are not being swept along with that sort of mood, either. I really can’t argue with that: it’s impossible to judge if valuations are currently high now because the current outlook really is good, or because people are too exuberant. All I can say is, “Time will tell.”
He also took more to task for saying that the VIX is at historically low levels. If you will note from the graph, it has currently only been this low once before (the index did not exist prior to 1990,) and, he noted that it is currently within “one standard deviation” of its mean. This is bad analysis, which I would not expect from a Charterholder, and it really gets me steamed because I wasn’t able to dissect his mistake fast enough to pass a good question to Gina Hardin to allow her to challenge it by crossing him.
(Skip this paragraph if math makes your eyes glaze.) Hervert’s mathematical sin is that the VIX does not conform even roughly to a normal (or even symmetrical) distribution, and so talking about “standard deviation” in reference to a lopsided distribution such as the VIX really is not relevant.
Anyway, I wish I’d had time to bring that point up in the few minutes I actually got on the stand. Not that anyone would have understood it, which is why I stuck to my main points about incentives and Stoffel’s misinterpretation of my testimony.
I really don’t care that much what ROE Xcel is authorized. I’m much more concerned about the incentives that they are given. With the right incentives, Xcel would stop trying to build coal plants and instead invest heavily in energy efficiency, demand side management, time of use pricing, energy storage, transmission, and renewable energy generation, and make a lot of money doing it. That’s what I would hope to come out of a rate case. Maybe under our next governor, we’ll get something like that.
So go vote Tuesday (even if you don’t live in Colorado.) It really does matter who wins even the small races. If you had the time to read through this multipage diatribe, surely you have enough time to make it to the polls.