While our politicians stimulate smart grid and renewable energy until we tingle, debate about global warming and dream up subsidies of every type to revolutionize the energy business for the future, a funny thing is happening in the energy industry right here at home. We are re-inventing the energy business the old fashioned way—-by just doing it!
Three things drive this renewal of America’s energy future:
- Advanced technology including horizontal drilling and other E&P solutions to improve productive capacity, performance and overall potential of oil, gas and power resources right here at home.
- Investment realities are driving major oil & gas firms and a score of smaller, faster, more nimble competitors to use technology to go after real opportunities instead of depending upon gigantic plays in distant places of questionable political reliability.
- Untapped domestic opportunities are proving to be just as powerful a source of growth as chasing illusive foreign investment. In a world economy turned upside down doing business close to home, in stable markets, under the rule of law, where economics matter is proving attractive.
The result is the spectacular growth in unconventional gas in the US which is not only turning global markets and would-be energy monopolists upside down, but dramatically improving America’s energy security, energy reliability and our economy.
Don’t believe me?
The US Energy information Agency reports that over the last three years the United States has surpassed Russia as the global leader in producing natural gas. This is driven entirely by the growth in production from shales using American developed horizontal drilling, hydraulic fracturing and other techniques to unlock oil and gas from previously uneconomic plays. All across America E&P companies are bring new supplies of natural gas and domestic oil to market.
More exploration and geological analysis suggests that the potential for unconventional gas is substantial—very substantial and wide spread. Only a few years ago growth in demand for natural gas was a big problem because that demand threatened to turn the US gas market from a domestic market into a global one creating the same dependence on imported liquefied natural gas to meet demand as we have for oil imports. This risk of energy imbalance represented one of America’s greatest strategic threats.
Today in a few short years, without major government intervention—except staying out of the way, our energy economy and energy future is dramatically different—for the better.
Now consider Europe by comparison.
Collaboration between Germany and Russia and acquiescence by the rest of the EU has quickly lead to a situation where Europe is increasingly dependent upon imported Russian natural gas to meet its winter heating and industrial requirements. So in 2006 when Russia shuts off gas to Ukraine in a pricing dispute after Ukraine objected to a 400% increase in prices, the impacts were felt across much of Europe and served as a wake up call.
Russia offered to buy virtually all the exportable gas from Libya, Europe’s only logical alternative to Russian gas and has opposed pipeline construction projects it does not control to serve EU markets.
EU has been working overtime to build renewable energy projects to reduce its energy dependence but it requires hundreds of projects and deep subsidies to make a significant difference in that dependence. In a recent story in the UK, Gazprom Chairman Alexander Medvedev said the UK should be more “pragmatic” saying it would be impossible to meet the UK’s greenhouse emission reduction targets of getting one-third of its electricity from renewables by 2020 without gas. Medvedev may be closer to right than most Europeans want to hear when he says it will be one-third the cost to meet emission reduction goals if the UK just replaces its dirty coal plants with new gas plants rather than wind energy.
So we have the perfect lab experiment at work and we can see what the empirical results will be. Already, the Europeans are hitting bumps in the road with the failure of their feed-in-tariff regimes in Spain and Germany causing substantial disruption of their solar PV markets. Wind production in the EU is moving ahead and the EU will be the global leader in offshore wind production if it achieves its targets. But will it be enough?
Expanding clean and renewable energy use to reduce greenhouse gas emissions is an important part of a responsible, sustainable energy future for every market. But a rapid transition from coal baseload is a daunting challenge and it has a very high cost. And important as environmental sustainability is to our energy future, it is not the only strategic interest that must be protected.
Equally important is energy security and the avoidance of energy extortion that has plagued customer relationships with Russia. It is not as if the EU does not know this is a problem, but it is very difficult to escape the embrace of the Russian bear once he squeezes you.
For the US, the growth in unconventional natural gas is a change in energy dynamics that is revolutionizing our energy outlook and dramatically improving our energy security and economics.
The biggest risks for unconventional gas are not technical or market risks—they are political risks that the Congress and Administration will slap new taxes on domestic energy production that have a chilling effect on capital investment. If the domestic energy markets are left to work based upon the competitive laws of supply and demand, America is coming back strong.
On February 18, 2010, FERC issued an order granting Google the authority to sell electric power services subject to FERC jurisdiction at approved market based rates.  The order covers energy capacity Google might acquire or contract, power sales, and services.
Google has made no secret of its desire to be green and do green deeds. It has invested in renewable energy projects for its own energy requirements and directly and through its foundation has become an active voice in the policy discussions surrounding environmental and energy issues.
But like most big business enterprises, Google seeks to do well by doing good. And in the case of energy it has the potential, the money and now the power to be a big pain in the back side for many in the energy space.
Monetize Google Data Center Assets. First, the obvious question people are asking is why would Google want to do this? For one thing it sits on the ‘muther-of-all-data center assets’ needed to run its business, and in a smart-grid enabled electric power world ahead that tsunami of smart meter data must go somewhere. Google can make money selling meter data management services to virtually anybody who wants to play in the smart grid space turning its data center capacity into a money printing machine in parallel with its advertising business revenues.
Monetize the Tsunami of Smart Meter Data for Services. Second, all that meter data tells Google more than we ever wanted it to know about how we use energy in our homes and businesses. Insight from those consumption patterns combined with Google earth snapshots of each of us smiling in our driveways is pretty valuable stuff. Imagine the advertising leverage it creates when you can target ads to people based upon their energy use patterns as well as their internet surfing proclivities. The biggest customers for this service might actually be utilities who know they are in over their IT heads in managing such huge data flows successfully.
Mapping the World’s Energy Information Patterns. Third, imagine the possibilities as scores of vendors of sensors, boxes, networks and gadgets of every kind seek Google’s help to assemble the moving parts of the smart grid into solutions that fit just right for each of hundreds of customer segments all that data above and everything else Google knows about our good and bad habits. The entire cleantech space today including Smart grid is in the midst of a big consolidation phase where smaller players are eaten by larger ones in a search for more complete solutions to offer to potential customers. Google Energy can help speed that up and be the Match.com-equivalent for the energy space. Google can thus map the energy use patterns of a large part of the world over time and use that patterning to create value from its service capabilities all across the value chain.
Branding Wholesale Electric Power Sales? Fourth, I almost forgot the foundation for the order itself which gives Google Energy the authority to go into the markets and offer power supply services at market based rates is the logical extension of what it is already doing for its own facilities. Aggregating more customers is a fast, easy, way to bring down the costs of energy for all who participate. Likely, this will begin with commercial and industrial customers who are much easier to aggregate and are accustomed to shopping in competitive wholesale markets. It also avoids a fight with utilities over seeking to aggregate retail customers. The wholesale power business offers opportunities to scale Google Energy in measured doses and bring into the family people who really understand the business for the big play ahead.
At a minimum, Google Energy might be a power marketing brand that enables many small power producers to sell their capacity, energy and services to a wholesale power marketer able to create a large footprint quickly with brand recognition, use Google services and pay Google in a piece of the action while facilitating its scaling up process.
But all of this is the tease isn’t it. Yes, Google can probably make plenty of money just monetizing its existing assets and offering those same services used for its own portfolio to others. Yes, it can enhance the advertising revenue potential of its book by expanding its data footprint to include energy use patterns. Yes, it can build its brand and gain customer acceptance of Google Energy as a reliable service provider.
Going for Customer Aggregation Gold. Lastly, taken together all of the smart grid enabled technology coming to market means little if energy continue to be rate regulated and individual customers pay average costs instead of being subjected to dynamic prices that reflect the true real time cost of meeting our energy demands.
Google Energy is a bet that real time dynamic energy pricing will make Google’s capacity to bring the world’s energy information to market in useful ways extremely valuable in the future in segmenting and aggregating customers.
Politicians and regulators have adopted policies that will materially raise our energy costs for renewable energy that is more costly, for emissions reduction efforts that are more costly, for smart grid technology that is more costly. And they are discouraging power generation construction from our traditional sources of baseload power such as coal, hydropower and nuclear that have moderated marginal costs and thus rates over the last fifty years. Instead, our newer renewable sources are cleaner but more expensive and they must be backed up by natural gas because of their intermittency. Natural gas prices are volatile.
Combine real-time dynamic pricing and volatility in natural gas prices and you have a recipe for chaos. The solution for that in a smart grid enabled market environment is to stop selling commodity energy alone and bundle it with other products and services where risk can be mitigated and managed. Customer aggregation enables this fundamental change in the utility business model and Google Energy is positioning itself to be a major player in that future.
The advantage of a Google Energy is that Google sees the world in macro scale. It does not fear change and seeks to use the power of information to enable it. Yes, it knows too much about us. Yes, it is capable of exercising market power in subtle but ruthlessly effective ways we must guard against. Yes, it has done deals that facilitated censorship abroad and risked our trust at home as a result.
Conversely, it has the scale to make change possible in some of our intractable public policy domains. If is uses that power to enable choice that is a wonderful outcome. If it uses it to just get bigger, richer and raise its own stock price to Warren Buffet levels while depriving competitors of Oxygen that would be unwise.
What makes all of this possible is changing technology. The question is the same one we have always faced. How do we use technology to do well ourselves while advancing the common good?
It is tough love time for our politicians here on the Left Coast!
While all eyes have been on Massachusetts and the election of a Republican to fill Ted Kennedy’s Senate seat, the potential for a revolution is also shaping up on the Left Coast here in California with the same force as one of those giant Mavericks waves off Half Moon Bay the surfers dream to ride.
Senator Dianne Feinstein told supporters she would NOT run for Governor of California. No surprise, there—who in their right mind would want to be Governor? But that is part of the revolution underway. Rumors swirl each election about whether Dianne Feinstein will run for Governor. Each time she teases and then, as now, says no thanks. Why? Because being Governor is a no-win job in California. Not even the Terminator could shake things up enough to change the political dynamics so he will leave office with a $22 billion hole in the budget. So now, still unannounced but all alone, former Governor Jerry Brown, now California Attorney General, is the likely candidate for Democrats.
The race for Governor on the Republican side is also a small field with a primary fight between Meg Whitman of eBay fame and fortune and Steve Poizner, State insurance Commissioner and Silicon Valley fat cat. Poizner is far behind Whitman in the polls and fundraising and now faces the ugly problem of looking like he is actually going to do something about Anthem Blue Cross’s outrageous 39% health insurance rate hike. Memo to Steve in the bottom of the hole: Quit Digging!
This sets up an interesting contest for California’s future between Ms eBay Entrepreneur Whitman and either former Governor Moonbeam or the brash, seasoned urbane and urban reformer that Jerry Brown turned into as a very successful Mayor of Oakland for eight years. It will be an interesting race of ideas and cut throat politics. To counter Meg’s money, Democrat friends of Jerry are launching a series of attack ads on Whitman designed to tarnish her image and cast her as a brazen, scornful, hard-hearted “rich bitch” who will be no friend of the People of California. So that should be fun to watch since the Democrats own more than their share of California’s problems and turnabout is fair play.
The juicy race this time is the Senate seat of Barbara Boxer who is running scared—and she should. Strident and in-your-face has always been Senator Boxer’s style seared into our conscious by the replay of that snide clip of the Senator berating some flustered general for calling her “Mam” in a Senate hearing. She can be counted on to be a sponsor for almost every liberal or environmental cause that registers in the polls and now that advocacy for the left is haunting her. Serious polling says Barbara Boxer is in SERIOUS trouble and November could see her dumped as the country—even California—moves back to the political center or just takes revenge on all incumbents.
The race on the Republican side pits former HP CEO Carly Fiorina against former Congressman Tom Campbell who started out running for Governor and bailed out to challenge Boxer when he realized Meg Whitman could buy him many times over. Campbell represented Silicon Valley in Congress and was Dean of the Haas B School at UC Berkeley and took a leave of absence to be State Finance Director. California has sent women to the US Senate for a generation so that is not an issue, but will we send a Republican business person! Egads!
But a careful study of the political climate reveals the fundamental economic, business climate and governance problems facing the Golden State. California is a state of huge potential being strangled by its government, tax system, and political correctness gone amuck. It is time for tough love in the Golden State and we may need a fresh eyes business person with a sharp knife to do the job.
According to the Tax Foundation, California ranked 11th among the States in per capita income in 2008 with $47,706 per person compared to the national average of $44, 254. If taken separately, the California economy ranks as the 6th largest in the world, but these days it is looking a lot more like Greece!
The Golden State has great potential but it is running out of gold with a $22 billion budget deficit to solve largely because it has a very progressive income tax that depends upon a small number of wealthy people doing well in a growing stock market to fund its services. When times are good the gold rolls in and California politicians spend like there is no tomorrow. When times are bad and the gold runs out, the state borrows to play the float until the next boom. But several years in a row of declining revenue in a banking and credit crisis threaten to kill the golden goose.
California ranks 48th out of 50 states in business climate ratings, 45th in corporate tax rates, and 49th in individual income tax rates according to the Tax Foundation and its neighbor Nevada ranks #1. But not even that giant sucking sound of California business moving out of state was not enough to stave off near disaster in the Silver State when the economy and housing values tanked. It does not even buy California time since outmigration of people leaving the Golden state is also speeding up in their search for jobs, lower cost of living and a better business climate.
Thanks to Proposition 13 which capped property tax rates, California ranks 15th among the states in property taxes and falling home valuations drop tax assessments automatically. Politicians know that messing with Prop 13 is the “third rail” of politics so they have not tried it–yet. But California is a non-recourse state meaning we still face the real threat that people will give up on California’s future and throw the keys to their underwater house on the bankers table and walk out on us to start over fresh someplace else. There are still 14 other states with lower property taxes to choose.
I still believe in California and its potential for innovation and rebirth. But a little revolution every now and then is good thing as Thomas Jefferson observed at the founding of our Republic.
The recession has awakened us from our complacency. The change we had hoped for from the Obama Administration is not working out so well for California or the nation. So in Virginia, New Jersey, Massachusetts and bubbling up here in California like ‘Mt Wilshire’ in the movies things are churning. But as voters we must do more than just ‘kick the incumbent bums out’ to solve these problems—we must actually DO SOMETHING about the fundamentals and the problems they cause and discipline our future political leaders to change their behaviors. And that is the challenge facing Meg Whitman and Jerry Brown; Barbara Boxer and either Carly or Tom, and candidates up and down the San Andreas fault line.
What is your plan for California?
Why should we hire you to be our Governor or Senator?
What will you do to fix our State’s problems?
How do we know you won’t be just like the other politicians?
What must we ALL do to change the way our state is governed to live into our potential not repeat our past mistakes? That’s what we want to hear—practical solutions that work. Hmm, maybe a business person as Governor or Senator would be a good idea.
The Great Central Valley has apparently had enough of the Federal government and environmental advocates for the Delta Smelt shutting off the water spigot thus killing the agribusiness economy and threatening the water supply for Southern California.
Perhaps, I exaggerate—but not much.
The smack down this week was word from Senator Dianne Feinstein that she would attempt to insert into a must-pass bill in Congress (any bill will do) a provision to increase the water allocations for Central Valley farmers to 40% of what they got last year. This would be up from the 10% allocation they are limited to under a Federal Court injunction in a pending environmental lawsuit.
California is no stranger to water conflicts and solutions always seem to break down in the politics of advocacy on the many sides of this issue. Dianne has always had a keen interest in the water issues dating back to her time as Mayor of San Francisco when environmental groups tried several times to scale the Hetch Hetchy water system with legal and political action to restore the pristine nature of the watershed made famous by John Muir himself.
Not even liberal San Francisco would stand still for that “let them drink bottled recycled water” outrage.
Feinstein has always been the “go to” person for water issues and the rest of the California Congressional delegation generally follow her lead. Nancy Pelosi recognizing that no political good can come from getting involved in California water issues has stayed out of it. Barbara Boxer can usually be counted on to be a reliable vote for whatever the environmental advocacy groups wanted—one reason she is in DEEP TROUBLE in her re-election effort this Fall. So Dianne has always provided “adult supervision” when needed. And it looked like this is one of those times.
Governor Schwarzenegger, to his credit, had been a persistent advocate of additional water supply and water development to fix the Delta and assure adequate water supply for California’s future. His problem is the state cannot afford the $10 billion in bond projects California needs right now.
The San Francisco Chronicle reported that Feinstein decided to get involved after Stewart Resnick, owner of Kern County’s Paramount Farms, and a big time supporter of Democrats complained that “sloppy science” by federal wildlife agencies was causing farm water shortages. Last Fall, Feinstein asked the Obama administration to get the National Academy of Sciences to review the biological opinion process. 
We don’t know why Dianne decided to preemptively act. Maybe the NAS was about to tell her the opinion process was fine. Or maybe, the Central Valley farmers convinced her they were going under. Whatever the reason, her action shocked environmentalists and Democrats.
The biggest problem with the Federal and State environmental laws today is the lack of balance of environmental and other public interest factors such as the economic reasonableness of the actions taken. Federal resource agencies and environmental advocates have no fiduciary responsibility for the consequences of their advocacy and thus no incentive to resolve the issues in dispute.
Biological opinions issued to support such actions are often subject to challenge, but the defendants in the environmental litigation own the practical burden of proving them wrong. I’ve written before of my own firsthand experience negotiating a settlement of the Mokelumne River hydropower relicensing issues in the mid-1990’s. The ONLY WAY we got a settlement was for the Utility to spend whatever it took to “own the science” on the river. That meant we had to convince the Feds that were prepared to go to court to show beyond a reasonable doubt that the biological opinions issued by US Fish and Wildlife and CA Fish & Game were flawed and why. In the end, we got a settlement because the resource agencies feared the precedent of having their opinions overturned as faulty more than they worried about the habitat or biological issues on the river.
As we have seen, the public broadly supports our environmental objectives but often feels that those goals are being used to pursue political agendas without much regard for the economic costs and consequences. In this case, California’s multi-billion dollar agribusiness sector has been virtually shut down and the water supply for much of Southern California threatened by actions to prevent the Delta Smelt from being sucked into the water conveyance pumps.
Dianne may just be playing hardball to get both sides to settle. Or she may recognize that the current stalemate is doing more harm than good for everyone. Whatever the reason, her action to end the impasse is timely and wise.
The problem is we are woefully short of politicians with the good judgment and common sense of Dianne Feinstein. My senior senator is a class act.
The ARRA stimulus bill targeted $36.7 billion in spending for energy investments, with solar, wind, and the smart grid as the major focus for spending while biofuels, energy storage and carbon capture and sequestration projects saw targeted financing. This Federal money certainly stimulated the venture capital sector that saw it as a once in a lifetime cleantech binge.
Analysts said there were 356 deals in 2009 including 110 Series A and seed round start up deals, compared to 350 deals in 2008 and 222 deals in 2007 with a 2009 total capital invested of $4.85 billion down from $7.6 billion in 2008—the record year. Venture capitalists continue to bet heavily on cleantech and renewable energy with solar power investment of $1.4 billion in 84 deals according to GTM Research continuing its four year lead in the category. Biofuels saw $976 million in investment perhaps responding to the big bet made in the sector by XOM. 
The sleeper in the race was water with 33 deals totaling $130 million. Water and energy have always been integrally linked but the best way to profit in the water business is to provide the technology, advanced process services and equipment to increase supply, reduce waste and improve the efficient and cost effective treatment of water.
The Great Cleantech Flip Ahead?
The market also saw an uptick in capital investment from outside the United States and that combined with the stimulus and VC spending binge suggests rising demand for cleantech opportunities might mean a rush of IPOs in 2010 to cash in big time before the inevitable consolidation process eats some of the best opportunities. Timing seems right for increased deal activity in 2010 because Federal stimulus money is drying up and prospects for more gravy out of Washington are greatly diminished over worries about the deficit.
The VC trade press says investors are looking for opportunities in smart grid infrastructure perhaps hoping to pick up products and capabilities that can “tuck under” to make more complete and thus valuable solutions. The bigger fish are also looking opportunistically to eat the smaller fish in the consolidation process. Any anyone who did NOT get ‘stimulated’ or got VC capital infusion and now is threatened by those that did turning them into ‘fish food’ in the consolidation process now underway.
Global Competition is Good
The other factor at work is that as the markets improve we need for more deal flow to put capital to work, consolidate market share, and position for the next boom. This is a global competition with the US, EU and China as healthy rivals for this investment.
Fish Stew with Sour Wine in EU
The EU today is the weakest of the three global rivals with problems in Euro zone in Greece, Spain and others. Germany and France are working to address the economic problem but it is a distraction, adds uncertainty, and will require bailouts to prevent more damage. UK investors seem more attracted to the US markets than Europe leaving the problem to Germany with France along for the ride. Renewable energy in EU took big hits with the failure of feed-in-tariffs in Spain and then Germany two of the largest markets causing equipment prices to tumble worldwide as vendors dumped excess solar panels and China slurped up FiT subsidies from existing contracts.
China Demand for Growth is High but Sustainable Growth Means Coming to America.
Strange as it seems from the political sparring between the Obama Administration and China over issues like arms sales to Taiwan and chicken parts, Iran nukes and North Korea sanctions issues, these two rivals seem linked at the hip even if the lips are bantering. Rivalry results in tiffs like this but the core relationship between the US and China is too interdependent for either to do something stupid.
China needs American markets to export its goods and sustain its growth. It buys US dollars and increasingly invests capital in US assets and businesses to further diversify its portfolio and reap the benefits from the most stable world economy returning to growth. Besides, China needs something only America can provide—technology and brainpower to deploy it.
The US needs China to finance our deficit and recovery by continuing to buy dollars and increasingly invest in American business to allow the US Government to dig out of its deficit hole. The US also needs China to drive down the cost of goods sold and especially to drive down the cost of renewable energy equipment such as solar panels and wind turbines to grid parity prices with natural gas. Unless this happens, renewable energy is not sustainable or affordable long term.
If the global rivalry is managed and healthy both China and the US can win big time. If they permit other issues to distract them from their strategic relationship both lose potentially big time.
The US is the World’s Best Hope for Recovery
Like it or not, the US is still the world’s most influential superpower even when its economy is weak. We likely will survive the Obama Administration stumbles with a big debt but that can be fixed over time with a robust recovery. That must be our single minded focus—putting Americans back to work and leveraging their ingenuity to drive markets, technology, innovation and growth around the world.
Grid lock in Washington DC is a wonderful thing.
It constrains the worst aspirations of both political parties. Recent elections in the US have humbled the Democrats, but the Republicans make a huge mistake if they see the Democrats stumble as their gain. Voters are surly and have a ‘pox on both your houses’ attitude that will require human political sacrifice to purge. And November 2010 is shaping up to be a time of wholesale political sacrifices threatening all incumbents. This sends our beltway bandits running for cover, but voters smell blood and will not be denied. There are risks in electing a new Congressional majority of people with little elected office experience, but the genius of America has always been our ability to reinvent ourselves when we needed it most. America is in the early stages of that process of renewal which will play out in 2012 in the next presidential election.
The Return of Prudence in Energy Costs Looms
Meanwhile we have market and economics work to do. On the energy front we have seen explosive growth of clean and renewable energy from wind and solar. We have been over stimulated in smart grid investment—ahead of its full potential—so we are likely to see a consolidation of players, firming of interoperability standards, and then a pause while the political issues that will determine the next wave are decided. The issues are mixed for the energy markets.
Renewable portfolio standards have created incentives for wind and solar growth but rising utility rates to pay higher than market costs for renewables are starting to hit the fan and ratepayers do not like it. In addition, we lack the electric transmission capacity to bring all this new renewable energy to market and we lack the political will to speed up the environmental review and transmission construction to make it work. NIMBY could crater the renewable energy market in the US over transmission line siting and construction.
COP15 meltdown and the collapse of credibility for climate science research have stalled emissions reductions advances. We do not know if this is temporary or fatal. The market for carbon credits is sinking like a rock in both EU and US with emissions allowances now selling for as little as $2 per tonne. At those prices there is no incentive to invest in more expensive solutions—just pay the penalty and let the government worry about it.
Smart meters are being installed as an accelerated pace but largely sit unused and un-useful without the changes in policy like real-time pricing or dynamic pricing as it is now being called to give customers the incentives to make smart energy decisions. Utilities face a tsunami of meter data heading their way with limited capability to do anything with it. Customers really don’t want all that information and as long as we continue to have rates based upon average prices and regulatory lag in rate cases—we just keep on living our lives.
So all of this geopolitics, venture capital investment, and policy hassle is going to converge in a giant pause as we await the next election and torment our politicians. Ratepayers will increasingly complain more loudly about rising utility bills and regulators will rediscover “prudence” looking for a way to slow down rate increases and save their skin.
Meanwhile, investors who want to cash out have two choices: sell out to now to strategic buyers looking for good deals and get your money out of cleantech, renewable energy and smart grid while the getting is good. Or, if you feel lucky, wait for a good window in an improving economy and try the IPO route to cash in big time.
The problem with the latter strategy is that window of opportunity may not arrive in time and the global competition is going to keep moving. Sit and wait to cash out and you may miss the next big wave after cleantech or the hassles over rates and policy may hurt your flip.
My prediction: Prepare for the big fish food feast ahead where flip, consolidation, and a new focus on riding the next wave will be on the menu. What is that next wave? Well, think about it, you really don’t need any of this cleantech, smart grid or renewable hassle if you control the communications networks to make all of that as well as streaming TV, home area networks and the more fun side of life work faster, better, cheaper do you. Now we’ll pay big money for entertainment and faster, wireless communications on new iPad toys. Energy—its a big hassle.
Can I get the sports package with that? To go, please.
Here in California the past few days, the media has been full of outrage over the proposed 39% rate increase by Anthem Blue Cross for individual health insurance policy holders. Washington DC has heard that outrage and our politicians at every level are piling on demanding an explanation. It turns out this isn’t just limited to California. The same company or affiliates raised premiums 23% in Maine, 22.8% in Oregon, and likely other places I don’t know about. I also suspect that Anthem Blue Cross is not the only insurer using this opportunity, for good or ill, to raise rates either as a “me to” tactic or in the belief there is safety in numbers.
I have two of my children who having graduated from college are no longer eligible to be on our family group health insurance plan. COBRA enables me the privilege of continuing their coverage but the monthly premiums for that privilege are about $500 per month per kid and just increased by 8%. I guess I should feel lucky compared to the Anthem Blue Cross customers. But it still is $1,000 per month I must come up with or risk having two of my graduated but “without benefits” kids uninsured. That is the trap isn’t it. We can’t afford our increasing health care insurance costs but we can’t afford NOT to have it.
I have wrestled with the ideas proposed in ObamaCare. On the one hand, a single payer system is seductively simple. On the other, government services are notoriously heavy-handed, costly, and not very user-friendly. Try visiting the DMV lately?
The US Health & Human Services Department says that healthcare spending reached $2.3 trillion in 2008, or $7,681 per person or 16.2% of GDP double the 8.1% of GDP in 1975, and triple the 5.2% share in 1960. Clearly, we have a growing problem here and our aging population bubble is going to make it worse before it gets better.
So what’s going on with these outrageous health premium increases?
This isn’t a new problem as we all know. Premiums have gone up and up and up as health spending has increased over time. It has been compounded by periods of high inflation and even when the CPI is low health costs kept rising at faster rates than other consumer prices.
No competition, a focus on billable procedures, and no incentives by each of us as individual consumers of health care services to control the costs since more and more of our first dollar costs were being covered by our plans—a vicious cycle of cost increases seemingly out of control.
“Give the People what they want, and give it to them hard!”
The conspiracy-theorist in me wonders if the stumbling of ObamaCare once thought inevitable but now seemingly dead on arrival, is provoking a backlash of a different sort. Is there a campaign to make the current system so painful, so costly, so in-your-face that we will put aside our reservations and trepidations about the single payer public option and flee to it as refuge from all this?
Health insurance companies are ranking right up there with banks and other scoundrels for our civic loathing. Yet, we can’t seem to find the right answers to the question of how we would reform the system to make it work better. The ObamaCare cure seems worse than the disease.
From Vicious Circle to Virtuous Circle for Health Care
The pragmatist in me says that the real solution to health care cost increases is to re-introduce market competition and individual responsibility to the system shifting the decisions about both spending, plan coverage, and cost reasonableness to individuals in a reformed system that creates a more “virtuous circle” for all. By modifying our tax laws and setting competitive market principles to work we could see significant improvements in both quality of care, coverage availability, and affordability.
Five Principles for Virtuous Circle Health Care Reform
There are plenty of ideas to consider as alternatives before we give up and go to the single-payer government system including but not limited to:
- Interstate competition. Congress could authorize interstate competition for health care plans of various types to allow vendors to compete to aggregate individual policyholders for their plans without the current state-by-state mandated coverage and restrictions. Such a system seems to have worked better than expected in giving seniors the ability to shop for prescription drug coverage so maybe it will work here. The problem is only about 13 million Americans buy health insurance in the form of individual plans since the vast majority still gets health plan coverage under group insurance plans through their employers. The law also effectively prohibits multi-employer insurance buying cooperatives or risk pools making it difficult for small business to afford coverage for employees. And for individuals, choice is limited, prices are very high, and there is no more assurance they will not be subjected to the same volatile rate spikes for coverage they currently see since one rationale by Anthem Blue Cross for its rate increases is that the recession means that fewer healthier Americans are buying individual coverage. DUH! Not in a captive market where ABC can jack the price up 39% and its customers’ choice is pay it or get dumped.
- Transition from Employer-based Group Coverage. We all like this because it is what we know and we don’t have to do anything about it. Group coverage is only about 50 years old begun during the WWII period to attract working to defense contractors and spread during the post-war boom times to become the norm. The system was a good way for employers to attract workers in a crowded field. Unions liked it because it gave them leverage in labor bargaining agreements. Employees liked it because it was a “benefit” and often thought of as “free” even though the practical consequence was merely shifting salary dollars to benefit costs and limiting our freedom to shop for medical and insurance coverage. The tax system also virtually enshrines this approach today making medical insurance costs tax deductible for employers as a cost of doing business, not taxable to group- covered employees while individual insurance premiums are not deductible unless they get to a high hurdle of 7.5% percent of your taxable income. Nonetheless, the current dilemma is so many employees are now covered this way they fear changes that would shift them to either a government plan or to the volatile individual market preferring the stick with “the devil we know”—until, that is, we get laid off!
- Medical Savings Accounts and Major Medical Coverage Individual Plans. Federal government data tells us that out-of-pocket payments for medical expenses has fallen from 47% of total health spending in 1960 to a record low of 11.9% in 2008. The reason is simple; our group coverage often was “improved” by paying more of the “first dollar” items we used to pay for out of pocket. Medical Savings Accounts were introduced to encourage a reverse in this shift in coverage by bundling customer paid first dollar costs with major medical insurance coverage for catastrophic care . This balancing was thought to offer the best of both worlds in individual responsibility for preventive health and routine care and insurance protection at lower costs for major medical needs. Advocates of single payer systems hated it, but it still might be the best option for many Americans. But it is very hard to do. One reason is that state by state regulation forces required coverage on many plans and thus it was impracticable for insurers to aggregate enough major medical insured to make the risk tolerable within a given state. Interstate shopping for coverage without mandated coverage features would open a new world of competition to the health market. Paying out of pocket first dollar health costs with either pre-tax dollars from MSAs or tax deductible dollars would restore individual responsibility and cost consciousness.
- Tort Reform. Let’s face it, the plaintiffs bar gets hammered for aggressive ambulance chasing lawsuits seen as driving up malpractice insurance costs to the point many doctors just stopped practicing. Balance that against the occasional horror story we all hear about medical mistakes and genuine malpractice building sympathy for the aggrieved. The trial lawyers have been major political contributors at both the Federal and State levels and have successfully preserved their options to date. But while tort reform to limit malpractice lawsuits and awards may work to reduce doctors’ medical malpractice costs it, alone, is unlikely to bring down premium costs for the individual insured. That was the experience in Texas when reform was introduced, the State saw an increase in the number of doctors practicing both at risk specialties as well as in rural areas, but insurance premiums overall for individuals and groups continued to rise.
- Pre-existing Conditions Coverage. There is a fine balance between setting premiums based upon the relative risk of the insured and using issues like pre-existing conditions to effectively deny coverage and improve profit margins shifting these individuals into high risk pools. One answer is to have bigger pools so such risks of pre-existing conditions can be partially mitigated and spread across a larger base. Another is to have a premium schedule that reflects increased risks with premium adders that are equitable across the entire pool for such pre-existing conditions but limit the discrimination on covering such individuals. California has such a policy requiring insurance plans to accept those who are forced out of group plans to transition through COBRA to private plans without considering pre-existing conditions. It seems to be a reasonable compromise of interests and builds the base of individual plan insured.
So my suggestion for the President and the Republicans flirting with bipartisanship is this:
Use these 5 principles above to craft a reform plan for the existing system that empowers individuals and creates a gradual but deliberate transition from group plan coverage to individual market based coverage. You’d do this by making all current employer group spending on healthcare taxable income to each employee. Employees could stick with their group plan or use that money to shop for a new plan in interstate commerce that better suits their needs paying any increase or keeping any savings. Their premiums for participating in either the employer group plan or a separate private plan would be tax deductible. The government should set a maximum deductible premium but grandfather a transition in over five years to allow the competitive market place to work. The role of the States and Federal Government is to assure full disclosure of plan coverage and limits and standard presentation of premiums and costs. The vendors in competition will be more than happy to build software and other solutions to encourage plan comparisons just as happens now for comparing Rx coverage.
That’s my plan and I’m sticking to it!
It appears that climate science is not as settled as Al Gore professed even as late as Copenhagen. Reports of “errors” keep piling up as researchers take a fresh look at key findings and reports emanating from the international bodies and research universities most responsible for the body of literature being used to shape the world’s environmental and economic future.
“Skeptics Up, Obama Down, Cap and Trade Dead”
That was the conclusion of an ongoing series of investigative news reports in the UK on the IPCC and other research institutions linked to the UN’s Climate Change policy analysis.  Just a month ago, the panel was forced to retract is report on the rapid melting of glaciers after it was found that it could not be supported by the evidence. 
Correction Course on Political Correctness in Progress
That scientific research has been tilted toward a favored policy outcome is neither shocking nor new. That the rest of the science community tolerated this “junk science” so long is the real tragedy. This kind of passionate inquisition has been going on for centuries, but rarely has so much money been spent pursuing political correctness nor the risk of economic harm from such policy prescriptions so profound. From faster melting glaciers, to rain forest collapse to agricultural production declines in Africa, the list of dire conclusions now being shown as based upon inadequate research, suddenly unavailable data, or just unsubstantiated opinion keeps coming like a slow trickle turned into a major flow.
Exposing these “research errors” is useful and timely to be sure. We can only hope that this tilting of science for the sake of continued research funding, professional advancement and tenure, or just vanity will be exposed and the erring parties discredited. But where was “peer review” when we needed it?
As humans, we understand human failing, and can forgive it even as we discipline those who engage in it. But we expect more from our governments and our rising cynicism and trust in government has a far more lasting and corrosive effect when we discover we are being mislead on the science and then mislead by politicians about the policies proposed as a result of reading that ‘political’ science.
It is NOT about the Environment, Stupid!
It would be a mistake of equal or greater proportion for those who cheer this collapse of climate change research to take it as repudiation by the public of our collective interest in being good stewards of the planet. The environmental movement has succeeded in persuading us that we must all act responsibly, avoid unnecessary pollution, and decry actions that needlessly despoil the planet or cause harm. We still expect to leave the earth a cleaner place for our children than we found—as the cliché goes.
But something is changing in our sense of environmental responsibility.
This exposure of bad behavior by climate scientists will result in more skepticism to be sure from this experience, and a better sense of the need for balance as a consequence of the economic recession we have experienced. We still expect environmental responsibility. But our definition of environmental economics is changing to include more balance of the cost and consequences of proposed policies against the benefits of enacting them.
Is there a Good Outcome from this Bad Science?
This could mean some profound changes yet ahead in the US and around the world after the effects of this climate change “crisis” plays out through the next election cycle:
- Reality Therapy in Mexico City. Hopes for a COP15 “do-over” in Mexico City should be diminishing considerably. If anything, the next UN conference in Mexico City should be a place full of confession, repentance, remedial education and soul searching about the important of academic rigor, peer review and transparency as a foundation for re-starting the debate about the real science of climate change.
- US EPA Endangerment. US EPA must quickly back off its threatened endangerment finding before it risks having its authority in the matter gutted by an outraged Congress looking for someone to hang for this climate change embarrassment. More than Waxman-Markey has been left bleeding on the sausage making floor of Congress, the Administration now lacks the political authority to pursue the same agenda by regulatory fiat.
- The Environmental Responsibility Act. Congress should require all Federal agencies and State governments using Federal money to include in any environmental impact statement or environmental review and/or Federal rule making an analysis of the economic impact of any such proposed action and a finding, subject to judicial review, that balances such costs and benefits in the public interest. The law should also include a “loser pays” provision in environmental litigation to assure that environmental lawsuits are not used as tactics to extract settlements or pursue political agendas.
- AB32. This California law to regulate greenhouse gas emissions is actually an income redistribution tax act designed to evade the two-thirds rule on budgets and taxes in the California Legislature. It gives the California Air Resources Board the authority to set carbon taxes administratively on an annual basis. The likely consequence is that such fees will be pegged to the size of the California budget deficit and, conveniently, requires no elected official to actually vote to raise taxes. The California Energy Commission and California Public Utilities Commission have reported to the Legislature that they believe a carbon tax of $100 per tonne would be required to implement the policy goals of AB32 and the companion 33% RPS standard. The collapse of the climate science foundation for AB32 will expose it for what it is. Besides, with RGGI and EU carbon credit prices falling like a rock to about $2 per tonne, AB32 will not likely produce the revenue California politicians’ dream of anyway after the climate science is “settled”.
Maybe unsettled science is a good thing if it forces a balancing of the costs and benefits of major policy changes in environmental laws and other public policies. Voters are in a surly mood over the state of the economy and their anxiety about their own financial future. This is the kind of political climate crisis that brought us Proposition 13 in an earlier California era. Today there is no similar ‘quick fix’ for California unless we hit “reset” by authorizing one of the ballot measures being circulated today calling for a state constitutional convention. For Congress, the path to hope we can believe in is actually swifter the old fashioned way Americans love—“throw the bums out” in the November 2010 election.