Category Archives: Energy

FirstEnergy Scores One For Free Market Capitalism

Did you hear about last month’s appeal by FirstEnergy Solutions to the United States Department of Energy? It may have been one of the most unusual requests that was ever directed to a Cabinet-level Department of the United States government.

FirstEnergy, a struggling coal and nuclear energy producer of electricity, asked the Energy Department to declare a national emergency and order its customers to pay it above-market prices for its power. In theory, the federal government possesses the authority to do so under the Great Depression era Federal Power Act, derived from an earlier law that was first enacted in 1920.

Why did FirstEnergy need this support? Its coal and nuclear generated electrical power plants have been struggling to compete against less expensive and cleaner energy facilities. So FirstEnergy appealed for direct price intervention by the federal government, asserting that the insolvency of nuclear and coal plants would constitute a national energy emergency.

Department of Energy Secretary Rick Perry declined to grant the request. And how did FirstEnergy respond?

Instead of intensifying its political lobbying activities in hopes of a direct government intervention, the struggling company reached an agreement with the creditors of its nuclear and coal division. Although the firm is not yet on stable footing, it appears to be negotiating a path through its period of financial distress.

So let’s score one for free market capitalism. Although it must have been tempting for the Presidential administration of the United States to respond to the appeal of a struggling coal energy producer, it opted instead for a non-interventionist market based response.

That’s not to say, of course, that all of the parties acted in a perfectly consistent manner. FirstEnergy did issue the original appeal for a highly questionable government declaration of a national emergency. And it did take Secretary Perry more than one week to express skepticism about the request.

Eventually, though, the private corporation and the government entity both embraced a free market strategy. Their decisions represented an unremarkable, conventional conclusion to a remarkable, unconventional appeal.

Brazil’s Libra Oil Field and the Peril of Government Complexity

If you’re a Brazilian citizen with a relatively low income, you may have been anticipating the launch of operations at the Libra oil field. After all, Libra was expected to be the first project to produce revenues for a new governmental “… special fund that is supposed to spend money on areas like education and health.

Regrettably, though, the plan to generate public funds through the government ownership of oil fields hasn’t proceeded as planned. Although Libra will soon start producing crude oil, the government of Brazil has no ability to sell it.

Huh? In a world that is hungry for energy, and at a time of rising oil prices, how can an oil producer have no means to sell its product? The answer to this question lies in the sheer complexity of the government’s contracting process.

You see, in an attempt to prevent the corruption that has plagued Brazil’s state-sponsored energy firm Petrobras, the rights to Libra’s profits reside in a newly created special fund called Pré-Sal Petróleo SA (PPSA).

But not all of Libra’s profits are placed there; only 42% of “profit oil” is controlled by PPSA. So what does “profit oil” mean?

This is where the legal process become very complicated. Instead of paying Petrobras or other private contractors a simple fee to operate the Libra field, the government permits the firms to keep large shares of crude oil revenues to cover their expenses.

Any revenues in excess of these expenses are shared by the firms and the federal government. And 42% of Lbra’s excess funds has been earmarked for PPSA to finance Brazilian social services.

In accordance with these complex terms, the private contractors cover their expenses before the government obtains its own share of profit oil. Thus, when production volume is low, private contractors may break even while the government receives no revenue at all.

But this is not the only example of complexity that is plaguing the Libra field. In addition, the government must grant a “commercial agent” contract to a private firm to sell its profit oil. And because of a lengthy and complicated contract bid-and-review process, it may take years for the agent to be selected, while the production process is likely to begin generating oil in a few months.

The outcome? The government will soon produce a product to generate funds for people in need. And buyers will be available to purchase the product. But the government has established a legal process that will hand much of its revenues to private operators, and that will belatedly introduce a sales and distribution process long after it is first needed.

Brazil is a prime example of what energy industry veterans call the “resource curse” or the “paradox of plenty.” Indeed, there is a reason why nations with immense energy fields are often unable to translate their natural resources into national wealth. Many of these countries are victims of their own tendencies to develop legal systems of immense complexity.

The Lizard That Defeated The Energy Industry

How can a lizard destroy the energy industry? Apparently, by its very existence.

That obviously hasn’t happened yet, considering the energy industry’s current upswing in corporate profits. But a face-off in the Permian Basin of Texas and New Mexico is worrying industry advocates that a tiny reptile might stop the business sector in its tracks.

The reptile is the Dunes Sagebrush Lizard. It lives in the sand that is required by upstream energy producers to engage in fracking operations. Without this natural resource, the firms would be unable to extract oil and gas from the ground for delivery to energy customers.

Prior to the fracking era, the lizard was considered for designation as an Endangered Species. It wasn’t granted that status at the time, but today, commercial operations in its natural habitat are raising new concerns about the viability of the tiny creature.

We’ve heard such concerns before, haven’t we? During the 1970s, for instance, a tiny fish called the snail darter delayed the construction and operation of the Tellico Dam. The project included a $115 million hydroelectric facility on the Little Tennessee River.

And several years ago, Michael Kraten (the author of this blog) developed a composite business case named Save The Blue Frog. It trains college students, industry producers, and their investors to develop methods for assessing the impact of environmental factors on the long-term sustainable value of energy projects.

The case has evolved into an active learning role-playing simulation game. It now provides the foundation and framework for Michael’s Sustainability and MBA Capstone Accounting courses at Providence College. And it is also heavily utilized in the Rhode Island Society of CPA’s Certified Sustainable Value Professional (CSVP) program.

And what of the Dunes Sagebrush Lizard? At the moment, energy producers, environmental groups, and government regulators are all proposing potential solutions to this existential problem. If they can achieve an agreement that balances the needs of our human and lizard societies, they may provide a blueprint for addressing other intractable issues as well.