Business Law Prof Blog

Behavior and Business Law Conference

The University of Tennessee School of Law's James L. Clayton Center for Entrepreneurial Law will be hosting a Behavior and Business Law Conference on October 2, 2010.  The multi-disciplinary event features a number of terrific scholars.  The full schedule is here.

SJP

More on Markets and the Impact of Energy Subsidies

A little while back I discussed energy incentives (see here) and noted that people often forget that the incentives for traditional, non-renewable fuel energy “far outweigh renewable industry incentives.” A thoughtful comment to that post noted that, “Your point that subsidies for conventional energy far outweigh those for renewable energy is somewhat misleading.” (Please note: I don’t name my commenter or his organization because I am cannot be sure of the source. No disrespect is intended, and I will update this post with that information if I can verify that information.)

The comment goes on to (correctly) provide the Energy Information Administration numbers (PDF here) for energy subsidies per megawatt hour of energy:

Coal: $0.44/MWH

Natural gas: $0.25/MWH

Nuclear: $1.59/MWH

Hydroelectric: $0.67/MWH

Solar: $24.34/MWH

Wind: $23.37/MWH

I guess it is all how you look at the issue. Beyond the fact that these numbers do not consider externalities from some of these other resources, to me, the per-megawatt-hour-numbers are the more misleading way to consider energy subsidies and their impact on markets. Here’s why: considering the per-megawatt-hour price doesn't look at the total market impact. Try this for an analogy: Does anyone really think that the federal government’s loan to Tesla Motors had a greater impact on the auto market (and the economy) than the Chrysler and General Motors loans/investments? Of course not, but if you considered the amount of money provided per auto produced it would look like Chrysler and GM were getting very little relative to Tesla.

So let’s look at the actual dollars, according to the same EIA report,

Federal energy-specific subsidies and support to all forms of energy are estimated at $16.6 billion for fiscal year (FY) 2007.

. . . .

Changes in the distribution of subsidies by fuel type between 1999 and 2007 reflect a redirection of priorities. For example, subsidies for renewables increased from 17 percent of total subsidies and support in 1999 to 29 percent in 2007.

What does this mean in real dollars? Renewables accounted for $4,875,000,000 of the $16,581,000,000 in total 2007 energy subsidies. This means that $11,706,000,000 went to energy projects not related to renewable energy.

For me, the total dollars spent on traditional energy resources provide a greater market distortion than dollars spent on renewables. First, this is because the overall impact of dollars spent is greater than (more than twice) that spent on renewables, Second, traditional fuel source companies are well-established businesses that have (or should have) sound business models and methods. If we think the costs of those products are too high, it would be far more efficient to put the money back in the hands of consumers through lower taxes than it is give the companies subsidies. (At least, this is true if we can figure out which tax to reduce to put the money in the right hands.)

Furthermore, when subsidies are used, we expect to get more of whatever it is we are subsidizing. It is certainly true that renewables account for a small percentage of total energy (7% for 2008), but that number is growing rapidly. If we are trying to get more renewable energy, it makes sense to subsidize the cost. We did that for nuclear power, and the investments (at least arguably) paid off. But the dollars spent in the 1950s aren’t reflected in today’s subsidy costs, so nuclear power may look much cheaper than it is from a total cost perspective. (Not to mention non-subsidy related clean-up costs in places like Hanford.)

If we continue to subsidize coal and oil, we should expect to get more of that, too. If that’s the goal, fine, but we need to be clear that’s our goal as we continue to spend so much money.

I happen to believe it is worth spending some money to pursue renewable and sustainable energy resources, but I don’t discount that reasonable people disagree. I also agree that energy markets would be more effective if we used less subsidies across the board. For me, though, the first place I’d start cutting spending would be in the subsidies for established fuel sources. There is more money there, and those markets are already well established.

In addition, the comment noted that despite subsidies since the 1970s, “I doubt that wind and solar companies have ever developed plans to become profitable without these huge subsidies (and mandates).” My sense is that at least some of the companies have, but I can’t disprove this point right now. Regardless, though, it still seems to me that after all this time, oil and coal companies should be better able to make it on their own than the renewable energy companies.

All in all, I am not sure we disagree all that much, but we seem to have quite different views of where the bigger (or more pressing) problem is in the subsidy market. In the end, the commenter noted opposition to “all incentives and mandates for all types of energy.” Perhaps that’s right, but I’d definitely start with removing the incentives for more fossil fuels.

--Joshua Fershee

Things that can make a lefty like me lean right.

Wasteful government spending.  Taliban mutilations.

SJP

Citizens United in Action

Target makes newly-available political contribution.  There is an outcry.  Target apologizes.

SJP

Exploring Corporate Personhood Through Citi-SEC Settlement

Over at the New York Times Dealbook, Andrew Ross Sorkin questions whether the SEC's $75 million fine as part of a settlement with Citigroup (for failing to tell shareholders about some $40 billion of subprime mortgage exposure) is punishment to the companies or the shareholders. 

Sorkin writes that "institutions are nothing more than their constituent parts — individuals who make choices on behalf of the organization. Some of those choices are good and some are bad. When they are very bad, the decision makers should suffer the consequences." 

This is certainly a reasonable assertion, but it is not a foregone conclusion that corporations are (legally speaking) "nothing more" than their constituent parts.  Furthermore, how bad does the decision have to be to hold the decision maker accountable?  If the decision maker is responsible for poor choices, does the decision maker then get to take the resuling benefit if the decisions are "very" good? 

Regardless, the posture of this settlement provides another great example through which to explore the relationship between shareholders, directors, and the "fictional person" that is the corporation.  For a good set of fairly recent discussions on a few of these issues, see here and here (and the links found there).

--Joshua Fershee

Kudos to the SEC...

Given the size and breadth of our behemoth stock market, perhaps the best any regulatory agency can do is to ensure adequate disclosure of the deal and/or circumstances.  As FDR said upon presenting the first securities law to Congress in 1933:

The Federal Government cannot and should not take any action which might be construed as approving or guaranteeing that newly issued securities are sound in the sense that their value will be maintained or that the properties which they represent will earn profit...There is, however, an obligation upon us to insist that every issue to be sold in interstate commerce shall be accompanied by full publicity and information.

Charles R. Geisst, Wall Street/A History (1997), p. 228

Which is why we should celebrate the announcement late last week that the SEC had exacted a $75 million penalty from Citigroup for its downplaying of subprime exposure in 2007.  In sum, the SEC took issue with the bank minimizing its subprime exposure as $13 billion "when in fact it was more than $50 billion".  Not only did the Commission signal that it shall not wait for Congress or class action juries to tackle the key issue of the Crisis, it also named company officials for their part in the lacking disclosures (Citigroup and the executives settled without admitting or denying the allegations).  

The SEC's public statement on the charges is itself noteworthy for many reasons:

1.  The SEC Director of Enforcement is quoted as saying "Even as late as fall 2007, as the mortgage market was rapidly deteriorating, Citigroup boasted of superior risk management skills..."  The focus on 2007 is much more accurate than the 2008 disaster timeline previously offered by the industry (which, of course, serves to benefit from superficial notions of the global economic crisis being "the perfect storm");

2.   Likewise the pinning of the alleged violations to specific numbers and "tranches" indicates some heavy lifting by the Commission - applaudable efforts given the routine deference accorded the "technical" world of CDOs; 

 3.  The charges were brought even though the assets in question were eventually disclosed by Citigroup in November 2007, indicating a lack of tolerance for any "eventual disclosure" defense.

4.  The fact pattern indicates that the bank's eventual disclosure was prompted by ratings downgrades, revealing that, even though flawed, the credit rating agency model of 2007/2008 did occasionally serve a salutary purpose.

Overall, bravo to the SEC for tackling a thorny issue (i.e., CDO pricing) that has staved off much inquiry and discipline to date.  The Commission's statement (with links to the related civil complaint and order) can be found here:   http://www.sec.gov/news/press/2010/2010-136.htm

---JSC, 8/4/10

All Eyes on Basel...

The Financial Reform recently signed by the President eschewed net capital limits in favor of product limits and enhanced federal power to wind down/intervene with behemoth failures. Such approach leaves the possibility of enhanced capital restrictions to the representatives of 27 nations who met last week in Basel to reform worldwide banking standards.

But the Basel reforms themselves appear to have lost their umph.  See "In Basel, Eternal Work in Progress" (NYT, July 29, 2010).  Those reading the tea leaves from this European brew now predict wishy-washy definitions of 'net capital' and extravagant phase-in periods for the much anticipated changes.

What a shame.  The world seems to agree that internecine risk taking is unavoidable, and its precise manifestations always unpredictable.  That leaves limits on the coffers as the only rational means of preventing a recurrence of the present global crisis.  And yet it does not appear that those coffers that plunged us into despair will become subject to meaningful new limits in the near future.

Stated otherwise, ours shall remain a largely deregulated economy.

---JSC, 8/2/10   

Hedge Fund Win In UK Should Make for Good Appeal

A U.K. court just ruled in favor of some hedge funds who lost their money in the Lehman Bros. investment bank failure, the Wall Street Journal reports.  Good news for those funds whose money was not properly "ring-fenced"; not great for those funds whose monies were properly segregated as they now must share the recoverable wealth. 

The decision reversed a High Court decision.  This one should be interesting should there be an appeal, and I'd have to imagine there will be one.

--Joshua Fershee