Canada Trip I – Via Rail to Toronto

The Old 70 as she prepares to depart for Toronto. The Eye of Sauron, a.k.a. the gigantic, LED billboard atop the Renaissance Center in Detroit, can be seen in the distance.

I’m in Montreal and Toronto this week for a program through Kogod. The topic is marketing in a cross-cultural setting, and it’s been the first class whose content I’ve actually really enjoyed. One article– definitely the most conceptually interesting I’ve read since starting B-school- proposes a theory of “antiservice,” exploring the bizarre things that happen in consumer systems when you intentionally and systemically screw people.

Reflections on taking the 5:30 train from Windsor, I have to say that the rail trip to Toronto is a thoroughly pleasant one. The most noticeable thing looking out the windows from the train– as well as from the far-less pleasant drive up the 401- is the relative absence of sprawl and, almost universally, the absence of billboards.

Hating the 401 is as Canadian as maple syrup, Tim Horton’s, or hockey. But there is something really nice about having a corridor free of billboards promising eternal salvation, deals on RV’s, or both in the same string of ads. (Indiana, state of the great twofer!) Heck, even the Wi-Fi works on Via Rail.

What would it be like to have a civil society, where things worked, where policymakers were a smidge less enamored of austerity?

God bless America, am I right?

Follow my Twitter @nzorach for live coverage of the trip and general hijinks.

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What’s More Expensive Than Spending On Climate Change? Not Spending On It.

One morning last fall, I found myself standing in the basement of my 1895 home, watching a waterfall cascade off a brick wall in the basement. Bathrobed, beslippered, and not yet sufficiently caffeinated, I slowly realized the futility of attempting to actually do anything about it. This round was Mother Nature, 1, Disinvested Built Environment, 0. The previous owner of the home, an international power couple of absentee landlords, hadn’t bothered to replace the gutters that had been scrapped in years past. There were grading issues. And, as with any old house, there were “Even with a degree in this stuff and years of experience, I honestly have no idea what is going on here” issues. Renovating an old house in a Rust Belt city can be sort of like peeling an onion, with each layer revealing some ever more bizarre architectural forensics, until the bottom layer just turns out to be some schism in space-time that simply doesn’t add up.

Fortunately– at least as far as being able to fix the problem- it wasn’t an issue of broken public infrastructure, but rather of a broken, old house. When the adjacent homeowner rebuilt their sidewalk, they made sure that the dirt was nearly level with their new sidewalk, which meant that it was a few inches above our windowsills, hence the waterfall of rain. Thanks, suburban absentee landlords! But this was a matter of excavation and meandering of nylon liners and pebbles and drain pipes. In other words: things could have been so much worse. As a city inspector, I have seen unspeakable things– like sewage backed up to the top steps of the basement stairs- so this was benign.

Detroit, as many other cities, has begun a slow but steady push to disconnect rainwater sources from its sewer systems, meaning that in the case of increasingly severe weather, the likelihood of sewer overflow decrease substantially. Progress on this and implementation of widespread GSI has been anemic at best, and the water department remains a black box of mysterious dysfunction and poor customer service.

Indeed, when I was at the City, I was actually explicitly forbidden from making mention of stormwater disconnect ordinance violations to property owners. When I moved to Detroit, this was a huge issue, and I lost several hundred dollars of stuff in a basement flood in 2016 and also some stuff in a minor apartment flood in 2015 (insurance, both times, pulled a “gotcha” fine print moment, and I bade farewell to some coveted material possessions– though this is quite cathartic and good for movement down the spiritual path toward pervasive chill in the face of utterly ridiculous stuff happening to you).

Though they have their extremes, Great Lakes are reasonable in terms of weather. So, while a crazy thunderstorm isn’t unusual, there aren’t hurricanes, and things like major drought or wildfires are rare. Thus I am more attuned to the frequency of infrastructure failures than to the increased frequency of storms. But it got me wondering about quantifying the damages of extreme weather.

Failures of the built environment can be on a case-by case basis, or they can be on a district-wide or monumental, citywide scale. Detroit’s twin city of Windsor, in the Land of the Rising Timbit, has experienced catastrophic flooding in residential areas a couple of times since I’ve been in Detroit alone. Historically high water levels on the Great Lakes are prompting unending rounds of handwringing from politicians pestered by constituents to act, but unable to muster the courage to talk about climate adaptation. CBC Windsor reported just yesterday that unprecedented water levels and flooding have not slowed sales of beachfront property.

EXTREME CLIMATE AND THE ECONOMY

Because we’re isolated from the extreme storm systems that terrorize the southeastern United States every year and typically don’t see catastrophic tornados, the biggest threats in the Great Lakes are heavy rainfall and extreme cold. Northern parts of the Great Lakes region don’t even really get extreme heat at this point, but most of the Great Lakes region, flat and having been gradually stripped of wetlands, the ultimate drainage system, is prone to flooding in heavy rainfall.

But the systems are essentially the same. An illustration:

Let’s say a red state government knows that at some point within a period of a few months every year, a masked man will enter the state capitol building, parade into the governor’s office, and demand a check for anywhere from a few hundred million dollars to as much as a hundred billion. In addition to his uncanny ability to evade security guards and metal detectors, this mysterious figure also has the ability to convince the governor to cut a check every time. Every year, the masked man points out that the governor could avoid paying most of this quizzical ransom by investing a few billion dollars each year in infrastructure improvements, climate change mitigation efforts, and wetland restoration.

“I can’t spend money on that!” the dyed-in-the-wool Republican protests. “Anthropogenic climate change is a liberal lie!”

“Fine,” the stranger retorts, “I guess I’ll see you next year.”

This is a hyperbolic illustration that isn’t really that different from how it actually goes down. Politicians persist in treating extreme weather as an inevitability as opposed to a risk that can be mitigated. Dorian has already done billions in damages, and other recent storms have been far more costly.

NOAA isn’t entirely sure about the degree to which hurricanes are getting more frequent as a result of climate change, but they’re fairly sure that climate change is a major problem and is making storms more intense. Over the six years that we’ve recorded more than one Category 5 storm, three of these years have been since 2002.

Beachfront homes in the Carolinas. (Photo by Sherry Smith.)

But you need not rely solely on climate data: Urban growth along the Gulf Coast means that more damage will occur year-over-year by virtue of there simply being more stuff there. Florida’s population has increased twenty-fold in the past century and more than two hundred fold since the middle of the 19th century, while Texas, whose coast is also proximal to hurricane paths, has increased more than sixfold in the past century. Growth rates are more modest in the rest of the coastally exposed states, but the US Census Bureau nonetheless notes a near doubling of coastal population in a half century (1960-2008), with a 150% increase in population in the Gulf of Mexico region alone.

Also think that there are few dense urban centers in the Gulf Coast. A preponderance of sprawl means lots of vinyl siding and pole barn structures– things whose roofs are easily rended asunder by storms. Hundreds of billions, if not indeed trillions, of purportedly prime real estate, built without permanent protections against flooding, is exposed to potential catastrophic damage. Investment funds place protective hedges in the forms of derivatives that stand to profit or protect an underlying position from large price swings. Can you imagine not doing the same with real estate? Insurance clearly isn’t enough.

Sprawlhaven, Florida: Satellite imagery of Tampa Bay and Tampa-St. Petersburg-Clearwater metropolitan statistical area, which has increased around eightfold in population since 1950. The MSA, which is a major tourist destination as well as a center for industry and shipping, frequently experiences major flooding. A planner once remarked to me on the irony that Tampa has an extraordinarily impressive stormwater management system, engineered to channel away rainwater, but that no amount of concrete could work with nature to mitigate flooding events. A few feet of sea level rise would have catastrophic effects on hundreds of billions of dollars of Florida’s beachfront real estate.

For kicks, though, let’s look at the GDP of the states typically worst hit by hurricanes. I’m defining this as Gulf and Atlantic states with the most exposed coastline, so, Texas, Louisiana, Alabama, Mississippi, Florida, South Carolina, and North Carolina. The cities– if we define cities as being municipalities with more than 100,000 people- most vulnerable to hurricanes are mostly in Florida, and, in terms of population, the larger cities of Tampa and Miami regularly make lists of places most vulnerable, as does the city of New Orleans. (Florida accounts for a large chunk of the Gulf Coast states’ 1,631 miles of coastline).

Pundits indulge in unending outrage over the cost of the supplemental nutrition assistance program (SNAP, or food stamps). This costs taxpayers about $71 billion per year and feeds millions of Americans, allowing them to, well, participate in basic metabolic processes involved with living, and, thereby, other economic processes, like contributing to the growth of the economy. Hurricane Harvey cost upwards of $125 billion in one single incident. No one really knows how much damage Hurricane Maria caused, but Puerto Rico alone shouldered over $100 billion in damages, and 3,000 people died. Dorian will be in the billions, and 59 deaths have already been recorded.

Pundits argue that food stamps are voluntary on the part of the government that provides it and on the part of the recipients that sign up. They also argue that poor people are lazy and dumb, and we can’t in any way plan for or meaningfully mitigate a crazy storm that threatens a populated area littered with stick-framed buildings and vinyl siding. What’s more, the idea that humans can meaningfully influence the planet is a liberal fantasy, right?

Think about the absurdity of this.

One recalls Mike Davis’ Ecology of Fear and wonder whether America at large epitomizes or indeed embraces this imagination of disaster as part of its perpetual, paranoid fear of destruction. As the President rails against Those Refugees or Those Rapists Crossing The Border, his base eats it up. But that base– largely concentrated in poor red states that already receive the lion’s share of welfare spending– overwhelmingly stands to be among the populations most vulnerable to extreme weather events. In other words, sustainability and climate change are most pressing to the most vulnerable people, who then vote for a party and a candidate that repeatedly deny the importance or even, indeed, existence of those issues.

While the same is true in the hood– that lower-income people of color by and large stand to be screwed the most readily by extreme weather events- this is true in any scenario considering populations that lack economic resources. It’s harder to move, it’s harder to maintain a house, it’s harder to afford things in general, so it’s much harder to shoulder the burden of a storm dumping water in your basement, extreme heat, cold, or, say, an economic downturn. But cities are generally moving much faster than rural areas owing to the economies of scale associated with green infrastructure improvements.

Lay down for a moment the Birkenstock-wearing, tree-hugging, crystals and chakras feel-good environmentalism. This can be about nothing more than dollars and cents, if that’s how we want to play it. We know that we  can plan for these events. Short of addressing the very issues of climate change and parts per million of carbon, we may be able to mitigate these events by building better quality buildings, better quality neighborhoods, and better quality urban infrastructure. We also know that, at a very real level, these events will cost the economy hundreds of billions of dollars per year, and whether or not you think climate change is to blame, the number of billion-dollar events is on the rise, if as a result of unchecked, sprawling growth in the Gulf Coast and nothing else.

Some trend line here. NOAA data on the incidence of major events, 1980-2018. Note the increasing incidence of billion-dollar disasters from severe storms and tropical cyclones.

We will be forced to reckon with these effects sooner rather than later as the present overheated economy hurtles headlong the next market crash while absorbing hundreds of billions of dollars in storm damage from a single year alone. Insurers will drop coverage of homes, the national flood insurance program will require a bailout from the government that gave it license to, well, insolvently insure a bunch of homes that keep flooding.

Part of the author’s rain garden, which, combined with a lengthy trench on the side of the house that leads out to the front yard, is designed to hold 15-20% of the region’s annual rainfall without flooding the basement (calculation based on hardscaping over several thousand square feet of hardscaping including roofs, sidewalks, and patios), which is equivalent to a very rare storm event indeed. Prior to the construction of this, the basement experienced light flooding in heavy rain. Total construction costs were around $10,000 and will save thousands of dollars in what had been unmitigated, ongoing damage to structural members, masonry, and random stuff in the basement.

As someone who is strongly motivated by the idea that markets can respond to climate challenges with regulatory intervention, I am not taking a doom-and-gloom approach as much as I am pointing out the fact that this stuff is getting really fucking expensive.

Solutions will necessarily be broken down into a few specific areas of focus in terms of climate change mitigation and adaptation:

  1. Macroeconomic / Regulatory (Federal): Major regulation has to focus on incentivizing a shift from fossil fuels. I am not sure how aggressive it has to be, but, while I am skeptical of doom-and-gloom portrayals from many of my fellow lefties, major moves have to begin now. I’m not sure if it is a carbon tax or cap-and-trade, but it certainly involves eliminating the fossil fuel subsidies we currently maintain. Oil companies have even lobbied for carbon tax, though, critics have pointed out, these efforts are dwarfed by their lobbying against environmental regulation.
  2. Regulatory (State & Local): State and local governments have many more tools at their disposal to effect better climate resilience initiatives at local levels. Banning companies from doing stupid stuff vis-a-vis aquifers. Programs at all levels of government should prioritize incentivizing habitat protection, restoration, and imposing stringent, credit-based systems for greenfield or wetland development.
  3. Architectural: Designing buildings that can withstand hurricane force winds and storm surges. Does this mean building all new buildings in flood-prone areas on giant reinforced concrete piers? How about entire neighborhoods that can withstand flooding? Probably that, too. Whatever gets built, it has to be done better than has been done in the past. (The problem here is that engineers are wont to pursue purely technical solutions– how to design a waterproof house, for example, rather than how to mitigate flooding through making better use of natural systems.)
  4. Infrastructural: People laughed at Henry Flagler (of Standard Oil and Miami, Florida fame) when he built a railroad to Key West– and it subsequently was completely destroyed in the 1935 Labor Day Hurricane, which killed 423 people, mostly World War 1 vets serving in the WPA. Less funny than destroying the pet project of a billionaire is when hundreds of citizens are killed, or when larger, more expensive things get destroyed and keep getting destroyed by storms.

Don’t get all hot under the collar about what it’s going to cost. It’s not some conspiracy to make money for irrelevant rich people or for George Soros And Her E-mails to take over your brain with Sharia Law. The costs are already being incurred, and they’re staggering– trillions over but a handful of years and hundreds of billions in any year, between flood insurance claims, infrastructure damage, lost productivity, congestion, waste, debris, destroyed landscapes.

We need to retool public budgets to indicate that protecting human beings from the environment and protecting the environment from wanton destruction is a major priority, and this can begin with an improved focus on how natural and manmade systems can work together to manage our relationship with the environment. Wall Street has already begun to attach marginal considerations in assessing creditworthiness and risk, suggesting that the systems must be considered in terms of not only ecologies and public infrastructure but also markets. Climate adaptation solutions are possible, expensive, and far cheaper than not spending on them.

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Autonomous Vehicles And The City Of To-Morrow

No, it’s not a Potemkin Village in which erstwhile Governor Rick Snyder staged his great Austerity March for propaganda films. It’s the MCity Test Facility at the University of Michigan’s North Campus in Ann Arbor. The site, designed to test the autonomous vehicles of to-morrow, was developed along with a number of other labs and research facilities when the university acquired a former Pfizer facility when it closed in 2007.

As part of an event for the Young Professionals in Transportation, I arrived on what will hopefully be the second to last sweaty-hot day of the year with a Detroit contingent including some former colleagues from the City. We all drove separately, of course, because the high-speed rail won’t be built for another 20 years.

Autonomous Vehicles would benefit from, but not necessarily require for successful implementation, systemwide infrastructure improvements that combined improved, uniform road design standards with “smart” technology to manage traffic flow and tell cars a bit more information about what’s going on.

We were welcomed by Assistant Director Victoria (Vicky) Waters, who walked us down the winding drive from the MCity offices to the site itself, which is fenced off from civilization. The 32-acre site is situated on rolling hills to improve sightlines for the robots, and the chain link perimeter fence is festooned with banners of sponsor companies who help fund the research. MCity essentially leases itself out to companies interested in testing vehicle technology in real-life, however controlled environments. The site features a variety of intersection and street designs, a simulated tree canopy, and a tunnel designed to simulate a GPS-blocking environment of an underpass.

Waters walked us around the street grid, which also features some make-believe storefronts, complete with sidewalk patios. She pointed out a handful of robotic lawnmowers that were diligently milling about some sections of grass in the middle of the site before finding their way back to their respective charging cradles. It is truly a sight to behold and looks more or less like a real cityscape.

MCity Assistant Director Victoria Waters explains DSRC and the quite sophisticated setup of the test facility.

We stopped to look at a crosswalk equipped with what us lefty planners derisively call a “Beg Button” that, when pressed, begins the cycle of flashing some orange lights so we can cross safely. This was used as an example to explain Dedicated Short Range Communications technology (DSCR, not to be confused with the other DSCR that the Big Three are kind of lacking these days), which is one of the guiding lights on how AV’s interact with their surroundings.

Example: A car is driving through an urban area at 25 miles per hour (40km/h). 0.6 miles ahead (1k), a group of pedestrians enter a crosswalk. That crosswalk is able to transmit a signal to any equipped car nearby. In an autonomous vehicle, this information would enter the series of tubes in the AV software. Car brain would then decide whether, based on its current speed and spacing from other vehicles, it needed to slow down or not in anticipation of the pedestrians. (If, for example, they were Cubs fans or city building inspectors, a truly “smart” car might actually speed up.) 

Realistic Practice: As a matter of pedestrian safety, I’m going to again invoke my favorite phrase and call it a bit of an intellectual tour de force in a conceptual desert. We know that pedestrian and cyclist safety is not a matter of us lacking 5G transmitters on every building and connected cars that can translate our verbal instructions to driving directions, but rather a matter of our society’s 20th century-and-beyond obsession with designing cities for cars and for cars alone. Jalopnik recently came out swinging against some neoliberal techno-optimist’s harebrained idea that we should turn sidewalks themselves into essentially restricted-access spaces to cater to autonomous vehicles.

Waters is clearly passionate and invested in the work she is doing with MCity, but thinks that autonomous vehicles remain a bit too pie-in-the-sky for us to be blindly optimistic about them solving all of the world’s problems. There is no regulatory consistency, she says, and the federal government has failed to step up to the plate to facilitate the development of robust guidelines and frameworks. Collaboration has been limited in an industry historically very protective of its innovations, and this has only become more entrenched with the rise of so-called Connected Vehicles. Security remains a huge concern, as evidenced by the likes of a 2015 incident that saw a Jeep maliciously hacked remotely while driving on a highway.

And there are further stormclouds on the horizon, with an economic pullback looming. This has been evidenced in automotive just this week in Moody’s downgrading Ford Motor’s credit to junk status after an exorbitant restructuring. (Wow, it’s almost like I called this a couple of weeks ago and said that this exact same thing was going to happen!) With few plans for commercialization and an inevitable sales dip accompanying whatever trainwreck of a credit crunch is about to happen in the economy, the Big Two and a Half can invariably plan on selling fewer cars, which will hurt the bottom line.

But just because the future of for-profit, autonomous vehicle technology has an uncertain future, though, doesn’t mean that cities do– nor does it mean we should give up on all of the technology. Intelligent Transportation Systems comprise a field of technology that is already nearly a half century old, and, as Detroit city engineer Tony Geara noted at the event yesterday, technology is always evolving, changing, and getting better, so we must constantly consider this in the process of periodic infrastructure repair, renovation, and maintenance. This should be on everyone’s mind as we face an unmitigated catastrophe of infrastructure deterioration. While we should remain cautious about putting all of our eggs in an autonomously-driven basket, we should always remain focused on figuring out ways to make cities work better for people. If technology can help that, I’m certainly listening and interested.

The City of Detroit contingent at MCity’s facilities outside Ann Arbor. From left: Hind Ourahou, Mobility Strategist; Amarynth Sichel, Impact Investment Consultant; Lorenzo Johnson, Lead For America Fellow; and Tony Geara, Transportation Engineer. The MCity test site itself is about 1/4 mile to the north-northeast of this location, near the blue water tower pictured. (Photo by author.)

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Liability in the Age of Easy, Profitable Destruction

Early on the morning of July 16th, 1945, in the middle of an uninhabited desert halfway between the remote cities of Alamogordo and Soccoro, New Mexico, the first atomic bomb was detonated. It was the culmination of six years of work by over a hundred thousand military and civilian personnel from the United States, the United Kingdom, and Canada, in what became known as the legendary Manhattan Project.

The BADGER explosion on April 18, 1953, as part of Operation Upshot-Knothole, at the Nevada Test Site. Courtesy of the National Nuclear Security Administration / Department of Energy.

J. Robert Oppenheimer, the physicist who led the project, later recalled words from the Bhagavad Gita, a line that Vishnu says to Arjuna: “Now I am become Death, the destroyer of worlds.” At the moment it was apparent that the test had succeeded, fellow physicist Kenneth Bainbridge turned to Oppenheimer and said, a bit less philosophically, “Now we’re all sons of bitches!” He later characterized the implosive fission of a roughly softball-sized pair of half-spheres of plutonium as a most “foul and awesome display.”

After cheering the development of this tool of mass destruction, Oppenheimer would later lament the use of the second atomic bomb against civilians in Nagasaki, in the second of two bombings that killed hundreds of thousands of mostly civilian Japanese. This would, according to accounts of an October 1945 meeting with President Harry Truman, really piss the president off. The argument in favor of the use of atomic bomb against civilian targets has been widely accepted by many historians as a horrific, however favorable, alternative to the millions of civilian and military deaths that would inevitably result from an invasion of Japan. Of course, plenty of historians still don’t agree that an invasion of Japan would have been the only way to force the country into surrender, especially given the fall of the Third Reich earlier in 1945, but that is, in this case, a separate can of worms.

This question of responsibility has long dogged scientists. Is a scientist responsible for what they create? In a liberal market economy, is a company responsible for what they create? It’s a funny point of agreement between liberals and conservatives that highlights the rise of a new American liberalism in the “neoliberal” camp– the insistent focus on the purity of the individual and of individual intent.

I frequently get into this debate with scientists who believe that their work is ethically and morally pure and that they don’t have any responsibility for what happens to the science after it leaves their hands (I seem to remember what actually devolved into a shouting match in the boxcar at Batch with a Canadian Ph.D. of a now-ex girlfriend, who argued that genetically modified organisms are pure and virtuous science, and scientists should never bear any responsibility for the malfeasance of their corporate overlords).

But the impending collapse of Purdue Pharmaceutical as a target of nationwide opioid lawsuits seems to demonstrate that, at least in the eyes of courts, companies indeed do have responsibility for what they produce. The company has been hammered by opioid lawsuits owing to the international epidemic of overdose deaths and has agreed to a settlement that pays out way more than it actually makes, meaning, well, deuces. Beyond Purdue’s five thousand worldwide employees, this settlement, as it continues to unfold, will invariably have massive repercussions and implications for the trillion-dollar pharmaceutical industry as the 1998 tobacco settlement did for that industry.

Courts– and society- agreed in 1998 that Big Tobacco was liable for selling products that killed millions. That settlement, which generated billions in revenues for states, tectonically restructured the tobacco industry, but it certainly did not destroy it. Tobacco remains a cash cow, with an albeit smaller pool of companies still churning out revenues (see table below). The major thing differentiating the multi-billion dollar development of a weapon of war like the atomic bomb from the private sector development of tools of awesome and lethal power is that the government has effectively limitless resources at its disposal and so the motive for massive scale is that more salient.

The major thing that differentiates my point of view from the modern American conservative or the Ayn Rand-reading neoliberal pedant is my belief that the burden of responsibility should fall upon those with the most power, the most control of the value chain, and the most influence. This has differentiated me in my characterization of a lot of conflicts. “Maybe Eric Garner shouldn’t have been selling cigarettes if he didn’t want to be extrajudicially executed!” they will say, or, “maybe that Palestinian teen shouldn’t have been throwing rocks at a tank if he didn’t want to be shot!” So, no, I do hold the radical belief that if you have more power, more information, and, usually, more capital, that you have more responsibility. Not tobacco farmers, nor the workers who run the massive ships that bring oil across the oceans, but, indeed, doctors overprescribing opioids– probably not only violating the Hippocratic oath but also fit in the same category as extremely well-paid, extremely well-informed corporate executives.

Big oil and big tobacco have one unusual thing in common that makes them both attractive investments but also particularly easy targets for litigation over the collateral and externalized effects of their products, and that’s the fact that they generate a ton of cash that the companies don’t know what to do with. The average company in the S&P 500 pays a dividend of 2.5%, but tobacco and oil companies routinely pay out two or three times that rate. In business terms, it’s because they have a good thing going, they’re selling a lot of it, and if they were to keep that profit, they wouldn’t necessarily be able to deliver as good a return on equity as selling barrels of oil or smokes. Similarly, tobacco companies will not diversify into manufacturing iPhones– though it is possible to imagine a world where oil diversifies into energy products like batteries or solar panels (remember the short-lived Beyond Petroleum?), but for now, the name of the game is to stick to cranking out that sticky icky.

Company – Oil Cap Yield
BP $126bn 6.57%
Chevron $224bn 4.03%
EcoPetrol $689bn 8.27%
ExxonMobil $300bn 4.91%
Royal Dutch Shell $224bn 6.76%
Total SA $135bn 5.77%
Company – Tobacco    
Altria $82bn 7.66%
British American Tobacco $82bn 7.29%
Philip Morris $113bn 6.24%

Pharmaceutical companies are a bit different because they ride on the prospective success of single products that have massive R&D costs, but end up being massively profitable before their patent expirations. They generate massive amounts of cash but often do not pay dividends– they are sort of the sectoral equivalent of tech unicorns that VC investors are often hunting.  Everything hinges on the success of FDA approvals, drug trials, and the ability to commercialize these very valuable patents until they inevitably expire. The company that first announces that it has developed a cure for cancer that can be commercialized is going to go through the roof overnight in terms of valuation.

Mallinckrodt Pharmaceutical-manufactured vicoprofen, also known as hydrocodone. To tie this back to the beginning of our story, Mallinckrodt Pharmaceutical’s former headquarters in North St. Louis, which operates still to this day, was involved in enrichment of uranium for the early atomic bombs. 

Granted, part of this is just tradition of how companies in different sectors are managed and how capital assets are organized. But the major difference with the Sackler Oxycontin Empire is the fact that opioids were treated the same way by the company as oil was treated by ExxonMobil or tobacco leaves by RJ Reynolds or Altria

Beyond big pharma, this question of liability in the form of externalized damages opens up avenues toward litigation that could transform entire industries and, indeed, society at large in how we think about the very notion of personal and collective responsibility. I’m not alone in thinking about this question, and it’s interesting to consider the biggest potential targets in terms of the deaths and destruction they cause every year:

1) Big Oil: This seems the biggest target, given the tremendous damage to air quality, locally, and to the planet’s climate, by combustion of gasoline. Lawsuits are already ongoing against ExxonMobil and others, and the oil industry is responding by slowly getting its feet wet in some nascent technologies that, it claims, will mitigate climate change. While some lawsuits against big oil have been dismissed, others are proceeding.

2) Tobacco (again; still nearly half a million deaths per year in the US): Media coverage has focused heavily on a spate of incidents involving bizarre respiratory illnesses of otherwise healthy people using vape pens. Tobacco makers are all deep in the vape game at this point, and, as we explore alternatives to tobacco in terms of synthetic vapor products and cannabis, the question of intensive standardization and regulation will become ever-present– but likely not before some major litigation points out the complete lack of controls that have led to these deaths.

3) Automakers (36,000 killed in car crashes; 6,000+ pedestrians killed and 800+ cyclists per year): The uptick in pedestrian and cyclist fatality rates is not purely a product of the increase in automakers’ insistence on selling trucks and SUV’s. But that is a huge part of it. Of course, automakers would be free to use the defense that they aren’t driving the cars that are killing people, or that cities are designing streets poorly (they are). But it seems they are certainly aggressively selling cars that they know to be more lethal in collisions with pedestrians, and that is troubling.

4) Gunmakers (21,000 suicides, 11,000 homicides annually): The firearm industry is already in freefall since that gun-grabbing Muslim socialist Obama left office with nary a meaningful piece of firearm legislation to his name. I wrote about this a year and half ago, when some major funds decided that they were dumping gun stocks (a little late, given that this was after they had substantially declined). Since that time, leaders VSTO, AOBC, and RGR have all lost a further 20-70% of their valuation. Congress under the Bush Administration tried to protect the gun industry from litigation. But the aftermath of the 2012 Sandy Hook massacre provided evidence that the victims or families of victims of shootings are entitled to sue manufacturers. At issue is the same question of negligently or even criminally pushing sales with no attention to ensuring safe usage.

This collective batch of companies comprise multiple sectors that represent, depending on how you count, double digit percentage points of the entire US economy or, indeed, global GDP. But what we should have learned from “winning” the war on coal is that markets actually do work in cases when they’re allowed to, and can indeed replace bad things with better things that do better for everyone. Just to be clear, I’m not saying that capitalism doesn’t still need to be reworked from the bottom up, but rather that it’s not as though going after the major offenders is going to result in some sort of cataclysm, as is the scenario painted by sundry hand-wringers of the right wing media echo chamber.

The Sackler family is already trying to disclaim responsibility for the monster they created, but it’s a little late for their business empire. But in comparison to Purdue’s private ownership, public companies may receive no such protection if litigation proceeds against the likes of every household ticker symbol on the stock market involved in the manufacture of various and sundry tools of death and destruction. It is below us as a human race, whether technicians or managers, to not connect the dots between the products we produce with our own two hands and what is done with those products.

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On The Banks of the Mighty Maumee

In anticipation of Alexandria Ocasio-Cortez’s imminent assumption of her role as supreme socialist ruler of the cosmos, in which she orders the immediate seizure of all public and private assets and the destruction of all commercial aircraft, I decided to book a train from my native Pennsylvania back to Detroit via Toledo.

Seeing Freedomland by rail is as much a study in natural beauty as it is in disinvestment and austerity. Yea, tho we grieve each delay announced by the chubby, bespectacled conductor, making way for freight, as the trucks go clickety-clack ‘neath worn carpet, one can stare out the Makrolon™ windows, beyond shuttered steel mill, hill, and dale. Delays aside, I’ve never had a really bad experience on a train– I met one of my oldest friends on an Amtrak once by random chance, and used to frequently run into colleagues and friends between Lancaster (LNC) and New York (NYP).

Outside the Northeast, where trains run frequently, punctually, and even profitably, distance Amtrak routes are a great study in asking that question of why the national passenger rail provider struggles for hundreds of millions in capital funding appropriations while Congress doesn’t so much as blink at a request for additional hundreds of billions to fund jets that will never fly to fight wars that will never happen.

The food is actually not bad, and the seats are large, comfortable, and recline to a nearly sleepable angle– comparable to first class without the dehumanizing experience of dealing with the TSA. I can also say that Amtrak trains have, in every experience since my earliest memories, always had outlets at each seat, which is more than I can say for probably 95% of commercial aircraft in the past twenty years.

But I digress.

MORNING IN THE GLASS CITY

Toledo at 5am is, like most cities, pretty dead. But not inhospitable, I found, as I walked through a mostly-abandoned post-industrial area near the train station toward the riverfront, where a new park is being built around the base of the Anthony Wayne Bridge (1931) over the Maumee River (the Shawnee and Miami-Illinois people both called this the ‘River of the Ottawa People,’ as best I can find, although the name ‘Maumee’ derives from the same word as ‘Miami’ as in the tribe).

The Middlegrounds Metro Park is being developed in conjunction with an extensive renovation of the bridge structure and will provide access to acres of green space as well as a biodiverse assortment of native wildflowers and grasses built around a drainage and stormwater retention system. I noted blazing star (liatris), bluestem (andropogon, which I translate from the Latin as “Gerard’s Man-Beard”), switchgrass (panicum), black-eyed susan (rudbeckia), and many more, including a number I completely didn’t recognize. The vegetation is dense and some of the grasses are a full six feet high.

Let’s go back to the colonial era (did it ever really end?), subcategory “Manifest Destiny,” when white settlers believed that the prairie couldn’t grow anything because it often lacked trees. Never mind that these damn grasses were five or ten feet high and held strong through prairie fires and floods. By the time industrialized agriculture busted onto the scene in the latter half of the 20th century, prairie grasses were passé, and this was around the time we started paving over everything to build free parking, because automobiles and mah freedom.

The 20th century saw the symbiotic development of dams in the name of flood control, decimation of native prairie habitat and wetlands, and hardscaping of as much urban surface as possible– as well as an increase in the rates of catastrophic flooding. (Remove wetland and you reduce the capacity of the natural environment to absorb rainwater– it isn’t rocket science. It’s almost as though… this could have been predicted.)

The Anthony Wayne Bridge over the Maumee River at sunrise. Photo by author.

While many native grasses in the United States are not endangered species, they may be considered endangered or threatened on a regional basis owing to how rare they have become in certain areas. Photo by author.

The park pretty much highlights everything I want to see in redevelopment projects:

  • Accessibility: Anyone can get to it easily on foot, bike, by car, or by public transit
  • Stormwater management systems built into a robust landscaping program
  • Native landscaping making use of nature’s own evolutionary processes, using plants suitable for the local climate and the area’s proximity to the river– things that will survive and even thrive through low-level flooding and the vicissitudes and extremes of Midwestern weather
  • At a more granular level, it would appear that the park’s development accompanied a planned renovation of the bridge. It is valuable if we consider projects like this as having a threefold purpose of 1) being integrated with infrastructure and therefore infrastructure funding, 2) providing accessible public space, and 3) serving as a tool for redevelopment or economic development.

RESOLVING CONTEXT

There is even a bikeshare station for the city’s Tole-Go rides. See what they did there? Quite clever. Context is the one unresolved question, since this park is sort of tucked off into an otherwise heavily industrial– and disinvested- part of town, and it is unclear what exactly is going to happen with it. The Norfolk Southern service yard to the south is kind of a mess, because why would a Class I railroad, a highly profitable corporation thanks to taxpayers, ever think to be a better corporate citizen in the neighborhoods it’s junking up with trash and rusting steel bits?

“That Camaro owner must be a cop to feel entitled to park like that,” or, “the Toledo Train Station Has Seen Better Days.” Photo by author.

As the train rolled through Johnstown some twelve hours earlier, I had wondered to myself, what if we have been– for decades- thinking the wrong way about economic development, by targeting these supposedly low-hanging fruits of “more profitable markets” in cities like Brooklyn in the 1980s and 1990s or Detroit in the 2010s, missing out, in the process, on a whole spectrum of cities that have that magic but are totally off the radar of folks thinking nationally about investment and economic development? Real estate valuation is so utterly and critically low in cities like Toledo, Johnstown, Gary, Youngstown, McKeesport. Yet these cities all or mostly are home to vastly important natural resources, namely, rivers that can be used for ecological restoration and stormwater management, if not indeed commerce or economic development.

I made it back in plenty of time to catch the Dog back to Detroit. The heavily advertised wifi didn’t work, but for a $15 trip, during most of which I was asleep, I ain’t complaining.

Good job, Leedz.

Posted in Climate adaptation, Climate Resilience, Environment, Stormwater, Transit infrastructure, Urban Planning | Tagged , , , , , , , , , , , , , , , , , , , , | Leave a comment

Bad Ideas And Bad Companies Do Not Need Your Defense

I was out for happy hour the other night with a transportation group. In spite of its legendarily bad public transit system, Detroit’s accompanying scene is expansive enough to boast sub-niches: There is a transit justice and organizing group, a transit justice and advocacy group, a scene of techy “mobility” nerds who just love autonomous vehicles, and, in this case, there is a group of, well, vaguely defined transportation professionals at large but with a vaguely more public focus.” It was a diverse group– something I’m always glad to see in a city that has a mysteriously high number of highly educated white guys “representing” the interests of a majority black city.

DDOT’s Mikki Taylor-Hendrix at Pao on Grand Circus in downtown Detroit talks mobility.

I biked from home in Southwest to the Detroit Shipping Company– and back when I realized I had forgotten my keys- and back again in time for the 5:30 departure, only minimally sweaty (Verily I say unto thee– it is great having an eBike, though I really wish there was such a thing as a biometric bike lock– get on it, Kickstarter!). We bussed downtown on the FAST (SMART), sipped and supped at a hopelessly trendy sake bistro— with tiki inclinations, no less- and then bussed back on the Dexter (DDOT), all using the same farecard (what a time to be alive!). Represented were Detroit’s own General Motor Carriage Corporation, HNTB, AECOM, AAATA, DDOT, the city’s mobility office, and the Center for Automotive Research (a.k.a. CAR– you see what they did there, of course).

The conversation invariably turned to The Future. I toasted a tiki drink to regional cooperation, on which we are all betting through hopes on a new, less awful Oakland County executive (one of the wealthiest counties in the country, led for years by a drunk racist who staunchly opposed regional transit expansion or cooperation with Detroit and who has gone the way of the Koch). 

IN DEFENSE OF THE TRUCK

So, we all agree that we like buses and that we need more buses, more trains, and better infrastructure for things that aren’t cars. What we don’t agree on is the role of autonomous vehicles or the future of the automakers. I’ve always called AV’s a conceptual tour de force in an intellectual desert, borrowing a phrase from one of my heroes, who used the term to describe genetically modified crops. It’s not that the technology is a bad idea or fundamentally flawed, he argued, it’s that it’s not rooted in a robust context. This is especially true in the case of AVs given how little we have invested in comparison into transit systems– and how studies increasingly show that “innovative” services like Lyft and Uber actually increase traffic. Companies like GM have spent billions on AV’s with no strategy for profitable exit or, indeed, commercialization at all, on any sort of horizon.

Most experts agree that within a few decades, many fewer people will own their own cars. And yet, in spite of how little money we have invested in public transit as a society, one of the arguments that always comes up is that of apologism for the automotive industry, which is, by any estimate, in decline. This is especially true in Michigan, where we simply cannot let go of the obsession with the monumentalism of the Big Two and a Half.

The Ford F250 Super Duty, the state animal of Michigan. With a curb weight of over 7,000 lbs (3000+kg), the F250 can tow up to 35,000 lbs (15900kg) or hold about 2600 lbs of cargo* and boasts a fuel economy of about 16mpg. * – 3.3 times more than my Honda Civic!

Truck apologism was an important part of the conversation. “Trucks,” the apology goes, “are highly profitable, so it’s important to sell as many of them as possible in order to fund cool things like divisions working on autonomous vehicles and emergent mobility solutions.”

One of my colleagues who worked for such a division of one of the Big Two and a Half before, well, that company started downsizing that division and she quit, insisted this to me as well for many moons. Get a six figure salaried, white collar GM employee drunk and they will tell you about how much they hate their jobs and how much they hate selling trucks. But complain about the truck-dependent paradigm to that same person and they will push back with ineffable vitriol. How can trucks be The One True Way if truck sales are at an all-time high and these companies are still downsizing alternative product lines Perhaps because growth is finite but greed is not?

One gentleman dug in and went so far as to argue that trucks are a “recession-proof” product, because business owners can write off the cost of a truck. This, of course, isn’t backed up by any evidence. So, I’ll just ask: Why do people feel the need to defend these companies? We could rehash the age-old debates about how they’ve been terrible corporate actors– thinking about the debacle that was the GM Poletown project, or the auto bailout and the golden parachutes that said bailout mysteriously did not prevent. I don’t want to rehash that, ’cause that’s another rabbit hole. These companies suck by a number of metrics. And what’s more than that, they don’t need you to defend their virtue over happy hour.

But, to quote Levar Burton, don’t take my word for it.

Let’s look at some math: GM spent north of $1 billion to acquire Cruise and invested $500 million in Lyft. Neither company makes money (though I’ve always maintained that Lyft would make money if they downsized their exorbitant white collar workforce owing to the high marginal profit per ride, a.k.a. infinitesimal variable cost). It is unclear how much money GM-owned Maven makes, and Ford and other automakers are relatively quiet about their side hustles because they aren’t trucks, and we’ve gotta sell trucks, because trucks! $1.5 billion on those two investments alone is a lot of sales of pickups.

The last recession proved that truck sales are indeed not recession-proof because the last recession nearly destroyed the automakers on sales declines alone. In 2007, they were banking on selling giant SUVs. Rather, when the shit hit the fan, people actually started riding the bus. Imagine.

FINANCIAL ANALYSIS

So, I made a little table to compare the Big Two and a Half based on their corporate fundamentals. In the simplest terms, quick ratio refers to the short-term solvency of the company in its ability to meet its short-term debts while “current” refers to overall solvency of the balance sheet (which is, in effect, not balanced). Price-to-earnings multiples reflect how excited the market is in a company and, controlling for other factors, whether it is cheap or overvalued (useful in choosing stocks to invest in). A company that has beaucoup cash flow but a quick below 1.00 might refinance that debt. But if there is a credit crunch and corporate bonds are downgraded and suddenly a company can’t borrow as much cheap money, a low quick ratio will turn into some bad news rull quick. (2008?)

 

Quick Ratio

Current Ratio

P/E* (MRY)

(P/E) / S&P 500 Average
  F 1.1 1.2 7.3 34.3%
GM 0.8 0.96 6.58 30.94%
FCAU 0.60 0.81 3.74 17.58%

* Price to Earnings ratio calculated from the most recent year normalized to include “extraordinary items,” which, mysteriously and through a trick of accounting wizardry, seem to appear about every year.

 This chart tells us a few things:

First: Record truck sales or not, the market is simply not excited about the automakers. The average price to earnings ratio on the S&P is 21x. These companies are trading at a third or, in FCA’s case, as little as 18% of that number. That means investors perceive one or a combination of things including high risk, low growth potential, or general unsexiness (“sexy” sells, and if you don’t think that’s a technical metric, just look at Beyond Meat, whose stock has gone on a rollercoaster ride based on dubious revenue projections that cannot possibly reflect the realities of the market for substitute meat products). For comparison, Netflix trades at 121x price to earnings with the a current ratio just above FCA’s– this means that while the video streaming giant is no more solvent than one of the largest automakers, investors think it has a lot more growth potential. For kicks, consider that Netflix’s market cap puts it at about $130 billion, while $FCAU lags at a paltry $20 billion. Yes, really– no one cares about Jeeps, but they sure care about Stranger Things.

Second: Any downturn in sales is going to hammer these guys. Ford may be okay with a stronger balance sheet. Its stock already took a hit amid a 9-figure cost of restructuring aimed at saving, well, a nine figure sum. The transportation sector is already considered a bellwether of economic activity, and freight rail began to slow down about a year ago back when everyone was still riding the truck wave– around the time the Big Two and a Half announced their restructuring. Automotive is part of this. In Detroit’s case, there are a bazillion suppliers that are also affected. Metro Detroit’s economy remains relatively undiversified.

Third: This isn’t directly reflected in the chart but rather something we can deduce, and that’s the idea that autonomous vehicles are costing billions of dollars but haven’t produced any inkling of revenue, even on the horizon. Pharma companies invest big bucks in crazy drugs thinking they’ll be able to capitalize those expenses and sell them for bigger bucks– autonomous vehicle technology promised this and more, but no one is even thinking about what this will look like. Regulation is even more elusive. The result? This is money thrown into the corporate sandbox, but Wall Street isn’t seeing revenue potential. (Here’s a very long, very boring, but very comprehensive assessment of the market.)

THE FUTURE

I’m not entirely in the business of gloom and doom, so I’ll try and turn this into a positive spin: I’m not saying there isn’t hope. Far from it– there is plenty of energy for better things than this broke-ass paradigm. In Metro Detroit, the new Oakland County executive is interested in getting transit on the ballot. Transit expansion could well save Detroiters thousands of dollars a year on transportation costs, a revenue-positive equivalent to a massive cash handout per household, and that could have wild and crazy implications for the city’s beleaguered economy. Broader than Metro Detroit, General Motors is even investing in the development of all-electric vehicles, while companies like Tesla, in spite of rocky finances and douchemaster CEOs, are blazing trails in microgrid power solutions that ten years ago would have been unheard of.

It’s time to embrace the coming change and what that might mean for cities like Detroit: cleaner air, more affordable ways to get around, and, invariably, downsizing of giant corporations too large to understand the writing on the wall. But no one should ever feel the need to defend these companies, nor the need to defend bad business models. These business models haven’t served Detroit for years, but they also haven’t served Americans. Trucks pollute more, cost more to operate, and are more likely to kill pedestrians. And the companies that make them aren’t virtuous corporate actors. The market will likely kill demand anyway as we hurtle toward a global credit crunch and people stop buying $60,000 cars, and closing the taps of Saudi oil from either geopolitical pressure or cartel machinations will make 15mpg far less attractive.  In the mean time, let’s think beyond the truck and think into what a “triple zero” tomorrow might actually look like.

Also, get thee to Pao and let me know what you think of their food.

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Well, World, We Had A Good Run

I guess this is it. The Amazon, the globe’s largest carbon sink, is burning, the yield curve has inverted, there are trillions of dollars of negative interest debt on global markets and even in corporate bonds, and the US government is projected to run a trillion dollar deficit for the next forever. The media is maintaining false equivalencies between the “far left” protesting white supremacists, because we’ve normalized the far right, who apparently want everyone dead in planned mass shootings. Oh, and they’re still putting children in concentration camps at the US-Mexico border, because I guess that’s a good use of taxpayer money that we seem to not have any of. But, hey, my 401(k) is doing great, eh, libturds? This seems to be the dominant rhetoric from the Right on the state of things.

Nothing can shake the longest bull market in US history. Until, of course, something does shake it– perhaps someone blowing someone else up, or perhaps another tweetstorm aimed at derailing a sold half century of diplomacy with NATO allies– and then we’re up a certain crick, as it were. Honestly? I kind of can’t wait. I mean, can’t be that bad, right? It’ll be ugly. But a substantial disruption of neoliberal market capitalism might be the best way to, well, disrupt the idea that neoliberal market capitalism is the only way to do things.

Going to get into bed now, debating whether I should read about marketing management for my business degree (hey, if you can’t beat ’em, right?) or my book on austerity.

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Happy Canada Day!

This Canada Day, I drove all the way from Detroit to celebrate in a foreign country (a.k.a. “across the river”)– to buy gas in a province where that gas is subjected to a carbon tax. This is admittedly mostly so I could tweet about it to Premier Doug Ford, who has spent millions of Ontario taxpayer dollars fighting the carbon tax as “the worst tax ever.” Ford’s administration, currently beleaguered by a series of scandals over nepotism, disinformation, and an inability to close a budget deficit that it ran on the promise of fixing, suffered a major defeat last week when a second court sided with the Trudeau government, upholding the constitutionality of the tax.

But as the Pittsburgh Post-Gazette’s Tracie Mauriello points out: by most estimations, the tax has proven pretty progressive, directly returning a stream of tax revenue back into the pockets of taxpayers and disproportionately taxing more carbon-intensive businesses and the wealthy, who typically consume more. Mauriello points out that British Columbia’s economy has grown by a double-digit percentage while emissions have dropped.

Me in festive garb, wearing, what I am told, is not a “hockey jersey” but rather a “sweater.”

Skeptics remain, of course– that is, self-styled economists who believe that any form of taxation is theft (an assertion with which even libertarianism.org disagrees) and who don’t believe that it is valuable to internalize the “social costs” of carbon. Critics also lament that China and India contribute more to pollution than the United States does, even though this is somewhat misleading. Those countries largely lack environmental protections, on the one hand, but, on the other, carbon footprint is largely tied more to wealth through consumption than anything else (see Naomi Klein), so any attempt to an create a lower-carbon economy would disproportionately penalize heavy consumers– and the poor ain’t that.

But I trust we’ll get there, one record-breaking heat wave, one tank of gas at a time.

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Detroiters Grapple With Questions of Energy Future

Yesterday evening, concerned citizens, activists, and energy professionals packed a lecture room at Wayne County Community College in downtown Detroit to offer public comment to the Michigan Public Service Commission. The hearing was on utility DTE’s proposed Integrated Resource Plan, which it is required to submit to the MPSC, a proposal outlining– you guessed it- its unflagging affinity for fossil fuels.

While a few supporters showed up to cheer DTE doing a great job of investing in communities and something something, the majority speakers complained about the company’s failure to commit to meaningful efforts to curb climate change, the issue of widespread pollution resulting from reliance on fossil fuels, and the need to provide safe, reliable, clean power for future generations. Power equity as well as reliability was an issue raised, as ratepayers in the hood often struggle with frequent blackouts, bizarre billing issues, and shutoffs. Remember that time DTE CEO Gerard Anderson was so offended by accusations of unreliability that he took to Crain’s to defend the virtues of his company (Anderson, in the process, inadvertently self-owned when he conceded that a major storm that had knocked out power for six hundred thousand customers had knocked down twenty times more power lines than was expected).

The last time I was in WCCCD was actually to attend the IRP forum, where a large, bearded man identifying himself as a DTE engineer in charge of implementing large capital projects, told me about how climate change is a liberal lie and we desperately need natural gas to fulfill our needs. Fracking? Concerns about safety are overblown, he told me. Carbon dioxide? Not as big a deal as the doomsayers are making it out to be. But let me tell you about how the one winter, it was so cold that we almost ran out of natural gas, which is why we need to invest in better natural gas infrastructure. In addition to uttering a number of flat-out untruths, the dude was mostly just kind of, well, unimaginative.

This is how DTE operates as a company– unimaginatively. Is it their fault, though?

Well, yes, mostly– but not entirely.

In terms of their place in the market, investor-owned utilities, or IOU’s, are odd beasts indeed. Investors view them as safe, stable, long-term bets owing to their uniquely monopolistic nature and the relative inelasticity of demand for their services. Everyone’s gotta turn on the lights at night and everyone has to heat their homes in the winter. Utilities have predictable balance sheets: their capital expenditures, though massive, are limited in number and frequency and planned out years in advance, utility rates are set by public mandate, and demand is predicted with reasonable accuracy based on weather patterns and population growth rates. The major risks to a utility are commodity prices for gas and coal, which can spike tremendously during a cold snap or a heat wave.

Utilities begrudgingly accept relatively limited regulation in exchange for this monopoly; if true “deregulation” were to occur and, say, microgrid and distributed generation solutions were to crop up on every corner, large IOU’s might well lose a double-digit percentage of their revenue potential overnight. But their continued existence, at least in the short term, is necessary for one reason and one reason only:

Baseload generation– the electricity that must be generated 24 hours a day to ensure that the grid is stable and can meet demand as peak demand fluctuates- cannot at this time be provided by renewable resources in most geographies. Solar panels produce power during the day and wind power produces more at night, and demand is, inconveniently, configured in opposition to this, a trend utility nerds call the Duck Chart. While there are multifarious ways to normalize demand over the day (realtime pricing and a lot of complicated stuff I don’t need to get into), we aren’t quite at the stage of being able to economically store enough power. It’s coming, don’t worry (the Tesla Powerwall is perhaps the best known example). This is the only reason why we still have massive coal power plants and nuclear power plants, which can produce a ton of power at a very low marginal (per kilowatt hour) cost.

Being able to do one thing very well and have a customer for it leads to predictability. But while predictability may inspire suits in banks to offer favorable rates to finance massive capital improvements, it is at odds with innovation or dynamism. Simply put, utility companies are, to the stock market, well, boring. They’re viewed as a safe bet to the point that equity outflows from risky companies like Amazon or Netflix go into companies like DTE as “safer” investments before they go into lower-yield treasury bonds, considered to be the safest investment. To give an extreme comparison, if DTE were valued at the same price-to-sales ratio as Beyond Meat, the new fake meat startup and darling of the IPO market right now, it would be worth more than Amazon, Microsoft, or Apple. Such is the folly of investment logic– safe is boring, and exciting is a great way to lose your ass.

Investors believe that because cash flow from operations is limited by regulated rates that their companies are intrinsically limited, too, in what they can profitably achieve, and the utilities have come to believe this as well.

But while the heavy tethers that keep DTE close to the ground spell stability for a risk-averse investor, they don’t mean that the company isn’t wildly profitable. Especially as we enter an increasingly unpredictable era of climate– not to mention a highly risk-prone global energy market, where oil is both on the wane and also threatened by geopolitical upheaval– it is time to get creative about what companies like DTE can do with that money.

But while a utility isn’t a charitable foundation, which is mandated to spend a specific number of dollars per year on philanthropy, neither is it governed by the same manic growth fever as exciting startups like Netflix or Amazon.

 

Embedded in the security of a utility’s economic might is the implied, but rarely realized, ability to do interesting, profitable things with that extra money.

DTE paid no taxes last year on a record-breaking, more than billion dollars in profit. Through its IRP, it’s pushing natural gas expansion. Its commitments to energy efficiency (or “waste reduction” as One Tough Nerd once called it), are gestural.

What could that money be used for? Some ideas:

  • Photovoltaics to power tens– if not hundreds- of thousands of Michigan homes
  • Improving the electrical grid so that it is more resilient and better suited to handle distributed generation, microgrid solutions, and electric vehicles for the next generation
  • Develop EV charging infrastructure
  • Developing platforms to scalably retrofit existing housing stock, multifamily buildings, and commercial buildings with better building envelopes, more efficient heating equipment (eliminates the need to plan and finance multi-million dollar capex years down the line for the utility, improves health of workers, increases free cash flow for residents and businesses alike)
  • Developing territory-wide renewable generation to supplant the eventual closure of the old-school Fermi nuclear plant near Detroit
  • Developing next generation nuclear technology to provide reliable baseload generation for future generations (don’t @ me, I’m just saying)

If they didn’t want to do these things themselves, they could also invest in companies pioneering new solar technology (or other energy solutions). Excepting Tesla, purveyor of Powerwalls and solar shingles, supposedly (NASDAQ:TSLA), solar companies typically trade at a heavy discount, because investors think they are risky (this article kind of covers it). Utilities are not risky. There are only a few dozen– but not a few hundred- in the entire country. So, companies aren’t really competing with each other for market share, they’re just doing their thing to stay afloat and happen to make a bunch of money in the process.

What if utilities invested in solar companies to develop next generation solutions for carbon-free power grids? Indeed, what if pigs sprouted wings?

Coulda but did’n’a– and likely will not. What DTE did do instead was up its dividend payout to investors— a decision made just before it petitioned the MPSC to raise electricity rates. Because they lack the imagination to revolutionize the wild world of energy. Of course, the MPSC’s hands are largely tied, because, though it is responsible for hosting events like last night’s public comment session, any demands placed on the utility could elicit pushback in saying that “higher rates would be required to achieve [x].” Because that would either be demonstrably false or, at the very least, horribly disingenuous, changes would have to come via legislative or executive mandate.

Michigan Governor Democrat Gretchen Whitmer’s current deadlock with a Republican legislature is evidence that any changes would necessitate a great deal of headbutting.

This critique is not to demand that a company stop making money– that is, quite explicitly, its only purpose- it’s rather to suggest that maybe the company just stop being, well, so boring.

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The End Of Coal: A War Without Belligerents

News broke last week that coal producer Wyoming-based Cloud Peak Energy is filing for bankruptcy. Let’s face it: the future of the dirty power source hasn’t looked bright for a solid decade now. Marcellus Shale natural gas drilling through “fracking” went from virtually nonexistent in 2008, coming online at the peak of an oil bubble, to more than 18 billion cubic feet per day extracted last year. The meteoric rise of relatively novel extraction techniques in previously unexplored domestic geographies was accompanied by a president interested in ramping up restrictions on major carbon polluters.

Coal producer Cloud Peak Energy, Inc. plummeted from a price of 19.55 on June 20, 2014 to a price today of 0.061 per share, a loss of 99.7%, during a time in which the S&P 500 gained about 40%. It announced plans last Friday to file for bankruptcy.

Sure, those things weren’t good for coal.

But coal’s slow demise– its share of national power generation will soon dip below a quarter- is more a matter of obsolescence than The Big Bad Socialist Gubmint. (Fox News Contributor Daniel Turner apparently wasn’t tracking commodity prices and the connections between coal, natural gas, and the stock market crash in 2008.) It isn’t just Cloud Peak. Coal as a market segment has been struggling for years, and many experts have pointed out that it wasn’t even a growth industry without the Clean Power Plan. Decades prior, as Charles Herrick points out, a major impediment to eastern coal, was deregulation under Democratic President Jimmy Carter that allowed increased consumer choice in public utilities and increased competition from western mines, which were more efficient per ton. Environmental regulation under George H. W. Bush further limited emissions as a matter of curbing acid rain.

A series of catwalks surrounds the old furnaces of the former “Rheinische Stahlwerke zu Meiderich bei Ruhrort,” which translates to something like the “Rhenish Steel Works at Meiderich At The Ruhr Spot,” or, as it is colloquially known, Landschaftspark Duisburg-Nord (Landscape Park Duisburg North).

But, contrary to the Scotts Pruitt of the world, there isn’t any war on coal– not in the way oil industry interest groups want you to think, and certainly not in the way a traditional war has belligerents, just as there is no real war on cars. There are just alternatives. That’s how markets work– even Crain’s thinks so. Between the reforms of Carter and Bush, we’ve also seen plummeting prices-per-watt of solar power, and, over a decade since 2008, we’ve seen solar generation more than triple in generating capacity, natural gas increase by 50%, and coal decline. Solar is even growing in rural America where it pits traditionally conservative skepticism over climate change against the benefit of self-sufficiency.

What’s next for when we move on beyond dirty fossil fuel generation? As I follow with bated breath the proposed redevelopment of Detroit’s own Conner’s Creek site, I think back to my trip to the Duisburg-Nord park in Germany, a massive project to redevelop a former steel mill into an expansive, public park. DTE’s own solar farms in Detroit are unimpressive in their intentional isolation, gated off with massive, chain-link fences, and only gestural toward a renewable energy future within the company’s coal-chugging generation mix. But Detroit’s got enough space that there is plenty of opportunity to consider better contexts for future projects.

And in the mean time, we can always think about better investment opportunities than dirty rocks.

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