Taming the Giant Corporation

www.tamethecorporation.orgTyson Slocum

Public Citizen’s Energy Programtslocum@citizen.org

www.citizen.orgJune 10, 2007

The Problem: Corporate Control Over Our Energy & Government

Public Citizen’s Solution: Invest in Energy Technologies Controlled By

Families, Not Corporations

Challenges to address:1. Transportation/Oil

2. Electric power3. Climate Change

• The coal companies complain to Congress that they can’t afford to build expensive new power plants on their own – they ask for and receive government handouts.

• The nuclear power companies argue that they can’t afford to build new plants without financial assistance from the gov’t.

• But how many families would love to install solar panels on their roof but can’t afford it? How many Americans would like to renovate their home to make it more green but can’t afford to?

Top World Oil Producers, 2006

1. Saudi Arabia 10.7 million barrels/day2. Russia 9.7 bbl/d3. U.S.A. 8.4 bbl/d4. Iran 4.1 bbl/d5. China 3.8 bbl/d6. Mexico 3.7 bbl/d7. Canada 3.3 bbl/d15. Iraq 2.0 bbl/d

Share of 2006 World Oil Consumption (85 million barrels/day)

W. Europe (17

countries)16%

China9%

U.S.A.24%

Rest of World51%

When Dick Cheney said, “Conservation may be a sign of personal virtue but it is not a sufficient basis

for a sound, comprehensive energy policy”

What he really meant to say: “Energy companies make more money the more energy they sell.

Conservation and efficiency aren’t profitable! And an energy policy that doesn’t hand windfall profits

to our biggest campaign contributors is not a sound, comprehensive energy policy!”

• Fossil fuel & nuclear producers dominate the energy debate– 75% of government spending programs (NOT

including tax breaks, royalty relief, etc) subsidize oil, coal and nuclear ($2.3 billion in FY 07) – only 8% for wind, solar & geothermal ($0.238 billion) and 16% for energy efficiency ($0.492 billion)

– The oil industry alone receives ~ $8 billion/year in tax breaks, and royalty relief.

– Incentives for efficiency / renewables are small and temporary, while oil/coal/nuke big and permanent

The Best Energy Policy Money Can Buy

• Oil, coal and nuclear companies, their PACs and top executives have made $200 million in campaign contributions since 2000 – 75% to the GOP

• Over that same time period, they spent over $1 Billion lobbying the fed gov’t.

• Goldman Sachs gave $17.8 mil to politicians and spent $7.5 mil lobbying

Mergers have consolidated market & political power

• Exxon and Mobil in ‘99• Chevron and Texaco in ’01, then buys Unocal in ‘05• Conoco and Phillips merge in ’02, then buys Burlington Resources

in ’05• Valero buys Ultramar/Diamond Shamrock in ’01, then buys Orion

Refining in '03, then buys Premcor in ’05• Anadarko Petroleum simultaneously acquired Kerr-McGee and

Western Gas Resources in ‘06• Goldman Sachs acquired Kinder Morgan’s 43,000 miles of pipelines

in ’06, bought a Midwest oil refinery in ’05, bought 1,600 natural gas wells in ’04, owns a stake in the Iroquois natural gas pipeline, owns a piece of Cobalt International Energy, acquired TXU in ’07, bought Cogentrix’s power plants in ‘03

Big Profits for Big Oil

• Largest six (ExxonMobil, ChevronTexaco, ConocoPhillips, BP, Shell, Valero) have posted $477 billion in profits since GW Bush has been President.

• In 2001, Exxon’s global return on capital investment was 17.4%; by 2006 it was 32.2%. Pacing the company was US refinery operations, with 65.8% ROCE.

• When was the last time an oil company went bankrupt?

Europe vs. U.S. Gas Prices

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$1.00

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$3.00

$4.00

$5.00

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France Germany England U.S.A.

Tax

Price+Tax

Total Vehicle Kilometers of Travel per capita

• Japan: 4,003

• Germany: 6,359

• England: 6,359

• Sweden: 6,410

• France: 6,726

• U.S.A. 9,293

In 2006, ExxonMobil spent:$37.2 billion on stock buybacks and

dividends to shareholders$824 million on capital investment on

U.S. oil refineriesZERO on alternative clean energy

In all, top 5 oil companies have spent $172 billion buying back stock and paying dividends since 2005. In addition, they have $56 billion in cash.

They have $1 trillion in combined assets – they will squeeze profits out of that sunk investment for as long as possible, and lobby against government policies that threaten this monopoly.

Mergers, Weak Laws Create Uncompetitive Markets

• The FTC investigated high prices, and found: “An executive of [one] company made clear that he would rather sell less gasoline and earn a higher margin on each gallon sold than sell more gasoline and earn a lower margin. Another employee of this firm raised concerns about oversupplying the market and thereby reducing the high market prices. A decision to limit supply does not violate the antitrust laws.”

Supreme Court Eviscerates Antitrust Protections

• SC ruled in 2005 in Texaco v. Dagher that a joint venture between Texaco and Shell that all parties agreed resulted in big price hikes didn’t violate antitrust law as the court relied on a rule of reason analysis rather than per se.

Refining is Where the Action Is

• BP's California refinery operations earned them $14.84 for every barrel they refined in 2006 - while they earned only $3.92/barrel in England and $4.22/barrel in Singapore.

• In 1999, U.S. oil refiners enjoyed a 18.9 cent margin for every gallon refined from crude oil. By 2005, they posted a 48.8 cent margin for every gallon of gas refined, a 158% jump.

In Face of Prices Tripling Over 5 Years, Consumer Demand Hasn’t

Moderated

• Prices must get punitively high– See 1973 Arab oil embargo and other price

shocks. Demand goes down, but unemployment, inflation goes up.

– Families must get access to alternatives before relying on markets (prices) can drive demand down.

Investment Banks Buying Oil Infrastructure

My comments as an expert witness opposing Goldman Sachs’ acquisition of Kinder Morgan’s 43,000 mi. of pipelines:

“Energy traders like Goldman Sachs are investing and acquiring [energy infrastructure] assets not just for passive investment, but because controlling infrastructure affords their energy trading affiliates an “insider’s peek” into the physical movements of energy products unavailable to other energy traders. Armed with this non-public data, a company like Goldman can open lines of communication between the affiliates operating pipelines and the affiliates making large bets on energy futures markets. The sheer size of Kinder Morgan’s pipeline network would allow Goldman’s energy traders access to reams of key data unavailable to any other energy traders, potentially providing the company with an ability to manipulate crude oil and refined products markets.”

Deregulation of energy trading markets has given energy companies and financial firms control over setting

prices

• Enron led the deregulation fight, pushing the CFTC and Congress in Dec. 2000 to deregulate energy trading.

• Federal regulators have no idea who is trading what in futures markets

From the April 10, 2007 Wall Street Journal:

“Oil markets were rocked by a massive, instant surge in after-hours electronic trading one day last month, when prices for futures contracts jumped 8%. This spike stands out because it was unclear at the time what drove it. Two weeks later, it is still unclear. What is clear is that a rapid shift in the bulk of crude trading from the raucous trading floor of the New York Mercantile Exchange to anonymous computer screens is making it harder to nail down the cause of price moves. The initial jump “triggered more orders already set into the system, and with prices rising, people thought somebody must know something,” Tom Bentz, an analyst and broker at BNP Paribas Futures in New York who was watching the screen at the time, said the day after the spike. “The more prices rose, the more it seemed somebody knew something.”

Ethanol’s No Panacea

• Transferring cropland to fuel production is unsustainable and will increase food prices and misallocate water resources.

• Transportation of ethanol from production to consumption is inefficient.

• Ethanol has only 2/3 of the energy of gasoline

• Improving fuel-economy, mass transit, plug-in hybrids and hydrogen more feasible.

U.S. Auto Companies Far Behind

• Focused on building SUVs, intoxicated by the $4,000 per vehicle profit margin. But $3/gallon gas is killing sales.

• Facing growing pressure to curtail greenhouse-gas emissions, U.S. auto makers are worried that the critical battery technology they'll need to compete is getting locked up by Japanese rivals who moved more quickly to develop gas-electric hybrid vehicles.

Solutions• Repeal all tax breaks, close royalty loopholes

allowing oil and/or implement a windfall profits tax, dedicating the new revenues to financing clean energy, energy efficiency and mass transit.

• Strengthen antitrust laws by empowering the FTC to crack down on unilateral withholding and other anti-competitive actions by oil companies. Re-evaluate recently approved mergers.

• Re-regulate energy trading exchanges.• Improve fuel economy standards to reduce

gasoline demand. In 2006, average fuel economy was 21 mpg; in ’88 it was 22.1

Electric Power

• In just the last decade, deregulation has radically redefined power markets, establishing market-based prices where we once had cost-based.

• As we see in IL, CT, CA, MT, MD etc. states have no control over electric prices – FERC does.

• Deregulation caused the 2003 blackout

Deregulation promotes coal, nukes

• 30 year old coal and nuke plants are making as much as 260% rates of return in deregulated power markets.

• This sends perverse market signals, giving incentive to run and build dirty, dangerous power sources.

• This is fueling a coal and nuclear revival – with capital costs all heavily subsided of course.

Power Plants Are Being “Flipped” As Though They Were Beachfront

PropertyIn 2005, 4 private equity firms - Blackstone, Hellman & Friedman, KKR and Texas Pacific Group - sold Texas Genco after just one year for a $4.9 billion profit.

• In all, $85 billion has been spent in the last few years buying existing power plants – mainly investment banks, hedge fund and private equity. Money would be better spent building new renewable energy and investing in energy efficiency.

What is it, 1960?

• 150 proposals to build new coal power plants across the country.

• At least 17 new nukes:– NRG proposes 2 in Texas– TXU (now Goldman Sachs) wants 2 new ones in Texas– NuStart in Alabama (11 utilities consortium)– Constellation in Maryland and California– Duke Energy 2 in SC and NC– Exelon in IL– Progress Energy in FL– Entergy in MS and LA– Dominion in VA– Southern Co in GA

No Lessons Learned From Enron

• FERC has one statutory obligation: enforcing “just and reasonable” rates. But FERC believes that deregulated markets are competitive, and that competition automatically produces “just and reasonable” rates.

• But markets are not competitive, so therefore power companies are routinely price-gouging households.

• FERC does not actually review rates charged in deregulated markets.

• Warren Buffett, chairman and CEO of Berkshire Hathaway, told a national meeting of state regulators that “most of deregulation was a mistake” because, in a deregulated market, “generators have a clear incentive to reduce power reserves.” The last thing they want, he continued, is excess capacity; they want “power supplies to be tight.”

Deregulation leads to higher rates

• average rate in 36 rate-regulated states• 2002 7.7 cents kwh• 2006 9.1 cents• Jan '07 8.6

• 14 deregulated (CA, CT, DE, IL, MA, MD, ME, MI, MT, NH, NJ, NY, RI, TX and DC)

• 2002 10 cents• 2006 12.9 cents• Jan '07 13 cents

• 52% higher• average annual growth in deregulated: 5.5%• in 36 regulated: 2.3%

2005: Repeal of PUHCA

• The 70 year old investor and consumer protection statute, which limited utility mergers and restricted the ability of investment banks to own utilities was repealed. Public Citizen predicted a wave of mergers, and it has happened.– Warren Buffett’s MidAmerican buys Pacificorp in ’05– Duke and Cinergy merge in ’05– Keystone and National Grid in ’06– Australian investment bank Macquarie buys

Duquesne Light in ’06.

We’ve had victories

• Teaming up with ACORN, labor, PIRG and others, Public Citizen led coalitions to stop $30 billion worth of mergers:– Proposed Exelon and PSEG merger– Constellation and FPL– Oregon, Arizona and Montana have all rejected utility

takeovers by private equity and investment banks in last couple of years

In all cases, our grassroots efforts stopped the mergers at the state level after FERC approved them in just months with no hearing

Leadership at the state level

• 22 states have mandated Renewable Electricity Standards, requiring utilities to produce or procure a certain minimum amount of renewable energy

• States lead the way in efficiency incentives• New Jersey has the best incentives for

solar, allowing most families to recoup their investment in just a couple of years, rather than 10+

Solutions

• Fund billions of dollars for households for energy efficiency and onsite renewable energy

• Re-regulate electricity by ending market-based rates

• Restore PUHCA and get financial firms out of the business of controlling utilities

• Establish a federal Renewable Electricity Standard

• Enforce stronger appliance standards• Promote municipally-owned power.

Climate Change

• Electric power accounts for 40% of ghg; oil accounts for 44%

• Some environmental groups focus on market-based, cap and trade – this will fail, just as it is failing in Europe

• Big environmental groups are pushing for coal’s revival with carbon sequestration with liability immunity – sticking taxpayers with billions of dollars in costs

• Rather than continue to rely on our current polluting infrastructure, government must pave the way to laying the groundwork for a renewable energy infrastructure, funded by taxes on energy companies.