Author: bill

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Are The Ivanpah Solar Plant Problems A Result Of Bad Science Or Bad Luck?

Many people including me thought that the science behind Ivanpah Solar Plant was so much better than the rest of the pack that it was the renewable energy idea that was most likely to succeed. Last year I heard stories that the plant was using considerably more natural gas than anticipated in an effort to start steam generation from solar power earlier in the day. So either the brine was cooling off too quickly overnight or someone had dramatically underestimated the power available from the morning sun. It is an intriguing mechanical engineering problem but it looked more like a problem with bad solar science rather than bad luck with the weather. The unanswered question was whether this solar science problem could be overcome with a small additional cost or was this a deal breaker for this plant?

This month we got the answer.

California electric utility regulators on Thursday, March 17, approved a deal between Pacific Gas & Electric and the owners of Ivanpah solar plant that gives plant operators more time to increase electricity production.

The plant’s owners have agreed to pay PG&E an undisclosed sum in exchange for getting time to improve the plant’s electricity output. The deal followed realizations that the plant is failing to meet its production obligations to the utility.

Technically the plant’s owners signed a forbearance agreement so that PG&E will not declare that its power purchase agreement with the plant owners is in default. When PG&E uses the word default the problem is serious and activists are forcing it to confront the production problem. If Californians opted to buy renewable power through higher utility rates, they better be getting their power from solar powered generators and not from gas powered generators. If the plant owners do not get their act together by July 31 then they probably have only one six month extension they can count on before PG&E will push for default.  According to the report the solar power production for last year amounted to only 624,500 megawatt hours of solar power or about 62% of what they expected to produce. This production number is 50% better than the previous year and it was achieved primarily by preheating the water to extend the solar production day.  Once again this looks like a mechanical engineering patch for bad solar science rather than luck with the weather.

The really interesting question is what can the plant owner’s do to avoid default and what is the future for renewable energy. The plant owner’s have enough solar data from running the plant in 2014 and 2015 to predict the maximum amount of electricity they can generate from solar power. Do they have any engineering tricks left that will improve solar power production by 50% or is the best strategy is to avoid the sunk cost fallacy and admit defeat. Negotiating a new contract with lower production quotas sounds like a better financial solution for the plant owners than throwing additional money at the problem or shutting down the plant. The enduring problem is that the Ivanpah failure will give credence to the argument that big renewable energy projects are not only bad investments but are prone to corruption through the use of bad science. Future renewable energy projects will be slower to fund and construct since they will have to meet much tougher scientific standards.

 

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Double Smoked Spiral Sliced Ham for Easter

IMG_20160327_153458Last week spiral sliced ham last week was on sale at Meijer for $1.15 per pound and Jeff Phillips sent me a newsletter about his Double Smoked Spiral Sliced Ham recipe. It was either a remarkable coincidence or it was meant to be. The recipe is pretty simple. You drizzle honey in between the slices and apply Jeff’s rub on the outside. So I prepped the ham and stuck it in the smoker before going to church. When I came back I brought it upstairs to finish it off in the oven.

That somewhat boring ham had transformed into a interesting combination of smoky flavor, spiciness, and sweetness. My wife wanted cheese grits with jalapenos so I balanced the meal with some green peas.  It probably took me no more than thirty minutes to put this meal together. This is an easy, fun change of pace from the traditional Easter meal.

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Cooking Pork Chops With The Anova Sous-Vide Cooker-Version 2

Cooking Pork Chops With The Anova Sous-Vide Cooker-Version 2

Pork chops finished off on a cast iron griddle


Although I like my previous recipe for Cooking Pork Chops With The Anova Sous-Vide Cooker, I changed the recipe slightly to get a better sear on the pork chop without drying it out. Since my pork chops are about 1 inch thick, I cook the pork chops in my sous-vide cooker to a temperature of 135° for about 45 minutes. Then I heat a cast iron griddle to a medium high temperature for about ten minutes. This allows me to get the good, quick sear on the pork chops without too much of a temperature drop. When I sear the meat for about two minutes a side, the inside is done, and it looks like this.

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Searching For Donald Trump’s Voice

I am ambivalent about Mr. Trump’s chances of being elected president but I have always wondered whether he would have that presidential moment that brings people different groups of  people together for a common cause. Tonight I heard a very good speech by Mr. Kasich about Israel. There was a lot of stuff he said that I could agree with. My wife gushed over the speech. She voted for him in the primary but I have to agree with her, it was a very good speech. It was everything we would want from a presidential candidate.

Then Mr. Trump spoke and something mysterious happened. My wife, a Kasich supporter, gushed over it even though he said approximately the same stuff as Mr. Kasich. There was something about his delivery that conveyed that he actually meant it. Something that connected with her. She actually thought Trump’s speech was better than Mr. Kasich’s speech! Based on the audience response I think he connected and won some people over. I was kind of surprised.  After all of these weeks he was sounding presidential. He may not be Bill Clinton but we have to start to recognize that he has some of Bill’s magic of connecting with the common man and woman. Sorry Hillary, but Trump and Bill Clinton have it and you do not. He won my wife over! At some point Peggy Noonan has to wondering if Mr. Trump has finally found his presidential voice like Reagan did. Are we in for something special?

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Concealed Carry Statistics For Ohio

Although the Ohio Attorney General publishes quarterly concealed carry statistics on the licenses issued and renewed, I wanted to know the total number of concealed carry licenses in Ohio and whether existing license holders are renewing. Since concealed carry licenses are valid for five years I realized that I had almost all of the data I needed to calculate those numbers. My only problem was the missing reports for the 1st quarter of 2010 and the 4th quarter of 2012 so I had to estimate them. The formula for the total number of active licenses is the sum of the licenses issued and renewed over the last five years. The formula for the renewal rate is licenses renewed divided by the sum of the licenses issued and renewed from the same quarter five years ago. Since the attorney general data starts in 2008 I was only able to calculate the total concealed carry licenses for the last three years. Here is my best guess at the renewal rate and year over year growth rate for the last two of years.

Date Licenses Issued Licenses Renewed Total Licenses Renewal Rate License YoY Growth Rate
1/1/2014 16,205 15,832 429,393 75% 17%
4/1/2014 16,004 15,058 437,709 66% 12%
7/1/2014 11,945 11,159 445,453 73% 9%
10/1/2014 13,912 10,097 455,663 73% 9%
1/1/2015 15,593 12,071 467,167 75% 9%
4/1/2015 19,608 12,042 480,297 65% 10%
7/1/2015 16,000 10,129 493,924 81% 11%
10/1/2015 20,388 10,309 510,850 75% 12%

Concealed Carry Statistics For Ohio

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ACA Exchanges Appear To Be Morphing Into High Risk Pools

As I have said in the past unless health insurance exchanges changed their ways and started to offering affordable health insurance to the un-subsidized healthy people they were going to morph into high risk pools. It appears that Brian Blase and I agree on this matter. In a recent article posted on Forbes and the Mercatus Center he highlights some of the problems that are worth repeating, enrollees are poorer, enrollees are  older, and un-subsidized healthy people are not signing up.

Takeaway #2: Enrollees Skewing Much Poorer Than Expected 

The table below shows enrollment by income group in 2015 and 2016 contrasted to the Urban Institute’s projections of 2016 enrollment made in January 2015. The table shows that exchange enrollees are much poorer than Urban expected. Other groups, including CBO and Rand, also made large errors with this projection. For example, when the law passed, Rand projected that nearly half of exchange enrollees would be unsubsidized when the law was fully implemented.

 

As a healthy person who is exempt from the individual mandate because I cannot purchase health insurance from the exchange for less 8.05% of my salary, I have indicated that I will go without health insurance in 2017 because saving the equivalent of my 2016 insurance premium into a savings account gives me better bang for my healthcare buck than paying exorbitant premiums for insurance I will unlikely use when it has a $10,000 deductible. With the lowest cost 2016 bronze plan costing $1,025 a month, this is up 78% over my 2016 grandfathered plan and 229% over my 2011 premium of $311. Not surprisingly Brian says it differently but the result is the same.

Unless people receive extremely large subsidies or have very expensive health conditions, buying exchange plans generally makes them worse off than remaining uninsured. As a result, the exchanges appear to be morphing into high risk pools for people with income less than twice the FPL. Simply put, it now appears that there is a significant risk that the ACA, without major change, may lead to the destruction of the individual market for health insurance.

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How To Curb Violence At Trump Rallies

To curb violence at Trump rallies I think we should borrow some ideas from the success concealed carry licensing has had with reducing gun violence. To paraphrase my liberal friends, what we need are some common sense protest laws. If concealed carry laws are an appropriate accommodation for 2nd amendment concerns then a similar set of laws should be appropriate for the 1st amendment concerns. My proposal is that if a prospective protester wants to protest against a political candidate at the candidate’s rally, that protester should go through an eight hour training class, get a back ground check,  and apply for a registered protester card. To be fair it should be a photo identification card and cost about the same as a concealed carry license. Just the paperwork alone should scare off all but the serious protesters who actually have a legitimate issue they are protesting against. I am sure that if registered protesters demonstrate the same respect and courtesy that concealed carry holders have for the fellow human beings, the violence at campaign rallies can be avoided.

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Dillian’s Loop

There is something just not right about our economic malaise. Obviously this economy is different from my father’s economy but just because it is different does not mean it is better. When I went to college in the 1970s my middle class parents cash-flowed my education. Today it is nearly impossible for middle class parents to cash-flow their kid’s college education. Is this progress? The same is true about health insurance. It was such a non-issue in the 1970s that I can only remember that I had it and did not have to pay for it. As a healthy person I get no value from my current health insurance but it has grown to be one of my largest expenses and most of the increase occurred in the last couple of years. Is this progress? We seem to stuck in a loop where we keep spending more money to get the same results our parents got for much less.  It is this value proposition that is frustrating and angering the middle class the most. Yesterday I was pleasantly surprised to read a Mauldin Economics newsletter describing “Dillian’s Loop“.  Jared described it simply by giving the following example.

  • If the regulations work, they are declared a success and they write more regulations.
  • If they don’t work, it means they need to have more regulations.

In a way it reminds me of Albert Einstein’s quote, “Insanity: doing the same thing over and over again and expecting different results“. The subtle difference is that “Dillian’s Loop” makes fun of people who continue to propose single factor answers to multi-factor problems despite getting the wrong answer or in some cases the right answer for the wrong reason. In the developed world we still cling to the belief that there are simple solutions to complex problems and we are only one smart administrator away from eventual success. This belief permeates a lot of our policy making. Many of the Affordable Care Act supporters believe that because they expanded Medicaid it is working as intended and the act only needs a little tweaking to bring affordable health care back into the Affordable Care Act. If reforming health care costs was that simple why didn’t the Affordable Care Act supporters start off with that? Do they really believe a few more regulations will fix the health care cost problem? Even if this overly simplistic belief system leads us into making bad decisions on complex problems like the Affordable Care Act, regulations, or quantitative easing, we cling to another belief that there is still time to kick the problems down the road for the next generation to fix. The problem is that our faith in these two beliefs is waning and the clock is ticking on when our problems will spin out of control. If we cannot fake till we make it, we will be screwed.

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Are Exchange Traded Funds Riskier Than Mutual Funds?

I  came upon this question while listening to David Stockman make his pitch for his Bubble Financing newsletter. Evidently he made some money by correctly anticipating the downfall of a biotech exchange traded fund(ETF) and was now predicting the demise of the 3 trillion dollar ETF market. The problem I had with his argument was that the risks facing a small, single sector ETF comprised mainly of startup biotech companies are considerably different than the risks facing a large ETF based on a well diversified portfolio of stable, liquid stocks.  It was especially ironic that Agora Financial was sponsoring the Buble Financing video since another one of their advisers, Jim Rickards, has been recommending an ETF that I have owned for several years as part of my large company asset category, Schwab US Dividend Equity ETF (SCHD). I doubt anyone would make the argument that an ETF like SCHD is as risky as a biotech ETF. This comparison becomes even more stark when you look at the liquidity and diversification of the largest ETF, SPY.

Then we get to the mutual fund question. Although ETFs are relatively new, mutual funds based on indexes have a long history. Is Mr. Stockman really saying that a large, stable ETF based on the S&P 500 such as SPY is significantly riskier than a mutual fund based on the same index such as the Vanguard 500 Index (VFINX). History has shown these two assets have similar risk and performance and brokers and customers look at them as being equivalent. As an old school MBA who constructed his retirement portfolio with large, stable ETFs, I thought I should do a little investigating. Was there a higher mis-pricing risk or other risk associated with ETFs that is not present in mutual funds or was this just another rant by a stock picker against the index funds strategy?

To put this investigation in perspective I started working in the 1970s. In the 1970s many defined benefit pension plans were under attack for under-funding by businesses and by embezzlement and fraud by the fund managers. It comes as no surprise that 401k plans were born to add a bit more honesty and accountability to the ugly retirement funding situation. In the 1980s private companies quickly replaced their defined benefit plans with 401k plans and added better fund performance reporting as a safeguard against the misdeeds of the past. Typically these companies offered their employees four investment options, company stock, a mutual fund stock plan, a bond plan, and a money market fund. The 401k plans became popular and reasonably well-understood. It did not take long before it became common knowledge that most of the stock plans consistently under-performed the S&P 500.  By the end of the 1980s the HR directors got fed up with the employee complaints and the repeated excuses by poor performing fund managers. Since the academic research said that index funds out-perform most fund managers their solution was too either add index funds as an investment option or to require a significant portion of index funds in the stock portfolio option. The battle lines were drawn. Fund managers needed to start beating the S&P 500 on a long term basis to justify their fees or the HR directors would going to divert even more of the investments to the very efficient S&P 500 index funds. In the quest for higher performance for retirement accounts, low cost index mutual funds and ETFs grew into a 3 trillion dollar behemoth. In the last eight years most of the growth has come via index ETFs.

So what was David Stockman complaining about?

  • As far as I can determine both the ETF, SPY, and mutual fund, VFINX, fall under the same SEC rules. If there is a systemic risk with SPY then that same risk affects VFINX. Since VFINX was created in 1976, history tells us that the systemic risk for this asset class is very low.
  • I agree with Mr. Stockman that an ETF such as SPY will occasionally have times the in which the ETF does not accurately reflect the value of the underlying securities. The mis-pricing risk is a problem for market makers and day traders. I am not sure how much a long term investor cares about daily fluctuations.
  • If an ETF such as SPY is faced with a severe drop in the underlying assets, I am not sure why Mr. Stockman thinks the fund managers will be forced to redeem ETF shares and sell stocks into a declining market. The liquidity risk in Mr. Stockman’s doomsday scenario is real but this is the same risk as a run on a company stock like Apple or Exxon. Although making a market in a declining or rising security may be scary or painful, market makers having been doing this in good and bad markets for a very long time.

Just when I had written off Mr. Stockman as just another stock picker who thinks indexed funds like SPY are boring and risky, I ran into this Planet Money podcast, Episode 688: Brilliant vs. Boring, which describes the million dollar bet between Warren Buffet and hedge fund managers in which one of the all-time best stock pickers said the S&P 500 would outperform a sampling of hedge funds.  According to Fortune:

Through the seven years, Vanguard’s 500 index fund, as represented by its Admiral shares, is up 63.5%. That’s the portfolio carrying Buffett’s colors. Protégé’s five hedge funds of funds are, on the average—the marker the bet uses—up an estimated 19.6%.

Enjoy!

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The Moral Dilemma of the Citizens United And Super Delegates Issues

I have to chuckle when Bernie Sanders supporters try to make the moral argument that the Citizens United ruling is corrupting the democratic process at the same time they are get short changed delegates due to Super Delegate rules. Obviously the democratic process is no match for the brutal reality of Democratic party politics. “Why do you look at the speck of sawdust in your brother’s eye and pay no attention to the plank in your own eye?”

It is amazing that Bernie Sanders continues to talk about Citizens United. I understand that this is a hot button issue for Democratic voters but you have to wonder whether this is a good time to talk about this issue considering the success of both his and Donald Trump’s low budget political campaigns. Since Hillary Clinton is the only big money candidate left in the presidential campaign when Bernie Sanders criticizes big money in politics he is criticizing her with a Democratic party hot button issue. Oops!