Wednesday, September 28, 2011

Today in Crony Capitalism: Rick Perry and Infrastructure; Barack Obama and General Electric (GE)

First up, the President and General Electric from Marginal Revolution:
Why they call it Green Energy: The Summers/Klain/Browner Memo
The LA Times reports that Larry Summers and Timothy Geithner ”raised warning flags” about the loan guarantee program for renewables long before the Solyndra bankruptcy. The article doesn’t have a lot of new information (the key players are clearly protecting themselves) but it does link to a fascinating briefing memo written for the President in October of 2010 by Summers, Ron Klain (then chief of staff to the Vice President), and energy advisor Carol Browner.
The memo says that OMB and Treasury were concerned about three problems, “double dipping” (massive government subsidies from multiple sources), lack of “skin in the game” from private investors and  ”non-incremental investment,” the funding of projects which would occur even without the loan guarantee.
The memo then illustrates with one such program, the Shepherds Flat Loan guarantee. Here is the relevant portion of the memo:
The Shepherds Flat loan guarantee illustrates some of the economic and public policy issues raised by OMB and Treasury. Shepherds Flat is an 845-megawatt wind farm proposed for Oregon. This $1.9 billion project would consist of 338 GE wind turbines manufactured in South Carolina and Florida and, upon completion; it would represent the largest wind farm in the country.
The sponsor’s equity is about 11% of the project costs, and would generate an estimated return on equity of 30%.
Double dipping: The total government subsidies are about $1.2 billion.
Subsidy Type
Approximate Amount (millions)
Federal 1603 grant (equal to 30% investment tax credit)
State tax credits
Accelerated depreciation on Federal and State taxes
Value of loan guarantee
Premium paid for power from state renewable electricity standard

Skin in the game: The government would provide a significant subsidy (65+%), while the sponsor would provide little skin in the game (equity about 10%).
Non-incremental investment: This project would likely move without the loan guarantee. The economics are favorable for wind investment given tax credits and state renewable energy standards. GE signaled through Hill staff that it considered going to the private market for financing out of frustration with the review process. The return on equity is high (30%) because of tax credits, grants, and selling power at above-market rates, which suggests that the alternative of private financing would not make the project financially non-viable.
Carbon reduction benefits: If this wind power displaced power generated from sources with the average California carbon intensity, it would result in about 18 million fewer tons of CO2 emissions through 2033. Carbon reductions would have to be valued at nearly $130 per ton CO2 for the climate benefits to equal the subsidies (more than 6 times the primary estimate used by the government in evaluating rules).
In my view, the Summers/Klain/Browner analysis was a damning indictment of the Shepherds Flat project. The taxpayers were expected to fund by far the largest share of the bills and also of the risk and in return they weren’t getting many benefits in terms of reduced pollution. In contrast, Caithness Energy and GE Energy Financial Services, the corporations behind the project, weren’t taking much risk but they stood to profit handsomely. I guess that is why they call it “green” energy....MORE
And from Economic Policy Journal a look at the Governor's dealings:

Rick Perry' s Cintra Problem
Madrid-based Cintra is involved in road construction projects across the globe, including the operation of the Indiana Toll Road. Because of lower than expected traffic on the toll road, speculation is mounting that Cintra may default on its $3.8 billion Indiana operation.

What does this have to do with Rick Perry?

Cintra and its partners are also building in Texas the $2.1 billion North Tarrant Express, which involves the reconstruction of Loop 820 and Texas 121/183 in Northeast Tarrant County. Cintra is also the lead partner in the LBJ Express, which includes the expansion of Interstate 635 in Dallas.

The company is also lead partner in two segments of the Texas 130 toll road project between Austin and San Antonio.

The projects include both toll and free lanes and in total amount to more than  $5 billion in projects in Texas. Rick Perry pushed all these projects through..

A key feature of the North Tarant Express contract is that Cintra is guaranteed a buyback by the state of Texas (aka Texas taxpayers) if the project proves unprofitable, just like the Indiana project is now unprofitable.

No one really knows what financial state the Texas projects are in. According to the Fort Worth Star Telegram:

While nothing indicates that the Texas projects are at risk, transportation officials are privately expressing concern about whether Cintra and other developers will complete the work, considered an indispensable part of Texas' plan to handle population and economic growth over the next half-century.
Bill Meadows, a Texas Transportation Commission member, has asked for an analysis of the state's 52-year contracts with Cintra and its partners -- NTE Mobility Partners on the North Tarrant Express project -- as it relates to default.
If Cintra defaults in Indiana, focus is going to turn to Texas. Among the things that will be discovered are these details:

Perry's former staffer Dan Shelley worked as a ‘consultant’ for Cintra (in 2004), became Perry’s liaison to the legislature during the time that Cintra was awarded the development rights to the multi-billion dollar Trans Texas Corridor (in 2005), then went back to work as a lobbyist for Cintra (in 2006). Shelly's daughter, Jennifer Shelley-Rodriguez, also has a consulting contract with Cintra....MORE