Kochland

The largest privately held company-

o???Koch prized experimentation and failure; been largest privately held company in America- not everyone can be market-cap frenzied?

o???Use of experimental economics to overcome business problems; for eg. the way to deal with “holdout problem”, the RoW problem for laying down its pipeline- ever learning

o???People preferred Koch over top investment banks. Koch retained his best employees through what they called 'shadow stock' contracts, that paid out as the company's value increased but didn’t confer any ownership.

o???Almost everywhere rules are made to favor the legacy companies mostly because they’re the ones setting the rules- Governments want control, conglomerates want newbies

Making opportunity out of threats-

o???Just about 50 years ago, unlike today, the real price of oil was never known to outsiders. It depended on who had the most intelligence. Koch being the largest refiner/ pipeline owner depended on price opacity to make fortunes.

o???NYMEX listed oil futures for crude oil in 1983. It was anathema to this bilateral business model of Koch et al.- since it introduced transparency.

o???Once the futures were in place, all of a sudden everyone started having a price reference. The futures market flourished, and Koch understood in sometime that trading oil futures gave it a chance to make money independent of its refineries.

o???In futures, the more information traders have, the better priced is the futures contract.

o???Koch had an advantage in that they could ship the oil while simultaneously making bets in futures market about what would happen when that barge load of oil arrived on shore-

o???I take liberty to compare this to the present situation in India when the electricity futures are about to be introduced and expected to bring in the much-needed transparency in bilateral pricing of power. Koch’s advantages are analogous to our Indian utilities with PPAs, who, more than anyone else, have an idea of what would happen to electricity market volume/prices, if they operate plants with some strategy while simultaneously betting in the futures to hedge their positions- the overall strategy being to optimize their costs. In this sense the utilities have the maximum info. and they are far better placed to make trained bets than any other traders/speculators.

California crisis- we have gone through it so many times, but every-time one understands something more-

o???Prices on power exchanges could float as per market but what utilities could charge their consumers was fixed. During the first few years of deregulation, on utilities insistence the state agreed to freeze customer rates at a significantly high levels just to avoid a low cost recovery situation where market rates in wholesale go too high, and cost recovery falters. When the California crisis ensued, these rates were derided as a cap, when instead they were the floor.

o???Just like Enron, Koch profiteered from the high prices on the ancillary ISO market where the caps didn’t exist. The parking strategy - sell in DAM market from say California to Arizona and back into the ISO emergency market of California (circular trading)- deployed to misuse ISO markets, caused huge losses to the exchequer. It was the cap imposed by FERC in emergency market that brought things under control. Thank fully squaring-off w/o delivery isn't allowed here in India.

o???Price capping- The electricity market is different from all the markets. The mkt for that last MWh is seller's market and trader could ask a ransom for it when the time comes. Therefore, a cap is required in electricity markets - a cap not too low to dissuade sale/purchase, and not too high to burden the end consumers. Better cap it at the retail level, so that during extraordinary circumstances the state can decide if load shedding has more value results in lower losses than subsiding for the high power cost for the interim period.

The book talks a lot about the lobbying powers of these oil barons, specially about their successful endeavors in portraying the entire oil/coal based growth as holier than anything else. Following are few notable facts on crude’s contribution to atmosphere-

CO2 in atmosphere

o???1859- when Edwin drake hit his gusher of oil well in Pennsylvania. A barrel of crude when burnt- 317 kg of co2 in air released

o???1890- a total of 1.3 bn t co2 were released

o???1930- 3.86 bn t

o???1970- 14.53 bn t

o???2011- 32.27 bn t

As a result of the above, carbon that composed 316 ppm in atmosphere in 1959, increased to around 420 ppm by 2019. Scientists warned to keep it around 350 to keep away catastrophic events.

·In America, as early as 1991, Koch and others helped foster skepticism about evidence of climate change. Koch, Exxon others constituted very powerful lobby and advocated strong alternate views against climate change.

Emissions control-

o???Cap and trade- one of the most proposed mechanisms- gained support after HW Bush imposed it on power plants to contain acid rain. By 2008, emissions were 60% lower than in 1980.

o???Emissions capping is unpopular since it leads to an increase in price of every commodity; but what gets the politicians interested in it is the monetization of these emissions i.e. carbon pricing. When it was proposed in US, following were the proposed allotments-Electricity companies – 378 bn $ worth of allotments, RE- 6%, natural gas fired plants- 6.5%, oil refiners- 1.7%. Oil refineries were finally given 17.8 bn $. But the rules didn’t see the light of the day – thanks to lobbying efforts of oil cos.

·?????????The book also discusses about how fracking which came into being around 1970s failed to deliver any meaningful results for 40 years as it was too expensive to be economically viable. Government interventions through subsidies and the price spikes of 2008 finally made it a viable alternate.?

Overall, the book is a delight to read- recommend it to anyone willing to understand the nuances of big private companies, oil/gas based growth, and the authority the barons had in eliminating any potential competitor to their business- Renewables being their biggest threat.