News that doesn't receive the necessary attention.

Friday, March 28, 2014

Sixth crony green flop funded by Mississippi taxpayers: Twin Creeks (solar equipment), Stion (solar panels), View/Soladigm (smart windows), Silicor Materials/Calisolar (silicon), Vidia/HCL Cleantech (biofuels), and Kior (Khosla biofuel). Next likely flop is Kemper County Lignite Plant startup

"Nationally and locally, the "green" energy sector has been a hotbed for cronyism and government subsidies. Mississippi Governor Haley Barbour hailed the state's granting of loans to several green energy projects, such as solar plants for Twin Creeks Technologies and Stion and the biofuels facility for KiOR. In particular, the Kemper County clean coal plant owes thanks to its $270 million Department of Energy grant to BGR Group, the lobbying firm Barbour helped found."...(subhead, "Cronyism in Mississippi") 

2/7/14, "Another one bites the dust," Kelley Williams, Bigger Pie Forum

"Startup failures"

"Kior, a state funded green energy project, recently announced the shutdown of its Columbus Mississippi plant. It was supposed to produce gasoline and diesel from pine trees. This is the sixth state funded technology start up that has failed.

Others include Twin Creeks (solar equipment), Stion (solar panels), View/Soladigm (smart windows), Silicor Materials/Calisolar (silicon), and Virdia/HCL Cleantech (biofuels). These startups received hundreds of millions in loans and other inducements from the state paid for by taxes on existing businesses, their employees, and others - who probably could have spent their money better. Hard to see how they could have done worse.

These failures are costly and embarrassing. But they are dwarfed by the unfolding disaster at Mississippi Power's Kemper County Lignite Plant startup. This update on Kior is a warning of Kemper's looming nightmare and a wakeup call for southeast Mississippi and Mississippi Power's customers.

Kior shutdown

Kior put a hopeful face on the shutdown announcement. You know: not to worry because the shutdown is just temporary while we raise money to fix what doesn't work. Kind of like the smiley face it put on the $31.3 million loss first quarter 2013 that I wrote about last May. The CEO said then: not to worry because we are making progress and expect things to get better.

However, things got worse, not better. Losses increased and totaled $261 million at the end of Q3 2013 - more than the cost of the plant. That's a lot of money for most people. But it's chump change for Kior's creator, billionaire Silicon Valley venture capitalist Vinod Khosla. He has bankrolled Kior with help from other billionaires including Microsoft founder Bill Gates. And he may continue to do so indefinitely.

So while bankruptcy is probably inevitable, the timing is uncertain. Who knows when he will pull the life support plug? He may be hoping for a federal bailout payoff from Kior's lobbying expenses which have steadily increased along with its losses. Or he may have a state bond bill in mind like Kemper's to force customers to finance Kior's cost.

But insiders are bailing. Former Secretary of State Condoleezza Rice resigned from the board in December. The Chief Financial Officer suddenly quit without the usual "no disagreements with management" statement. An investor filed a class action lawsuit last August alleging misleading reporting. In the last few weeks one of the largest shareholders liquidated his position at prices in the $1.50 range vs the initial public offering price of $15 and high of $23.85. The stock closed recently at $1.11 per share.

Death spiral

What took so long for people to wake up? Was it the residue of the initial hype or blind trust in really smart, really rich people and experts and popular politicians? Or the silence of public agencies and organizations that initially endorsed the project but stood quietly by while it went down the drain and took state funds with it?

The company has been another dead man walking for months. The $254 million plant was completed in May 2012 over budget and behind schedule. Startup efforts and commercial operations were late due to plant changes and unexpected problems. There were scale up issues. The technology was new and not proved as represented initially. So the original design was faulty. Sound familiar - like Kemper's faulty design based on incomplete engineering?

This required more research and more design changes. Research costs to date are $86.2 million with $22 million more planned in 2014 for a process that was supposedly already commercial (like Kemper's). This is 43% of plant construction cost. If Kemper's experience is similar to this much smaller and simpler plant, it is looking at another $2+ billion research costs, major plant modifications and years of effort to achieve even partial operations.

The Kior plant has not operated consistently or at more than 70% of theoretical capacity even intermittently after almost two years of trying. Q3 2013 net loss was $43.1 million up from $38.5 million in Q2 despite higher production. The more it makes, the more it loses.

Losses included about $4 million of stock based compensation expense per quarter. Wonder if some insider departures were related to tax liabilities on stock awards greater than the decreasing market value of the stock?

Blinded by hype

The Kior plant was originally announced with great hype. However, the governor's office and the Mississippi Development Authority have been silent about the shutdown and the fate of the 1000 jobs and five plants initially promised when the legislature approved a $75 million interest free loan for the first plant. Odds are not good the state will get its (our) money back
. Odds are not good that the 100 current employees mentioned in the shutdown announcement will keep their jobs.

Odds are not good that the plant's unworkable experimental technology vetted by the MDA and blessed by the blue ribbon Mississippi Energy Institute will ever work or will be a "key step toward energy self reliance for our country-- as the former governor announced. Odds are not good that the $2 million the legislature gave to Alcorn State and Mississippi State to develop methods to gather other products such as corn stalks to be turned into crude oil will have any lasting results.

But despite the odds, some people are still hopeful. The executive director of Natchez Inc. said there is nothing from his standpoint to view the measure (shutdown) as a negative regarding a planned second plant in Natchez. Seems we are almost insanely desperate for jobs. We should be sanely desperate for a sane and workable economic development policy.

Unworkable policy

Kior and Kemper are good examples of an unworkable policy. They both have a lot in common in addition to the hype. As I said before, both were negotiated in secret, vetted by agencies subordinate to their sponsoring politicians, supported by business leaders with construction contracts and other business in mind, and funded by the legislature after intense lobbying - but with little or no independent review or informed debate.

Neither appears to have been subject to open and careful review and monitoring during construction and startup. Their sponsors and the legislature seem unaware of their problems. Both are based on experimental technology and wishful thinking and concepts that violate a fundamental law of nature (Conservation of Energy).

Both involve state inducements and federal grants and preferences that apparently induced the loss of good judgment and common sense. Federal preferences force refiners to buy biofuels. This guarantees a market and price for Kior's product. But not its profitability. The Public Service Commission sets a guaranteed price for electricity. Mississippi Power’s monopoly guarantees the market. But not cheap electricity for customers.

Law of inverse hype

The initial fanfare around Kior suggests a Law of Inverse Hype: The greater the hype, the more dubious the claims - especially if they defy common sense and fundamental natural laws. Example: the hype about Kior's magic catalyst that would do in one day what Mother Nature took a million years to do. According to The Daily Journal, one legislator who voted for the Kior financial package exclaimed: "This is an unbelievable process!" Turns out he was right.

The hype for the Kemper lignite plant has been off the Richter scale. Two governors, the US Secretary of Energy, Newt Gingrich, other assorted politicians, luminaries, academics, and so on have all now being justified as a believable supply alternative to natural gas in case there is a Chicken Little event.

The flip side

The flip side of Kior and Kemper may be the recent low key announcement by the governor and company about the General Atomics expansion at Shannon, Mississippi. The company will invest $11 million and create 80 jobs there. It is not a new technology startup. It will relocate existing product lines already providing equipment and services to the defense, nuclear, oil and energy storage industries. They will locate in a vacant building in the Tupelo/Lee Industrial Park South that joins the company's existing campus according to the Lee County Courier.

There is some MDA assistance involved. But no massive state aid for "next generation plants and technology" or an "unbelievable process." My guess is the Law of Inverse Hype applies here too: the less the hype, the better the odds of success.

Assuming General Atomics knows what it is doing and saying, 80 jobs for $11 million will work out to be $137,500 per job at virtually no cost to the state. Got that? No cost to the state (that's you and me) to create 80 jobs. That's because the investment is private money - General Atomic's shareholders money.

A better policy

Wouldn't it be something if we had a state economic development policy that encouraged private investment by keeping more money in the private sector? Might be more productive than state aid and tax breaks for targeted "unbelievable processes" paid for by taxpayers - who are left with less to invest in a believable process or business of their own.

If you think individuals and businesses are more careful and efficient investing their own money than the state is "investing" yours, think about how to get individuals and businesses more money to invest. Lower taxes are an obvious way, of course. Another less obvious way is honest objective regulation that puts the public interest first.

Biggest job killer ever

If the Public Service Commission deems the $3+ billion cost of the plant prudent forcing customers to pay for it as the company proposes, the extra cost of electricity to households and businesses will be over $400 million per year over the 40 year life of the plant. That's over $16 billion that will leave the state. That's over $16 billion that will not be invested or spent in Mississippi.

If the private sector can create a job for $137,500, and if Kemper sucks over $16 billion out of the state, then Kemper will prevent or destroy over 116,363 jobs in Mississippi over its life. That is a net loss of over 116,163 jobs assuming Kemper creates the 200 permanent jobs it has projected.

We can do better

Supporting a project that will cost over 116,163 jobs is not good state economic development policy.
We can do better."

"Kelley Williams is the former CEO of First Mississippi/Chemfirst and a Jackson resident. He can be reached at kelley@greenover.com."

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"Cronyism in Mississippi," Bigger Pie Forum

Overview

What is cronyism?

Cronyism takes many forms, but the common thread is the use of government connections to promote one's own interest in a legal way. This can be done through bailouts, subsidies, regulations, foreign quotas and tariffs, mandates, and even tax breaks. Each of these has the potential of giving an advantage to one firm or individual over another with the government's permission. Often these preferences are rationalized by the fear of market failure—the fear that bad things will happen, or good things won't occur if the government doesn't step in to help.

How cronyism works

Cronyism works in two directions: 1) Organizations lobby the government for favors; 2) Politicians favor groups that can support them politically.

Economics professor Randall G. Holcombe explains that, "Firms increase their profits through government favors, and in exchange they support the politicians who provide the favors." For example, a company may lobby Congress for special tax breaks on a certain industry. Legislators may give the breaks only to those special industries in hopes of getting financial backing in return. Unions may also lobby government agencies to pressure companies to take action like relocating production for the sake of union jobs.

Why cronyism is possible

Cronyism is possible because of government power and the natural human desire for gain. Government holds power in order to promote liberty and rule of law, but that power also allows government to hand out tax breaks, subsidies, or make laws favoring one group over another.

Conversely, the potential for government favors attracts private interests to lobby for privileges or foster profitable friendships in powerful places, rather than fairly compete in the marketplace. This set-up promotes a process of give and take between government officials and industries: government gives out favors; industry supports the officials who hand out the favors; and vice versa. Even the regulatory field (which is supposed to protect the public from unfair business practices) ends up as breeding ground for cronyism. Industries can "capture" the interest of the regulators who may raise rates or make rules that favor one group and block out others.


Welfare is often thought of as giving to the poor. But with cronyism, welfare extends to many classes, all the way up to rich corporations getting subsidies and bailouts. There are numerous examples: Banks and car manufacturers are bailed out; subsidies go to oil companies and big conglomerates; health insurance companies get big indirect subsidies through tax breaks for employers.

Programs touted to help the less advantaged also end up providing revenue opportunities for the wealthy. JPMorgan has a niche industry supplying debit cards for the government food stamp program. Instead of helping to save the iconic small family farm, most agricultural subsidies go to the big farmer. Mortgage interest deductions may sound good for struggling homeowners, but are often more beneficial to wealthy individuals who buy expensive property--and low-income homeowners often cannot even take the deduction. In the realm of education, Federal student aid subsidies inflate college tuition and replace institutional-funded aid, meaning more money for colleges and potentially higher costs for needy students. Even in primary and secondary schools, corporations profit from contracts allowing them to exclusively supply all educational products to certain public school districts in the name of school reform. Contracts for school construction or transportation can be subject to fraud by the rigging of bids.

Impacts of cronyism

Cronyism hurts the public at large. Instead of investing in better and cheaper products and services, businesses spend time and money "rent seeking" after government favors. Increased prices also hit consumers when cronyism in the form of tariffs and foreign import quotas limits access to less expensive products. 

Instead of focusing on keeping the public safe and free, government officials cater to personal supporters. Any government subsidies, loans, or tax credits given to these special interests in turn go on the tab of taxpayers. In effect, government uses the public's money to favor one business or industry over another. Not only is this unfair to the taxpayer, it is also unfair to businesses that don't have money to spend on political connections.

More so, it is very difficult to reduce cronyism once it has a foothold. The very nature of cronyism means those opposed to losing their privileges will be able to use their crony network to stop the system from being reformed. And, businesses seeing other organizations getting favors are encouraged to lobby to get in on the benefits themselves, or at least to protect themselves from any unfair disadvantages. 

Cronyism in Mississippi

Nationally and locally, the "green" energy sector has been a hotbed for cronyism and government subsidies. Mississippi Governor Haley Barbour hailed the state's granting of loans to several green energy projects, such as solar plants for Twin Creeks Technologies and Stion and the biofuels facility for KiOR.

In particular, the Kemper County clean coal plant owes thanks to its $270 million Department of Energy grant to BGR Group, the lobbying firm Barbour helped found. More importantly, Barbour lobbied for Southern Company, the power company that owns Kemper, before running for governor. He then promoted the Kemper project while in office, a move that suggests connections and a conflict of interest typical of cronyism. BGR Group later pulled the reference to the Kemper success from its website.

A culture of cronyism also appears to exist among administrators of the Mississippi Department of Education (MDE). Questions have been raised about confidential data sharing practices for profit and the involvement of a former MDE employee in inflating public school ratings.

Other examples of Mississippi cronyism include Magnolia Ventures and the "Beef Plant." Magnolia Ventures, which started in 1994, received $20 million in state bonding money and went bankrupt after three years. One of its major lobbyists embezzled significant amounts from the company as later chairman and CEO.

Beef Processors LLC, which received a $55-million dollar taxpayer-backed loan, ended up going bankrupt in 2004, its owner convicted of embezzlement. The plant's construction oversight had made illegal contributions to then governor Ronnie Musgrove, who supported the project.

In 2012, the Handy Hardware factory, recipients of a $3.6 million state grant, decided to leave Mississippi. The company never produced the 175 jobs it had agreed to create in three years.

How to combat cronyism

In the realm of government and politics, cronyism can be combatted by limiting the power of government to play favorites in giving bailouts, subsidies, and tax subsidies. Peter Schweizer, president of the Government Accountability Institute, advocates "complete transparency" in the arena of election financing, in addition to barring large contributors from getting government grants. 

On the corporate side, businesses and industries can fight cronyism by not seeking government handouts or favoritism, but instead keeping to fair play and healthy competition, while saving lobbying for the purpose of limiting government's harmful use of power and fighting off cronyism.

The mainstream media needs to join independent journalists in watching out for cronyism. By keeping the public informed, they have the opportunity to fire up both sides of the political spectrum for the chance to shame and boycott cronies.

Selected Charts and Graphs
  • This interactive chart shows that government bailouts "are only the tip of the iceberg" in American cronyism. Moving the cursor over various sections of the iceberg will provide explanations of other cronyism culprits, like monopolies, protectionism, and even tax credits.
  • This chart lists the affiliations of individuals appointed to the President's Export Council in 2010. Beside each affiliation is a record of the money donated by that group in support of the president. Commenting on the plumbers union topping the list, The Heritage Foundation notes, "Now we'll wait to see exactly what the plumbers are going to export!"
  • This chart lists the top 50 interest groups giving to incumbent members of Congress in 2012. It displays the amount given, the Democrat and Republican percentage of the money, and the top recipient of the money. A dropdown list allows viewers to review the data for each Congressional election cycle going back to 2000.
  • In 2011, the health sector was the largest interest group lobbying the Congressional Committee on Deficit Reduction, as shown in this chart by OpenSecrets.org: "About 30 percent of these organizations -- 118 groups in total  -- were from the health sector… an area that is facing steep cuts from the supercommittee."
  • Occupy Wall Street and the Tea Party movement share a similar concern for cronyism as seen in the overlap of this Diagram.
  • This infographic displays the estimated amount of government money spent on various forms of energy from 2002 to 2008. Costs include both tax credits and direct spending.
  • The total impact of energy-related tax preferences on Fiscal Year 2011 income taxes was approximately $20.5 billion, according to Table 1 on Page 3 of this Congressional Budget Office (CBO) brief.
  • Nearly half of Mississippi state revenue in 2010 came from the federal government. Mississippi's proportion of federal grant money can be compared with that of other states on this map. Transfers of government money often create incentives for cronyism.
  • Chart 2 shows the proportion of government subsidies that went to large farms over small farms in 2002. Large farms (the top 10 percent of recipients) received 65 percent of the subsidies, while small farms in the bottom 80 percent received only 19 percent of the subsidies. Heritage Fellow Brian M. Riedl states, "Farm subsidies have evolved from a safety net for poor farmers to America's largest corporate welfare program."
  • This interactive map shows the amount of federal agricultural subsidies given to each state from 2003 to 2005. It also shows the amount of subsidy money given to the country's top ten farm businesses that receive those subsidies. Four of those ten are located in Mississippi.
  • Mississippi offers a number of financial incentives to encourage business growth in Mississippi. The 2012 Mississippi Incentives Report provides an overview of these awards, which are overseen by the Mississippi Development Authority. The map on page 2 of the report shows the distribution of stimulus grants, disaster grants, and economic development grants and loans throughout the state in 2012.
Selected Articles
  • A January 2013 Wall Street Journal article unveils the cronyism embedded in a federal tax reform bill. Tax credits include special interests, from a StarKist factory in Samoa to energy efficiency credits for consumers that will indirectly subsidize Whirlpool.
  • Some companies pay much lower tax rates than others. This in-depth report by Citizens for Tax Justice and the Institute on Taxation and Economic Policy explains who pays what, and why, and notes that some corporations pay hardly any tax.
  • In this article, Bill Frezza of the Competitive Enterprise Institute contrasts crony capitalism with market capitalism. He blames the crony capitalists, those who prosper on government favors, for raising discontent against the wealthiest "1%."
  • AgainstCronyCapitalism.org gives a rundown of instances where crony capitalism can crop up—instances where government intervention in a private market has distorted the market. These include banking, the car industry, farming, and lawmaking.
  • Economics professor Randall G. Holcombe goes into depth on the causes of crony capitalism, summing up the problem as one of big government. He says that "even in providing 'public goods,' government can steer funds to benefit cronies, so crony capitalism is fostered by any government spending, even when the rationale for that spending has a public-interest foundation. More government spending for any reason increases the incentives for cronyism."
  • In this blog post, policy analyst Nicolas Loris discusses the rise of renewable energy subsidies. Taxpayers are getting "desensitized," and businesses of course want to jump in on the bandwagon if money's going to be given away. Green energy needs help because it's too costly, but taxpayers end up suffering due to "pricier electricity."
  • Blogger Charles Hugh Smith walks through an illustration of how regulations can kill small business—in this case, farmers. In his example, a super farm lobbies the government and gets subsidies. Next, regulations come that are too difficult for small farms to deal with. They don't have enough resources to fight if they get in trouble with the government, while corporate farms are too big for the government to risk bothering. Regulations continue to multiply and force out the little man. Smith thinks the only solution is to ban all private campaign funding and lobbying.
  • In Three Easy Ways to End Cronyism, Peter Schweizer chides the anti-crony lip service of politicians who don't actually combat the problem. He thinks a good place to start eliminating cronyism is with election financing:
"1.    No government loans or grants to firms or entities connected to campaign bundlers and large financial supporters.
 2.    Complete transparency when it comes to campaign financiers and bundlers.
 3.    No campaign fundraising from large government contractors."
  • F.H. Buckley discusses the importance of rule of law to the nation's prosperity in the July/August 2012 edition of The American Spectator. He predicts the continued expansion of corruption and cronyism with the growth of government, increased bailouts, and poor mainstream media coverage on the issue. He compares lobbying in America to the practice of bribery in poor countries.
  • This video of the grand opening of GreenTech's MyCar plant in Horn Lake, Mississippi, shows former President Bill Clinton, Mississippi Gov. Haley Barbour and well known Democratic fundraiser Terry McAuliffe, acting chummy. Terry McAuliffe, then chairman of GreenTech, worked with Barbour to open the plant in Mississippi. GreenTech got a $5 million loan from the state. McAuliffe, while running for governor in Virginia, claimed his state didn't offer a competitive incentive package. He didn't mention that Virginia also had concerns about the company's business model.
This opens the door to cronyism, since utility companies can take advantage of ratepayers, regardless of the plant's success, if they can gain the favor with the commissioners."
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2/15/11, "Plant closure bursts Georgia’s biomass bubble," Atlanta Journal Constitution, Dan Chapman

"The premise, and the promise, were brilliant in their simplicity: Turn tree waste into fuel, help break the Middle Eastern choke hold on America’s economy and"....

[Ed. note: The "Middle East choke hold" no longer exists. The US is a net oil exporter as of 2011. Further, "today, half of net U.S. petroleum imports come from the Western Hemisphere, and half of that (or a quarter of the total) comes from Canada. Only 12% came from Saudi Arabia last year (2010)."]
  • (continuing, AJC): "bring hundreds of jobs to rural Georgia.
What wasn’t there to like?

Plenty, starting with the closing last month of the Range Fuels cellulosic ethanol factory that promised to help make Georgia a national leader in alternative energy production. Then there’s the money — more than
  • $162 million in local, state and federal grants, loans and other subsidies committed to the venture.
Much of that has been spent; recovery would be difficult. Officials at Colorado-based
  • Range Fuels,
who didn’t return calls for this story, have said they plan to eventually re-open the Soperton plant.
 
But critics — ranging from budget hawks to renewable energy experts to dispirited locals — say the shutdown is a case of
  • good money thrown at unproven science and lofty promises.
We gave those subsidies in hopes of getting something in return — jobs,” said Wallace Little, a laid-off special ed teacher from Soperton who applied for a Range job. “And we hope they come back, as far-fetched as that sounds.
  • We need jobs. We need them bad.”
Over the last six years, Georgia has successfully wooed a variety of companies specializing in biomass — cellulosic ethanol, corn ethanol, biodiesel, wood pellet, wood-to-electricity — with the goal of becoming a renewable energy leader.
  • Many of the companies, though, are no longer in business.
Vinod Khosla, the dot-com billionaire behind Range Fuels,

  • vowed in 2007 to
  • “declare a war on oil” and said “cellulosic ethanol is the weapon we need.”
State and national officials were giddy when ground was broken later that year for the $225 million ethanol distillery outside Soperton, 155 miles southeast of Atlanta.

Range Fuels represents a new future for our country,” proclaimed then-Gov. Sonny Perdue,
  • flanked by dignitaries and beauty queens.
“With Georgia’s vast, sustainable and renewable forests, we will lead the nation.”

U.S. Energy Secretary Samuel Bodman, who steered a $76 million federal grant to Range, said that “by relying on American ingenuity
  • and economic security.”
The U.S. Department of Agriculture followed up with an $80 million loan guarantee.

  • Georgia officials pledged $6.2 million.
Treutlen County, one of the state’s poorest, offered 20 years worth of tax abatements and 97 acres in its industrial park. Private investors reportedly put up $158 million. In all, the project raised more than $320 million.

  • It hasn’t been enough.
By now, Range had expected to produce 20 million gallons of ethanol. Seventy Georgians would have jobs, denting  
  • Treutlen’s

  • Range shut down in early January. Only a few employees in Soperton remain.
Bud Klepper, plant manager for Range Fuels, told The Soperton News that the shutdown is “not permanent,” adding that
  • the company seeks additional financing.
“We’re just taking him at his word that it’s just a temporary shut down,” said John Lee, executive director of Treutlen’s development authority. “There’s nothing else we can do.”"...


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11/30/11, "U.S. Nears Milestone: Net Fuel Exporter," Wall St. Journal, by L. Pleven, R. Gold
A combination of booming demand from emerging markets and faltering domestic activity means the U.S. is exporting more fuel than it imports,
  • upending the historical norm.
According to data released by the U.S. Energy Information Administration on Tuesday, the U.S. sent abroad 753.4 million barrels of everything from gasoline to jet fuel in the first nine months of this year, while it imported 689.4 million barrels."...(remainder of article is subscription)






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I'm the daughter of an Eagle Scout (fan of the Brooklyn Dodgers and Mets) and a Beauty Queen.