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Excerpt from Willamette Week - 2009-04-08; Page 15It may go down as the most spectacular corporate flameout in recent Oregon history.
Last June, a company called Cascade Grain opened an ethanol plant in Clatskanie, 56 miles northwest of Portland. The largest such facility on the West Coast, Cascade?s plant had the capacity to produce 113 million gallons of ethanol each year.
Buoyed by pioneering legislation and subsidized with millions of taxpayer dollars, the $200 million facility brought dozens of family-wage jobs to the depressed Coast Range town and cemented Oregon?s leadership role in the nation?s transition to renewable energy.
Seven months later?Jan. 8, to be exact?the plant shut down.
No longer do milelong trains carrying Midwest corn rumble through Columbia County. Cascade?s gleaming stainless-steel tanks and 82,000 linear feet of spaghetti-strand piping hold little more than air. Only a skeleton crew of employees remains, assisting bankruptcy lawyers and protecting the plant from looters.
Cascade?s lightning-fast skid into bankruptcy is more than a stunning story of a business failure. It?s also a cautionary tale of the unanticipated speed bumps on Oregon?s path to sustainability. Cascade?s failure is not a uniquely Oregon story. One-fifth of the ethanol industry?s production capacity in the U.S.?most of it less than five years old?has shut down.
But the story of Cascade Grain?s bankruptcy is perhaps more alarming than failures elsewhere because Oregon did so much more than other states?with both carrots and sticks?to promote ethanol.
All those efforts were not enough. Today in Clatskanie, the jobs are gone. And Oregon taxpayers are on the hook for tens of millions of dollars.
Jeff Rouse, fuels manager of Carson Oil, an independent Portland ethanol and gasoline merchant, says no one should be surprised Cascade failed.
In the ?rush to green,? Rouse says, policymakers ignored common sense and basic economics.
?The State of Oregon bent over backward to make people want to come here and invest,? Rouse says. ?[Gov.] Ted Kulongoski wants Oregon to be the greenest state in the country?and that?s great, but you need to know who you are and what you are.?
An industrial ethanol plant such as Cascade?s is a larger, higher-tech version of a moonshiner?s still. The plant?s operators grind corn, mix it with water and enzymes, and cook it into a ?mash.? After the mash ferments, the liquid is distilled into ethanol, and the solids, called distiller?s grain, become animal feed.
The federal Clean Air Act of 1977, which began the phasing out of lead in gasoline for health reasons, catapulted ethanol into prominence.
Ethanol was one of two primary substitutes for lead (which raised gasoline?s octane, a measure of performance). Over time, regulators realized the other substitute, MTBE, also carried health risks.
In recent years, ethanol began to serve another role: helping the U.S. reduce its dependence on foreign oil. Because ethanol comes from a renewable domestic source?corn?advocates promoted mixing it with gasoline to stretch each barrel of oil.
Given recent oil price spikes and Americans? addiction to driving, Congress and state legislatures passed laws to promote ethanol. Those laws created an investment frenzy much like the current race to line the Columbia Gorge with wind farms (see sidebar, page 19, and ?A Mighty Wind,? WW, March 11, 2009).
Federal figures show the number of ethanol plants has more than doubled since 2004 and annual capacity has skyrocketed from 3 billion gallons to 12.5 billion gallons?enough ethanol to fill 17,000 Olympic-sized swimming pools with corn-based fuel.
But even as Oregon rushed to join the ethanol party, the good times were nearly over.
State Sen. Jackie Dingfelder (D-Northeast Portland) is a bright-eyed, driven lawmaker with a cluster of ideas about how to make Oregon the greenest state in the union.
STATE SEN. JACKIE DINGFELDER: Said in 2007, ?The time is now to jump-start rural Oregon and jump-start this industry.? IMAGE: Thomas Cobb
Nobody put more effort into making Oregon an ethanol pioneer than Dingfelder, 48, who works as a senior environmental planner when not serving as chairwoman of the Senate Energy and Environment Committee.
In a legislative hearing Jan. 24, 2007, Dingfelder made the case for why Oregon should jump ahead of other western states and pass an aggressive mandate for ethanol and other biofuels.
?I do believe that without this plan, our economic opportunities will be eclipsed by the states of California and Washington,? she said. ?We?ll be well-positioned to be a national leader on both the economic and environmental fronts.?
Dingfelder convinced her colleagues that ethanol and other renewable fuels such as biodiesel were the future. Producing such fuels not only meant new jobs and a cleaner environment, it would also help narrow the only chasm in Oregon wider than the Columbia Gorge?the urban-rural divide. Rural Oregon would profit by making green fuel for city dwellers.
?The time is now to jump-start rural Oregon and jump-start this industry,? Dingfelder said. ?But we have to act this session.?
With the backing of agricultural interests and virtually every environmental group in the state, the legislation sailed through both houses.
Hearings about ethanol and other renewable fuels were more like Sierra Club meetings than legislative debates.
When the ethanol mandate came to a vote, most Republicans, often skeptical of green policies, climbed aboard: Only seven of 90 lawmakers voted no.
The bill created incentives for biodiesel, the conversion of wood waste to fuel, and other futuristic technologies. But most significantly, it required that all gasoline sold in Oregon contain 10 percent ethanol. With that mandate, Oregon leaped ahead of every other western state.
Brian Doherty, a lobbyist for the Western States Petroleum Association, was a lonely voice of opposition.
His group, which includes the gasoline blenders who would have to implement Oregon?s ethanol mandate, thought the law was too much, too fast.
Doherty argued the mandate ignored all sorts of potential risks and unintended consequences.
?Nobody listened,? Doherty says.
Within weeks of the passage of the bill, the new state mandate kicked in?guaranteeing a market for Cascade Grain.
A year earlier, the state had given Cascade an even more important boost: a crucial loan from the Oregon Department of Energy.
Cascade CEO Chuck Carlson, a 58-year-old Minnesota native who previously worked for the agri-business giant ConAgra in California and managed a grain company in Moro, Ore., had worked for more than four years to get the state?s backing.
Carlson also lined up an equity investor, Berggruen Holdings of New York, which invested about $80 million.
The state had previously reviewed proposals from Cascade and found them wanting. But in 2006, Dave Stevens, the state loan officer who reviewed Cascade?s application, gave it a green light.
?The current proposal brings together the necessary partners and management team in a well-designed plant, and presents a project that is comprehensive in its management of the commodity risks and has a sound financial structure,? Stevens wrote in a May 1, 2006, loan review. ?The investor will be able to realize a strong, ongoing return on their investment.?
Soon afterward, the state Department of Energy approved what Stevens says is the largest single loan in the department?s history: $20 million to be repaid over 14 years at 5.6 percent interest. Banks loaned another $100 million.
Stevens noted in his write-up that Oregon?s willingness to loan money was a factor in locating the plant here.
?The willingness of the state to participate has been a positive note in dealing with the lenders and investors,? he wrote. ?No other state in the Northwest has an incentive like the loan program.?
Taxpayers also provided Cascade with other help, including a five-year property tax break worth up to $2 million per year. And last year Cascade got about $11 million from a state business energy tax credit. And money from a Columbia County urban renewal district provided nearly $30 million of infrastructure, such as a road and a rail spur to Cascade?s plant.
With all the goodies taxpayers provided Cascade and a new ethanol mandate in place, the company?s prospects looked bright when it started production last June.
But Oregon?s best intentions proved no match for wild swings in commodity prices and the ethanol industry?s excess production capacity. Seven months after it started production, Cascade shut down.
The reasons Cascade failed are simple: lousy operating margins exacerbated by balky equipment. Or, put another way, ethanol prices were too low to cover the cost of production; and, for reasons that remain in dispute, Cascade?s plant ran only intermittently, and its ethanol did not always meet industry specifications.
In his 2006 review of Cascade Grain?s loan application, the Department of Energy?s Stevens highlighted a key risk: the price of corn.
?The market for the major feedstock [corn] is a key to the successful operation of the Project,? Stevens wrote. ?The market for corn is currently favorable for the Project?s finances. Corn prices are anticipated to rise from current lows, but remain in the 15-year historical range of $1.82 to $3.24 [per bushel].?
But ultimately, high corn prices and a weak gasoline market whipsawed Cascade.
Corn prices far exceeded historical prices, in part because ethanol plants multiplied like Las Vegas subdivisions.
All the new facilities boosted corn demand. Experts disagree about how much of the price increase came from ethanol and how much from increasing food demand, but ethanol claimed an ever larger chunk of the corn crop.
In 2002, for instance, federal figures show 11 percent of the nation?s corn crop got converted into ethanol; in 2007, the number was about 25 percent. Over the next year, the USDA expects ethanol makers to buy fully one-third of corn production.
In July 2008, a month after Cascade started production, corn prices reached an all-time high of $7.99 a bushel. That was more than twice the high end of the range the Energy Department?s analysis had contemplated.
And after corn prices peaked, they declined more slowly than gasoline prices. That divergence drove Cascade?s operating margin?the difference between the price of ethanol and the price of corn?into negative territory.
Cascade?s biggest problem was that there was just too much ethanol being produced in this country. By the end of 2008, figures show, ethanol capacity was about 12.5 billion gallons, but demand was a little more than 9 billion gallons a year.
?The entire ethanol industry has seen reduced and negative margins over the past several months,? Carlson says.
Doug Vind of Western Ethanol, an Orange County, Calif., distributor active across the West, says Cascade simply showed up too late for the party.
?Three years ago, they could have made a lot of money and socked some away for later,? says Vind, who purchased Cascade-produced ethanol. ?But margins were negative from the get-go, and they had problems with quality control.?
Cascade faced another challenge, as well. Building a $200 million piece of machinery is complicated, and even though ethanol technology is well-developed, construction of Cascade?s plant did not go smoothly.
Carlson says the plant never performed as JH Kelly, the general contractor who built it, promised.
?In the seven months Cascade had the plant operating, there were less than 20 days in which we were able to run at full capacity,? he says.
And the ethanol Cascade produced sometimes failed to meet buyers? quality specifications.
In January, Cascade?s quality issues became severe. The company sent hundreds of thousands of gallons of ethanol to Portland that contained excessive amounts of sulfates, say industry sources. Buyers rejected the shipments, which meant Cascade did not get paid.
The financial hit was more than the company could absorb. On Jan. 28, the company declared Chapter 11 bankruptcy.
Carlson says Cascade?s bankruptcy was painful to him because it cost so many employees their jobs, but it should not affect or lessen Oregon?s commitment to ethanol.
?These were unforeseen problems that dramatically affected our ability to produce and run efficiently,? Carlson says. ?[But] renewable energy is vital to Oregon and the country as a whole.?
Today, Cascade?s hammer mill, designed to crush 7 million pounds of corn daily, sits in a silence broken only by the quacking of ducks and honking of geese on the rain-swollen Columbia. In a Portland bankruptcy court, creditors are picking at Cascade?s carcass.
Not only did the nearly 60 jobs the plant created turn out to be fleeting, but ethanol critics are increasingly questioning the facility?s environmental promise.
Although some research says ethanol is environmentally superior to gasoline, a number of studies have found that when the fertilizer and fuel used to produce, harvest, transport and process the corn are factored in, ethanol is no greener than gasoline and may in fact be worse for the environment.
The Oregon Legislature is now considering at least five bills aimed at scaling back or eliminating the 10 percent ethanol mandate because of concerns that it reduces mileage, harms some engines and raises food prices.
Sen. Vicki Walker (D-Eugene), a proponent of anti-ethanol legislation, believes the fuel drastically reduces a car?s mileage.
?I hate ethanol,? Walker told the House environment committee March 26.
While Carlson hopes to restart his ethanol plant soon, one creditor recently asked bankruptcy judge Elizabeth Perris to force Cascade into liquidation.
In March, Valero, a large Gulf Coast oil refiner, bought seven ethanol plants in a bankruptcy auction for about 30 cents on the dollar. An industry expert told the court here Cascade?s plant is worth about $50 million, a quarter of its construction cost.
That means lenders?including taxpayers?will take a bath.
Kulongoski and Dingfelder are taking the position that while unfortunate, Cascade?s problems are a short-term blip on the long-term path to sustainability.
Dave Van?t Hof, Kulongoski?s point man on energy and environment issues, says the governor believes the subsidies for Cascade and the ethanol mandate were good decisions and he would do nothing differently.
?We?re staying the course,? Van?t Hof says. ?We?re not going to win on every investment, but on average we?re going to get a positive return.?
Dave Stevens, the state Department of Energy loan officer who reviewed Cascade?s business plan, retired March 31, knowing that the biggest deal he approved was also probably the worst.
?I don?t know if it [the loan] was a mistake,? Stevens says. ?I won?t be overly defensive, but I don?t know what else we could have done.?
Ethanol boosters like Carlson, Cascade?s CEO, say the future is bright: Consumption will catch up with production capacity and the industry will move toward ?second generation? ethanol production using cellulosic sources unburdened by corn?s drawbacks, such as wood-product waste.
But even some left-leaning critics, such as Chuck Sheketoff of the Oregon Center for Public Policy, say policymakers need to slow down and invest taxpayer money more carefully.
?I?m not sure we?re asking basic questions like, ?Is this a good deal?? and, ?Will it happen anyway, without incentives??? Sheketoff says. ?Subsidies should be based on good business sense.?
BY NIGEL JAQUISS
Very Interesting TV - Computer
Excerpt from Weston Investment Co. LLC - 2009-03-14A few years after I was born, my Dad met a stranger who was new to our small Texas town. From the beginning, Dad was fascinated with this enchanting newcomer and soon invited him to live with our family. The stranger was quickly accepted and was around from then on.
As I grew up, I never questioned his place in my family. In my young mind, he had a special niche. My parents were complementary instructors: Mom taught me good from evil, and Dad taught me to obey. But the stranger...he was our storyteller. He would keep us spellbound for hours on end with adventures, mysteries and comedies.
If I wanted to know anything about politics, history or science, he always knew the answers about the past, understood the present and even seems able to predict the future! He took my family to the first major league ball game. He made me laugh, and he made me cry. The stranger never stopped talking, but my Dad didn't seem to mind.
Sometimes, Mom would get up quietly while the rest of us were shushing each other to listen to what he had to say, and she would go to the kitchen for peace and quiet. (I wonder now if she ever prayed for the stranger to leave.)
Dad ruled our household with certain moral convictions, but the stranger never felt obligated to honor them. Profanity, for example, was not allowed in our home...not from us, or friends or any visitors. Our longtime visitor, however, got away with four-letter words that burned my ears and made my dad squirm and my mother blush. My dad didn't permit the liberal use of alcohol. But the stranger encouraged us to try it on a regular basis. He made cigarettes look cool, cigars manly and pipes distinguished. He talked freely about sex. His comments were sometimes blatant, sometime suggestive, and generally embarrassing.
I now know that my early concepts about relationships were influenced strongly by the stranger. Time after time, he opposed the values of my parents, yet he was seldom rebuked...and NEVER asked to leave.
More than fifty years have passed since the stranger moved in with our family. He has blended right in and is not nearly as fascinating as he was at first. Still, if you could walk into my parents' den today, you would still find him sitting over in his corner, waiting for someone to listen to him talk and watch him draw pictures.
His name?
We just call him "TV."
He has a wife now...we call her "Computer."
Obama's Radicalism Is Killing the Dow
Excerpt from The Wall Street Journal - 2009-03-06; Page A15A financial crisis is the worst time to change the foundations of American capitalism.
It's hard not to see the continued sell-off on Wall Street and the growing fear on Main Street as a product, at least in part, of the realization that our new president's policies are designed to radically re-engineer the market-based U.S. economy, not just mitigate the recession and financial crisis.
The illusion that Barack Obama will lead from the economic center has quickly come to an end. Instead of combining the best policies of past Democratic presidents -- John Kennedy on taxes, Bill Clinton on welfare reform and a balanced budget, for instance -- President Obama is returning to Jimmy Carter's higher taxes and Mr. Clinton's draconian defense drawdown.
Mr. Obama's $3.6 trillion budget blueprint, by his own admission, redefines the role of government in our economy and society. The budget more than doubles the national debt held by the public, adding more to the debt than all previous presidents -- from George Washington to George W. Bush -- combined. It reduces defense spending to a level not sustained since the dangerous days before World War II, while increasing nondefense spending (relative to GDP) to the highest level in U.S. history. And it would raise taxes to historically high levels (again, relative to GDP). And all of this before addressing the impending explosion in Social Security and Medicare costs.
To be fair, specific parts of the president's budget are admirable and deserve support: increased means-testing in agriculture and medical payments; permanent indexing of the alternative minimum tax and other tax reductions; recognizing the need for further financial rescue and likely losses thereon; and bringing spending into the budget that was previously in supplemental appropriations, such as funding for the wars in Iraq and Afghanistan.
The specific problems, however, far outweigh the positives. First are the quite optimistic forecasts, despite the higher taxes and government micromanagement that will harm the economy. The budget projects a much shallower recession and stronger recovery than private forecasters or the nonpartisan Congressional Budget Office are projecting. It implies a vast amount of additional spending and higher taxes, above and beyond even these record levels. For example, it calls for a down payment on universal health care, with the additional "resources" needed "TBD" (to be determined).
Mr. Obama has bravely said he will deal with the projected deficits in Medicare and Social Security. While reform of these programs is vital, the president has shown little interest in reining in the growth of real spending per beneficiary, and he has rejected increasing the retirement age. Instead, he's proposed additional taxes on earnings above the current payroll tax cap of $106,800 -- a bad policy that would raise marginal tax rates still further and barely dent the long-run deficit.
Increasing the top tax rates on earnings to 39.6% and on capital gains and dividends to 20% will reduce incentives for our most productive citizens and small businesses to work, save and invest -- with effective rates higher still because of restrictions on itemized deductions and raising the Social Security cap. As every economics student learns, high marginal rates distort economic decisions, the damage from which rises with the square of the rates (doubling the rates quadruples the harm). The president claims he is only hitting 2% of the population, but many more will at some point be in these brackets.
As for energy policy, the president's cap-and-trade plan for CO2 would ensnare a vast network of covered sources, opening up countless opportunities for political manipulation, bureaucracy, or worse. It would likely exacerbate volatility in energy prices, as permit prices soar in booms and collapse in busts. The European emissions trading system has been a dismal failure. A direct, transparent carbon tax would be far better.
Moreover, the president's energy proposals radically underestimate the time frame for bringing alternatives plausibly to scale. His own Energy Department estimates we will need a lot more oil and gas in the meantime, necessitating $11 trillion in capital investment to avoid permanently higher prices.
The president proposes a large defense drawdown to pay for exploding nondefense outlays -- similar to those of Presidents Carter and Clinton -- which were widely perceived by both Republicans and Democrats as having gone too far, leaving large holes in our military. We paid a high price for those mistakes and should not repeat them.
The president's proposed limitations on the value of itemized deductions for those in the top tax brackets would clobber itemized charitable contributions, half of which are by those at the top. This change effectively increases the cost to the donor by roughly 20% (to just over 72 cents from 60 cents per dollar donated). Estimates of the responsiveness of giving to after-tax prices range from a bit above to a little below proportionate, so reductions in giving will be large and permanent, even after the recession ends and the financial markets rebound.
A similar effect will exacerbate tax flight from states like California and New York, which rely on steeply progressive income taxes collecting a large fraction of revenue from a small fraction of their residents. This attack on decentralization permeates the budget -- e.g., killing the private fee-for-service Medicare option -- and will curtail the experimentation, innovation and competition that provide a road map to greater effectiveness.
The pervasive government subsidies and mandates -- in health, pharmaceuticals, energy and the like -- will do a poor job of picking winners and losers (ask the Japanese or Europeans) and will be difficult to unwind as recipients lobby for continuation and expansion. Expanding the scale and scope of government largess means that more and more of our best entrepreneurs, managers and workers will spend their time and talent chasing handouts subject to bureaucratic diktats, not the marketplace needs and wants of consumers.
Our competitors have lower corporate tax rates and tax only domestic earnings, yet the budget seeks to restrict deferral of taxes on overseas earnings, arguing it drives jobs overseas. But the academic research (most notably by Mihir Desai, C. Fritz Foley and James Hines Jr.) reveals the opposite: American firms' overseas investments strengthen their domestic operations and employee compensation.
New and expanded refundable tax credits would raise the fraction of taxpayers paying no income taxes to almost 50% from 38%. This is potentially the most pernicious feature of the president's budget, because it would cement a permanent voting majority with no stake in controlling the cost of general government.
From the poorly designed stimulus bill and vague new financial rescue plan, to the enormous expansion of government spending, taxes and debt somehow permanently strengthening economic growth, the assumptions underlying the president's economic program seem bereft of rigorous analysis and a careful reading of history.
Unfortunately, our history suggests new government programs, however noble the intent, more often wind up delivering less, more slowly, at far higher cost than projected, with potentially damaging unintended consequences. The most recent case, of course, was the government's meddling in the housing market to bring home ownership to low-income families, which became a prime cause of the current economic and financial disaster.
On the growth effects of a large expansion of government, the European social welfare states present a window on our potential future: standards of living permanently 30% lower than ours. Rounding off perceived rough edges of our economic system may well be called for, but a major, perhaps irreversible, step toward a European-style social welfare state with its concomitant long-run economic stagnation is not.
Mr. Boskin is a professor of economics at Stanford University and a senior fellow at the Hoover Institution. He chaired the Council of Economic Advisers under President George H.W. Bush.
By MICHAEL J. BOSKIN