Cheap Electricity
Research for Online Investors

by John Dalt

11/20/09

A few years ago, a friend of mine started a business importing manufactured goods from China.  He acted as a broker/agent.  He had contacts with different manufacturers in China, and depending on what widget you wanted built; he could ‘get ‘er done.’  This was a Wild West sort of business, as contracts meant nothing to the Chinese, if someone was willing to pay a little more they would move production to the more profitable item.

My friend told me of the competitive advantages China had; cheap labor and lack of restrictive regulation.  People wanted jobs and the government wanted full employment for political reasons, so they stayed out of the way.  I was aware of these advantages, but the one that surprised me, was energy costs.  My friends point was made on an expansive basis.  He emphatically told me, “Every country that has created an economic boom, an industrial revolution, did it with cheap energy.  Cheap and plentiful energy is the one common denominator in every business expansion, and China has cheap energy.”

This morning I received a press release that drove home the silliness behind negotiating with the Chinese on ‘Global Warming’ or ‘Climate Change’.  The Chinese raised electric rates for business on Friday by 5.7%  This was the first increase since July 2008 when rates went up 5%.  Residential rates have not increased since July of 2006, when they increased 1%

China produces about 75% of its electricity with coal, the cheapest fuel.  With this increase, Chinese industry and business will pay 3.4 cents per kilowatt-hour compared to the U.S. average of 10.4 cents, more than three times as much!  I checked my bill last month; including taxes, fuel surcharges, facility charges, and hidden charges it works out to a nice 13.7 cents per kilowatt-hour.  Chinese business pays one-fourth of what I pay for electricity.

I am so excited our government wants to pass ‘cap and trade’ that will drive up our costs.  It makes you want to chew glass.  One of the sickest ideas, that has traction, is for the U.S. to pay ‘developing countries’ to help them adjust to a clean economy, and reduce their green house gases.

Let me get this straight.  We pay anywhere from three to four times as much for our electricity, because of clean air regulations and want to raise our rates even more.  Then we will pay China to help them ‘adjust’ to cleaner energy production.  In another time and place, this would be called for what it is, stupid.

China uses four times as much energy as the U.S. per dollar of economic output. They can use this much, because it is inexpensive, which drives their economic engine. They don’t have to be efficient since their input costs are so low.

Sometimes the easiest way to understandand an issue is to reduce it down to personal terms.  Suppose a business man  is looking to open a small machine shop that operates on very tight margins.  There are two potential locations to open the shop.  One is a city on a freeway, the other a small town one-hundred miles away served by a two lane county highway, so delivery will cost a little more.

The city on the freeway is a strong union town, with a high wage scale.  There is high unemployment because of the economic downturn, but most are collecting unemployment benefits and won't take a job unless it pays at least $20 per hour.  The mayor is a former union steward, and has pushed through an ordinance that employers must pay every employee a 'living wage'.

T he people in the small town are excited for any new business, and offer incentives to any business that will locate there.  There are plenty of young people on small farms that are looking for jobs, and will take any pay offered.  They are anxious to learn new skills and "will give an honest day's work for an honest day's pay."

The city is supplied electricity by the regional utility that operates clean generating plants.  They have 'invested' in a wind farm, and have a test solar generating facility under construction.  They won an award for environmental friendliness!  Their electric rates are higher than the national average, but they are 'responsible' corporate citizens.

The small town operates their own city utility.  They generate electricity with old multi-fuel, open crankshaft generators.  Right now they using natural gas because it is cheap, but monitor the cost of fuels and switch when diesel or propane offer a value proposition.  Because they have extra capacity, the town council will 'lock' in electric rates for new businesses for three years at one-half the state utility's rates.

The small town incentives for new business include ten-year forgivable construction loans if a new business hires at least 25 citizens, low interest operating loans and tax abatements for ten-years.

Where would you locate your new business?

Resources for this article are the Associated Press; you can read their story, “China Raises Nonresidential Electricity Rates.”

We are still trying to understand the reasons Attorney General Eric Holder has decided to put Khalid Shaikh Mohammed, and four others, on trial in Manhattan Federal Court. This comes after Khalid offered to plead guilty before a military tribunal, and be executed. No, we will try to snatch victory from the mouths of defeat. Why let him plead guilty? We can move him to the U.S. and give him a civilian trial with all constitutional guarantees.

Makes sense to me, as I am sure it will to all of us when the defense attorneys tie up the court for years with motions to dismiss charges because the defendants were tortured.  Maybe they will argue they were not granted a speedy trial.  Did we read them their Miranda rights?  Will their allies try to assassinate the judge, jury and prosecutors?  Could they be acquitted?  Will the Federal Courthouse and surrounding area become a terrorist target?  I am sure the Attorney General has thought about all of these things.  That is why he decided not to accept Khalid’s guilty plea and hang him.  It was obviously a better idea to put him on trial in Manhattan.

A high school classmate of mine is a retired U.S. Marshall.  He guarded the federal judge, and his family during the trial for the 'Blind Sheik' in 1995, as they were targets of the jihadists.  I have not talked to him lately, but I think he would have a few choice comments for Holder about Civilian Trials.

Holder can impugn  the people that protect us at a public trial

" Out here, due process is a bullet..."-- John Wayne as Col. Mike Kirby in The Green Berets (1968)

We could always count on ‘The Duke’ to give it to us straight.

The idea of a good slogan for a t-shirt has ignited your imagination. Some of the best:

“You will be assimilated”—B.W.
“Change we can believe in…Comrade” and “You Lie!” ---G.C.
“867 billion later…where are the jobs?”---T.M.
“How’s that hope and change thing working for you, now?” ---W.A.

One of the best comments was by W.A. about needing dish rags (with Maobama’s picture) to scrub the floor, and the idea of a talking bottle opener with the slogan about change.

“Great gift ideas for Christmas, to go with the coal I’m giving away.”

On ethanol, from subscriber N.O., “Never, ever fall in love.”

Send me your ideas for t-shirt captions at feedback@galtstock.com

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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