Driving in the Rain

This is not a rant. OK, it's sort-of a rant, but actually it's an attempt to turn a rant to productive use. In the interests of improving the general level of rain driving skills in Southern California, please consider a few thoughts from someone who's lived in places where serious, heavy rain is a regular occurrence.

1. Use your headlights. Seriously, it's not about you being able to see. It's about other people being able to see you and not run into you. By turning on your headlights, you're also turning on your tail lights, side lights, and all the other things that make your car a mobile Christmas tree, improving the chances that traffic coming your way will stop in time.

2 Be predictable. This is basic defensive driving stuff. The people around you may be hydroplaning, might have fogged up windshields, or might be totally freaking out because there's precipitation falling from the heavens. Use your turn signal when you change lanes. Don't weave. Don't make quick lane changes except in an emergency. Basically, pretend you're surrounded by a bunch of jumpy, freaked-out psychotics armed with two ton chunks of plastic and steel and don't do anything to startle them.

3. Drive in the wheel marks of the car in front of you. The wheels of the car in front of you are doing a bang-up job of clearing water off the roads. You can see those wheel marks on a wet road as a somewhat more dryish patch. The tires throw the water to the sides, and then the water gradually flows back where it was before. That means that, for a window of time, there's a somewhat more dry patch of road. By driving in that dry-ish patch, you reduce your chances of hydroplaning.

4. Drive towards the middle of the road. Most of the big puddles will be towards the edges of the road, because that's how we slope roads. Drive towards the middle to avoid them.

5. Allow extra stopping distance. Your brakes don't work as well when they're wet. And even if they do, your tires have less friction on a wet road. And even if they work well, you might find out, at the wrong time, that you're hydroplaning. Allow yourself some extra stopping distance.

6. Try not to hit the brakes in the middle of a curve. In a curve, your tires are already doing what they can to hold your car on the road. Hitting the brakes might be just what it takes to get them sliding instead of gripping. Try to slow down before you get to the curve. Once you're in it, if you need to slow down further, take your foot off the gas and coast. Use the brakes in the curve as a last resort.

7. If you're hydroplaning, try not to steer or brake. If you're hydroplaning, your car wants to go straight ahead. Your front tires aren't gripping well, if at all, so steering can send you into a spin. The best thing to do, if the road and traffic will allow it, is to take your foot off the gas and coast till the wheels grip again. (The faster the car, the more likley it is to hydroplane. By slowing down, you give the water more time to get out from under the tires, so the tires can grip the road again.) If you have antilock brakes, they should still work to slow the car, but not as well as on a dry road--see "allow extra stopping distance" above. If you don't have ABS, and you have to use the brakes, use them with caution and remember that you might have to pump them. Sometimes you'll hit a large puddle on only one side of the car. That'll tend to pull the car in the direction of the puddle, because of the friction from the water. Correct as you would for any other skid, steering away from the puddle to keep the car moving straight ahead.

Driving in Flood Waters

And now a word for the aspiring Captain Nemos out there--and I count myself a proud member of your ranks.

First off, let's talk about why driving in flood waters is usually a bad idea.

If it's not a bad flood, your car's likely to be hydroplaning a good bit of the time. Also, you can get water up the tailpipe, which will toast the engine pretty darn quickly. As you drive forward through the flood, a bow wave will build up ahead of the car, and water will start sloshing through the engine compartment. That sloshing water can short out the ignition wires, stalling the engine. Also, a car's door seals are designed to keep out rain, not flood water, so she'll start taking on water, which means, at a minimum, you're going to have to replace the jute that glues the carpet to the floor, you'll need to worry about rust, and you might soak the computer (which is often on the floor under one of the font seats).

If it's a bad flood, the tires might leave the road surface. A car will float, at least for a few minutes. During that time, the front wheels become rudders and the drive wheels act like paddle wheels, but minus the paddles. Congratulations, skipper: your vessel will doggy paddle along at maybe 5 miles per hour until she stalls, sinks, or gets swept away by the current to a nasty fate somewhere downstream.

So, it's usually a bad idea to drive through flood waters. However, if you should find yourself in this situation, here are a few things to keep in mind.

1. Consider whether bailing out is the better answer. If the car's in danger of getting swept away, you mght be better off abandoning it. After all, chances are good you can swim better than a car can.

OK, Cap'n Nemo, you've decided to hang with the car. Let's talk about driving in this new environment.

2. Downshift. You need to keep water out of the tailpipe, which means you need to keep lots of exhaust bubbling out. Hybrid drivers (and I'm one) don't have a lot of choices at this point, but folks with non-hybrids should downshift (that's "L1" if you're in an automatic) to keep the engine revved up.

3. Watch the speed. The last thing you want to do is slosh water up onto the ignition cables and stall the engine, because then water gets into the tailpipe and it's all over. (As an aside, if you do stall it, but you manage to coast to a dry-ish area, drying off the ignition cables may be all you need to do to get it started again.)

4. If the wheels leave the road, don't panic. You'll feel it if it happens. Keep the engine revved up and doggy paddle to the nearest relatively dry area. Remember, though, not to rev too much because once those wheels grab again, you don't want the car to suddenly launch itself into something. Once you're back on solid ground, make an appointment with your mechanic, cause you'll probably need it.

You can find more rain driving tips here.

Airlines "Hedging" Fuel Prices

During a lull at work, I was skimming the financial headlines and came across an opinion piece with this provocative headline: "The perils of plunging oil prices: UAL's effort to fight fuel costs backfires". The piece goes on to talk about how airlines' heading strategies are backfiring now that oil prices have dropped, so they're suffering financial losses and having to lay people off.

What's odd here is that hedging shouldn't backfire. Hedging is a method of reducing risk, kind of like insurance, but if you're a clever airline on a tight budget you can often do it for no out of pocket cost. For instance, an airline might decide it can afford jet fuel when oil's $100 per barrel but no more, so it might sign a forward contract, a contract with a supplier to pay that price for jet fuel--no more and no less--for the next two years. True, if oil drops below $100, the airline may be upset that it's locked into the $100 price, not the lower market price, but those are losses it's already figured into its business model. At least theoretically. Or if it wants to to limit the range of fuel prices, it could set up a collar (or, more accurately, a costless collar): pay someone for the right to buy fuel from them at the $110/barrel price (buy a "call" option), and finance it by selling someone else the right to sell fuel to the airline at the $90/barrel price (sell a "put" option). If oil goes above $110/barrel, the airline's covered, and it oil goes below $90/barrel, the airline has to buy it at $90, so the airline's locked into the $90-110 price range.

A look at United Airlines' quarterly report for the quarter that ended September 30, 2008 reveals a somewhat different story:

Aircraft Fuel Hedges. We have a risk management strategy to hedge a portion of our price risk related to projected jet fuel requirements primarily through collar options. The collars involve the simultaneous purchase and sale of call and put options with identical expiration dates. In order for the Company to obtain more favorable terms for a portion of its hedge positions, the Company also entered into collars with additional features. These hedge positions include extendable collars, referred to above, and collars that include twice the amount of put volume as call volume. Gains and losses derived from the Company’s hedge positions are not accounted for as cash flow or fair value hedges under SFAS 133. The Company’s hedges that are classified either in Mainline fuel expense or nonoperating income (expense), based on the nature of the hedge instruments.

(emphasis added) This looks more like speculation than hedging. Twice as many "put" options as "call" options? No wonder they're getting hit. Using the collar example above, for each person they've paid for the right to buy fuel at the higher price, they've sold two people the right to sell them fuel at the lower price. And the price of oil dropped way below that lower price. (In reality, probably no fuel is changing hands. Instead, they just settle up the amount of money each party would have gained or lost if it had traded fuel. Financially, the net result should be pretty close, give or take some taxes.)

more on prop 7

The prior research and discussion on Prop 7 continues, both on this blog and in the comments here. Here's where things stand now.

1. I've managed to convince myself that Prop 7 will not affect the legal status of distributed power generation (such as rooftop solar) that's operating under a net metering program.

Net metering is a program where you hook your rooftop solar up to the grid. You pay your utility company for the amount of power you use minus the amount you generate. Under net metering, if you generate more than you use, the utility doesn't have to pay you for it unless you have some sort of separate contract with them.

I was concerned that Prop 7's language would interfere with distributed generation. It turns out it still might, but not the part of distributed generation that's part of net metering. The Energy Policy Initiatives Center has a useful article (pdf) on California law governing Renewable Energy Credits. Section 5, along with its footnotes, gets into distributed generation. It points out that distributed generation through net metering is governed by a separate set of laws, not by the part Prop 7 changes. That's what the exclusion from the definition of "Retail Seller" of generation consistent with Section 218(b) is all about in Public Utilities Code section 399.12(i)(4)(A).

Now, if you want a contract where you get paid for generating more than you use, that may well put you in the category of being a photovoltaic producer under 30 megawatts, so Prop 7 may have some implications for you.

2. It's still not clear what effect Prop 7 has on producers under 30 megawatts.

There are basically two arguments that prop 7 locks out producers of less than 30 megawatts. I think I may have cleared one up, but the other's still murky.

2.a. Must an "in-state renewable electricity generation facility" be a "facility"?

The first argument goes something like this: to be an "eligible renewable energy resource," you must be a "solar and clean energy facility" and you must also be an "in-state renewable electricity generation facility" as defined in the public resources code. The public resources code § 25741 defines "in-state renewable electricity generation facility" as "a facility that meets all of the following criteria" and then gives a list of criteria. It also contains a definition of the word "facility" in § 25110, which the text of prop 7 (official pdf, unofficial HTML version) changes to specifically include "solar and clean energy plant", a term that means a plant of 30MW or more. So the question is whether an in-state renewable electricity generation facility must be a "facility" as defined in § 25110, or whether the word "facility" there is just the generic, English word "facility" without the statutory meaning. If it has the statutory meaning, then to qualify for the renewable portfolio standard, your solar or clean energy generator would have to generate at least 30MW.

I haven't been able to find a court case, a California Public Utilities Commission decision, or a California Energy Commission decision that addresses that question. However, the California Energy Commission publishes a set of guides for energy producers interested in the Renewable Portfolio Standard. One guide (pdf), in particular, covers what energy generators are eligible to participate in the Renewable Portfolio Standard. The current definition of "facility" is restricted to transmission lines and thermal power plants (which must have a capacity of at least 50 megawatts), but the eligibility guide says that solar photovoltaic generators are eligible and doesn't give a minimum size. So I can't point to chapter and verse, but it seems likely that the CPUC and CEC are using "facility" in its common meaning in this case, rather than as the defined term.

2.b. Is a "solar and clean energy plant" the same as a "solar and clean energy facility"?

When the "no on prop 7" folks put in their ballot response that prop 7 excludes renewable energy producers of less than 30 megawatts, the "yes on prop 7" folks took them to court. Peter Wall was kind enough to get a copy (pdf) of the ruling, which he posted to his blog. The associated legal whitepaper (pdf), which appears to be a moderately-edited legal brief, goes into more detail about the arguments. Essentially, the argument boils down to the fact that, to be eligible under the renewable portfolio standard, prop 7 requires that you be a "solar and clean energy facility" and an "in-state renewable electricity generation facility." But it doesn't define "solar and clean energy facility." It does define "solar and clean energy plant," however, and that definition sets a 30 megawatt floor on its size. It also defines "facility," but it does it over in the Public Resources Code, not in the Public Utilities Code where it uses "solar and clean energy facility."

In the court case, the folks against Prop 7 argued that Prop 7 made the two terms the same, that a "solar and clean energy facility" is a "solar and clean energy plant", blocking out producers under 30 MW. The folks in favor of Prop 7 argued that they're different. The court found "each of the party's interpretations has some support in the initiative's text." Personally, I'm not convinced either way by the arguments, so this one's still murky.

3. And now, two rants.

3.a. Rant the First: For cryin' out loud, California, fix your defined terms!

When you write a contract, it's common practice to capitalize defined terms. For instance, you might say something like this:

"Facility" means an thermal power plant which produces electricity and has a capacity of at least 30 megawatts.

And then when you use the definition, if you mean the defined term, you capitalize it, and when you don't mean the defined term, you leave it lower case to indicate the word takes on its ordinary meaning in common written English:

The Commission will consider the application of any facility, but it will approve an application only if it is submitted by a Facility.

This is something California does not do. Which means when they pepper the Public Utilities Code and the Public Resources Code with the word "facility," there's no way to know whether they mean the common term or the defined term. I mean, come on, all you'd have to do is distinguish between "Solar and Clean Energy Plant" and "solar and clean energy facility" and that whole issue 2.b. would just go away.

3.b. Rant the Second: Could we please raise the level of information here?

The amount of time it's taking to get hard info on this initiative is really adding up, and a big part of the problem is the "yes" and "no" campaigns. The "no on 7" web site is mostly conclusory statements with nary a link or cite to supporting data. I can't even get on the "yes on 7" site because it's flash-only, and flash is giving my browser indigestion right now. The Union of Concerned Scientists' "no on 7" page is marginally better, but it still doesn't provide the raw info necessary to really assess this complex set of changes. And there are rapidly approaching limits to how much time I can spend analyzing this stuff. It really shouldn't be necessary to spend hours digging for primary sources to cut through the crap.

prop 7's giving me fits

During a slow period at work, I decided to research some of the initiatives that will be on the ballot in the November election. Proposition 7 is causing some consternation. That's the one that increases targets for renewable energy, but it also does a number of other things. One of the questions I find most troubling is whether it blocks or tilts the playing field against small energy producers. See, I eventually want to be able to put solar panels on the roof, use what I need, then sell the rest back to the power grid. And even more importantly, I want everyone else in sunny California doing the same thing, because that means fewer transmission lines, fewer fossil fuel and nuclear plants, fewer distribution losses, and eventually a more resilient grid. The Prop 7 opponents say small renewable generators don't count towards the power plants' renewables quota, while the proponents say the proposition doesn't rule them out. The news reports haven't actually quoted the language at issue, and I can't find the Sacramento County Superior Court ruling by Judge Michael Kenny (in which he reportedly refused to take sides). So I decided to dive into the language of the proposition itself.

Let's start at page 121 (page 42 of the PDF), section 399.11(a). It discusses the intent of the law: "to attain the targets of generating 20 percent of total retail sales of electricity in California from eligible renewable energy resources by December 31, 2010" (plus 40% by 12/31/2020 and 50% by 12/31/2025) (emphasis added). That term "eligible renewable energy resources" also shows up in the definitions of "renewables portfolio standard" (section 399.11(g) at page 122) and "renewable energy credit" (section 399.11(h) at page 122). Basically, if it's not from an eligible renewable energy resource, it doesn't count for the renewables portfolio standard and you can't get a renewable energy credit from it. The renewables portfolio standard governs what portion of renewable energy the utility (technically, any "retail seller", defined in section 399.11(i)) has to buy (sections 399.14 and 399.15). I think renewable energy credits are the currency of the carbon trading system. (Section 399.13) As a result, what constitutes an eligible renewable energy resource is crucial to this whole question.

An eligible renewable energy resource is, with a few exceptions related to hydroelectrics and waste incinerators, a "solar and clean energy facility" that meets the defintion of "in-state renewable electricity generation facility". (Section 399.11(c).)

Now we're getting somewhere.

An "in-state renewable electricity generation facility" is a kind of "facility." (Section 25741.) A "facility" includes a regulated "solar and clean energy plant." (Section 25110, as amended, at page 124) And a "solar and clean energy plant" is an "electrical generating facility using wind, solar photovoltaic, [or] solar thermal . . . technologies, with a generating capacity of 30 megawatts or more" (plus small hydro of under 30 MW). (Section 25137, at page 125.)

As a result, it's entirely plausible to me that my rooftop solar of less than 30 MW would not be a "solar and clean energy plant", so it wouldn't be a "facility", so it wouldn't be an "in-state renewable electricity facility", so it wouldn't be an "eligible renewable energy resource", so it wouldn't count for the "renewables portfolio standard" and I couldn't get a "renewable energy credit" for it. Interestingly, when I searched on some of these terms looking for definitions in California law, I came across the California Solar Energy Industries Association's site which has a similar analysis, though they bolster it with some of the intent language.

Now, counter-arguments exist, and I'm sure they came up in the Superior Court case, but since the folks who drafted California's Public Resources Code put all the defined terms in lower case, it's tricky to tell what's a defined term and what's not (and where the boundaries lie), leading to this kind of ambiguity. And frankly, the whole thing cuts too close to the line for my tastes, so as much as it galls me to do it, I think I'll most likely be voting against this proposition. And if some wrong-thinking commentator interprets that vote as a vote against renewable energy in general, well, I guess I'll just have to point him or her to this blog entry.

[Added 10/22: See the comments for more discussion. Also, see the follow-up post here.]

AIG and Mark to Market Accounting

There's an interesting article here on the link between AIG and under-capitalization in the European banks. The author points out that AIG's insurance on defaults allowed European banks to operate with much less capital than regulations would normally require, hence the chaos in Europe when AIG was on the skids (and the big federally engineered bailout of AIG).

There's also an interesting collection of quotes here about the proposal to give the SEC the power to suspend mark-to-market accounting. The comments are also a great read. Favorite quotes:

• "Suspending mark-to-market accounting, in essence, suspends reality." -- Beth Brooke, global vice chair at Ernst & Young LLP;
• "As a former MBS derivative trader...... all I can say is that not requiring traders to [d]o MTM is essentially a license to print your own bonus...to say the least, this is not what an already opaque asset class needs at this time!" -- comment by Anonymous;
• "If the credit markets have seized up because nobody knows who holds the toxic waste on their balance sheets, how is hiding it and pretending it isn't there going to help?" -- comment by IrvineRenter.

OK, that's enough bad news for now. If the federal government's debating suspending accounting rules, the accounting equivalent of pulling the covers over your head, then I can do the literary equivalent. Off to find some good news.

just sayin'

Mortgages had one key advantage over junk bonds: they were rated AAA by the major credit-rating agencies. The U.S. government felt that home mortgages were important and it subsidized them, not only allowing taxpayers to deduct interest payments, but by implicitly backing the payments on mortgage bonds.

Salomon stripped these mortgages into pieces in the same way First Boston had stripped junk bonds. Salomon created a trust . . . transferred a pool of mortgages into the trust, and then created a structure to separate the mortgages into different tranches. . . . These strips of mortgages were generally known as Collateralized Mortgage Obligations, or CMOs, and the different varieties had fantastically colorful acronyms . . . In most cases, the wilder the name, the riskier the bond. The riskiest versions were sometimes just called "nuclear waste."

-- Frank Partnoy, Infectious Greed at 103, describing the creation of Collateralized Mortgage Obligations in the early 1990's.

As average investors learned about the losses, they became upset with Wall Street, and bankers briefly became pariahs, as they occasionally do. . . . The bankers didn't seem to care about all the fuss. They knew it would go away soon, as it always did. Instead, they disclaimed any responsibility, and blamed investors for making stupid bets and for failing to supervise their investments.

-- Frank Partnoy, Infectious Greed at 137-38, describing the climate in December 1994 and early 1995 as news began to spread of major losses due to derivatives trading, especially losses in Collateralized Mortgage Obligations due to the Federal Reserve's increase in interest rates on February 4, 1994.

For more than a decade, a massive amount of money flowed into the United States from investors abroad, because our country is an attractive and secure place to do business. This large influx of money to U.S. banks and financial institutions -- along with low interest rates -- made it easier for Americans to get credit. . . . Easy credit -- combined with the faulty assumption that home values would continue to rise -- led to excesses and bad decisions. Many mortgage lenders approved loans for borrowers without carefully examining their ability to pay. Many borrowers took out loans larger than they could afford, assuming that they could sell or refinance their homes at a higher price later on.

-- President George Bush, Address to the Nation, September 24, 2008, describing the economic crisis of 2007-2008.

As we all know, lax lending practices earlier this decade led to irresponsible lending and irresponsible borrowing. This simply put too many families into mortgages they could not afford. . . . A similar scenario is playing out among the lenders who made those mortgages, the securitizers who bought, repackaged and resold them, and the investors who bought them. These troubled loans are now parked, or frozen, on the balance sheets of banks and other financial institutions, preventing them from financing productive loans. The inability to determine their worth has fostered uncertainty about mortgage assets, and even about the financial condition of the institutions that own them. The normal buying and selling of nearly all types of mortgage assets has become challenged.

-- Treasury Secretary (and former CEO of Goldman Sachs) Henry Paulson, Statement to Congress, September 19, 2008, describing the economic crisis of 2007-2008.

Mortgage and asset-backed securities include residential and commercial whole loans and interests in residential and commercial mortgage-backed securitizations. Also included within Mortgage and asset-backed securities are securities whose cash flows are based on pools of assets in bankruptcy-remote entities, or collateralized by cash flows from a specified pool of underlying assets. The pools of assets may include, but are not limited to mortgages, receivables and loans. Additionally, the Company’s mortgage-related trading positions consist of loans purchased as non-performing loans, equity interests in commercial properties and asset-backed securities that are backed by mortgage loans or other assets.

It is the Company’s intent to sell through securitization or syndication activities, residential and commercial mortgage whole loans the Company originates, as well as those acquired in the secondary market. The Company originated approximately $0.5 billion and $2 billion of residential mortgage loans for the three and six months ended May 31, 2008, respectively, compared to the $17 billion and $32 billion for the three and six months ended May 31, 2007, respectively. The Company originated approximately $2 billion and $4 billion of commercial mortgage loans for the three and six months ended May 31, 2008, respectively, compared to the $19 billion and $32 billion for the three and six months ended May 31, 2007, respectively.

-- Lehman Brothers, Quarterly Report on Form 10-Q, July 10, 2008.

Lehman Brothers reported a preliminary net loss of approximately ($3.9) billion, or ($5.92) per common share (diluted), for the third quarter ended August 31, 2008, compared to a net loss of ($2.8) billion, or ($5.14) per common share (diluted), for the second quarter of fiscal 2008 and net income of $887 million, or $1.54 per common share (diluted), for the third quarter of fiscal 2007. The net loss was driven primarily by gross mark-to-market adjustments stemming from writedowns on commercial and residential mortgage and real estate assets

Net revenues (total revenues less interest expense) for the third quarter of fiscal 2008 are expected to be negative ($2.9) billion, compared to negative ($0.7) billion for the second quarter of fiscal 2008 and $4.3 billion for the third quarter of fiscal 2007. Net revenues for the third quarter of fiscal 2008 reflect negative mark-to-market adjustments and principal trading losses, net of gains on certain risk mitigation strategies and certain debt liabilities.

During the fiscal third quarter, the Firm is expected to incur negative gross mark-to-market adjustments on assets of ($7.8) billion, including gross negative mark-to-market adjustments of ($5.3) billion on residential mortgage-related positions, ($1.7) billion on commercial real estate positions, ($600) million on other asset-backed positions and ($200) million on acquisition finance positions. These mark-to-market adjustments were offset by $800 million of hedging gains during the quarter and $1.4 billion of debt valuation gains. The Firm is also expected to record losses on principal investments of approximately $760 million.

-- Lehman Brothers, Press Release filed with Current Report on Form 8-K, September 10, 2008.

I thought the symmetry was striking. What does it all mean? I dunno. You decide. I just blog here.

Oh, here's one more:

Turmoil in the credit markets has pushed Libor—the London interbank offered rate—to an all-time high, according to the British Bankers' Association. . . . Libor . . . [is] the rate at which banks lend to other banks that need temporary funds, by way of the London interbank market. This benchmark is significant because it represents the rate at which the world's most preferred borrowers are able to borrow money, and it's also a widely used reference point for short-term interest rates. . . . After the rejection of the bailout bill by the House of Representatives, banks hoarded cash, driving Libor up to 6.88 percent.

-- U.S. News & World Report, The Low-Down on Libor: Why its Surge Signals Despiration in the Credit Markets, September 30, 2008, noting that more than half of U.S. adjustable rate mortgages are tied to Libor.

sub-ocean methane leaking

I'm surprised this news hasn't gotten more coverage: there's preliminary news that, as the permafrost is melting, methane that was previously trapped beneath the Arctic Sea is bubbling to the surface and escaping to the atmosphere. Methane is about 20 times as powerful a greenhouse gas as carbon dioxide. It's not yet clear just how much methane is escaping, but it does raise the concern of a positive feedback loop, where more methane escapes, warms the climate, causing more permafrost melting, more methane escaping, and so on.