Stable and Reliable
The recent power crisis in Texas had me thinking back to the beginning of my career several decades ago when my primary job was as a power analyst. I trudged through many of the public power plants across the nation including the nuclear facilities and many of the plants in Texas.
Those tours took place when power generation was king. We discussed having to build enough generation to keep up with the high double digit load growth. Building generation of any kind takes a lot of careful planning. The forecast period is usually twenty years out or more.
Although a lot of power generation was built during that period, the distribution did not keep pace. This circumstance developed in part because distribution is a regulated industry and is largely conducted away from the public power community. Eventually, the distribution crisis was addressed but it took time. I will always recall the bottleneck that Path 15 was in California.
I raise these points to illustrate that often the greater needs are addressed, and the smaller factors or details do not always command the same amount of attention. The pressure points in failures often point to the finer details.
One phrase that I have often heard expressed in power circles is that the output must be stable and reliable. I have not heard this phrase as much in the common press. Reliability in power circles is tantamount to a mantra.
I do not profess to know all the reasons why reliability was not upheld during the recent bad weather in Texas. The cold itself is probably the greatest cause.
Engineers work very diligently to deliver a cost-effective project. Value engineering is a practice. It could be that such a weather scenario was considered so remote that it was not practical to plan for from a cost perspective. Costs versus reliability is the key tradeoff.
From my days as an electrical apprentice, I also greatly appreciate that wires and systems are in a series. When one trips off there is a better than even chance the others down the line will do the same.
I can imagine what a difficult task it was to try to balance the load. Wheeling power in from other jurisdictions was not possible for whatever reasons.
We will learn a great deal from the inquiries being conducted to determine the root causes. The “fix” no doubt will probably include some capital improvements that will have a need to be financed. Since public power is well represented in Texas, a good portion of the financing needs may need to be originated in the municipal market.
Stable and reliable has a price. The price is well worth it. Insurance claims for damage should be known soon. We will see how the repairs for frozen pipes and other damage will add up.
Turning to the market, the sharp decline in flows to the mutual funds this week and the rise in yields is coming at a time when supply is about to accelerate. I do not think that these conditions will change many plans for Issuers to come to market except for sensitive refundings. This rate rise is definitely indicating that we are entering a different phase of the economic recovery.
The vaccination penetration rate has reached approximately 15% for those receiving one dose. Given the greater availability of the vaccine, this percentage should be rising faster. The economy appears to be responding with lower jobless claims and more activity in the sectors that have been the most impacted.
I recently had the audacity to take a vacation. It was the first time I have flown in a year. Passengers were very compliant with the rules and many were wearing two masks.
My destination was Florida. It was great to be outdoors after the cold spell here in the Northeast. The restaurants in Florida were remarkably busy. The economy must be on the mend. The vaccination rate for those with one shot in the state is 13.9% or close to the national average.
We are entering a market environment that is experiencing more volatility. I believe the decline in flows to the mutual funds may have something to do with tax time. We are also collectively doing our best to anticipate what tax changes may be coming on the horizon. Increasing taxes on capital gains does not appear to be an inducement to reasonable risk taking in my mind. Municipals may be the beneficiary of some of the contemplated changes. The market will be able to cope with the changes as it always does. It does not appear we will be retreating in the upward march in yields.
John Hallacy
John Hallacy Consulting LLC
02/26/2021
Recent Comments