Like a physician with her stethoscope at the outset of a check-up, astute shareholders and directors should use the level and trend of a utility’s market-to-book ratio (MtB) as one of the first...
Black Swans and Turkeys
The industry isn’t as robust as we might think.
irresolvable dilemma, but a couple of Taleb’s principles can serve to guide the industry’s policy and strategic approaches in ways that will help ensure we’re not destroyed by a black-swan event.
Namely, Taleb’s 5th principle says, “Counter-balance complexity with simplicity.” This goes directly to the tangled mess of incentives, requirements and mandates that utilities are dealing with today. For example, between government grants, loan guarantees, renewable portfolio standards, tax credits, feed-in tariffs, smart-grid mandates, demand-response pricing, decoupling plans, incentive rates, and cap-ex tracking mechanisms, it’s impossible to know the true market value of any resource or asset. Uncertainties around EPA efforts to regulate greenhouse gases further exacerbate the problem.
Taleb might argue we need a simpler approach—perhaps a carbon tax that replaces the whole morass of provisions with a single policy signal for the market to price-in.
Consider also his 8th principle: “Do not give an addict more drugs if he has withdrawal pains.” And the energy industry is definitely on drugs, in the form of countless government subsidies that prop up every corner of the business. Taleb’s 8th principle suggests we should eliminate all such incentives, even if it causes some private-sector companies to suffer withdrawal.
As radical as it might seem, following Taleb’s advice could wean the industry from its dependence on unsustainable and overly complex public incentives—and deliver us safely past our metaphoric Thanksgiving Day.