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RICHARD SCHMALENSEE: Let's march
ahead into upstate New York

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00:00:28,140 --> 00:00:31,230
and do formaldehyde.

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00:00:31,230 --> 00:00:35,710
But first, there's a what
should business do issue

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that I should have
brought up last time.

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So I'll bring it up
now, because I didn't.

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This is super PACs.

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How many people know
what the Citizens United

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decision is or was?

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AUDIENCE: [INAUDIBLE]

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RICHARD SCHMALENSEE: So
well, it's more than that.

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Yes, a few.

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Let me just walk
through a little bit.

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So before 2010, basically,
corporations and unions--

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well, they still can't
make direct contributions

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to candidates, they could
fund independent organizations

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that put up political ads.

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But the political ads couldn't
be near elections, et cetera,

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et cetera.

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Now, after this decision they
can do essentially anything,

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as long as it's not
formally part of a campaign.

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So if you've been
following this year's

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Republican primary
season, there are

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a lot of super PAC ads targeting
one candidate or another.

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Most of it's negative, and
there's a lot of money.

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The question is, you're the
head of a publicly traded

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corporation.

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You can now make major
political contributions.

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The corporation can now make
major political contributions.

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00:01:49,740 --> 00:01:51,930
Should you?

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Should you, or when should you?

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00:01:55,440 --> 00:01:57,732
Stephen, what do you think.

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00:01:57,732 --> 00:01:59,440
AUDIENCE: I think they
should be able to.

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RICHARD SCHMALENSEE:
They're able to.

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I'm not talking about that.

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Should they?

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AUDIENCE: [INAUDIBLE]

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RICHARD SCHMALENSEE:
You're the CEO of--

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oh, pick your favorite.

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You're the CEO of Apple.

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Should you-- and Apple's
got a lot of cash.

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Should you spend some
of it to give some of it

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to a super PAC which has a
political agenda that you know?

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That's all.

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AUDIENCE: At the
end of the day, I

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think there is no harm in doing
so, because I would recommend

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or I would eventually
do that, just

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because when we have all these
different candidates that

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could potentially move things
in a different direction--

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especially for a company like
Apple that relies heavily

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on foreign countries to do
some of their manufacturing,

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or some of their new products
coming out in other related

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patents, it could be
very favorable for them

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see a certain type of
political candidate in office

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rather than someone else.

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RICHARD SCHMALENSEE:
So you would do it

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where the corporation's
interests were

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likely to be directly affected.

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Any other reason
you might do it?

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AUDIENCE: I would also do it--

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as could also do it as more
of a publicity type of thing,

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where [INAUDIBLE]
[? saying ?] we're

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in favor of this green
energy Initiative.

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And we would like to see
our candidates support it

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in that area.

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RICHARD SCHMALENSEE:
OK, David, you with him?

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AUDIENCE: Yeah, I agree that--

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I mean the [INAUDIBLE]
as a CEO, I

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would probably donate some money
if there was a direct impact.

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But also, again, for PR,
[INAUDIBLE] accomplish

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[? as far as the ?]
company in general,

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I think Apple gave money to
a political action candidate

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opposing the gay marriage
[? act ?] in California.

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So that's [INAUDIBLE] part
of [? the ?] initiative

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[INAUDIBLE] push forward.

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RICHARD SCHMALENSEE:
I think that might

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have been Apple's regular PAC.

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I don't think it was a
super-- maybe I'm wrong.

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I think the regular--

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the regular PACs,
let me describe it.

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They've existed for a long time.

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The regular PAC's where the
executives of the company

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contribute money.

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The super PAC is where the
company contributes money.

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There's a big difference.

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One is the executive's
own money-- executives

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or board members, and
the other is my money

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is a shareholder of Apple.

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00:04:15,280 --> 00:04:18,709
But if it directly affects the
corporation, I take the point.

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But you do it for
publicity and you do it

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for a variety of causes.

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So I'm a right-wing Republican
who owns Apple stock.

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Do I like you giving
to a green PAC?

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You don't care, OK.

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[LAUGHS]

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AUDIENCE: [INAUDIBLE]
[? also ?] [INAUDIBLE]

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Apple shares if the [INAUDIBLE]
in the political [INAUDIBLE]

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is really that
offensive [INAUDIBLE]..

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RICHARD SCHMALENSEE:
Anybody from the other side

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of the room?

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Vivian, what do you think?

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AUDIENCE: Sorry, I [INAUDIBLE].

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I don't really know
where we're at.

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RICHARD SCHMALENSEE:
The question

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is, should a corporation,
let's say Apple, take

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a big corporation that has
cash, make contributions--

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not the executives.

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But should the CEO
cause the company

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to make political contributions.

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And if so, when?

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And if not, why not?

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AUDIENCE: Do they make
political contributions?

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00:05:20,888 --> 00:05:24,850
RICHARD SCHMALENSEE: Should I
go for the Reform America PAC

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that favors Ron Paul or the--

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I forget what it's called
PAC that favors Romney,

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00:05:29,830 --> 00:05:33,852
or one of the
Obama-leaning PACs or--

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AUDIENCE: I think that's a
really risky position to make

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00:05:37,612 --> 00:05:40,902
as a [INAUDIBLE] interests
of your shareholders, so--

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RICHARD SCHMALENSEE:
Shareholders might not all

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agree.

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AUDIENCE: Right.

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RICHARD SCHMALENSEE: Yeah.

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[INAUDIBLE]

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AUDIENCE: Is it in the
interest of the company,

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like in regard to Apple with
imports from other countries

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in terms of manufacturing.

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Like, it's beneficial to the
company and to the shareholders

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to maximize value in that way?

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RICHARD SCHMALENSEE: So?

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AUDIENCE: I think it's
favorable that they're

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00:06:04,170 --> 00:06:06,040
doing it for the
company's best interests.

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RICHARD SCHMALENSEE: So if it's
somebody particularly focused

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on them.

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Ariana.

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AUDIENCE: I agree.

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I think that, even if the
company has given donate money

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to a cause that you don't
necessarily personally support,

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[INAUDIBLE] as a
shareholder, you [INAUDIBLE]

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[? their ?]
interests separately.

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Like, you have interest in
this corporation as pertains

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to making a profit,
and you might also

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have separate
personal interests.

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And so if personally,
you want to donate

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to whoever you think has the
right position on gay marriage,

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I think that's fine.

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But you should know that the
interest in the corporation

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is purely about making a profit.

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So if the corporation
is supporting

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a cause that furthers that
goal, then that's fine.

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RICHARD SCHMALENSEE: But
gay marriage probably

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doesn't have a lot to do with
my earnings as a shareholder.

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AUDIENCE: So you shouldn't be
worried about the corporation

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getting involved in that.

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RICHARD SCHMALENSEE: Andrew?

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AUDIENCE: So one thing
about allowing companies

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to do these sorts of things--

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I think that whereas
in some situations,

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you can see the merit
directly from banks,

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and there's this
candidate that I

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know it's going to force me to
have higher standards and all

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00:07:21,750 --> 00:07:26,220
that stuff, I might want to
go for the other candidate.

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But I think that having
these sorts of rules allows

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for companies to go in
this murky territory,

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where you're influencing
things you probably shouldn't.

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And you increase your--

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in terms of--

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RICHARD SCHMALENSEE:
Well, you're

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arguing you don't
like the decision.

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AUDIENCE: Sorry?

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RICHARD SCHMALENSEE: You
don't like the decision.

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00:07:45,060 --> 00:07:47,250
You don't like-- but
the decision's there.

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AUDIENCE: What I'm trying to say
is that a CEO doing something

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supposedly to improve
the company's position

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00:07:56,850 --> 00:08:02,190
is completely subjective,
because giving money

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to candidate x might be
interpreted as I'm doing it

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because I want him
to support this,

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which is good for my company.

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But then there are
whole other things

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that you're doing
by doing, which

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00:08:12,180 --> 00:08:13,980
I think is more of
a negative publicity

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than positive
publicity in the sense

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that you're influencing
decision-making.

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Because it might be
that you're doing it

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for him to support action
A. But for action B,

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you also have influence on him.

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And then that might
be that you don't

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want Apple to have
influence on what

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00:08:29,610 --> 00:08:31,358
he decides on something else.

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RICHARD SCHMALENSEE: I've been
on the board of a company that

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had one of these ordinary PACs.

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And the directors and
the officers chipped in,

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and we made contributions.

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This was a company
located on Wall Street,

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00:08:47,210 --> 00:08:51,950
and we were a regulated
company, a securities exchange.

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00:08:51,950 --> 00:08:54,770
And we made contributions
to both New York senators

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00:08:54,770 --> 00:08:57,020
and to the congressmen
from Wall Street

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so that they'd return our
phone calls basically.

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We're not going
to buy influence.

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00:09:01,820 --> 00:09:05,000
If they're not concerned
about the fate of companies

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00:09:05,000 --> 00:09:08,120
on Wall Street, then
they're in a lot of trouble.

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00:09:08,120 --> 00:09:11,030
But to basically
get your phone call

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00:09:11,030 --> 00:09:14,090
returned, you make a few
thousand dollar contribution.

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00:09:14,090 --> 00:09:17,240
So that's different
from giving $10 million

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00:09:17,240 --> 00:09:20,720
to support Newt Gingrich.

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So Marie, you had a point,
or were you were waving?

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AUDIENCE: No, sorry.

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00:09:24,595 --> 00:09:26,775
RICHARD SCHMALENSEE: OK, Jacob?

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00:09:26,775 --> 00:09:28,230
AUDIENCE: [INAUDIBLE]
a question.

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00:09:28,230 --> 00:09:30,410
Is it possible for an
international corporation

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00:09:30,410 --> 00:09:32,970
to contribute to an
American politician--

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00:09:32,970 --> 00:09:35,280
or like if it's an
American company with, say,

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foreign executives
who are making

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00:09:36,655 --> 00:09:38,905
the decision whether or not
appropriations [INAUDIBLE]

220
00:09:38,905 --> 00:09:40,428
giving money to a politician?

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00:09:40,428 --> 00:09:45,360
RICHARD SCHMALENSEE: Well, if
they have a subsidiary that

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00:09:45,360 --> 00:09:47,310
is a US person.

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00:09:47,310 --> 00:09:51,450
So if you have a subsidiary
that has a US charter,

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00:09:51,450 --> 00:09:54,120
then presumably,
that entity can.

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00:09:54,120 --> 00:09:58,380
You can't make direct
contributions-- well, sorry.

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00:09:58,380 --> 00:09:59,880
They can't make
direct contributions

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00:09:59,880 --> 00:10:01,780
to the candidate in any case.

228
00:10:01,780 --> 00:10:05,160
The question is, can you
contribute to a super PAC?

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00:10:05,160 --> 00:10:09,040
A foreign corporation doesn't
have us rights of free speech.

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00:10:09,040 --> 00:10:11,070
So I've never heard
it brought up,

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00:10:11,070 --> 00:10:13,250
but I think it could be barred.

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00:10:13,250 --> 00:10:14,750
AUDIENCE: [INAUDIBLE]
question about

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00:10:14,750 --> 00:10:15,833
whether it should be done.

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00:10:15,833 --> 00:10:18,770
RICHARD SCHMALENSEE: Well,
I'd just set up a US company

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00:10:18,770 --> 00:10:20,270
if I wanted to do that.

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00:10:20,270 --> 00:10:22,302
AUDIENCE: Yeah, in
which case could there

237
00:10:22,302 --> 00:10:24,640
be anti-American
interests that influence

238
00:10:24,640 --> 00:10:25,640
[INAUDIBLE] politicians?

239
00:10:25,640 --> 00:10:29,045
RICHARD SCHMALENSEE: Yes, so I
actually found an interesting--

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00:10:32,210 --> 00:10:34,940
there's a foundation
called Sunlight Foundation.

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00:10:34,940 --> 00:10:36,950
You can find them on the web.

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00:10:36,950 --> 00:10:41,330
And they looked at who's
making these contributions.

243
00:10:41,330 --> 00:10:47,020
And in fact, you don't find any
publicly held contributions.

244
00:10:47,020 --> 00:10:50,010
I couldn't find any.

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00:10:50,010 --> 00:10:52,500
Certainly no company
I'd ever heard of

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00:10:52,500 --> 00:10:56,430
is on the list for contributions
above $25,000. $20,000

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00:10:56,430 --> 00:10:58,410
actually was their cut.

248
00:10:58,410 --> 00:11:03,180
Lots of private corporations,
individuals, unions,

249
00:11:03,180 --> 00:11:04,680
partnerships.

250
00:11:04,680 --> 00:11:07,440
The only publicly traded
company I could find

251
00:11:07,440 --> 00:11:11,280
is CONSOL, which is a coal
company as far as I can tell.

252
00:11:11,280 --> 00:11:12,820
I don't know them well.

253
00:11:12,820 --> 00:11:17,020
They gave $125,000
to a Romney PAC.

254
00:11:17,020 --> 00:11:21,400
And you have to
ask yourself, why?

255
00:11:21,400 --> 00:11:24,280
I assume that's a
CEO who leans Romney

256
00:11:24,280 --> 00:11:27,610
and whose board is
captive, which is not

257
00:11:27,610 --> 00:11:29,620
unheard of-- that
the board is composed

258
00:11:29,620 --> 00:11:30,940
of his friends or her friends.

259
00:11:30,940 --> 00:11:33,250
I don't know who the CEO is.

260
00:11:33,250 --> 00:11:37,990
So it's interesting that most
large corporations, Apple,

261
00:11:37,990 --> 00:11:41,960
et cetera, are not
playing this game,

262
00:11:41,960 --> 00:11:45,480
even though by law they can.

263
00:11:45,480 --> 00:11:46,710
I just find that interesting.

264
00:11:46,710 --> 00:11:52,690
And it has to do with what
they think their role as CEO is

265
00:11:52,690 --> 00:11:54,380
and how they should behave.

266
00:11:54,380 --> 00:11:56,860
As I said, I could only find
one publicly traded company.

267
00:11:56,860 --> 00:12:01,540
There are a lot of so-and-so
family company contributes,

268
00:12:01,540 --> 00:12:03,190
and that's a family company.

269
00:12:03,190 --> 00:12:05,590
It's effectively a partnership.

270
00:12:05,590 --> 00:12:08,900
So not publicly traded.

271
00:12:08,900 --> 00:12:09,400
So--

272
00:12:09,400 --> 00:12:10,620
AUDIENCE: [INAUDIBLE]

273
00:12:10,620 --> 00:12:11,870
RICHARD SCHMALENSEE: Which is?

274
00:12:11,870 --> 00:12:13,850
AUDIENCE: [INAUDIBLE]

275
00:12:13,850 --> 00:12:15,450
RICHARD SCHMALENSEE: Yeah.

276
00:12:15,450 --> 00:12:16,110
Yeah, yeah.

277
00:12:16,110 --> 00:12:16,410
Yeah.

278
00:12:16,410 --> 00:12:16,860
Oh yeah.

279
00:12:16,860 --> 00:12:17,790
AUDIENCE: [INAUDIBLE]
[? already that ?]

280
00:12:17,790 --> 00:12:20,248
maybe all the companies don't
think Romney is going to win,

281
00:12:20,248 --> 00:12:22,730
so nobody's putting in
the money [INAUDIBLE]..

282
00:12:22,730 --> 00:12:24,980
RICHARD SCHMALENSEE: There
is a lot of money going in.

283
00:12:24,980 --> 00:12:28,960
And what we don't see--

284
00:12:28,960 --> 00:12:32,650
if you look at what finances
senatorial and congressional

285
00:12:32,650 --> 00:12:36,520
campaigns, you will see
plain, old, ordinary PACs

286
00:12:36,520 --> 00:12:39,220
contributing, like
the one I described,

287
00:12:39,220 --> 00:12:42,520
where I want to make sure
my phone call gets returned,

288
00:12:42,520 --> 00:12:45,500
and I want you to be sure that
you worry about wheat farmers--

289
00:12:45,500 --> 00:12:47,950
so the wheat
Farmers Association.

290
00:12:47,950 --> 00:12:53,343
But it is interesting,
Obama has a PAC,

291
00:12:53,343 --> 00:12:55,260
but they're not sure
he's going to win either.

292
00:12:55,260 --> 00:13:02,240
So anyway, we'll come back to
the lobbying and contributions.

293
00:13:02,240 --> 00:13:05,480
It's more for access
than for votes I think.

294
00:13:05,480 --> 00:13:07,970
But, OK, yes, Stephen.

295
00:13:07,970 --> 00:13:09,700
AUDIENCE: Just a quick
question for that.

296
00:13:09,700 --> 00:13:12,075
You mentioned that there were
private companies that were

297
00:13:12,075 --> 00:13:13,650
still doing this type of stuff?

298
00:13:13,650 --> 00:13:15,525
Could it be that some
of the public companies

299
00:13:15,525 --> 00:13:18,520
are going through those means
to make their donations?

300
00:13:18,520 --> 00:13:20,270
RICHARD SCHMALENSEE:
I think-- and they've

301
00:13:20,270 --> 00:13:22,760
talked about it that there
are some companies that

302
00:13:22,760 --> 00:13:24,680
are dummy companies
that get set up.

303
00:13:27,200 --> 00:13:30,530
But mostly, it hides
rich individuals.

304
00:13:30,530 --> 00:13:34,470
So you can't follow
through from this website.

305
00:13:34,470 --> 00:13:36,170
But if you read
in the paper, they

306
00:13:36,170 --> 00:13:38,240
talk about trying
to track down donors

307
00:13:38,240 --> 00:13:40,160
and getting a post office box.

308
00:13:40,160 --> 00:13:41,330
So it's a company.

309
00:13:41,330 --> 00:13:42,680
It has a post office box.

310
00:13:42,680 --> 00:13:44,780
It's legally incorporated.

311
00:13:44,780 --> 00:13:47,660
Its documents aren't public
because it's closely held.

312
00:13:47,660 --> 00:13:52,160
So that's a mask behind which
some rich person is hiding.

313
00:13:52,160 --> 00:13:56,720
I don't think it would be a sane
thing for a big publicly traded

314
00:13:56,720 --> 00:14:00,420
company to hide that
way, because if there

315
00:14:00,420 --> 00:14:02,820
were enough money,
somebody will find it out.

316
00:14:02,820 --> 00:14:04,890
I mean, there's a lot.

317
00:14:04,890 --> 00:14:07,470
Somebody gives $1 million
and they're hiding,

318
00:14:07,470 --> 00:14:11,010
it's a good story if you
can figure out who it is.

319
00:14:11,010 --> 00:14:13,830
If it turns out to be
Apple, it's a scandal.

320
00:14:13,830 --> 00:14:15,720
So that's too risky.

321
00:14:15,720 --> 00:14:16,710
David?

322
00:14:16,710 --> 00:14:18,960
AUDIENCE: Would it be possible
that some of the larger

323
00:14:18,960 --> 00:14:22,010
companies, whose financial
contributions would

324
00:14:22,010 --> 00:14:24,440
make a significant
impact on the campaign,

325
00:14:24,440 --> 00:14:26,740
are companies that would
already have access anyway?

326
00:14:26,740 --> 00:14:30,620
If Tim Cook called up the
White House and said, look,

327
00:14:30,620 --> 00:14:33,410
we really need to talk to
someone in the treasury

328
00:14:33,410 --> 00:14:35,840
or something, like [INAUDIBLE]?

329
00:14:35,840 --> 00:14:38,340
RICHARD SCHMALENSEE: Yeah, Apple
doesn't need to buy access.

330
00:14:40,980 --> 00:14:42,930
This mining company may.

331
00:14:42,930 --> 00:14:46,030
Backing Romney's not the
most obvious way to do it.

332
00:14:46,030 --> 00:14:48,390
So I assume that this is
just a personal preference

333
00:14:48,390 --> 00:14:52,050
of somebody, and a board that
says, yeah, sure it's $125,000.

334
00:14:52,050 --> 00:14:53,660
Who cares?

335
00:14:53,660 --> 00:14:55,160
We'll just cut your bonus.

336
00:14:55,160 --> 00:15:03,500
OK, it's an interesting issue
of the role of the corporation.

337
00:15:03,500 --> 00:15:07,010
But it's also interesting what
most of them choose to do.

338
00:15:07,010 --> 00:15:09,980
Let's go to upstate New
York and do formaldehyde.

339
00:15:09,980 --> 00:15:15,510
I just answered that question,
so we've lost that one.

340
00:15:15,510 --> 00:15:19,170
What's Darren's
issue in the case?

341
00:15:19,170 --> 00:15:21,040
Matthew?

342
00:15:21,040 --> 00:15:29,724
AUDIENCE: He's [INAUDIBLE] part
of [INAUDIBLE] [? opposing ?]

343
00:15:29,724 --> 00:15:32,958
the [INAUDIBLE].

344
00:15:32,958 --> 00:15:35,250
RICHARD SCHMALENSEE: But what
problem is he addressing,

345
00:15:35,250 --> 00:15:37,620
or what opportunities
is he addressing.

346
00:15:37,620 --> 00:15:38,190
What's the--

347
00:15:38,190 --> 00:15:39,660
AUDIENCE: [INAUDIBLE]

348
00:15:39,660 --> 00:15:39,960
RICHARD SCHMALENSEE:
[? Other ways ?]

349
00:15:39,960 --> 00:15:41,520
to heat their venting.

350
00:15:41,520 --> 00:15:43,890
A lot of steam.

351
00:15:43,890 --> 00:15:44,880
Anything else it does?

352
00:15:44,880 --> 00:15:45,380
Scott?

353
00:15:45,380 --> 00:15:47,730
AUDIENCE: Also, the steam
causes damage to the building,

354
00:15:47,730 --> 00:15:50,440
and it corrodes the
materials in the building.

355
00:15:50,440 --> 00:15:52,740
And it also causes an ice
sheet on the ground, which

356
00:15:52,740 --> 00:15:54,330
is dangerous for employees.

357
00:15:54,330 --> 00:15:56,580
RICHARD SCHMALENSEE:
Lovely stuff, lovely stuff.

358
00:15:56,580 --> 00:15:59,770
OK that's what he's got.

359
00:15:59,770 --> 00:16:02,370
He has three options
to deal with these

360
00:16:02,370 --> 00:16:03,930
that he considers first of all.

361
00:16:03,930 --> 00:16:05,100
Do you recall what they are?

362
00:16:05,100 --> 00:16:06,151
Rachel?

363
00:16:06,151 --> 00:16:08,560
AUDIENCE: [INAUDIBLE]

364
00:16:08,560 --> 00:16:11,175
RICHARD SCHMALENSEE: Yes.

365
00:16:11,175 --> 00:16:13,333
AUDIENCE: [INAUDIBLE]

366
00:16:13,333 --> 00:16:15,500
RICHARD SCHMALENSEE: Lithium
bromide, bromine, yeah.

367
00:16:19,880 --> 00:16:21,800
Anybody got the third one?

368
00:16:21,800 --> 00:16:22,300
[? Wyatt? ?]

369
00:16:22,300 --> 00:16:25,450
AUDIENCE: Everyone [INAUDIBLE]
speed the flow of water

370
00:16:25,450 --> 00:16:26,283
between [INAUDIBLE].

371
00:16:26,283 --> 00:16:28,117
RICHARD SCHMALENSEE:
Speed the flow of water

372
00:16:28,117 --> 00:16:29,610
through, so it
just comes out hot,

373
00:16:29,610 --> 00:16:32,220
it doesn't come out of steam.

374
00:16:32,220 --> 00:16:36,990
OK, why is he focused on
combined heat and power?

375
00:16:36,990 --> 00:16:38,590
Why is he focused
on co-generation?

376
00:16:38,590 --> 00:16:41,310
What are the issues with
the others, of the advantage

377
00:16:41,310 --> 00:16:43,830
of this in broad terms?

378
00:16:43,830 --> 00:16:45,360
Kirsten?

379
00:16:45,360 --> 00:16:47,914
AUDIENCE: The disadvantage
for speeding up

380
00:16:47,914 --> 00:16:50,910
the process of producing hot
water was that they didn't

381
00:16:50,910 --> 00:16:53,160
have a good place to put
the hot water, especially

382
00:16:53,160 --> 00:16:53,400
in the summer.

383
00:16:53,400 --> 00:16:54,930
They didn't want to just
dump it into the environment

384
00:16:54,930 --> 00:16:56,800
because that might have
a detrimental effect

385
00:16:56,800 --> 00:16:59,288
on the environment, [INAUDIBLE].

386
00:16:59,288 --> 00:17:01,830
RICHARD SCHMALENSEE: And just
dump it in a cool stream, yeah.

387
00:17:01,830 --> 00:17:03,663
AUDIENCE: Yeah, so they
said, in the winter,

388
00:17:03,663 --> 00:17:05,550
they could heat the
buildings without using

389
00:17:05,550 --> 00:17:08,335
too much electricity [INAUDIBLE]
going to be a problem.

390
00:17:08,335 --> 00:17:12,560
And [INAUDIBLE] was
that it would require

391
00:17:12,560 --> 00:17:15,759
a lot more [INAUDIBLE] changes.

392
00:17:15,759 --> 00:17:17,480
RICHARD SCHMALENSEE:
OK, so we focused

393
00:17:17,480 --> 00:17:19,160
on combined heat and power.

394
00:17:21,770 --> 00:17:23,795
Did anybody look at this?

395
00:17:26,480 --> 00:17:29,330
If it saves money, does it
save much money relative

396
00:17:29,330 --> 00:17:30,680
to the firm's revenue--

397
00:17:30,680 --> 00:17:34,165
to that plant's revenue?

398
00:17:34,165 --> 00:17:36,422
[? Obedah. ?]

399
00:17:36,422 --> 00:17:41,990
AUDIENCE: In terms of, I
think, power [INAUDIBLE]

400
00:17:41,990 --> 00:17:44,240
cleaning the water or treating
the water, so that they

401
00:17:44,240 --> 00:17:48,590
can make it soft, because it's
usually hard, you save 75%.

402
00:17:48,590 --> 00:17:50,480
But that's only like
$10,000 or $8,000.

403
00:17:50,480 --> 00:17:52,865
But they make millions
upon millions of dollars.

404
00:17:52,865 --> 00:17:55,460
And savings are in the
low hundreds of thousands.

405
00:17:55,460 --> 00:17:57,710
RICHARD SCHMALENSEE: Low
hundreds of thousands, right.

406
00:17:57,710 --> 00:18:00,950
If you calculate--
there's a typo

407
00:18:00,950 --> 00:18:06,230
in the case where it talks about
five days absence being 0.01%.

408
00:18:06,230 --> 00:18:07,010
It's, in fact, 1%.

409
00:18:07,010 --> 00:18:10,100
And if you use
the other numbers,

410
00:18:10,100 --> 00:18:13,430
that plant has an annual
revenue of about $5.1 million

411
00:18:13,430 --> 00:18:17,180
based on the production
numbers they give.

412
00:18:17,180 --> 00:18:18,680
You worked the
numbers, Veronica.

413
00:18:18,680 --> 00:18:20,330
Good.

414
00:18:20,330 --> 00:18:23,360
So what I get is
that the savings

415
00:18:23,360 --> 00:18:26,990
would be maybe 2% of
revenue, the pre-tax savings,

416
00:18:26,990 --> 00:18:29,700
to compare pre-tax to pre-tax.

417
00:18:29,700 --> 00:18:31,475
OK, so not a big deal.

418
00:18:31,475 --> 00:18:33,600
We're going to talk about
whether it's a good deal,

419
00:18:33,600 --> 00:18:36,230
and we're going to talk
about whether they'll do it.

420
00:18:36,230 --> 00:18:41,780
Let me just do a short
riff on combined heat

421
00:18:41,780 --> 00:18:45,650
and power and waste energy.

422
00:18:45,650 --> 00:18:50,240
It's interesting, if
you look at the rejected

423
00:18:50,240 --> 00:18:54,150
energy versus usable
energy by sector--

424
00:18:54,150 --> 00:18:56,180
so this is waste.

425
00:18:56,180 --> 00:19:01,580
Transportation, 75% of what
goes in comes out as waste

426
00:19:01,580 --> 00:19:06,110
energy, electric generation
just about a third,

427
00:19:06,110 --> 00:19:07,850
and every place else about 20%.

428
00:19:11,930 --> 00:19:14,280
And you all know
the answer to that,

429
00:19:14,280 --> 00:19:16,130
what form the waste takes, yes?

430
00:19:16,130 --> 00:19:20,720
Waste energy is
usually heat, yeah.

431
00:19:20,720 --> 00:19:27,410
So, I mean, this one,
transportation's tough,

432
00:19:27,410 --> 00:19:32,210
because cars are not all
that efficient really.

433
00:19:32,210 --> 00:19:35,960
But for public transportation,
this is a tough one.

434
00:19:35,960 --> 00:19:40,520
Residential and commercial,
an awful lot of the energy

435
00:19:40,520 --> 00:19:42,120
is going into
heating and cooling.

436
00:19:42,120 --> 00:19:45,170
You can make it more
efficient of course,

437
00:19:45,170 --> 00:19:47,240
but it's hard to capture.

438
00:19:47,240 --> 00:19:50,360
What's attractive
about industrial

439
00:19:50,360 --> 00:19:54,020
and electricity is
you have high heat.

440
00:19:54,020 --> 00:19:55,670
You have large delta t.

441
00:19:55,670 --> 00:20:00,350
You have the ability to use a
big temperature differential.

442
00:20:00,350 --> 00:20:03,560
And that's the whole
combined heat and power

443
00:20:03,560 --> 00:20:08,660
story, that there really
are two basic forms.

444
00:20:08,660 --> 00:20:11,070
And the case kind
of mentions it.

445
00:20:11,070 --> 00:20:14,060
The first is called
district heating, where

446
00:20:14,060 --> 00:20:18,980
you take waste heat,
relatively low temperature,

447
00:20:18,980 --> 00:20:23,210
from electric generation,
and you pipe it around

448
00:20:23,210 --> 00:20:25,280
to heat buildings.

449
00:20:25,280 --> 00:20:27,710
The Danes did a lot of this.

450
00:20:27,710 --> 00:20:29,630
One of the readings
mentions that.

451
00:20:29,630 --> 00:20:34,820
It's also interesting, the
Soviets did a lot of it.

452
00:20:34,820 --> 00:20:38,720
It requires you to have
power plants relatively close

453
00:20:38,720 --> 00:20:40,640
to offices or
factories or homes,

454
00:20:40,640 --> 00:20:42,380
so it's not the greatest thing.

455
00:20:42,380 --> 00:20:46,010
And of course, it makes more
sense in a cold climate.

456
00:20:46,010 --> 00:20:48,560
Using waste heat to heat
buildings in Arizona

457
00:20:48,560 --> 00:20:53,600
is not necessarily a great deal.

458
00:20:53,600 --> 00:20:56,720
We put in subsidies in 1978--

459
00:20:56,720 --> 00:20:59,570
we'll talk a little bit
about PURPA at some point,

460
00:20:59,570 --> 00:21:05,060
that we're supposed to
encourage district heating.

461
00:21:05,060 --> 00:21:08,630
It didn't do much for a
variety of complicated reasons.

462
00:21:08,630 --> 00:21:11,300
It's generally acknowledged as
a good thing in lots of places,

463
00:21:11,300 --> 00:21:14,090
but we don't do very much
of it in this country

464
00:21:14,090 --> 00:21:15,320
for a variety of reasons.

465
00:21:15,320 --> 00:21:19,460
The other is
electricity generation,

466
00:21:19,460 --> 00:21:22,830
and there are two versions.

467
00:21:22,830 --> 00:21:27,860
The first is basic
combined cycle gas turbine,

468
00:21:27,860 --> 00:21:31,340
which is relatively recent--

469
00:21:31,340 --> 00:21:33,500
I should be able
to date it, but I

470
00:21:33,500 --> 00:21:37,250
can't, maybe the '70s, maybe
the '80s, generation technology.

471
00:21:37,250 --> 00:21:39,320
That's how people are
building efficient gas

472
00:21:39,320 --> 00:21:41,300
plants these days.

473
00:21:41,300 --> 00:21:47,510
You run a combustion turbine
which has a hot exhaust.

474
00:21:47,510 --> 00:21:50,370
You recover the heat
from the hot exhaust,

475
00:21:50,370 --> 00:21:53,660
which makes steam which
drives a steam turbine.

476
00:21:53,660 --> 00:21:57,470
Combined cycle, CC--
so you got two cycles

477
00:21:57,470 --> 00:22:00,390
working and basically
two generation units.

478
00:22:00,390 --> 00:22:03,620
This is pulled off
a Siemens website.

479
00:22:03,620 --> 00:22:07,530
This can be a very
efficient technology.

480
00:22:07,530 --> 00:22:10,100
and it's the same notion
of capturing waste heat.

481
00:22:13,580 --> 00:22:15,860
All you mechanical engineers
more about this than I

482
00:22:15,860 --> 00:22:19,890
do, but others may not.

483
00:22:19,890 --> 00:22:22,130
And this is the proposal.

484
00:22:22,130 --> 00:22:25,680
This is the kind of proposal--
this is pulled from the case.

485
00:22:25,680 --> 00:22:29,030
This is the kind of proposal
that our friend Darren

486
00:22:29,030 --> 00:22:32,180
is considering.

487
00:22:32,180 --> 00:22:35,135
This shows a boiler, but
it has to do, as you know,

488
00:22:35,135 --> 00:22:37,820
with the heat from that
exothermic reaction that

489
00:22:37,820 --> 00:22:40,190
makes formaldehyde.

490
00:22:40,190 --> 00:22:41,630
So this is what
he's considering.

491
00:22:41,630 --> 00:22:45,590
He's considering a simple
system that takes steam

492
00:22:45,590 --> 00:22:49,250
to drive a turbine, generate
electricity for internal use,

493
00:22:49,250 --> 00:22:50,540
maybe for sale.

494
00:22:50,540 --> 00:22:53,810
You cool it down, you recycle,
it you pump it through.

495
00:22:53,810 --> 00:22:57,320
You will have to use
some water, but you'll

496
00:22:57,320 --> 00:23:00,170
pull a lot of the water through.

497
00:23:00,170 --> 00:23:04,580
And the stuff that comes out
will be basically cooling

498
00:23:04,580 --> 00:23:06,080
the condenser.

499
00:23:06,080 --> 00:23:08,630
So this is what he's got.

500
00:23:11,420 --> 00:23:14,450
There are a lot of benefits
of this kind of system

501
00:23:14,450 --> 00:23:16,610
in general terms.

502
00:23:16,610 --> 00:23:18,673
You can reduce energy expenses.

503
00:23:18,673 --> 00:23:19,340
You could worry.

504
00:23:19,340 --> 00:23:24,680
It could avoid the risk
of varying energy prices,

505
00:23:24,680 --> 00:23:27,890
a lot of security, good
environmental benefits--

506
00:23:27,890 --> 00:23:30,530
mom and apple pie.

507
00:23:30,530 --> 00:23:36,230
But the question that Darren
faces is, is it a good deal?

508
00:23:36,230 --> 00:23:42,020
I want to mention two concepts
that the case kind of puts

509
00:23:42,020 --> 00:23:46,010
forward and the spreadsheet puts
forward without defining them.

510
00:23:46,010 --> 00:23:47,570
And I'll talk
about them briefly.

511
00:23:47,570 --> 00:23:53,330
So if you've got a
vector of cash flows CT,

512
00:23:53,330 --> 00:23:55,130
that's the net present value.

513
00:23:55,130 --> 00:23:57,950
You just discount
all the cash flows.

514
00:23:57,950 --> 00:24:01,910
The case talks about
the payback period.

515
00:24:01,910 --> 00:24:07,910
And the payback period
is the smallest time,

516
00:24:07,910 --> 00:24:11,480
such that basically, you get
your initial investment back,

517
00:24:11,480 --> 00:24:14,810
assuming there's an initial
investment up front,

518
00:24:14,810 --> 00:24:18,680
and then returns in
subsequent periods.

519
00:24:18,680 --> 00:24:27,230
You go out as far as you need to
recover the initial investment.

520
00:24:27,230 --> 00:24:34,070
This is a very old-fashioned way
of making investment decisions.

521
00:24:34,070 --> 00:24:36,650
And the problem with
it is stated there,

522
00:24:36,650 --> 00:24:40,270
because it matters what
happens after that time.

523
00:24:40,270 --> 00:24:43,180
I tell you that you
invest $100 today,

524
00:24:43,180 --> 00:24:45,250
you get $50 a year from now.

525
00:24:45,250 --> 00:24:49,540
$50 two years from now, the
payback period is two years.

526
00:24:49,540 --> 00:24:53,050
If that's all, that's
a terrible investment.

527
00:24:53,050 --> 00:24:56,020
You've just given me
your money for two years.

528
00:24:56,020 --> 00:25:00,520
What really matters is, OK,
what happens after that?

529
00:25:00,520 --> 00:25:03,890
What happens after, and the
longer the payback, all else

530
00:25:03,890 --> 00:25:05,890
equal, it may be the
[? worse ?] the investment.

531
00:25:05,890 --> 00:25:10,350
But you can have a really
terrible investment

532
00:25:10,350 --> 00:25:13,840
with a short payback
period because it dies.

533
00:25:13,840 --> 00:25:15,990
So the case talks about it.

534
00:25:15,990 --> 00:25:18,960
I just want to caution
you, by any sort

535
00:25:18,960 --> 00:25:21,900
of reasonable standard,
it's something

536
00:25:21,900 --> 00:25:25,740
you want to look at perhaps,
because it may be a horseback

537
00:25:25,740 --> 00:25:28,480
way of thinking about risk.

538
00:25:28,480 --> 00:25:30,480
After two years, we're
playing with house money,

539
00:25:30,480 --> 00:25:31,980
because we've gotten
our money back.

540
00:25:31,980 --> 00:25:33,105
Andrew, you have a comment.

541
00:25:33,105 --> 00:25:36,770
AUDIENCE: [INAUDIBLE]
when I was [INAUDIBLE],,

542
00:25:36,770 --> 00:25:40,440
I assume that even though it's
not the best metric to make

543
00:25:40,440 --> 00:25:43,320
a decision, you could
make a metric to see when

544
00:25:43,320 --> 00:25:46,080
your customers are coming in
terms of if I have something

545
00:25:46,080 --> 00:25:48,990
that has a payback period of
two and a payback period of 15

546
00:25:48,990 --> 00:25:53,760
years, I just know that
I have high risk in terms

547
00:25:53,760 --> 00:25:55,773
of when I get my money
back with the second one.

548
00:25:55,773 --> 00:25:57,690
RICHARD SCHMALENSEE: No,
I think that's right.

549
00:25:57,690 --> 00:26:01,140
But you also want to just look
at the nature of the risks.

550
00:26:01,140 --> 00:26:05,260
If I tell you it's a bond,
then you don't worry about it.

551
00:26:05,260 --> 00:26:07,320
If I tell you it's
a nuclear plant,

552
00:26:07,320 --> 00:26:11,220
OK, the nuclear plant
has a 20 year payback.

553
00:26:11,220 --> 00:26:13,680
But if it runs
for 40 years, it's

554
00:26:13,680 --> 00:26:15,600
got a high net
present value you're

555
00:26:15,600 --> 00:26:18,880
right to say, wait a minute
an awful lot can happen--

556
00:26:18,880 --> 00:26:22,170
see Germany, see Japan.

557
00:26:22,170 --> 00:26:23,820
So maybe I don't
want to do that.

558
00:26:23,820 --> 00:26:26,910
But that's the main argument.

559
00:26:26,910 --> 00:26:32,700
The internal rate of return
is also sort of interesting.

560
00:26:32,700 --> 00:26:37,830
You can think about the net
present value as a polynomial.

561
00:26:37,830 --> 00:26:41,910
Well, it's a polynomial
in 1 over 1 plus r.

562
00:26:41,910 --> 00:26:46,800
And you can say, well, suppose--

563
00:26:46,800 --> 00:26:48,690
we're doing this chalkless?

564
00:26:48,690 --> 00:27:03,390
Suppose that this is
the net present value,

565
00:27:03,390 --> 00:27:05,400
and this is the discount rate.

566
00:27:05,400 --> 00:27:09,630
Then what you might
expect is that if you make

567
00:27:09,630 --> 00:27:12,265
an upfront investment,
you get returns over time,

568
00:27:12,265 --> 00:27:13,890
the higher the discount
rate, the lower

569
00:27:13,890 --> 00:27:15,720
the net present
value, this point

570
00:27:15,720 --> 00:27:20,660
would be the internal
rate of return.

571
00:27:20,660 --> 00:27:24,090
Now, what's
interesting about that

572
00:27:24,090 --> 00:27:27,150
is that when the
picture looks like that,

573
00:27:27,150 --> 00:27:30,330
you don't have to get too
fussy about the discount rate,

574
00:27:30,330 --> 00:27:33,147
as long as it's below r star.

575
00:27:33,147 --> 00:27:34,230
That's what it's good for.

576
00:27:34,230 --> 00:27:36,750
It says, well, I know it's got
a positive net present value

577
00:27:36,750 --> 00:27:37,380
back here.

578
00:27:40,930 --> 00:27:43,270
So if the discount rate's
somewhere in this range,

579
00:27:43,270 --> 00:27:46,270
but I'm not sure
where it is, I know

580
00:27:46,270 --> 00:27:50,660
enough to know the net
present value is positive.

581
00:27:50,660 --> 00:28:02,060
But the graph could
look like that.

582
00:28:05,620 --> 00:28:09,170
It could look like that if
[? at ?] the end of the period,

583
00:28:09,170 --> 00:28:12,901
it is a nuclear reactor, and
we've got to clean it up.

584
00:28:12,901 --> 00:28:17,870
OK, then high discount rates
make that cleanup cost smaller

585
00:28:17,870 --> 00:28:20,750
in present value terms.

586
00:28:20,750 --> 00:28:23,690
It's a polynomial, so the
number of sine changes

587
00:28:23,690 --> 00:28:25,610
is related in ways I've
long since forgotten

588
00:28:25,610 --> 00:28:29,210
to the number of real roots.

589
00:28:29,210 --> 00:28:31,935
If there's only one
sine change, you're only

590
00:28:31,935 --> 00:28:33,060
going to get one real root.

591
00:28:33,060 --> 00:28:37,960
But if you have negative returns
at the end, you can get two.

592
00:28:37,960 --> 00:28:40,520
I suppose you can
get more than two.

593
00:28:40,520 --> 00:28:44,300
The normal thing, and
that's what the slide says,

594
00:28:44,300 --> 00:28:47,090
is to call the
smallest one r star.

595
00:28:47,090 --> 00:28:50,650
I think that's a little weird.

596
00:28:50,650 --> 00:28:53,860
The other thing
to keep in mind--

597
00:28:53,860 --> 00:29:07,090
again, if you just graph these,
you can say here's project A,

598
00:29:07,090 --> 00:29:17,230
here's project B. A has a higher
internal rate of return than B.

599
00:29:17,230 --> 00:29:19,480
But for discount
rates back here, you'd

600
00:29:19,480 --> 00:29:23,770
prefer B if you have to choose.

601
00:29:23,770 --> 00:29:26,450
If you have limited funds, they
have the same upfront cost.

602
00:29:26,450 --> 00:29:28,420
Your discount rate is in here.

603
00:29:28,420 --> 00:29:32,210
B has the higher net present
value, you'd pick it.

604
00:29:32,210 --> 00:29:35,150
So ranking by internal
rate of return

605
00:29:35,150 --> 00:29:37,460
doesn't give you a
desirability measure.

606
00:29:37,460 --> 00:29:40,250
It just gives you some
confidence about--

607
00:29:45,260 --> 00:29:48,890
it allows you to be uncertain
about the discount rate

608
00:29:48,890 --> 00:29:52,670
and still make a judgment
about present value.

609
00:29:52,670 --> 00:29:55,470
OK, questions about those?

610
00:29:55,470 --> 00:29:55,970
David?

611
00:29:55,970 --> 00:29:57,678
AUDIENCE: [INAUDIBLE]
[? talking about ?]

612
00:29:57,678 --> 00:30:01,046
the payback here, [INAUDIBLE]
value [INAUDIBLE]??

613
00:30:01,046 --> 00:30:02,934
RICHARD SCHMALENSEE: No.

614
00:30:02,934 --> 00:30:04,530
Normally, that's how they do it.

615
00:30:04,530 --> 00:30:04,700
[INAUDIBLE]

616
00:30:04,700 --> 00:30:05,930
I don't worry about
interest rates.

617
00:30:05,930 --> 00:30:07,400
Don't give me that fancy stuff.

618
00:30:07,400 --> 00:30:10,400
When do I get my money out?

619
00:30:10,400 --> 00:30:12,500
And you could see the problem.

620
00:30:12,500 --> 00:30:15,720
As I say, I could give you
a one year payback period.

621
00:30:15,720 --> 00:30:17,000
That's a lousy investment.

622
00:30:17,000 --> 00:30:18,690
That's pretty easy.

623
00:30:18,690 --> 00:30:22,160
Give me $100 today, I'll give
it back to you in a year.

624
00:30:22,160 --> 00:30:24,080
One year payback, fabulous.

625
00:30:24,080 --> 00:30:27,320
Not a good idea.

626
00:30:27,320 --> 00:30:32,030
So it's hard to imagine,
but you can read texts

627
00:30:32,030 --> 00:30:35,300
in the '50s that are debating
the merits of payback

628
00:30:35,300 --> 00:30:36,500
versus net present value.

629
00:30:36,500 --> 00:30:38,510
And you say, wait, how?

630
00:30:38,510 --> 00:30:41,690
Anyway, what I want to do--
unless there are questions

631
00:30:41,690 --> 00:30:44,660
about any of this, or general
questions about combined heat

632
00:30:44,660 --> 00:30:46,885
and power, I want to
go to the spreadsheet.

633
00:30:49,640 --> 00:30:52,220
It didn't occur to me to ask,
because of course this is MIT,

634
00:30:52,220 --> 00:30:56,280
but how many of you have
played with Excel before?

635
00:30:56,280 --> 00:30:59,070
Oh, good, that's what I thought.

636
00:30:59,070 --> 00:31:00,107
I feel so much better.

637
00:31:00,107 --> 00:31:01,190
All right, let's go there.

638
00:31:04,926 --> 00:31:06,510
That accords with my priors.

639
00:31:09,270 --> 00:31:12,870
All right, so there we
have the spreadsheet.

640
00:31:12,870 --> 00:31:14,790
Is that readable more
or less in the back?

641
00:31:14,790 --> 00:31:16,400
AUDIENCE: [INAUDIBLE]

642
00:31:16,400 --> 00:31:24,770
OK, and let's walk through
a set of questions.

643
00:31:24,770 --> 00:31:28,070
Let's figure out how to walk
through a set of questions.

644
00:31:28,070 --> 00:31:29,350
Hiram, what's happening here?

645
00:31:29,350 --> 00:31:31,152
AUDIENCE: [INAUDIBLE]

646
00:31:31,152 --> 00:31:33,110
RICHARD SCHMALENSEE:
That's what you got to do?

647
00:31:33,110 --> 00:31:35,880
Turn the side screen on?

648
00:31:35,880 --> 00:31:36,660
All right.

649
00:31:41,620 --> 00:31:42,120
No.

650
00:31:48,480 --> 00:31:50,100
All right, this
works [INAUDIBLE]..

651
00:31:50,100 --> 00:31:50,670
Thank you.

652
00:31:54,090 --> 00:31:59,720
If you walk through this,
this illustrates my point

653
00:31:59,720 --> 00:32:03,240
about depreciation.

654
00:32:03,240 --> 00:32:09,650
You get total savings, total
expenses, gross margin--

655
00:32:09,650 --> 00:32:12,440
that is to say what does
this thing throw off

656
00:32:12,440 --> 00:32:16,380
in terms of total
savings per year?

657
00:32:16,380 --> 00:32:20,460
You can subtract depreciation
and get earnings before taxes

658
00:32:20,460 --> 00:32:22,320
if you want to.

659
00:32:22,320 --> 00:32:23,820
But then you'll
notice what happens.

660
00:32:26,890 --> 00:32:29,500
They compute taxes and
they add back depreciation.

661
00:32:29,500 --> 00:32:32,540
It appears here and
it appears there.

662
00:32:32,540 --> 00:32:34,940
Depreciation is a game you
and your accountant play

663
00:32:34,940 --> 00:32:37,310
with the tax people.

664
00:32:37,310 --> 00:32:41,500
So when calculating the after
tax in your pocket savings,

665
00:32:41,500 --> 00:32:45,340
you have to say what
depreciation do I get to take.

666
00:32:45,340 --> 00:32:48,450
How does that affect my taxes?

667
00:32:48,450 --> 00:32:49,930
That's it.

668
00:32:49,930 --> 00:32:51,550
That's it.

669
00:32:51,550 --> 00:32:54,610
If you get faster depreciation,
your income is lower

670
00:32:54,610 --> 00:32:56,260
and your taxes are lower.

671
00:32:56,260 --> 00:32:58,000
Your income being
lower doesn't matter.

672
00:32:58,000 --> 00:33:00,852
Your taxes being lower does.

673
00:33:00,852 --> 00:33:03,420
Is that reasonably
straightforward?

674
00:33:03,420 --> 00:33:05,580
Because you're going to
see this in later life,

675
00:33:05,580 --> 00:33:07,290
I'll guarantee you.

676
00:33:07,290 --> 00:33:09,390
And it shouldn't be mysterious.

677
00:33:09,390 --> 00:33:12,630
It really is-- and it's
an accounting entity.

678
00:33:12,630 --> 00:33:14,670
You report it on taxes.

679
00:33:14,670 --> 00:33:17,340
Some companies use different
depreciation schedules

680
00:33:17,340 --> 00:33:21,120
for taxes than for financial
reporting, which you're

681
00:33:21,120 --> 00:33:24,270
allowed to do to some extent.

682
00:33:24,270 --> 00:33:29,610
OK, question, I talked
before about the difference

683
00:33:29,610 --> 00:33:31,500
between doing
things in real terms

684
00:33:31,500 --> 00:33:35,550
and doing things
in nominal terms.

685
00:33:35,550 --> 00:33:40,980
Assuming this is Darren, not
some Sloan student who wrote up

686
00:33:40,980 --> 00:33:44,340
the case, what's Darren doing?

687
00:33:44,340 --> 00:33:46,800
Is this a real analysis,
a nominal analysis?

688
00:33:46,800 --> 00:33:48,700
Is he confused?

689
00:33:48,700 --> 00:33:49,950
[INAUDIBLE] what do you think?

690
00:33:52,896 --> 00:33:54,538
AUDIENCE: I'm confused.

691
00:33:54,538 --> 00:33:55,580
RICHARD SCHMALENSEE: Huh?

692
00:33:55,580 --> 00:33:56,910
AUDIENCE: I'm confused.

693
00:33:56,910 --> 00:33:57,650
RICHARD SCHMALENSEE:
You're confused.

694
00:33:57,650 --> 00:33:58,520
OK, say why.

695
00:34:05,408 --> 00:34:11,659
AUDIENCE: I don't [INAUDIBLE]
understand how [INAUDIBLE]

696
00:34:11,659 --> 00:34:12,924
depreciation [INAUDIBLE].

697
00:34:12,924 --> 00:34:14,539
RICHARD SCHMALENSEE: On what?

698
00:34:14,539 --> 00:34:17,780
AUDIENCE: I don't understand
how I will characterize it

699
00:34:17,780 --> 00:34:21,440
as either [INAUDIBLE]
[? real ?] or inconsistent.

700
00:34:21,440 --> 00:34:23,960
Like, is this the nominal
what things should be,

701
00:34:23,960 --> 00:34:26,695
or a nominal like interest rate?

702
00:34:26,695 --> 00:34:28,070
RICHARD SCHMALENSEE:
Well, what I

703
00:34:28,070 --> 00:34:31,969
said last time was, if you want
to assume that prices don't

704
00:34:31,969 --> 00:34:37,610
change, in this world,
where prices do change,

705
00:34:37,610 --> 00:34:41,150
then you'd better use a
real discount rate that

706
00:34:41,150 --> 00:34:43,070
measures purchasing power.

707
00:34:43,070 --> 00:34:47,780
If you want to use the kind of
rates you see in the market,

708
00:34:47,780 --> 00:34:51,020
those rates are based
on people's expectations

709
00:34:51,020 --> 00:34:52,409
about inflation.

710
00:34:52,409 --> 00:34:56,750
So you'd better build in
expectations about inflation.

711
00:34:56,750 --> 00:34:58,820
What people often do--

712
00:34:58,820 --> 00:35:02,480
and it's a mistake, is to use
discount rates or interest

713
00:35:02,480 --> 00:35:06,840
rates from the market and
assume prices don't change.

714
00:35:06,840 --> 00:35:11,135
So is he inconsistent like
that, or is he consistent?

715
00:35:11,135 --> 00:35:12,010
I'll give you a hint.

716
00:35:12,010 --> 00:35:14,035
A 10% real rate
would be amazing.

717
00:35:16,670 --> 00:35:18,190
That would be very, very high.

718
00:35:20,990 --> 00:35:23,900
Not amazing, it would be high.

719
00:35:23,900 --> 00:35:25,528
[? Mathoura? ?]

720
00:35:25,528 --> 00:35:28,432
AUDIENCE: [? I mean, ?]
[INAUDIBLE]

721
00:35:28,432 --> 00:35:29,890
doing a nominal analysis

722
00:35:29,890 --> 00:35:31,807
RICHARD SCHMALENSEE:
Doing a nominal analysis,

723
00:35:31,807 --> 00:35:33,640
yeah, because he
builds in-- he has

724
00:35:33,640 --> 00:35:40,240
explicit assumptions
about inflation,

725
00:35:40,240 --> 00:35:45,010
and he's got an interest
rate that's 2003.

726
00:35:45,010 --> 00:35:47,560
That's a market rate in 2003.

727
00:35:47,560 --> 00:35:48,940
No reason you would know that.

728
00:35:48,940 --> 00:35:52,930
But you see the explicit
inflation numbers

729
00:35:52,930 --> 00:35:55,220
at a fairly high interest rate.

730
00:35:55,220 --> 00:35:56,950
So he's doing a
nominal analysis.

731
00:35:56,950 --> 00:35:58,000
It looks consistent.

732
00:36:02,340 --> 00:36:05,190
Is there any defense
in the spreadsheet

733
00:36:05,190 --> 00:36:08,550
or in the case as to the
choice of discount rate?

734
00:36:17,600 --> 00:36:18,600
Sarah?

735
00:36:18,600 --> 00:36:21,058
AUDIENCE: I don't remember
there being a very specific one,

736
00:36:21,058 --> 00:36:23,854
but I'm assuming [INAUDIBLE]
comparable risky assets

737
00:36:23,854 --> 00:36:24,690
on the market.

738
00:36:24,690 --> 00:36:25,120
RICHARD SCHMALENSEE: Yeah.

739
00:36:25,120 --> 00:36:26,280
He didn't say it, though.

740
00:36:26,280 --> 00:36:29,290
There's no discussion of
where that 10% came from.

741
00:36:29,290 --> 00:36:32,560
After all of that
incomprehensible nonsense

742
00:36:32,560 --> 00:36:36,360
last time about beta,
I was giving you

743
00:36:36,360 --> 00:36:38,670
what you ought to do,
not what people often do.

744
00:36:38,670 --> 00:36:41,580
And clearly, what
he did here was

745
00:36:41,580 --> 00:36:43,650
to take a horseback
reasonable rate.

746
00:36:43,650 --> 00:36:45,820
Let's say at 10%.

747
00:36:45,820 --> 00:36:49,290
That's pretty much in line
with cost of capital you see

748
00:36:49,290 --> 00:36:51,750
and discount rates you see.

749
00:36:51,750 --> 00:36:55,440
You would like him
to have done more.

750
00:36:55,440 --> 00:36:58,900
This is not
necessarily an ideal.

751
00:36:58,900 --> 00:37:01,608
Are the inflation
assumptions reasonable?

752
00:37:05,520 --> 00:37:06,900
Anybody react to those?

753
00:37:06,900 --> 00:37:08,190
What do you think?

754
00:37:08,190 --> 00:37:12,090
2% electricity, 2%
maintenance, 2% chemicals

755
00:37:12,090 --> 00:37:13,230
to be added to the water.

756
00:37:16,230 --> 00:37:21,340
AUDIENCE: [INAUDIBLE]
looking at interest rates

757
00:37:21,340 --> 00:37:22,635
on a yearly basis I don't know.

758
00:37:22,635 --> 00:37:24,010
RICHARD SCHMALENSEE:
I'm shocked.

759
00:37:24,010 --> 00:37:25,762
[LAUGHTER]

760
00:37:25,762 --> 00:37:26,795
[INAUDIBLE] shocked.

761
00:37:26,795 --> 00:37:28,670
I assumed that's what
people around here did.

762
00:37:28,670 --> 00:37:31,540
I certainly do.

763
00:37:31,540 --> 00:37:35,380
I mean, these are not
implausible numbers.

764
00:37:35,380 --> 00:37:37,810
I mean, if you look
historically at inflation rates,

765
00:37:37,810 --> 00:37:45,320
they run in this country 1% 2
and 1/2% So 2% is reasonable.

766
00:37:45,320 --> 00:37:48,740
What you don't see
in this spreadsheet--

767
00:37:48,740 --> 00:37:53,370
what you might like to see in
life is you might like to see,

768
00:37:53,370 --> 00:37:56,810
well, does the choice
of discount rate matter?

769
00:37:56,810 --> 00:37:57,920
You can check it easily.

770
00:37:57,920 --> 00:38:00,680
Enough we could put
another rate in.

771
00:38:00,680 --> 00:38:02,570
Do the inflation
assumptions matter?

772
00:38:05,720 --> 00:38:07,580
Is the outcome
sensitive to these

773
00:38:07,580 --> 00:38:11,660
things that don't
get defended much?

774
00:38:11,660 --> 00:38:14,630
If you were doing this for
real, and it was your money,

775
00:38:14,630 --> 00:38:16,160
you'd want to do that.

776
00:38:16,160 --> 00:38:17,720
You'd want to say,
OK, I'm not too

777
00:38:17,720 --> 00:38:19,880
sure about those assumptions.

778
00:38:19,880 --> 00:38:21,260
Are they critical?

779
00:38:21,260 --> 00:38:22,970
Do they drive the answer?

780
00:38:22,970 --> 00:38:25,740
If they do, you'd
want to look harder.

781
00:38:25,740 --> 00:38:27,890
We don't see any of that.

782
00:38:27,890 --> 00:38:31,100
We may be missing a dozen
spreadsheets in the background,

783
00:38:31,100 --> 00:38:34,000
but we don't see it here.

784
00:38:34,000 --> 00:38:41,290
OK, as you read the case where
are there risks on this sheet?

785
00:38:44,470 --> 00:38:49,070
Jorge, anything here
that's not certain?

786
00:38:56,270 --> 00:39:00,290
You think it's all
pretty rock solid.

787
00:39:00,290 --> 00:39:01,190
Matthew?

788
00:39:01,190 --> 00:39:03,850
AUDIENCE: I think something
that we didn't really bring up

789
00:39:03,850 --> 00:39:09,360
is that the company [INAUDIBLE]
that the installation time took

790
00:39:09,360 --> 00:39:13,576
much longer, or even a day
longer, [INAUDIBLE] production

791
00:39:13,576 --> 00:39:19,052
would set back the offset
of the cost [INAUDIBLE]..

792
00:39:19,052 --> 00:39:21,510
RICHARD SCHMALENSEE: Yeah, we
don't see the lost production

793
00:39:21,510 --> 00:39:25,050
here, and there is
presumably some risk there.

794
00:39:27,630 --> 00:39:31,900
And that's related to the
installation cost for which we

795
00:39:31,900 --> 00:39:35,740
have only an estimate.

796
00:39:35,740 --> 00:39:37,660
We don't have a guarantee.

797
00:39:37,660 --> 00:39:39,087
Rachel?

798
00:39:39,087 --> 00:39:41,045
AUDIENCE: Something that
[INAUDIBLE] jumped out

799
00:39:41,045 --> 00:39:43,670
to me was that I'm assuming
that they did get that grant,

800
00:39:43,670 --> 00:39:46,157
because there's been a lot of
policy talk about getting rid

801
00:39:46,157 --> 00:39:49,330
of them [INAUDIBLE].

802
00:39:49,330 --> 00:39:50,830
RICHARD SCHMALENSEE:
Yeah, I thought

803
00:39:50,830 --> 00:39:55,600
that was pretty bold
to say, well, I know--

804
00:39:55,600 --> 00:39:58,600
the text says we're
pretty sure we

805
00:39:58,600 --> 00:40:02,050
can get this matching
grant for $172,500.

806
00:40:02,050 --> 00:40:06,530
So we'll just assume we get it.

807
00:40:06,530 --> 00:40:09,005
And there's no lost
production in here.

808
00:40:09,005 --> 00:40:09,505
[INAUDIBLE]?

809
00:40:09,505 --> 00:40:11,260
AUDIENCE: [INAUDIBLE]
during that

810
00:40:11,260 --> 00:40:14,100
time was much more
reasonable [INAUDIBLE]..

811
00:40:14,100 --> 00:40:16,315
I think nowadays it might
be much more difficult

812
00:40:16,315 --> 00:40:17,440
after the financial crisis.

813
00:40:17,440 --> 00:40:20,500
But before then, [INAUDIBLE]
leading up to 2007,

814
00:40:20,500 --> 00:40:23,640
it wasn't very different
for [INAUDIBLE]..

815
00:40:23,640 --> 00:40:24,660
I mean, comparably.

816
00:40:24,660 --> 00:40:26,090
If you-- I think
about [INAUDIBLE]

817
00:40:26,090 --> 00:40:28,740
[? I'm ?] sure that argument
was probably fair for nowadays,

818
00:40:28,740 --> 00:40:30,565
but not necessarily
the case back then.

819
00:40:30,565 --> 00:40:32,315
RICHARD SCHMALENSEE:
If I were a naysayer,

820
00:40:32,315 --> 00:40:34,740
I'd say, do you have
that in writing?

821
00:40:34,740 --> 00:40:36,240
Do you have that grant?

822
00:40:36,240 --> 00:40:40,720
That's big relative to
the whole upfront cost.

823
00:40:40,720 --> 00:40:43,240
And he didn't
quite mention that.

824
00:40:43,240 --> 00:40:43,740
Yeah.

825
00:40:43,740 --> 00:40:45,870
AUDIENCE: Really, I mean,
companies like Tesla

826
00:40:45,870 --> 00:40:50,340
and Fisker Karma got like half
a billion dollar loans for their

827
00:40:50,340 --> 00:40:51,810
[INAUDIBLE].

828
00:40:51,810 --> 00:40:54,870
RICHARD SCHMALENSEE: Yeah,
but this is a New York State--

829
00:40:54,870 --> 00:40:57,180
I don't know this
program, or I certainly

830
00:40:57,180 --> 00:41:00,630
don't know what this
program looked like in 2003.

831
00:41:00,630 --> 00:41:03,240
All I know is that
the case said,

832
00:41:03,240 --> 00:41:06,620
can probably get the grant.

833
00:41:06,620 --> 00:41:10,190
I would say, gee, I'd really
like to know, how does this

834
00:41:10,190 --> 00:41:14,370
look without getting the grant?

835
00:41:14,370 --> 00:41:16,080
I mean, do we know
we're going to get it?

836
00:41:16,080 --> 00:41:20,400
Suppose installation--
in fact the installation

837
00:41:20,400 --> 00:41:26,380
cost, didn't they say $120,000,
$125,000, and he said,

838
00:41:26,380 --> 00:41:30,010
I think we can get
it down to $100,000.

839
00:41:30,010 --> 00:41:31,090
Isn't that right?

840
00:41:31,090 --> 00:41:32,550
Yeah, thank you.

841
00:41:32,550 --> 00:41:33,175
I need support.

842
00:41:35,780 --> 00:41:42,490
So anything else
that's uncertain here

843
00:41:42,490 --> 00:41:45,300
that you might want to focus on?

844
00:41:45,300 --> 00:41:46,230
Julian?

845
00:41:46,230 --> 00:41:48,920
AUDIENCE: I don't
see any removal costs

846
00:41:48,920 --> 00:41:51,522
on there [INAUDIBLE].

847
00:41:51,522 --> 00:41:52,980
RICHARD SCHMALENSEE:
Removal costs?

848
00:41:52,980 --> 00:41:55,110
You mean when you
scrap it at the end?

849
00:41:55,110 --> 00:41:56,940
AUDIENCE: Yeah.

850
00:41:56,940 --> 00:41:58,750
RICHARD SCHMALENSEE:
That's a good point.

851
00:41:58,750 --> 00:41:59,910
That's a good point.

852
00:41:59,910 --> 00:42:00,990
He doesn't talk about it.

853
00:42:00,990 --> 00:42:02,310
He runs it out for--

854
00:42:02,310 --> 00:42:05,280
I forget how long
this spreadsheet runs.

855
00:42:05,280 --> 00:42:10,380
But he didn't talk about what--

856
00:42:13,350 --> 00:42:15,580
presumably, you wouldn't
throw it all away,

857
00:42:15,580 --> 00:42:16,780
since some of it's pipe.

858
00:42:16,780 --> 00:42:17,790
But maybe you would.

859
00:42:17,790 --> 00:42:21,630
I mean, it's a pipe with water,
so it should last pretty well.

860
00:42:21,630 --> 00:42:24,930
But the generator you'd have to
replace, and the turbine you'd

861
00:42:24,930 --> 00:42:27,142
have to replace after a while.

862
00:42:27,142 --> 00:42:28,600
You're right,
there's none of that.

863
00:42:28,600 --> 00:42:30,210
But I guess you
could think about--

864
00:42:30,210 --> 00:42:35,215
well, the question is,
is there a disposal cost?

865
00:42:35,215 --> 00:42:36,090
AUDIENCE: [? Yeah. ?]

866
00:42:36,090 --> 00:42:36,450
RICHARD SCHMALENSEE: Yeah.

867
00:42:36,450 --> 00:42:38,040
The question isn't would
you have to replace that,

868
00:42:38,040 --> 00:42:39,165
because you probably would.

869
00:42:39,165 --> 00:42:42,000
The question is, should there
be a negative number at the end?

870
00:42:42,000 --> 00:42:44,980
Or could you sell it for scrap?

871
00:42:44,980 --> 00:42:49,180
And he didn't mention
that anything else?

872
00:42:49,180 --> 00:42:52,720
OK, do you like his
treatment of these risks?

873
00:42:55,055 --> 00:42:56,680
Darren is not our
favorite person here.

874
00:42:56,680 --> 00:42:57,250
Yes.

875
00:42:57,250 --> 00:42:59,650
AUDIENCE: Well, the
thing is, since we

876
00:42:59,650 --> 00:43:02,515
don't know exactly how he came
up with that discount rate,

877
00:43:02,515 --> 00:43:05,440
then there's a possibility
that he's not really

878
00:43:05,440 --> 00:43:07,990
accounting for the risks
and the cash flows.

879
00:43:07,990 --> 00:43:11,380
I mean, the discount
rate is low.

880
00:43:11,380 --> 00:43:14,980
But maybe he took
that into account

881
00:43:14,980 --> 00:43:20,350
when he calculated the
risk premium associated

882
00:43:20,350 --> 00:43:22,730
with his discount rate.

883
00:43:22,730 --> 00:43:26,140
RICHARD SCHMALENSEE:
Maybe, but--

884
00:43:26,140 --> 00:43:27,350
is this my next question?

885
00:43:27,350 --> 00:43:27,850
Yes.

886
00:43:31,070 --> 00:43:33,950
Did he use pessimistic
figures, optimistic figures,

887
00:43:33,950 --> 00:43:37,250
or more or less middle
of the road figures?

888
00:43:37,250 --> 00:43:39,180
Pretty optimistic, yeah.

889
00:43:39,180 --> 00:43:40,920
Chad, you agree, optimistic?

890
00:43:40,920 --> 00:43:55,700
OK, it's an interesting
presentational choice,

891
00:43:55,700 --> 00:43:59,600
because Darren
knows all of this.

892
00:43:59,600 --> 00:44:01,620
And Darren could
just say, well, yeah,

893
00:44:01,620 --> 00:44:02,870
I've been a little optimistic.

894
00:44:02,870 --> 00:44:04,040
But the 10% is high.

895
00:44:08,670 --> 00:44:12,630
This project looks so
good on his numbers

896
00:44:12,630 --> 00:44:16,468
that the better strategy
would be to be pessimistic.

897
00:44:16,468 --> 00:44:18,760
So you could say, look, I
mean, I was very pessimistic,

898
00:44:18,760 --> 00:44:21,000
and it still looked good.

899
00:44:21,000 --> 00:44:25,810
He didn't do that,
or he didn't explore.

900
00:44:25,810 --> 00:44:28,660
Again, if somebody shows you
one of these spreadsheets

901
00:44:28,660 --> 00:44:32,380
in later life, or if when
you're working for McKinsey

902
00:44:32,380 --> 00:44:35,440
they ask you to make
one, for heaven's sakes,

903
00:44:35,440 --> 00:44:36,970
think about the central case.

904
00:44:36,970 --> 00:44:38,560
Think about
variations around it.

905
00:44:38,560 --> 00:44:39,310
He didn't do that.

906
00:44:39,310 --> 00:44:40,720
He took the optimistic case.

907
00:44:44,920 --> 00:44:46,840
Kind of a surprise.

908
00:44:46,840 --> 00:44:50,230
I think what he
should have done is--

909
00:44:50,230 --> 00:44:53,900
oops, let's get it up there.

910
00:44:53,900 --> 00:44:57,962
Yeah, he should have
been central to the road.

911
00:44:57,962 --> 00:44:58,920
Here's a beta question.

912
00:45:03,040 --> 00:45:07,450
So the discounting applies to
how do we value energy savings.

913
00:45:10,397 --> 00:45:11,980
Those energy savings
are going to tend

914
00:45:11,980 --> 00:45:17,180
to be correlated with the
economy, against the economy,

915
00:45:17,180 --> 00:45:17,920
not at all?

916
00:45:20,940 --> 00:45:24,970
The energy savings,
probably two components.

917
00:45:24,970 --> 00:45:27,940
One, what's the
production volume?

918
00:45:27,940 --> 00:45:33,180
And let's take that as fixed
for the moment, because they do.

919
00:45:33,180 --> 00:45:36,180
You tend to run the thing flat
out unless things are terrible.

920
00:45:36,180 --> 00:45:38,660
And the electricity price--

921
00:45:38,660 --> 00:45:42,320
which way is the electricity
price go with the economy?

922
00:45:42,320 --> 00:45:42,820
Brendan.

923
00:45:42,820 --> 00:45:44,695
AUDIENCE: [INAUDIBLE]
[? doesn't vary ?] much

924
00:45:44,695 --> 00:45:45,590
for the economy.

925
00:45:45,590 --> 00:45:47,840
I'd say that's more
[INAUDIBLE] energy in terms

926
00:45:47,840 --> 00:45:49,040
of gasoline and stuff.

927
00:45:49,040 --> 00:45:51,913
That's more of a-- that varies
a lot more with economy, but--

928
00:45:51,913 --> 00:45:53,580
RICHARD SCHMALENSEE:
There's a lot more.

929
00:45:53,580 --> 00:45:56,390
But if you have
high demand, there's

930
00:45:56,390 --> 00:45:57,800
going to be a supply curve.

931
00:45:57,800 --> 00:46:00,650
Particularly in New York, which
is a market-driven electricity

932
00:46:00,650 --> 00:46:04,080
system, he'll be running
up a supply curve.

933
00:46:04,080 --> 00:46:05,675
So a little bit
with the economy.

934
00:46:05,675 --> 00:46:08,217
AUDIENCE: Yeah, I wouldn't say
a very high beta [INAUDIBLE]..

935
00:46:08,217 --> 00:46:09,550
RICHARD SCHMALENSEE: No, no, no.

936
00:46:09,550 --> 00:46:11,660
Not a very high beta,
but a positive beta.

937
00:46:11,660 --> 00:46:13,490
Yeah, so maybe-- yeah.

938
00:46:13,490 --> 00:46:17,270
AUDIENCE: But the thing is,
if he was using whatever

939
00:46:17,270 --> 00:46:21,525
that he recovers for
generating more electricity,

940
00:46:21,525 --> 00:46:22,650
then maybe that's the case.

941
00:46:22,650 --> 00:46:26,630
But if is using heat
to sell to people,

942
00:46:26,630 --> 00:46:29,508
then he can say that that's
something that's fairly--

943
00:46:29,508 --> 00:46:31,550
people wouldn't [INAUDIBLE]
[? vary by ?] prices.

944
00:46:31,550 --> 00:46:34,788
But maybe the economy-- people
will need that heat regardless.

945
00:46:34,788 --> 00:46:36,830
RICHARD SCHMALENSEE: But
what's on the table here

946
00:46:36,830 --> 00:46:39,050
is generation.

947
00:46:39,050 --> 00:46:41,030
What's on the table is
generation, not heat.

948
00:46:41,030 --> 00:46:43,760
He doesn't have a scheme
to pipe the heat away.

949
00:46:43,760 --> 00:46:48,790
He has a scheme to use the
steam to run a turbine.

950
00:46:48,790 --> 00:46:50,520
So good point.

951
00:46:50,520 --> 00:46:53,880
It's cold in New York,
even in good years and bad.

952
00:46:53,880 --> 00:46:57,258
But the electricity price
is what's at issue here,

953
00:46:57,258 --> 00:46:58,300
the value of the savings.

954
00:46:58,300 --> 00:47:09,360
So you could argue you should
use a somewhat higher discount

955
00:47:09,360 --> 00:47:12,090
rate than the firms over--

956
00:47:12,090 --> 00:47:15,210
than the cost of capital to
the firm as a whole, just

957
00:47:15,210 --> 00:47:18,010
because there's a positive beta.

958
00:47:18,010 --> 00:47:19,260
We'd have to look at the firm.

959
00:47:22,178 --> 00:47:26,160
AUDIENCE: [INAUDIBLE]

960
00:47:26,160 --> 00:47:28,320
RICHARD SCHMALENSEE:
I have no idea.

961
00:47:28,320 --> 00:47:32,237
Does anybody know anything
about the formaldehyde business?

962
00:47:32,237 --> 00:47:33,320
It's a very diverse group.

963
00:47:33,320 --> 00:47:34,760
No one does formaldehyde at all?

964
00:47:34,760 --> 00:47:35,880
[LAUGHTER]

965
00:47:35,880 --> 00:47:37,160
OK.

966
00:47:37,160 --> 00:47:40,460
I don't have a clue.

967
00:47:40,460 --> 00:47:47,270
They wrote the case as if
you just ran the factory.

968
00:47:47,270 --> 00:47:50,000
They didn't talk about
it being cyclical,

969
00:47:50,000 --> 00:47:52,970
and nobody talked about it
none of the naysayers talked

970
00:47:52,970 --> 00:47:54,542
about much cyclicality.

971
00:47:54,542 --> 00:47:55,250
But I don't know.

972
00:47:55,250 --> 00:47:55,750
Brendan?

973
00:47:55,750 --> 00:48:00,080
AUDIENCE: Yeah, I mean,
I think people are still

974
00:48:00,080 --> 00:48:02,750
RICHARD SCHMALENSEE:
[? Necessary ?] uses,

975
00:48:02,750 --> 00:48:05,990
but it does have other uses,
which the case discussed and I

976
00:48:05,990 --> 00:48:07,070
don't remember.

977
00:48:07,070 --> 00:48:11,960
But OK, what do you think of
the most important assumptions

978
00:48:11,960 --> 00:48:14,953
in this spreadsheet?

979
00:48:20,597 --> 00:48:21,680
Rachel, what do you think?

980
00:48:28,000 --> 00:48:29,990
Tough call, just
staring at it, yes?

981
00:48:29,990 --> 00:48:34,480
You'd have to go and look at--

982
00:48:34,480 --> 00:48:36,280
to answer that question--
and I raise it,

983
00:48:36,280 --> 00:48:38,410
because that is really
the key question.

984
00:48:38,410 --> 00:48:42,370
If I'm a naysayer and he
gives me the spreadsheet,

985
00:48:42,370 --> 00:48:44,980
I say, well what did you check?

986
00:48:44,980 --> 00:48:46,960
How sensitive is this
to the discount rate,

987
00:48:46,960 --> 00:48:50,140
to the electricity price, to
the electricity inflation?

988
00:48:50,140 --> 00:48:53,050
How sensitive is it to
variations in the installation

989
00:48:53,050 --> 00:48:53,920
cost?

990
00:48:53,920 --> 00:48:57,190
Does it matter whether
or not you get the grant?

991
00:48:57,190 --> 00:49:01,030
I can't tell here which
are the key assumptions,

992
00:49:01,030 --> 00:49:03,240
but a little fiddling
with this can.

993
00:49:03,240 --> 00:49:03,740
Alex?

994
00:49:03,740 --> 00:49:07,564
AUDIENCE: Wouldn't the grant be
the most important assumption

995
00:49:07,564 --> 00:49:09,320
because it's like half of your--

996
00:49:09,320 --> 00:49:11,320
RICHARD SCHMALENSEE: It's
half the capital cost.

997
00:49:11,320 --> 00:49:15,650
If you go down, though, to his
net present value, you say,

998
00:49:15,650 --> 00:49:18,700
well, that doesn't matter,
because it's $172,500,

999
00:49:18,700 --> 00:49:20,770
and the net present
value is ginormous.

1000
00:49:20,770 --> 00:49:23,170
So lose the grant.

1001
00:49:23,170 --> 00:49:28,460
The question is,
what assumptions

1002
00:49:28,460 --> 00:49:31,390
would turn it negative?

1003
00:49:31,390 --> 00:49:33,050
And he didn't answer that

1004
00:49:33,050 --> 00:49:35,950
AUDIENCE: I mean,
if it saved less

1005
00:49:35,950 --> 00:49:38,010
than [INAUDIBLE] it would save.

1006
00:49:38,010 --> 00:49:40,593
RICHARD SCHMALENSEE: Well, there
are a lot of things it'll do,

1007
00:49:40,593 --> 00:49:43,790
but the question is
which are uncertain?

1008
00:49:43,790 --> 00:49:46,540
They describe the technology
as pretty vanilla.

1009
00:49:46,540 --> 00:49:48,550
So I assume that was
not-- you're right.

1010
00:49:48,550 --> 00:49:50,350
That would do it.

1011
00:49:50,350 --> 00:49:57,690
If you saved less [? if ?] the
electricity price collapsed,

1012
00:49:57,690 --> 00:50:00,280
if the discount rate
were much higher,

1013
00:50:00,280 --> 00:50:04,200
in fact for one
reason or another.

1014
00:50:04,200 --> 00:50:07,920
I mean, you could add them up.

1015
00:50:07,920 --> 00:50:09,840
I asked this question
not because I

1016
00:50:09,840 --> 00:50:11,680
expect you to be
able to answer it,

1017
00:50:11,680 --> 00:50:15,660
but because you always
have to ask that question.

1018
00:50:15,660 --> 00:50:18,990
What's driving this answer?

1019
00:50:18,990 --> 00:50:20,700
What's driving this answer?

1020
00:50:20,700 --> 00:50:23,250
Finally, did anybody
see the mistake

1021
00:50:23,250 --> 00:50:25,985
in computing net present value?

1022
00:50:25,985 --> 00:50:26,485
Sarah.

1023
00:50:26,485 --> 00:50:28,765
AUDIENCE: He started in
column C instead of column B.

1024
00:50:28,765 --> 00:50:29,890
RICHARD SCHMALENSEE: Bingo.

1025
00:50:29,890 --> 00:50:32,455
AUDIENCE: [INAUDIBLE]
[? compare ?] savings,

1026
00:50:32,455 --> 00:50:33,490
as opposed to cost.

1027
00:50:33,490 --> 00:50:34,990
RICHARD SCHMALENSEE:
If you go here,

1028
00:50:34,990 --> 00:50:39,040
he takes the net
present value of--

1029
00:50:39,040 --> 00:50:44,590
it's C45, which is here.

1030
00:50:47,432 --> 00:50:51,040
C45, which is the after
tax net cash flow,

1031
00:50:51,040 --> 00:50:55,310
that's the right
thing, all the way out.

1032
00:50:55,310 --> 00:50:56,615
But he forgot the initial cost.

1033
00:50:59,140 --> 00:51:03,020
That's one of the most bizarre
mistakes I've ever seen.

1034
00:51:03,020 --> 00:51:05,470
If you look, there's the
formula-- net present value

1035
00:51:05,470 --> 00:51:07,510
of all the savings.

1036
00:51:07,510 --> 00:51:11,710
Well, what needs to
happen here, it's got to--

1037
00:51:11,710 --> 00:51:13,435
not available in protected view.

1038
00:51:15,960 --> 00:51:17,648
Do I trust the
contents of the file?

1039
00:51:17,648 --> 00:51:19,440
Of course I trust the
contents of the file.

1040
00:51:19,440 --> 00:51:21,090
We're all friends here.

1041
00:51:21,090 --> 00:51:23,400
What he needs to--

1042
00:51:23,400 --> 00:51:25,530
I see, because I erased.

1043
00:51:25,530 --> 00:51:31,575
What I need to do here is I need
to subtract the initial cost.

1044
00:51:40,842 --> 00:51:42,550
That doesn't turn it
negative, but it did

1045
00:51:42,550 --> 00:51:45,470
make a significant difference.

1046
00:51:45,470 --> 00:51:47,020
You see what he did.

1047
00:51:47,020 --> 00:51:51,280
It's one of these, you say OK.

1048
00:51:51,280 --> 00:51:54,350
He took the after
tax net cash flow.

1049
00:51:54,350 --> 00:51:59,440
So he went down, added
the savings, added--

1050
00:51:59,440 --> 00:52:00,790
that's maintenance savings.

1051
00:52:04,040 --> 00:52:07,790
You got savings on electricity,
maintenance, and chemicals,

1052
00:52:07,790 --> 00:52:08,660
which gets inflated.

1053
00:52:12,680 --> 00:52:13,850
All these get inflated.

1054
00:52:13,850 --> 00:52:19,740
You'll see the inflation
rate coming in here,

1055
00:52:19,740 --> 00:52:21,570
coming in, coming in.

1056
00:52:21,570 --> 00:52:25,410
Adds them up, subtracts
the required maintenance,

1057
00:52:25,410 --> 00:52:30,700
gets the net, gets the
gross margin, so to speak,

1058
00:52:30,700 --> 00:52:33,820
subtracts depreciation to
get the impact on earnings.

1059
00:52:33,820 --> 00:52:36,820
That would be the
increase in earnings.

1060
00:52:36,820 --> 00:52:43,291
Gets the taxes, adds back
depreciation, does all that.

1061
00:52:43,291 --> 00:52:45,280
Row 45 is the right row.

1062
00:52:45,280 --> 00:52:50,730
Net present value, forgot
the initial investment cost.

1063
00:52:50,730 --> 00:52:52,470
That's a bad move.

1064
00:52:52,470 --> 00:52:53,520
That's a bad move.

1065
00:52:53,520 --> 00:52:57,330
OK, Darren, is not
doing real well here.

1066
00:52:57,330 --> 00:53:03,350
Did anybody look at the payback
or the internal rate of return?

1067
00:53:06,400 --> 00:53:06,900
[INAUDIBLE]

1068
00:53:06,900 --> 00:53:08,415
AUDIENCE: I just want go
back to the assumption.

1069
00:53:08,415 --> 00:53:10,140
You're also assuming
that, for 10 years,

1070
00:53:10,140 --> 00:53:14,370
your production of formaldehyde
is going to stay the same.

1071
00:53:14,370 --> 00:53:17,940
RICHARD SCHMALENSEE: He's
making that assumption.

1072
00:53:17,940 --> 00:53:20,328
And we don't know
how sensible it

1073
00:53:20,328 --> 00:53:22,870
is, because we don't know much
about the formaldehyde market.

1074
00:53:25,500 --> 00:53:28,930
They say that they run
the plant 24 hours a day,

1075
00:53:28,930 --> 00:53:33,090
365 days a year, and it's a
highly automated facility.

1076
00:53:33,090 --> 00:53:35,460
And he's assuming
that will continue.

1077
00:53:35,460 --> 00:53:38,370
It's not clear what other
assumption you ought to make.

1078
00:53:38,370 --> 00:53:41,910
But you're right,
that's a key assumption.

1079
00:53:41,910 --> 00:53:45,540
If the plant shuts down
or goes to one shift,

1080
00:53:45,540 --> 00:53:47,601
those savings figures get cut.

1081
00:53:47,601 --> 00:53:49,948
AUDIENCE: I meant the
actual science of it.

1082
00:53:49,948 --> 00:53:50,990
RICHARD SCHMALENSEE: Huh?

1083
00:53:50,990 --> 00:53:52,532
AUDIENCE: I meant
the science-- like,

1084
00:53:52,532 --> 00:53:55,070
if your delta e is less
and stuff like that.

1085
00:53:55,070 --> 00:53:59,278
Like if you have [INAUDIBLE]
less than [INAUDIBLE]..

1086
00:53:59,278 --> 00:54:01,070
RICHARD SCHMALENSEE:
Well, you could do it.

1087
00:54:01,070 --> 00:54:03,320
I mean, if it's
proportional to throughput--

1088
00:54:03,320 --> 00:54:06,380
AUDIENCE: [? In ?] the case,
it specifically states that

1089
00:54:06,380 --> 00:54:08,630
the board mainly cares
about [? corruption of ?]

1090
00:54:08,630 --> 00:54:15,456
formaldehyde vis a vis
use of electricity.

1091
00:54:15,456 --> 00:54:17,610
RICHARD SCHMALENSEE:
I'm not sure I get it.

1092
00:54:17,610 --> 00:54:19,140
They mainly care
about formaldehyde,

1093
00:54:19,140 --> 00:54:21,553
and he's assuming
that we're just

1094
00:54:21,553 --> 00:54:23,970
going to keep running it flat
out, because the board cares

1095
00:54:23,970 --> 00:54:25,320
about production.

1096
00:54:25,320 --> 00:54:29,430
I mean, if the market dies or
if there's a plant problem, that

1097
00:54:29,430 --> 00:54:32,310
won't happen, and you just cut
the savings proportionately.

1098
00:54:32,310 --> 00:54:36,330
Well, you'd cut the savings
on electricity and chemicals

1099
00:54:36,330 --> 00:54:37,050
proportionately.

1100
00:54:37,050 --> 00:54:40,210
I'd have to think
about maintenance.

1101
00:54:40,210 --> 00:54:45,830
Yeah, OK, internal
rate of return.

1102
00:54:45,830 --> 00:54:47,600
How did he do that?

1103
00:54:47,600 --> 00:54:52,640
It's ROA, and the
formula is up there.

1104
00:54:55,332 --> 00:54:57,290
You could tell it's an
internal rate of return,

1105
00:54:57,290 --> 00:55:00,530
because that's what
Excel calls the formula.

1106
00:55:00,530 --> 00:55:04,760
And if you look at it, it's--

1107
00:55:04,760 --> 00:55:06,470
and 15% is an initial guess.

1108
00:55:06,470 --> 00:55:10,610
It's an iterative procedure.

1109
00:55:10,610 --> 00:55:18,920
It's B49 to R49, so it's
the internal rate of return

1110
00:55:18,920 --> 00:55:20,300
on the pre-tax cash flow.

1111
00:55:23,300 --> 00:55:26,230
Why would you do that?

1112
00:55:26,230 --> 00:55:30,360
Why wouldn't you take into
account the effective taxes?

1113
00:55:30,360 --> 00:55:31,920
If you look at
that, that's weird.

1114
00:55:31,920 --> 00:55:36,970
You should do it up
here, and we could do it.

1115
00:55:36,970 --> 00:55:37,720
I haven't.

1116
00:55:37,720 --> 00:55:43,160
It's going to be significant,
but that's just strange.

1117
00:55:43,160 --> 00:55:46,340
That's just strange.

1118
00:55:46,340 --> 00:55:48,680
And just for humor,
you really have

1119
00:55:48,680 --> 00:55:50,605
to look at the formulas
in a spreadsheet.

1120
00:55:54,340 --> 00:55:58,390
He didn't actually compute the
payback per that slide I did.

1121
00:55:58,390 --> 00:56:01,240
You didn't actually see when
you get your money back.

1122
00:56:01,240 --> 00:56:09,100
He went up here and took the
installed cost, divided it

1123
00:56:09,100 --> 00:56:13,540
by the C21 minus C29.

1124
00:56:21,220 --> 00:56:27,740
Yeah, divided it by what amounts
to G30 at the C32 divided it

1125
00:56:27,740 --> 00:56:30,760
by the annual savings
in the first year.

1126
00:56:30,760 --> 00:56:37,470
But the savings
differ year by year,

1127
00:56:37,470 --> 00:56:41,130
and he doesn't consider taxes.

1128
00:56:41,130 --> 00:56:43,050
So this is a
good-looking spreadsheet.

1129
00:56:43,050 --> 00:56:46,180
And what astonished me
when I looked at it was,

1130
00:56:46,180 --> 00:56:49,630
wait a minute, that's wrong,
that's wrong, that's wrong.

1131
00:56:49,630 --> 00:56:51,640
Otherwise, pretty good.

1132
00:56:51,640 --> 00:56:53,310
Otherwise, pretty good.

1133
00:56:53,310 --> 00:56:56,920
Any questions about
the spreadsheet?

1134
00:56:56,920 --> 00:57:01,030
OK, let's leave this.

1135
00:57:01,030 --> 00:57:03,760
No I don't.

1136
00:57:03,760 --> 00:57:05,710
Let's go away.

1137
00:57:05,710 --> 00:57:06,760
And let's go back.

1138
00:57:16,260 --> 00:57:20,550
I just put the spreadsheet
with the formulas in the notes.

1139
00:57:20,550 --> 00:57:23,850
Those are the issues
we've talked about.

1140
00:57:23,850 --> 00:57:25,770
Now let's talk about--

1141
00:57:25,770 --> 00:57:28,680
let's see.

1142
00:57:28,680 --> 00:57:30,460
Let's talk about the naysayers.

1143
00:57:30,460 --> 00:57:33,270
So I'm guessing--

1144
00:57:33,270 --> 00:57:37,780
I haven't spent my life
doing this spreadsheet.

1145
00:57:37,780 --> 00:57:40,890
But I'm guessing, if you run
through all of the things

1146
00:57:40,890 --> 00:57:45,070
that we've talked about, the
basic assumptions look OK.

1147
00:57:48,810 --> 00:57:53,130
The numbers, he's
too optimistic,

1148
00:57:53,130 --> 00:57:57,420
but his discount rate's
probably a little high.

1149
00:57:57,420 --> 00:58:01,110
So I'm guessing that if
you fiddle and diddle,

1150
00:58:01,110 --> 00:58:03,720
you will come to the
conclusion that it does have

1151
00:58:03,720 --> 00:58:05,100
a positive net present value.

1152
00:58:08,910 --> 00:58:13,830
First objection-- you
are now Darren, folks.

1153
00:58:13,830 --> 00:58:16,920
First objection-- if it's
such a great idea, how

1154
00:58:16,920 --> 00:58:20,170
come nobody else is doing it?

1155
00:58:20,170 --> 00:58:22,930
And your answer is?

1156
00:58:22,930 --> 00:58:25,058
Obadiah, what do you say?

1157
00:58:25,058 --> 00:58:26,350
You're going to just take that?

1158
00:58:26,350 --> 00:58:27,520
You're not going
to just take that.

1159
00:58:27,520 --> 00:58:28,320
What's your answer?

1160
00:58:32,568 --> 00:58:36,830
AUDIENCE: [INAUDIBLE]

1161
00:58:36,830 --> 00:58:39,440
RICHARD SCHMALENSEE:
Might be we're smart.

1162
00:58:39,440 --> 00:58:42,150
Might be this is a chance to
take a leadership position.

1163
00:58:42,150 --> 00:58:42,650
Charlotte.

1164
00:58:42,650 --> 00:58:44,983
AUDIENCE: It could be that
the reason they're doing this

1165
00:58:44,983 --> 00:58:47,370
is because they do all that
excess heat and steam that's

1166
00:58:47,370 --> 00:58:49,085
hurting their plant, and
maybe other people's plants

1167
00:58:49,085 --> 00:58:51,668
are designed in a way that they
never had that problem before,

1168
00:58:51,668 --> 00:58:53,628
so [INAUDIBLE] considered it.

1169
00:58:53,628 --> 00:58:55,670
RICHARD SCHMALENSEE: Could
be, although it sounds

1170
00:58:55,670 --> 00:58:57,830
like a standard
problem the way they

1171
00:58:57,830 --> 00:58:59,330
describe the basic reaction.

1172
00:58:59,330 --> 00:59:02,340
You just dump this stuff
in a vat and it gets hot.

1173
00:59:02,340 --> 00:59:02,840
Martha?

1174
00:59:02,840 --> 00:59:07,610
AUDIENCE: [INAUDIBLE]
have the same issue

1175
00:59:07,610 --> 00:59:09,542
with ice and [INAUDIBLE].

1176
00:59:09,542 --> 00:59:11,000
RICHARD SCHMALENSEE:
They might not

1177
00:59:11,000 --> 00:59:13,220
have the same issue with ice.

1178
00:59:13,220 --> 00:59:14,850
And the ice is
kind of a big deal.

1179
00:59:14,850 --> 00:59:15,710
You're right.

1180
00:59:15,710 --> 00:59:17,450
If you're in the
middle of the desert

1181
00:59:17,450 --> 00:59:19,460
and nobody can see you
venting a lot of steam,

1182
00:59:19,460 --> 00:59:20,720
you might just say--
of course, if you're

1183
00:59:20,720 --> 00:59:23,210
in the middle of the desert,
you may have a water problem.

1184
00:59:23,210 --> 00:59:26,090
[LAUGHS]

1185
00:59:26,090 --> 00:59:28,250
Actually, I think
my response would

1186
00:59:28,250 --> 00:59:30,817
be this is an opportunity
to show leadership.

1187
00:59:33,800 --> 00:59:36,860
But let's try the next one.

1188
00:59:36,860 --> 00:59:39,350
What's your answer to that one?

1189
00:59:39,350 --> 00:59:44,420
This is what I got, is
I estimated the revenue.

1190
00:59:44,420 --> 00:59:46,970
Yeah, yeah, I love
your net present value.

1191
00:59:46,970 --> 00:59:48,200
That's just swell.

1192
00:59:48,200 --> 00:59:51,020
But there's a risk here.

1193
00:59:51,020 --> 00:59:52,250
There's always a risk here.

1194
00:59:56,490 --> 00:59:58,230
Yes, there's always a risk.

1195
00:59:58,230 --> 00:59:59,580
We talked about outage.

1196
00:59:59,580 --> 01:00:01,170
We'll come back to outage.

1197
01:00:01,170 --> 01:00:03,480
But, I mean, it's 2% of revenue.

1198
01:00:03,480 --> 01:00:05,790
You're going to make the
plant more complicated.

1199
01:00:05,790 --> 01:00:08,760
And if you're lucky,
we'll save 2% of revenue.

1200
01:00:08,760 --> 01:00:10,160
Why should we do that?

1201
01:00:10,160 --> 01:00:12,270
It's going to be
lost in the noise

1202
01:00:12,270 --> 01:00:15,750
as production varies, as price
varies, as everything varies.

1203
01:00:15,750 --> 01:00:19,750
Why should we
complicate our lives?

1204
01:00:19,750 --> 01:00:22,570
Now, these kinds
of things come up.

1205
01:00:22,570 --> 01:00:23,070
Sam.

1206
01:00:23,070 --> 01:00:24,190
AUDIENCE: Well,
one, you could say

1207
01:00:24,190 --> 01:00:25,810
the whole-- you could play
the whole green angle,

1208
01:00:25,810 --> 01:00:27,950
like as if it were to make
the environment better.

1209
01:00:27,950 --> 01:00:30,500
But also you could say,
like, in the future,

1210
01:00:30,500 --> 01:00:31,220
we don't know what's
going to happen

1211
01:00:31,220 --> 01:00:32,387
to the price of electricity.

1212
01:00:32,387 --> 01:00:35,410
And if it rises, it's a good
insurance policy we have.

1213
01:00:35,410 --> 01:00:37,260
And also, you can
say the technology

1214
01:00:37,260 --> 01:00:39,500
that we're adding has a
pretty good track record.

1215
01:00:39,500 --> 01:00:42,125
Like, it's not that complex.

1216
01:00:42,125 --> 01:00:43,750
RICHARD SCHMALENSEE:
Yeah, I mean, this

1217
01:00:43,750 --> 01:00:47,390
is not the first time this
contractor has ever done it.

1218
01:00:47,390 --> 01:00:51,310
So the risk doesn't sound
like it's that high.

1219
01:00:51,310 --> 01:00:54,070
2% is 2%.

1220
01:00:54,070 --> 01:00:54,610
Not bad.

1221
01:00:54,610 --> 01:00:55,730
Anybody else?

1222
01:00:55,730 --> 01:00:56,230
Ryan.

1223
01:00:56,230 --> 01:00:59,197
AUDIENCE: It's actually checking
the formaldehyde process,

1224
01:00:59,197 --> 01:01:01,030
so it's not complicating
it in that respect.

1225
01:01:01,030 --> 01:01:03,880
But there's also the safety
issue, and like we said,

1226
01:01:03,880 --> 01:01:07,570
the green issue, the safety
issue being the [INAUDIBLE]..

1227
01:01:07,570 --> 01:01:08,800
RICHARD SCHMALENSEE: Yeah.

1228
01:01:08,800 --> 01:01:09,730
Got the safety issue.

1229
01:01:09,730 --> 01:01:10,420
That's a risk.

1230
01:01:10,420 --> 01:01:12,820
Boy, somebody slips
and falls on that ice,

1231
01:01:12,820 --> 01:01:19,060
and we get stuck with nice
negligence, big medical bills,

1232
01:01:19,060 --> 01:01:21,220
sympathetic plaintiff.

1233
01:01:21,220 --> 01:01:22,340
It's really depressing.

1234
01:01:22,340 --> 01:01:22,840
Scott.

1235
01:01:22,840 --> 01:01:25,720
AUDIENCE: So I think if you look
at it in terms of percentage,

1236
01:01:25,720 --> 01:01:27,370
it doesn't sound like very much.

1237
01:01:27,370 --> 01:01:29,050
Like saying [INAUDIBLE]
it's only 2%

1238
01:01:29,050 --> 01:01:31,300
of our revenue, that doesn't
sound very much at all.

1239
01:01:31,300 --> 01:01:36,850
But if you say it's $300,000
we're saving, then while it may

1240
01:01:36,850 --> 01:01:38,320
be only a small
portion of revenue,

1241
01:01:38,320 --> 01:01:44,140
$300,000 is a large amount of
money to pretty much anyone.

1242
01:01:44,140 --> 01:01:46,340
RICHARD SCHMALENSEE: To
a $5 million operation?

1243
01:01:46,340 --> 01:01:47,200
I don't know, maybe.

1244
01:01:47,200 --> 01:01:47,890
Yeah, yeah.

1245
01:01:47,890 --> 01:01:49,630
It's not trivial
in the absolute.

1246
01:01:49,630 --> 01:01:51,490
Anybody else?

1247
01:01:51,490 --> 01:01:52,420
[INAUDIBLE]

1248
01:01:52,420 --> 01:01:55,630
AUDIENCE: They're also going
to use current employees

1249
01:01:55,630 --> 01:01:57,110
to run the same thing.

1250
01:01:57,110 --> 01:02:01,465
So I presume their
salary would increase.

1251
01:02:01,465 --> 01:02:03,730
RICHARD SCHMALENSEE: I
wouldn't want to presume that.

1252
01:02:03,730 --> 01:02:06,160
I'd say their job
satisfaction would

1253
01:02:06,160 --> 01:02:09,100
increase because it would make
their jobs more interesting.

1254
01:02:09,100 --> 01:02:11,560
That's the pitch I'd use.

1255
01:02:11,560 --> 01:02:12,820
And it's a good point.

1256
01:02:12,820 --> 01:02:16,150
You might want to see if
you can get them behind it.

1257
01:02:16,150 --> 01:02:18,880
You might want to talk it up.

1258
01:02:18,880 --> 01:02:20,795
So you could say,
well, I've talked up

1259
01:02:20,795 --> 01:02:22,420
with the folks in
the factory, and they

1260
01:02:22,420 --> 01:02:23,817
actually like the idea.

1261
01:02:23,817 --> 01:02:24,400
[? Emerson? ?]

1262
01:02:24,400 --> 01:02:28,280
AUDIENCE: [INAUDIBLE] having
those same people [INAUDIBLE]

1263
01:02:28,280 --> 01:02:34,490
working [INAUDIBLE]
because they're

1264
01:02:34,490 --> 01:02:39,572
more familiar with the
[? cost is ?] [INAUDIBLE]..

1265
01:02:39,572 --> 01:02:41,210
RICHARD SCHMALENSEE:
It helps, yeah.

1266
01:02:41,210 --> 01:02:42,440
These people know it.

1267
01:02:42,440 --> 01:02:44,180
They want to keep
the plant running.

1268
01:02:44,180 --> 01:02:47,420
We all want to keep
the plant running.

1269
01:02:47,420 --> 01:02:48,860
This actually is common.

1270
01:02:48,860 --> 01:02:52,110
I mean, these paraphrase
the objections in the case.

1271
01:02:52,110 --> 01:02:55,760
I've added a little bit
of what you always hear.

1272
01:02:55,760 --> 01:02:58,960
This is another one.

1273
01:02:58,960 --> 01:03:03,280
We can invest and
grow capacity, as

1274
01:03:03,280 --> 01:03:06,580
opposed to this
complicating investment,

1275
01:03:06,580 --> 01:03:08,680
and we want to
grow the business.

1276
01:03:08,680 --> 01:03:11,770
You're not growing the business.

1277
01:03:11,770 --> 01:03:14,770
If we didn't have money,
well, then we wouldn't invest.

1278
01:03:14,770 --> 01:03:17,590
But if times are good and
we're selling this stuff,

1279
01:03:17,590 --> 01:03:20,230
we want to make more of it,
because that's how we grow.

1280
01:03:20,230 --> 01:03:24,820
And your investment isn't
a growth investment.

1281
01:03:24,820 --> 01:03:25,390
James.

1282
01:03:25,390 --> 01:03:28,437
AUDIENCE: Well maybe by selling
electricity and formaldehyde,

1283
01:03:28,437 --> 01:03:32,982
you're diversifying
both the [INAUDIBLE],,

1284
01:03:32,982 --> 01:03:35,458
which is even safer, even
though [? it's not that much ?]

1285
01:03:35,458 --> 01:03:36,802
electricity.

1286
01:03:36,802 --> 01:03:39,740
RICHARD SCHMALENSEE:
So yeah, we're

1287
01:03:39,740 --> 01:03:42,650
reducing the risk of our
operation overall because

1288
01:03:42,650 --> 01:03:44,390
of this electricity hedge.

1289
01:03:44,390 --> 01:03:47,090
And that means growth is safer.

1290
01:03:47,090 --> 01:03:48,320
You might try that.

1291
01:03:48,320 --> 01:03:49,126
Yes.

1292
01:03:49,126 --> 01:03:52,250
AUDIENCE: [INAUDIBLE]
experience with the technology

1293
01:03:52,250 --> 01:03:54,770
that's more PR-friendly,
in the sense that you have

1294
01:03:54,770 --> 01:03:56,720
less [INAUDIBLE]
[? gas. ?] [INAUDIBLE]

1295
01:03:56,720 --> 01:03:58,610
it's easier to build
things where you

1296
01:03:58,610 --> 01:04:01,010
want to get less public outcry.

1297
01:04:01,010 --> 01:04:03,625
And so that [INAUDIBLE]
to [INAUDIBLE]

1298
01:04:03,625 --> 01:04:06,410
grow that in the future.

1299
01:04:06,410 --> 01:04:09,170
RICHARD SCHMALENSEE:
Yeah, of course, except--

1300
01:04:09,170 --> 01:04:10,840
I mean, we are
making formaldehyde.

1301
01:04:10,840 --> 01:04:15,380
We can't fake into flowers.

1302
01:04:15,380 --> 01:04:17,010
[INAUDIBLE]?

1303
01:04:17,010 --> 01:04:17,750
Yeah.

1304
01:04:17,750 --> 01:04:21,170
AUDIENCE: I think maybe
finding a better solution

1305
01:04:21,170 --> 01:04:27,380
to get rid of the steam could
allow you to increase capacity,

1306
01:04:27,380 --> 01:04:30,440
because if it's
just lying around,

1307
01:04:30,440 --> 01:04:32,930
there's probably a maximum
amount of formaldehyde

1308
01:04:32,930 --> 01:04:37,745
that you can produce and have
this [? thing ?] creating ice.

1309
01:04:37,745 --> 01:04:39,870
RICHARD SCHMALENSEE: That's
an interesting thought.

1310
01:04:39,870 --> 01:04:43,820
So you're saying we could only
do so much of this venting

1311
01:04:43,820 --> 01:04:45,800
and ice and so on.

1312
01:04:45,800 --> 01:04:49,310
And that may someday
be a constraint on us.

1313
01:04:49,310 --> 01:04:51,920
AUDIENCE: Yes, in finding
a better solution,

1314
01:04:51,920 --> 01:04:57,230
that maybe [INAUDIBLE] enable
them to expand it even more.

1315
01:04:57,230 --> 01:04:59,005
RICHARD SCHMALENSEE:
OK, [INAUDIBLE]..

1316
01:04:59,005 --> 01:05:01,770
AUDIENCE: So this process
saving money every year

1317
01:05:01,770 --> 01:05:05,290
can add [INAUDIBLE] to that
year investment [INAUDIBLE]

1318
01:05:05,290 --> 01:05:07,700
get your initial investment
back [INAUDIBLE]..

1319
01:05:07,700 --> 01:05:09,690
RICHARD SCHMALENSEE:
Roughly year 3, yeah.

1320
01:05:09,690 --> 01:05:10,380
Extra money.

1321
01:05:10,380 --> 01:05:12,990
AUDIENCE: Yeah,
actually [INAUDIBLE]

1322
01:05:12,990 --> 01:05:14,698
capacity every year after that.

1323
01:05:14,698 --> 01:05:16,240
RICHARD SCHMALENSEE:
Oh, that's nice.

1324
01:05:16,240 --> 01:05:17,890
That's nice if we play it right.

1325
01:05:17,890 --> 01:05:20,080
I mean, you get this stuff.

1326
01:05:20,080 --> 01:05:21,640
You're getting this.

1327
01:05:21,640 --> 01:05:24,130
They don't specify in the
case who he's talking to.

1328
01:05:24,130 --> 01:05:27,040
But presumably, this is
a middle management group

1329
01:05:27,040 --> 01:05:29,980
that passes on capital
spending requests.

1330
01:05:29,980 --> 01:05:35,380
So your response would be,
look, folks, if this plant is

1331
01:05:35,380 --> 01:05:36,710
more profitable--

1332
01:05:36,710 --> 01:05:38,740
which it will be,
we're going to be

1333
01:05:38,740 --> 01:05:43,915
able to use that to get more
investment money to expand.

1334
01:05:46,520 --> 01:05:48,520
We don't necessarily get
to put it in our pocket

1335
01:05:48,520 --> 01:05:50,290
because it's all part
of the corporation,

1336
01:05:50,290 --> 01:05:52,445
but it would be a
good justification.

1337
01:05:52,445 --> 01:05:52,945
Andrew.

1338
01:05:52,945 --> 01:05:56,980
AUDIENCE: What you could
be doing with the--

1339
01:05:56,980 --> 01:05:59,200
that's kind of a question.

1340
01:05:59,200 --> 01:06:00,850
What you going be
doing with the money

1341
01:06:00,850 --> 01:06:03,780
you're using to build
this, [INAUDIBLE]

1342
01:06:03,780 --> 01:06:05,860
by your discount
rate essentially.

1343
01:06:05,860 --> 01:06:08,320
So we can just argue that--

1344
01:06:08,320 --> 01:06:10,288
I mean because it's kind
of an opportunity cost

1345
01:06:10,288 --> 01:06:11,580
that they're mentioning, right?

1346
01:06:11,580 --> 01:06:13,642
I mean, instead of spending
the money to do this,

1347
01:06:13,642 --> 01:06:15,100
you can spend to
grow the business.

1348
01:06:15,100 --> 01:06:17,545
But then you can answer,
like, that's why I'm using--

1349
01:06:17,545 --> 01:06:21,130
RICHARD SCHMALENSEE: It is,
except in most companies

1350
01:06:21,130 --> 01:06:26,020
of any size, you basically do
a capital budgeting process.

1351
01:06:26,020 --> 01:06:27,550
We're going to invest x--

1352
01:06:27,550 --> 01:06:31,900
I mean, you
shouldn't, but you do.

1353
01:06:31,900 --> 01:06:33,790
We're going to
invest x this year.

1354
01:06:33,790 --> 01:06:36,490
Your job is to figure out
how best to invest it,

1355
01:06:36,490 --> 01:06:43,390
as opposed to saying anything
that has a positive net

1356
01:06:43,390 --> 01:06:45,850
present value, we'll
figure out how to fund it.

1357
01:06:45,850 --> 01:06:48,190
And if you a great project--

1358
01:06:48,190 --> 01:06:53,200
and this is a way of just doing
a regular systematic budgeting

1359
01:06:53,200 --> 01:06:53,830
process.

1360
01:06:53,830 --> 01:06:59,770
If you come up with a
great, big, big project,

1361
01:06:59,770 --> 01:07:01,600
then you go to top
management and you say,

1362
01:07:01,600 --> 01:07:04,300
I know this is over the
capital budget, but.

1363
01:07:04,300 --> 01:07:07,060
But for little things like
this, and for this company,

1364
01:07:07,060 --> 01:07:10,270
this is probably a
relatively small project.

1365
01:07:10,270 --> 01:07:13,900
Darren doesn't have the
discretion to do it himself.

1366
01:07:13,900 --> 01:07:16,900
Routine things, he
probably has a limit.

1367
01:07:16,900 --> 01:07:22,930
You have a spending limit
without approval of $20,000

1368
01:07:22,930 --> 01:07:24,190
maybe, maybe more.

1369
01:07:26,750 --> 01:07:29,780
For anything above that,
up to some ceiling,

1370
01:07:29,780 --> 01:07:32,060
you got to clear it with
whatever this group is

1371
01:07:32,060 --> 01:07:34,340
that is full of skeptics.

1372
01:07:34,340 --> 01:07:38,570
Beyond that, the group has to
go and say to top management,

1373
01:07:38,570 --> 01:07:43,430
I know you only gave us $800,000
for the formaldehyde division.

1374
01:07:43,430 --> 01:07:47,510
But we have this great idea,
and we'd like to present it.

1375
01:07:47,510 --> 01:07:56,270
So it economizes is on top
management time to some extent.

1376
01:07:56,270 --> 01:08:03,000
It also gives you an
orderly budgeting process,

1377
01:08:03,000 --> 01:08:05,250
so you can predict cash flows.

1378
01:08:05,250 --> 01:08:08,850
But it imposes this
kind of constraint.

1379
01:08:08,850 --> 01:08:11,790
I mean, capital
budgeting processes do.

1380
01:08:11,790 --> 01:08:14,029
At some point, somebody
sits in the room--

1381
01:08:14,029 --> 01:08:16,029
you've got a good project,
I got a good project.

1382
01:08:16,029 --> 01:08:17,910
We don't have money for both.

1383
01:08:17,910 --> 01:08:21,330
And they're not so good that
we can get money for both.

1384
01:08:21,330 --> 01:08:23,939
We need to choose.

1385
01:08:23,939 --> 01:08:27,533
And there is a tendency
to say we want to grow.

1386
01:08:27,533 --> 01:08:28,200
We want to grow.

1387
01:08:28,200 --> 01:08:32,010
That is an issue that
investments in efficiency

1388
01:08:32,010 --> 01:08:35,895
and conservation
traditionally face

1389
01:08:35,895 --> 01:08:37,520
because they're not
growth investments,

1390
01:08:37,520 --> 01:08:39,222
and people like growth.

1391
01:08:39,222 --> 01:08:39,764
[? Obeida? ?]

1392
01:08:39,764 --> 01:08:41,347
AUDIENCE: I also
[INAUDIBLE] mentioned

1393
01:08:41,347 --> 01:08:43,319
this about the second
point, but it might

1394
01:08:43,319 --> 01:08:44,805
be 2% of revenue for one plant.

1395
01:08:44,805 --> 01:08:46,305
But what if you
have several plants?

1396
01:08:46,305 --> 01:08:46,805
[INAUDIBLE]

1397
01:08:46,805 --> 01:08:48,680
RICHARD SCHMALENSEE: If
it's like this plant,

1398
01:08:48,680 --> 01:08:51,110
it's 2% of revenue
for all plants, right.

1399
01:08:51,110 --> 01:08:54,149
AUDIENCE: If you install the
system at a number of plants,

1400
01:08:54,149 --> 01:08:56,040
you could easily
end up with revenue

1401
01:08:56,040 --> 01:08:58,075
like savings in the millions.

1402
01:08:58,075 --> 01:09:00,450
RICHARD SCHMALENSEE: You could
end up with a good number.

1403
01:09:00,450 --> 01:09:03,689
It would still be 2% of
revenue probably on that order.

1404
01:09:03,689 --> 01:09:04,550
OK, yeah.

1405
01:09:08,850 --> 01:09:11,460
Another way to do
that argument--

1406
01:09:11,460 --> 01:09:17,760
and it's a little variation on
the first one, would be, look,

1407
01:09:17,760 --> 01:09:20,740
guys, we can lead the
way for the company,

1408
01:09:20,740 --> 01:09:23,580
whatever this group is
that's approving the budget.

1409
01:09:23,580 --> 01:09:27,240
If this works here, and we're
very confident it works,

1410
01:09:27,240 --> 01:09:30,090
we're going to get a lot
of points with the company,

1411
01:09:30,090 --> 01:09:33,840
because we led the way
to 2% of revenue savings

1412
01:09:33,840 --> 01:09:36,329
in all of our
formaldehyde operations.

1413
01:09:36,329 --> 01:09:38,590
Or maybe it's not 2% everywhere.

1414
01:09:38,590 --> 01:09:41,840
We've got to run the numbers.

1415
01:09:41,840 --> 01:09:44,000
Electricity is
probably particularly

1416
01:09:44,000 --> 01:09:45,500
expensive in upstate New York.

1417
01:09:45,500 --> 01:09:46,910
It would be cheaper in Ohio.

1418
01:09:46,910 --> 01:09:49,850
But that's where
I'd go with that.

1419
01:09:49,850 --> 01:09:54,170
I wouldn't say 2% is--

1420
01:09:54,170 --> 01:09:57,050
2% is big if I multiply
it by a large number.

1421
01:09:57,050 --> 01:09:59,630
I would say it's
in our interest,

1422
01:09:59,630 --> 01:10:01,610
as the group sitting
around the table,

1423
01:10:01,610 --> 01:10:07,460
to demonstrate to the guys
up above that we can do this.

1424
01:10:07,460 --> 01:10:09,210
OK, here's another one.

1425
01:10:09,210 --> 01:10:10,130
This is a killer.

1426
01:10:13,490 --> 01:10:16,970
Our bonuses depend
on production.

1427
01:10:16,970 --> 01:10:19,098
That's how we do it.

1428
01:10:19,098 --> 01:10:21,140
And you're telling me it's
five days of downtime,

1429
01:10:21,140 --> 01:10:23,930
and we can recover from it.

1430
01:10:23,930 --> 01:10:26,270
But we don't know we
can recover from it.

1431
01:10:26,270 --> 01:10:30,320
You're putting my trip
to the Caribbean at risk,

1432
01:10:30,320 --> 01:10:33,480
and it's very cold in upstate
New York in the winter.

1433
01:10:33,480 --> 01:10:36,470
I need that bonus.

1434
01:10:36,470 --> 01:10:39,730
This is a risk.

1435
01:10:39,730 --> 01:10:41,190
What's your response, Casey?

1436
01:10:41,190 --> 01:10:41,920
You look ready.

1437
01:10:41,920 --> 01:10:43,530
You are ready on
this one, am I right?

1438
01:10:43,530 --> 01:10:45,600
AUDIENCE: Well,
first, they might

1439
01:10:45,600 --> 01:10:49,020
be able to switch their
production schedule to account

1440
01:10:49,020 --> 01:10:50,790
for take those
five days off then,

1441
01:10:50,790 --> 01:10:53,340
because they're not running
at full capacity all the time

1442
01:10:53,340 --> 01:10:53,995
anyway.

1443
01:10:53,995 --> 01:10:55,620
RICHARD SCHMALENSEE:
The case leads you

1444
01:10:55,620 --> 01:10:57,920
to some optimism, yes.

1445
01:10:57,920 --> 01:11:02,820
AUDIENCE: And then,
additionally, you

1446
01:11:02,820 --> 01:11:05,720
can just go back to the
[? handy ?] argument

1447
01:11:05,720 --> 01:11:08,790
that businesses need
to produce money,

1448
01:11:08,790 --> 01:11:11,428
but they don't necessarily
need to maximize their funding.

1449
01:11:11,428 --> 01:11:14,360
So we can do this [INAUDIBLE].

1450
01:11:14,360 --> 01:11:16,850
RICHARD SCHMALENSEE:
But this last point

1451
01:11:16,850 --> 01:11:19,540
isn't about the business.

1452
01:11:19,540 --> 01:11:21,748
It's about my trip
to the Caribbean.

1453
01:11:21,748 --> 01:11:24,500
[LAUGHS]

1454
01:11:24,500 --> 01:11:28,370
And I care about that.

1455
01:11:28,370 --> 01:11:29,658
This one's tough.

1456
01:11:29,658 --> 01:11:31,700
I don't mean to put you
particularly on the spot,

1457
01:11:31,700 --> 01:11:32,575
but this one's tough.

1458
01:11:32,575 --> 01:11:37,490
If you've got the compensation
structure set in such a way

1459
01:11:37,490 --> 01:11:41,180
that it biases toward
growth and towards revenue,

1460
01:11:41,180 --> 01:11:42,890
this is a tough one.

1461
01:11:42,890 --> 01:11:43,418
Charlotte?

1462
01:11:43,418 --> 01:11:44,960
AUDIENCE: You can--
back to the point

1463
01:11:44,960 --> 01:11:48,110
that we made on the
last objection, where

1464
01:11:48,110 --> 01:11:51,430
if you're the first plant to
start [INAUDIBLE] something

1465
01:11:51,430 --> 01:11:53,390
that saves your
company 2% in revenue,

1466
01:11:53,390 --> 01:11:58,122
and adds other plants then
the heads of organization

1467
01:11:58,122 --> 01:12:03,023
will look favorably on
you, and [INAUDIBLE]..

1468
01:12:03,023 --> 01:12:04,940
RICHARD SCHMALENSEE: We
can get a bigger bonus

1469
01:12:04,940 --> 01:12:07,760
if we can sell this.

1470
01:12:07,760 --> 01:12:09,136
Tough argument.

1471
01:12:09,136 --> 01:12:11,120
It's one you'd try, though.

1472
01:12:11,120 --> 01:12:11,760
David.

1473
01:12:11,760 --> 01:12:13,865
AUDIENCE: You would
get a promotion

1474
01:12:13,865 --> 01:12:15,590
if you can
demonstrate initiative

1475
01:12:15,590 --> 01:12:17,060
among your scale of thinking.

1476
01:12:17,060 --> 01:12:20,690
Because if you don't do it,
and someone else implements it,

1477
01:12:20,690 --> 01:12:23,872
they might displace
you [INAUDIBLE]..

1478
01:12:23,872 --> 01:12:25,580
RICHARD SCHMALENSEE:
It works for Darren.

1479
01:12:25,580 --> 01:12:28,250
It might not work for the
guys one notch above Darren.

1480
01:12:28,250 --> 01:12:28,970
It might, though.

1481
01:12:28,970 --> 01:12:30,050
It might.

1482
01:12:30,050 --> 01:12:32,180
Look, if you guys
all get behind this,

1483
01:12:32,180 --> 01:12:34,430
we'll all ride up
the ladder together.

1484
01:12:34,430 --> 01:12:35,772
Martha.

1485
01:12:35,772 --> 01:12:39,550
AUDIENCE: Going back to
what was said about how,

1486
01:12:39,550 --> 01:12:41,090
after your investment
was returned,

1487
01:12:41,090 --> 01:12:42,890
you'll be continuing
to save money.

1488
01:12:42,890 --> 01:12:45,230
So your close may
be less this year,

1489
01:12:45,230 --> 01:12:47,506
but they do much
greater in future years,

1490
01:12:47,506 --> 01:12:49,890
while they're able to start
expanding that growth,

1491
01:12:49,890 --> 01:12:51,390
and we're able to start--

1492
01:12:51,390 --> 01:12:53,910
so maybe instead of going
to the Caribbean this year,

1493
01:12:53,910 --> 01:12:57,030
you go to Vale or something.

1494
01:12:57,030 --> 01:12:59,490
[LAUGHTER]

1495
01:12:59,490 --> 01:13:03,400
But five years down the road,
you can go to Jurassic Park.

1496
01:13:03,400 --> 01:13:04,210
I don't know.

1497
01:13:04,210 --> 01:13:06,210
RICHARD SCHMALENSEE: Hey,
ski in the Adirondacks

1498
01:13:06,210 --> 01:13:07,590
instead of skiing in Vermont.

1499
01:13:07,590 --> 01:13:08,250
I don't know.

1500
01:13:08,250 --> 01:13:11,550
OK, anybody else?

1501
01:13:11,550 --> 01:13:12,050
OK.

1502
01:13:17,680 --> 01:13:18,640
How about that?

1503
01:13:18,640 --> 01:13:21,160
The case talks about
all these policies.

1504
01:13:21,160 --> 01:13:24,512
There's this killswitch problem.

1505
01:13:24,512 --> 01:13:26,470
There are other policies
about interconnection.

1506
01:13:26,470 --> 01:13:28,640
They're still in flux.

1507
01:13:28,640 --> 01:13:30,610
Maybe what we ought to
do-- it's a good idea.

1508
01:13:30,610 --> 01:13:31,750
OK, you've sold me.

1509
01:13:31,750 --> 01:13:33,290
It's a good idea.

1510
01:13:33,290 --> 01:13:37,170
Why don't we just wait?

1511
01:13:37,170 --> 01:13:38,550
Let's just let
this stuff settle.

1512
01:13:44,615 --> 01:13:46,310
Maybe if we do it
now, we'll have

1513
01:13:46,310 --> 01:13:48,230
to take precautions
we wouldn't have

1514
01:13:48,230 --> 01:13:51,440
to take if they apply more
sensible policies down

1515
01:13:51,440 --> 01:13:53,780
the road.

1516
01:13:53,780 --> 01:13:54,280
David.

1517
01:13:54,280 --> 01:13:56,260
AUDIENCE: You could argue
none of the competitors

1518
01:13:56,260 --> 01:13:57,640
are doing it now,
so doing it now

1519
01:13:57,640 --> 01:14:00,240
gives us a competitive
advantage versus in the future,

1520
01:14:00,240 --> 01:14:04,677
competitors are
already [INAUDIBLE]..

1521
01:14:04,677 --> 01:14:06,010
RICHARD SCHMALENSEE: But we are.

1522
01:14:06,010 --> 01:14:07,990
But suppose the policy
goes against us.

1523
01:14:07,990 --> 01:14:11,020
Suppose instead of
making it easier

1524
01:14:11,020 --> 01:14:14,410
to interconnect that the
policy change makes it harder.

1525
01:14:14,410 --> 01:14:17,560
It requires us to put on
more protective devices--

1526
01:14:17,560 --> 01:14:20,470
let's say $200,000 worth.

1527
01:14:20,470 --> 01:14:22,210
And then, all of a sudden--

1528
01:14:22,210 --> 01:14:24,910
that's extreme.

1529
01:14:24,910 --> 01:14:30,550
But all of a sudden, the
policies we were counting on,

1530
01:14:30,550 --> 01:14:32,290
the ability to
sell excess power,

1531
01:14:32,290 --> 01:14:35,350
which is still in
flux at this point,

1532
01:14:35,350 --> 01:14:36,640
it turns out we can't sell it.

1533
01:14:36,640 --> 01:14:40,540
Turns out we need to
have more protection.

1534
01:14:40,540 --> 01:14:43,680
Maybe we should wait.

1535
01:14:43,680 --> 01:14:47,040
Claudia, what do you say?

1536
01:14:47,040 --> 01:14:48,780
You sold up with the skeptics?

1537
01:14:48,780 --> 01:14:51,540
I mean, that's
not a crazy point.

1538
01:14:51,540 --> 01:14:52,330
No.

1539
01:14:52,330 --> 01:14:58,200
AUDIENCE: If it tends to
approach local regulators

1540
01:14:58,200 --> 01:15:03,330
directly and [INAUDIBLE]
make a point of [INAUDIBLE]..

1541
01:15:03,330 --> 01:15:05,910
RICHARD SCHMALENSEE: Well, one
thing Darren might have done

1542
01:15:05,910 --> 01:15:10,350
is he might have not
necessarily approached them.

1543
01:15:10,350 --> 01:15:13,200
But he might try to
get a feel from, say,

1544
01:15:13,200 --> 01:15:14,460
his local representative.

1545
01:15:14,460 --> 01:15:18,000
A lot of this stuff is
going on at the state level.

1546
01:15:18,000 --> 01:15:20,268
He's running a
pretty big operation.

1547
01:15:20,268 --> 01:15:21,810
He's one of the
great polluters-- no,

1548
01:15:21,810 --> 01:15:24,900
one of the great
operations in the area.

1549
01:15:24,900 --> 01:15:27,130
He might make a phone
call and say, look,

1550
01:15:27,130 --> 01:15:29,380
can you tell me where
this stuff stands?

1551
01:15:29,380 --> 01:15:32,970
I mean, is it going to get
resolved in six months,

1552
01:15:32,970 --> 01:15:35,040
or is this a five-year
marathon and it'll

1553
01:15:35,040 --> 01:15:36,930
get changed every so often.

1554
01:15:36,930 --> 01:15:37,650
That matters.

1555
01:15:37,650 --> 01:15:40,260
If it's going to get resolved
in six months, let's wait.

1556
01:15:40,260 --> 01:15:44,650
If it's going to be debated for
the next 10 years, why wait?

1557
01:15:44,650 --> 01:15:45,150
Ariana.

1558
01:15:45,150 --> 01:15:46,590
AUDIENCE: I think
this is where it

1559
01:15:46,590 --> 01:15:48,780
would have come in useful
for him to have made

1560
01:15:48,780 --> 01:15:51,690
a more pessimistic analysis.

1561
01:15:51,690 --> 01:15:54,300
And so maybe you do that first.

1562
01:15:54,300 --> 01:15:56,227
And then you say,
like, OK, well--

1563
01:15:56,227 --> 01:15:57,810
because, I mean,
when we looked at it,

1564
01:15:57,810 --> 01:15:59,952
it looked like, even if
some of the estimates

1565
01:15:59,952 --> 01:16:01,410
were a little bit
more pessimistic,

1566
01:16:01,410 --> 01:16:04,410
or you couldn't get the
grant that you wanted maybe,

1567
01:16:04,410 --> 01:16:06,930
or you estimated it with
some of the policies

1568
01:16:06,930 --> 01:16:08,370
not falling your way.

1569
01:16:08,370 --> 01:16:11,370
And you could still-- maybe the
profit wouldn't be as large.

1570
01:16:11,370 --> 01:16:13,440
But in the long run,
it's still worth it.

1571
01:16:13,440 --> 01:16:15,040
And you could come
and say like, look,

1572
01:16:15,040 --> 01:16:17,430
this is what I think
is going to happen.

1573
01:16:17,430 --> 01:16:18,730
I mean, you never really know.

1574
01:16:18,730 --> 01:16:20,460
And even if it goes
a little bit sour,

1575
01:16:20,460 --> 01:16:22,930
like we still are making
some kind of profit.

1576
01:16:22,930 --> 01:16:26,410
So it's worth it anyway.

1577
01:16:26,410 --> 01:16:30,720
RICHARD SCHMALENSEE: OK,
let me go to one last one.

1578
01:16:30,720 --> 01:16:33,930
Who'd like to make
the elevator pitch?

1579
01:16:33,930 --> 01:16:35,610
Is there a spin he
can put on this.

1580
01:16:35,610 --> 01:16:39,690
So he walked in with
his spreadsheet.

1581
01:16:39,690 --> 01:16:45,600
He got all these arguments, all
these nay-saying nitpickers.

1582
01:16:45,600 --> 01:16:48,750
What do you stand up and say?

1583
01:16:48,750 --> 01:16:50,130
What do you stand up and say?

1584
01:16:50,130 --> 01:16:52,297
Caroline, are you ready
with an elevator pitch here?

1585
01:16:52,297 --> 01:16:54,210
You ready with a
one minute speech

1586
01:16:54,210 --> 01:16:57,330
to make the committee turn
around and charge out the door

1587
01:16:57,330 --> 01:17:00,584
and go to the CEO and do it?

1588
01:17:00,584 --> 01:17:03,783
AUDIENCE: [INAUDIBLE]

1589
01:17:03,783 --> 01:17:05,750
RICHARD SCHMALENSEE:
Not quite ready, OK.

1590
01:17:05,750 --> 01:17:07,240
Anybody?

1591
01:17:07,240 --> 01:17:08,620
[? Albina, ?]
you're ready today?

1592
01:17:08,620 --> 01:17:09,370
AUDIENCE: OK.

1593
01:17:09,370 --> 01:17:10,710
that's good.

1594
01:17:10,710 --> 01:17:11,710
Sorry to disappoint you.

1595
01:17:11,710 --> 01:17:13,793
I don't have an elevator
pitch, but I'm curious as

1596
01:17:13,793 --> 01:17:16,420
to what the outcome was of
this case, because it's not

1597
01:17:16,420 --> 01:17:17,030
[INAUDIBLE].

1598
01:17:17,030 --> 01:17:18,550
RICHARD SCHMALENSEE: Let
me fish one more time

1599
01:17:18,550 --> 01:17:19,630
for an elevator pitch.

1600
01:17:19,630 --> 01:17:22,930
And then I'll tell you what I
think happened, which is not

1601
01:17:22,930 --> 01:17:25,000
unrelated to that question.

1602
01:17:25,000 --> 01:17:26,246
Max?

1603
01:17:26,246 --> 01:17:28,704
AUDIENCE: You want to appeal
to the interests of the board,

1604
01:17:28,704 --> 01:17:30,496
and their interest is
always the production

1605
01:17:30,496 --> 01:17:31,610
and maximizing profits.

1606
01:17:31,610 --> 01:17:36,490
So emphasizing the fact that
this short-term investment will

1607
01:17:36,490 --> 01:17:40,600
save a lot of money in the
long run, which you can in turn

1608
01:17:40,600 --> 01:17:43,780
invest in greater production
in the future, which

1609
01:17:43,780 --> 01:17:45,190
will give them bigger bonuses.

1610
01:17:45,190 --> 01:17:47,230
You can also appeal, I think--

1611
01:17:47,230 --> 01:17:50,380
it deals with a couple of points
to the safety of the workers

1612
01:17:50,380 --> 01:17:53,020
and to the integrity
of the whole plant.

1613
01:17:53,020 --> 01:17:54,740
In the article, it
talked about the ice

1614
01:17:54,740 --> 01:17:56,740
being a hazard for the
workers and the corrosion

1615
01:17:56,740 --> 01:18:01,008
of some of the structure of the
building [INAUDIBLE] as well.

1616
01:18:01,008 --> 01:18:02,800
RICHARD SCHMALENSEE:
What I think happened,

1617
01:18:02,800 --> 01:18:06,040
and it's not unrelated, to that
my understanding-- and I've

1618
01:18:06,040 --> 01:18:09,850
tried to verify it and I'll
see if I can do it next time,

1619
01:18:09,850 --> 01:18:12,100
is that in fact,
when he presented it

1620
01:18:12,100 --> 01:18:15,820
to the review operation,
it was turned down

1621
01:18:15,820 --> 01:18:19,120
for all of those reasons.

1622
01:18:19,120 --> 01:18:24,850
And he managed to get the ear,
one way or another, of the CEO,

1623
01:18:24,850 --> 01:18:29,930
and he pitched it as
industry leadership,

1624
01:18:29,930 --> 01:18:32,900
green public relations.

1625
01:18:32,900 --> 01:18:34,520
Economics are OK.

1626
01:18:34,520 --> 01:18:37,755
Economics are pretty
good, so we're not

1627
01:18:37,755 --> 01:18:39,380
going to lose money
on this investment.

1628
01:18:39,380 --> 01:18:42,920
But moreover, think about what
we can say to the community.

1629
01:18:42,920 --> 01:18:44,960
Think about what we
can say to the workers.

1630
01:18:44,960 --> 01:18:47,720
Think about what you can say
at the next industry convention

1631
01:18:47,720 --> 01:18:51,590
when you stand up and give
your leadership speech.

1632
01:18:51,590 --> 01:18:52,553
We'll get benefits.

1633
01:18:52,553 --> 01:18:53,720
I mean, we're venting steam.

1634
01:18:53,720 --> 01:18:55,845
It's not hurting anybody,
but it doesn't look good.

1635
01:18:55,845 --> 01:18:57,510
It's got to look better.

1636
01:18:57,510 --> 01:19:01,400
So he went around these
guys, is my understanding,

1637
01:19:01,400 --> 01:19:05,270
and pitched it as
an opportunity--

1638
01:19:05,270 --> 01:19:08,918
and not just an
economic opportunity.

1639
01:19:08,918 --> 01:19:10,085
He overstated the economics.

1640
01:19:10,085 --> 01:19:12,740
The economics are OK.

1641
01:19:12,740 --> 01:19:15,080
But he pitched it
as an opportunity.

1642
01:19:15,080 --> 01:19:21,410
And we'll see next week, and
we will see after the vacation,

1643
01:19:21,410 --> 01:19:26,060
that whether you view something
as a threat or an opportunity

1644
01:19:26,060 --> 01:19:29,510
makes a lot of difference
as to how you act on it.

1645
01:19:29,510 --> 01:19:31,660
Thank you very much.