WEBVTT 00:00:00.000 --> 00:00:02.520 The following content is provided under a Creative 00:00:02.520 --> 00:00:03.970 Commons license. 00:00:03.970 --> 00:00:06.360 Your support will help MIT OpenCourseWare 00:00:06.360 --> 00:00:10.660 continue to offer high quality educational resources for free. 00:00:10.660 --> 00:00:13.320 To make a donation or view additional materials 00:00:13.320 --> 00:00:17.190 from hundreds of MIT courses, visit MIT OpenCourseWare 00:00:17.190 --> 00:00:18.370 at ocw.mit.edu. 00:00:25.640 --> 00:00:28.140 RICHARD SCHMALENSEE: Let's march ahead into upstate New York 00:00:28.140 --> 00:00:31.230 and do formaldehyde. 00:00:31.230 --> 00:00:35.710 But first, there's a what should business do issue 00:00:35.710 --> 00:00:38.210 that I should have brought up last time. 00:00:38.210 --> 00:00:40.690 So I'll bring it up now, because I didn't. 00:00:40.690 --> 00:00:43.430 This is super PACs. 00:00:43.430 --> 00:00:46.310 How many people know what the Citizens United 00:00:46.310 --> 00:00:47.720 decision is or was? 00:00:47.720 --> 00:00:49.477 AUDIENCE: [INAUDIBLE] 00:00:49.477 --> 00:00:51.560 RICHARD SCHMALENSEE: So well, it's more than that. 00:00:51.560 --> 00:00:52.260 Yes, a few. 00:00:52.260 --> 00:00:54.310 Let me just walk through a little bit. 00:00:54.310 --> 00:00:58.740 So before 2010, basically, corporations and unions-- 00:00:58.740 --> 00:01:02.820 well, they still can't make direct contributions 00:01:02.820 --> 00:01:08.100 to candidates, they could fund independent organizations 00:01:08.100 --> 00:01:09.820 that put up political ads. 00:01:09.820 --> 00:01:14.650 But the political ads couldn't be near elections, et cetera, 00:01:14.650 --> 00:01:15.760 et cetera. 00:01:15.760 --> 00:01:20.850 Now, after this decision they can do essentially anything, 00:01:20.850 --> 00:01:24.430 as long as it's not formally part of a campaign. 00:01:24.430 --> 00:01:27.360 So if you've been following this year's 00:01:27.360 --> 00:01:30.090 Republican primary season, there are 00:01:30.090 --> 00:01:34.120 a lot of super PAC ads targeting one candidate or another. 00:01:34.120 --> 00:01:38.080 Most of it's negative, and there's a lot of money. 00:01:38.080 --> 00:01:41.190 The question is, you're the head of a publicly traded 00:01:41.190 --> 00:01:41.910 corporation. 00:01:41.910 --> 00:01:45.420 You can now make major political contributions. 00:01:45.420 --> 00:01:49.740 The corporation can now make major political contributions. 00:01:49.740 --> 00:01:51.930 Should you? 00:01:51.930 --> 00:01:55.440 Should you, or when should you? 00:01:55.440 --> 00:01:57.732 Stephen, what do you think. 00:01:57.732 --> 00:01:59.440 AUDIENCE: I think they should be able to. 00:01:59.440 --> 00:02:00.750 RICHARD SCHMALENSEE: They're able to. 00:02:00.750 --> 00:02:01.875 I'm not talking about that. 00:02:01.875 --> 00:02:02.995 Should they? 00:02:02.995 --> 00:02:03.870 AUDIENCE: [INAUDIBLE] 00:02:03.870 --> 00:02:05.550 RICHARD SCHMALENSEE: You're the CEO of-- 00:02:05.550 --> 00:02:06.720 oh, pick your favorite. 00:02:06.720 --> 00:02:09.120 You're the CEO of Apple. 00:02:09.120 --> 00:02:12.150 Should you-- and Apple's got a lot of cash. 00:02:12.150 --> 00:02:16.530 Should you spend some of it to give some of it 00:02:16.530 --> 00:02:21.840 to a super PAC which has a political agenda that you know? 00:02:21.840 --> 00:02:22.613 That's all. 00:02:22.613 --> 00:02:24.030 AUDIENCE: At the end of the day, I 00:02:24.030 --> 00:02:27.180 think there is no harm in doing so, because I would recommend 00:02:27.180 --> 00:02:29.340 or I would eventually do that, just 00:02:29.340 --> 00:02:32.477 because when we have all these different candidates that 00:02:32.477 --> 00:02:34.810 could potentially move things in a different direction-- 00:02:34.810 --> 00:02:38.070 especially for a company like Apple that relies heavily 00:02:38.070 --> 00:02:41.905 on foreign countries to do some of their manufacturing, 00:02:41.905 --> 00:02:44.280 or some of their new products coming out in other related 00:02:44.280 --> 00:02:47.190 patents, it could be very favorable for them 00:02:47.190 --> 00:02:50.220 see a certain type of political candidate in office 00:02:50.220 --> 00:02:51.340 rather than someone else. 00:02:51.340 --> 00:02:52.965 RICHARD SCHMALENSEE: So you would do it 00:02:52.965 --> 00:02:55.210 where the corporation's interests were 00:02:55.210 --> 00:02:58.010 likely to be directly affected. 00:02:58.010 --> 00:03:00.530 Any other reason you might do it? 00:03:00.530 --> 00:03:02.110 AUDIENCE: I would also do it-- 00:03:02.110 --> 00:03:05.000 as could also do it as more of a publicity type of thing, 00:03:05.000 --> 00:03:07.430 where [INAUDIBLE] [? saying ?] we're 00:03:07.430 --> 00:03:09.470 in favor of this green energy Initiative. 00:03:09.470 --> 00:03:13.040 And we would like to see our candidates support it 00:03:13.040 --> 00:03:14.450 in that area. 00:03:14.450 --> 00:03:16.655 RICHARD SCHMALENSEE: OK, David, you with him? 00:03:16.655 --> 00:03:19.740 AUDIENCE: Yeah, I agree that-- 00:03:19.740 --> 00:03:24.440 I mean the [INAUDIBLE] as a CEO, I 00:03:24.440 --> 00:03:29.540 would probably donate some money if there was a direct impact. 00:03:29.540 --> 00:03:33.445 But also, again, for PR, [INAUDIBLE] accomplish 00:03:33.445 --> 00:03:35.070 [? as far as the ?] company in general, 00:03:35.070 --> 00:03:38.600 I think Apple gave money to a political action candidate 00:03:38.600 --> 00:03:41.090 opposing the gay marriage [? act ?] in California. 00:03:41.090 --> 00:03:43.240 So that's [INAUDIBLE] part of [? the ?] initiative 00:03:43.240 --> 00:03:44.282 [INAUDIBLE] push forward. 00:03:44.282 --> 00:03:45.907 RICHARD SCHMALENSEE: I think that might 00:03:45.907 --> 00:03:47.360 have been Apple's regular PAC. 00:03:47.360 --> 00:03:49.318 I don't think it was a super-- maybe I'm wrong. 00:03:49.318 --> 00:03:50.300 I think the regular-- 00:03:50.300 --> 00:03:52.550 the regular PACs, let me describe it. 00:03:52.550 --> 00:03:54.020 They've existed for a long time. 00:03:54.020 --> 00:03:57.680 The regular PAC's where the executives of the company 00:03:57.680 --> 00:03:59.840 contribute money. 00:03:59.840 --> 00:04:04.290 The super PAC is where the company contributes money. 00:04:04.290 --> 00:04:06.350 There's a big difference. 00:04:06.350 --> 00:04:09.290 One is the executive's own money-- executives 00:04:09.290 --> 00:04:12.680 or board members, and the other is my money 00:04:12.680 --> 00:04:15.280 is a shareholder of Apple. 00:04:15.280 --> 00:04:18.709 But if it directly affects the corporation, I take the point. 00:04:18.709 --> 00:04:21.700 But you do it for publicity and you do it 00:04:21.700 --> 00:04:24.430 for a variety of causes. 00:04:24.430 --> 00:04:29.140 So I'm a right-wing Republican who owns Apple stock. 00:04:29.140 --> 00:04:33.380 Do I like you giving to a green PAC? 00:04:33.380 --> 00:04:34.490 You don't care, OK. 00:04:34.490 --> 00:04:35.470 [LAUGHS] 00:04:35.470 --> 00:04:37.303 AUDIENCE: [INAUDIBLE] [? also ?] [INAUDIBLE] 00:04:37.303 --> 00:04:46.280 Apple shares if the [INAUDIBLE] in the political [INAUDIBLE] 00:04:46.280 --> 00:04:48.100 is really that offensive [INAUDIBLE].. 00:04:48.100 --> 00:04:50.100 RICHARD SCHMALENSEE: Anybody from the other side 00:04:50.100 --> 00:04:50.780 of the room? 00:04:50.780 --> 00:04:52.200 Vivian, what do you think? 00:04:52.200 --> 00:04:54.182 AUDIENCE: Sorry, I [INAUDIBLE]. 00:04:54.182 --> 00:04:55.990 I don't really know where we're at. 00:04:55.990 --> 00:04:57.365 RICHARD SCHMALENSEE: The question 00:04:57.365 --> 00:05:00.370 is, should a corporation, let's say Apple, take 00:05:00.370 --> 00:05:03.790 a big corporation that has cash, make contributions-- 00:05:03.790 --> 00:05:04.810 not the executives. 00:05:04.810 --> 00:05:09.010 But should the CEO cause the company 00:05:09.010 --> 00:05:12.350 to make political contributions. 00:05:12.350 --> 00:05:13.220 And if so, when? 00:05:13.220 --> 00:05:14.140 And if not, why not? 00:05:17.514 --> 00:05:20.888 AUDIENCE: Do they make political contributions? 00:05:20.888 --> 00:05:24.850 RICHARD SCHMALENSEE: Should I go for the Reform America PAC 00:05:24.850 --> 00:05:27.220 that favors Ron Paul or the-- 00:05:27.220 --> 00:05:29.830 I forget what it's called PAC that favors Romney, 00:05:29.830 --> 00:05:33.852 or one of the Obama-leaning PACs or-- 00:05:33.852 --> 00:05:37.612 AUDIENCE: I think that's a really risky position to make 00:05:37.612 --> 00:05:40.902 as a [INAUDIBLE] interests of your shareholders, so-- 00:05:40.902 --> 00:05:42.860 RICHARD SCHMALENSEE: Shareholders might not all 00:05:42.860 --> 00:05:43.320 agree. 00:05:43.320 --> 00:05:43.640 AUDIENCE: Right. 00:05:43.640 --> 00:05:45.015 RICHARD SCHMALENSEE: Yeah. 00:05:45.015 --> 00:05:46.030 [INAUDIBLE] 00:05:46.030 --> 00:05:47.988 AUDIENCE: Is it in the interest of the company, 00:05:47.988 --> 00:05:51.940 like in regard to Apple with imports from other countries 00:05:51.940 --> 00:05:53.670 in terms of manufacturing. 00:05:53.670 --> 00:05:57.600 Like, it's beneficial to the company and to the shareholders 00:05:57.600 --> 00:06:00.150 to maximize value in that way? 00:06:00.150 --> 00:06:02.295 RICHARD SCHMALENSEE: So? 00:06:02.295 --> 00:06:04.170 AUDIENCE: I think it's favorable that they're 00:06:04.170 --> 00:06:06.040 doing it for the company's best interests. 00:06:06.040 --> 00:06:08.582 RICHARD SCHMALENSEE: So if it's somebody particularly focused 00:06:08.582 --> 00:06:09.755 on them. 00:06:09.755 --> 00:06:10.255 Ariana. 00:06:10.255 --> 00:06:11.460 AUDIENCE: I agree. 00:06:11.460 --> 00:06:15.210 I think that, even if the company has given donate money 00:06:15.210 --> 00:06:17.842 to a cause that you don't necessarily personally support, 00:06:17.842 --> 00:06:21.885 [INAUDIBLE] as a shareholder, you [INAUDIBLE] 00:06:21.885 --> 00:06:23.260 [? their ?] interests separately. 00:06:23.260 --> 00:06:26.760 Like, you have interest in this corporation as pertains 00:06:26.760 --> 00:06:28.680 to making a profit, and you might also 00:06:28.680 --> 00:06:30.760 have separate personal interests. 00:06:30.760 --> 00:06:32.940 And so if personally, you want to donate 00:06:32.940 --> 00:06:35.910 to whoever you think has the right position on gay marriage, 00:06:35.910 --> 00:06:37.420 I think that's fine. 00:06:37.420 --> 00:06:39.840 But you should know that the interest in the corporation 00:06:39.840 --> 00:06:41.670 is purely about making a profit. 00:06:41.670 --> 00:06:44.970 So if the corporation is supporting 00:06:44.970 --> 00:06:48.273 a cause that furthers that goal, then that's fine. 00:06:48.273 --> 00:06:50.190 RICHARD SCHMALENSEE: But gay marriage probably 00:06:50.190 --> 00:06:53.570 doesn't have a lot to do with my earnings as a shareholder. 00:06:53.570 --> 00:06:56.880 AUDIENCE: So you shouldn't be worried about the corporation 00:06:56.880 --> 00:06:59.710 getting involved in that. 00:06:59.710 --> 00:07:01.522 RICHARD SCHMALENSEE: Andrew? 00:07:01.522 --> 00:07:07.140 AUDIENCE: So one thing about allowing companies 00:07:07.140 --> 00:07:08.940 to do these sorts of things-- 00:07:08.940 --> 00:07:11.680 I think that whereas in some situations, 00:07:11.680 --> 00:07:14.550 you can see the merit directly from banks, 00:07:14.550 --> 00:07:18.420 and there's this candidate that I 00:07:18.420 --> 00:07:21.750 know it's going to force me to have higher standards and all 00:07:21.750 --> 00:07:26.220 that stuff, I might want to go for the other candidate. 00:07:26.220 --> 00:07:28.830 But I think that having these sorts of rules allows 00:07:28.830 --> 00:07:32.340 for companies to go in this murky territory, 00:07:32.340 --> 00:07:36.570 where you're influencing things you probably shouldn't. 00:07:36.570 --> 00:07:40.250 And you increase your-- 00:07:40.250 --> 00:07:41.040 in terms of-- 00:07:41.040 --> 00:07:41.610 RICHARD SCHMALENSEE: Well, you're 00:07:41.610 --> 00:07:42.945 arguing you don't like the decision. 00:07:42.945 --> 00:07:43.770 AUDIENCE: Sorry? 00:07:43.770 --> 00:07:45.060 RICHARD SCHMALENSEE: You don't like the decision. 00:07:45.060 --> 00:07:47.250 You don't like-- but the decision's there. 00:07:47.250 --> 00:07:53.130 AUDIENCE: What I'm trying to say is that a CEO doing something 00:07:53.130 --> 00:07:56.850 supposedly to improve the company's position 00:07:56.850 --> 00:08:02.190 is completely subjective, because giving money 00:08:02.190 --> 00:08:05.670 to candidate x might be interpreted as I'm doing it 00:08:05.670 --> 00:08:07.600 because I want him to support this, 00:08:07.600 --> 00:08:09.040 which is good for my company. 00:08:09.040 --> 00:08:10.650 But then there are whole other things 00:08:10.650 --> 00:08:12.180 that you're doing by doing, which 00:08:12.180 --> 00:08:13.980 I think is more of a negative publicity 00:08:13.980 --> 00:08:15.870 than positive publicity in the sense 00:08:15.870 --> 00:08:18.120 that you're influencing decision-making. 00:08:18.120 --> 00:08:20.430 Because it might be that you're doing it 00:08:20.430 --> 00:08:23.880 for him to support action A. But for action B, 00:08:23.880 --> 00:08:25.230 you also have influence on him. 00:08:25.230 --> 00:08:27.480 And then that might be that you don't 00:08:27.480 --> 00:08:29.610 want Apple to have influence on what 00:08:29.610 --> 00:08:31.358 he decides on something else. 00:08:31.358 --> 00:08:33.900 RICHARD SCHMALENSEE: I've been on the board of a company that 00:08:33.900 --> 00:08:37.049 had one of these ordinary PACs. 00:08:37.049 --> 00:08:40.460 And the directors and the officers chipped in, 00:08:40.460 --> 00:08:44.630 and we made contributions. 00:08:44.630 --> 00:08:47.210 This was a company located on Wall Street, 00:08:47.210 --> 00:08:51.950 and we were a regulated company, a securities exchange. 00:08:51.950 --> 00:08:54.770 And we made contributions to both New York senators 00:08:54.770 --> 00:08:57.020 and to the congressmen from Wall Street 00:08:57.020 --> 00:09:00.320 so that they'd return our phone calls basically. 00:09:00.320 --> 00:09:01.820 We're not going to buy influence. 00:09:01.820 --> 00:09:05.000 If they're not concerned about the fate of companies 00:09:05.000 --> 00:09:08.120 on Wall Street, then they're in a lot of trouble. 00:09:08.120 --> 00:09:11.030 But to basically get your phone call 00:09:11.030 --> 00:09:14.090 returned, you make a few thousand dollar contribution. 00:09:14.090 --> 00:09:17.240 So that's different from giving $10 million 00:09:17.240 --> 00:09:20.720 to support Newt Gingrich. 00:09:20.720 --> 00:09:23.540 So Marie, you had a point, or were you were waving? 00:09:23.540 --> 00:09:24.595 AUDIENCE: No, sorry. 00:09:24.595 --> 00:09:26.775 RICHARD SCHMALENSEE: OK, Jacob? 00:09:26.775 --> 00:09:28.230 AUDIENCE: [INAUDIBLE] a question. 00:09:28.230 --> 00:09:30.410 Is it possible for an international corporation 00:09:30.410 --> 00:09:32.970 to contribute to an American politician-- 00:09:32.970 --> 00:09:35.280 or like if it's an American company with, say, 00:09:35.280 --> 00:09:36.655 foreign executives who are making 00:09:36.655 --> 00:09:38.905 the decision whether or not appropriations [INAUDIBLE] 00:09:38.905 --> 00:09:40.428 giving money to a politician? 00:09:40.428 --> 00:09:45.360 RICHARD SCHMALENSEE: Well, if they have a subsidiary that 00:09:45.360 --> 00:09:47.310 is a US person. 00:09:47.310 --> 00:09:51.450 So if you have a subsidiary that has a US charter, 00:09:51.450 --> 00:09:54.120 then presumably, that entity can. 00:09:54.120 --> 00:09:58.380 You can't make direct contributions-- well, sorry. 00:09:58.380 --> 00:09:59.880 They can't make direct contributions 00:09:59.880 --> 00:10:01.780 to the candidate in any case. 00:10:01.780 --> 00:10:05.160 The question is, can you contribute to a super PAC? 00:10:05.160 --> 00:10:09.040 A foreign corporation doesn't have us rights of free speech. 00:10:09.040 --> 00:10:11.070 So I've never heard it brought up, 00:10:11.070 --> 00:10:13.250 but I think it could be barred. 00:10:13.250 --> 00:10:14.750 AUDIENCE: [INAUDIBLE] question about 00:10:14.750 --> 00:10:15.833 whether it should be done. 00:10:15.833 --> 00:10:18.770 RICHARD SCHMALENSEE: Well, I'd just set up a US company 00:10:18.770 --> 00:10:20.270 if I wanted to do that. 00:10:20.270 --> 00:10:22.302 AUDIENCE: Yeah, in which case could there 00:10:22.302 --> 00:10:24.640 be anti-American interests that influence 00:10:24.640 --> 00:10:25.640 [INAUDIBLE] politicians? 00:10:25.640 --> 00:10:29.045 RICHARD SCHMALENSEE: Yes, so I actually found an interesting-- 00:10:32.210 --> 00:10:34.940 there's a foundation called Sunlight Foundation. 00:10:34.940 --> 00:10:36.950 You can find them on the web. 00:10:36.950 --> 00:10:41.330 And they looked at who's making these contributions. 00:10:41.330 --> 00:10:47.020 And in fact, you don't find any publicly held contributions. 00:10:47.020 --> 00:10:50.010 I couldn't find any. 00:10:50.010 --> 00:10:52.500 Certainly no company I'd ever heard of 00:10:52.500 --> 00:10:56.430 is on the list for contributions above $25,000. $20,000 00:10:56.430 --> 00:10:58.410 actually was their cut. 00:10:58.410 --> 00:11:03.180 Lots of private corporations, individuals, unions, 00:11:03.180 --> 00:11:04.680 partnerships. 00:11:04.680 --> 00:11:07.440 The only publicly traded company I could find 00:11:07.440 --> 00:11:11.280 is CONSOL, which is a coal company as far as I can tell. 00:11:11.280 --> 00:11:12.820 I don't know them well. 00:11:12.820 --> 00:11:17.020 They gave $125,000 to a Romney PAC. 00:11:17.020 --> 00:11:21.400 And you have to ask yourself, why? 00:11:21.400 --> 00:11:24.280 I assume that's a CEO who leans Romney 00:11:24.280 --> 00:11:27.610 and whose board is captive, which is not 00:11:27.610 --> 00:11:29.620 unheard of-- that the board is composed 00:11:29.620 --> 00:11:30.940 of his friends or her friends. 00:11:30.940 --> 00:11:33.250 I don't know who the CEO is. 00:11:33.250 --> 00:11:37.990 So it's interesting that most large corporations, Apple, 00:11:37.990 --> 00:11:41.960 et cetera, are not playing this game, 00:11:41.960 --> 00:11:45.480 even though by law they can. 00:11:45.480 --> 00:11:46.710 I just find that interesting. 00:11:46.710 --> 00:11:52.690 And it has to do with what they think their role as CEO is 00:11:52.690 --> 00:11:54.380 and how they should behave. 00:11:54.380 --> 00:11:56.860 As I said, I could only find one publicly traded company. 00:11:56.860 --> 00:12:01.540 There are a lot of so-and-so family company contributes, 00:12:01.540 --> 00:12:03.190 and that's a family company. 00:12:03.190 --> 00:12:05.590 It's effectively a partnership. 00:12:05.590 --> 00:12:08.900 So not publicly traded. 00:12:08.900 --> 00:12:09.400 So-- 00:12:09.400 --> 00:12:10.620 AUDIENCE: [INAUDIBLE] 00:12:10.620 --> 00:12:11.870 RICHARD SCHMALENSEE: Which is? 00:12:11.870 --> 00:12:13.850 AUDIENCE: [INAUDIBLE] 00:12:13.850 --> 00:12:15.450 RICHARD SCHMALENSEE: Yeah. 00:12:15.450 --> 00:12:16.110 Yeah, yeah. 00:12:16.110 --> 00:12:16.410 Yeah. 00:12:16.410 --> 00:12:16.860 Oh yeah. 00:12:16.860 --> 00:12:17.790 AUDIENCE: [INAUDIBLE] [? already that ?] 00:12:17.790 --> 00:12:20.248 maybe all the companies don't think Romney is going to win, 00:12:20.248 --> 00:12:22.730 so nobody's putting in the money [INAUDIBLE].. 00:12:22.730 --> 00:12:24.980 RICHARD SCHMALENSEE: There is a lot of money going in. 00:12:24.980 --> 00:12:28.960 And what we don't see-- 00:12:28.960 --> 00:12:32.650 if you look at what finances senatorial and congressional 00:12:32.650 --> 00:12:36.520 campaigns, you will see plain, old, ordinary PACs 00:12:36.520 --> 00:12:39.220 contributing, like the one I described, 00:12:39.220 --> 00:12:42.520 where I want to make sure my phone call gets returned, 00:12:42.520 --> 00:12:45.500 and I want you to be sure that you worry about wheat farmers-- 00:12:45.500 --> 00:12:47.950 so the wheat Farmers Association. 00:12:47.950 --> 00:12:53.343 But it is interesting, Obama has a PAC, 00:12:53.343 --> 00:12:55.260 but they're not sure he's going to win either. 00:12:55.260 --> 00:13:02.240 So anyway, we'll come back to the lobbying and contributions. 00:13:02.240 --> 00:13:05.480 It's more for access than for votes I think. 00:13:05.480 --> 00:13:07.970 But, OK, yes, Stephen. 00:13:07.970 --> 00:13:09.700 AUDIENCE: Just a quick question for that. 00:13:09.700 --> 00:13:12.075 You mentioned that there were private companies that were 00:13:12.075 --> 00:13:13.650 still doing this type of stuff? 00:13:13.650 --> 00:13:15.525 Could it be that some of the public companies 00:13:15.525 --> 00:13:18.520 are going through those means to make their donations? 00:13:18.520 --> 00:13:20.270 RICHARD SCHMALENSEE: I think-- and they've 00:13:20.270 --> 00:13:22.760 talked about it that there are some companies that 00:13:22.760 --> 00:13:24.680 are dummy companies that get set up. 00:13:27.200 --> 00:13:30.530 But mostly, it hides rich individuals. 00:13:30.530 --> 00:13:34.470 So you can't follow through from this website. 00:13:34.470 --> 00:13:36.170 But if you read in the paper, they 00:13:36.170 --> 00:13:38.240 talk about trying to track down donors 00:13:38.240 --> 00:13:40.160 and getting a post office box. 00:13:40.160 --> 00:13:41.330 So it's a company. 00:13:41.330 --> 00:13:42.680 It has a post office box. 00:13:42.680 --> 00:13:44.780 It's legally incorporated. 00:13:44.780 --> 00:13:47.660 Its documents aren't public because it's closely held. 00:13:47.660 --> 00:13:52.160 So that's a mask behind which some rich person is hiding. 00:13:52.160 --> 00:13:56.720 I don't think it would be a sane thing for a big publicly traded 00:13:56.720 --> 00:14:00.420 company to hide that way, because if there 00:14:00.420 --> 00:14:02.820 were enough money, somebody will find it out. 00:14:02.820 --> 00:14:04.890 I mean, there's a lot. 00:14:04.890 --> 00:14:07.470 Somebody gives $1 million and they're hiding, 00:14:07.470 --> 00:14:11.010 it's a good story if you can figure out who it is. 00:14:11.010 --> 00:14:13.830 If it turns out to be Apple, it's a scandal. 00:14:13.830 --> 00:14:15.720 So that's too risky. 00:14:15.720 --> 00:14:16.710 David? 00:14:16.710 --> 00:14:18.960 AUDIENCE: Would it be possible that some of the larger 00:14:18.960 --> 00:14:22.010 companies, whose financial contributions would 00:14:22.010 --> 00:14:24.440 make a significant impact on the campaign, 00:14:24.440 --> 00:14:26.740 are companies that would already have access anyway? 00:14:26.740 --> 00:14:30.620 If Tim Cook called up the White House and said, look, 00:14:30.620 --> 00:14:33.410 we really need to talk to someone in the treasury 00:14:33.410 --> 00:14:35.840 or something, like [INAUDIBLE]? 00:14:35.840 --> 00:14:38.340 RICHARD SCHMALENSEE: Yeah, Apple doesn't need to buy access. 00:14:40.980 --> 00:14:42.930 This mining company may. 00:14:42.930 --> 00:14:46.030 Backing Romney's not the most obvious way to do it. 00:14:46.030 --> 00:14:48.390 So I assume that this is just a personal preference 00:14:48.390 --> 00:14:52.050 of somebody, and a board that says, yeah, sure it's $125,000. 00:14:52.050 --> 00:14:53.660 Who cares? 00:14:53.660 --> 00:14:55.160 We'll just cut your bonus. 00:14:55.160 --> 00:15:03.500 OK, it's an interesting issue of the role of the corporation. 00:15:03.500 --> 00:15:07.010 But it's also interesting what most of them choose to do. 00:15:07.010 --> 00:15:09.980 Let's go to upstate New York and do formaldehyde. 00:15:09.980 --> 00:15:15.510 I just answered that question, so we've lost that one. 00:15:15.510 --> 00:15:19.170 What's Darren's issue in the case? 00:15:19.170 --> 00:15:21.040 Matthew? 00:15:21.040 --> 00:15:29.724 AUDIENCE: He's [INAUDIBLE] part of [INAUDIBLE] [? opposing ?] 00:15:29.724 --> 00:15:32.958 the [INAUDIBLE]. 00:15:32.958 --> 00:15:35.250 RICHARD SCHMALENSEE: But what problem is he addressing, 00:15:35.250 --> 00:15:37.620 or what opportunities is he addressing. 00:15:37.620 --> 00:15:38.190 What's the-- 00:15:38.190 --> 00:15:39.660 AUDIENCE: [INAUDIBLE] 00:15:39.660 --> 00:15:39.960 RICHARD SCHMALENSEE: [? Other ways ?] 00:15:39.960 --> 00:15:41.520 to heat their venting. 00:15:41.520 --> 00:15:43.890 A lot of steam. 00:15:43.890 --> 00:15:44.880 Anything else it does? 00:15:44.880 --> 00:15:45.380 Scott? 00:15:45.380 --> 00:15:47.730 AUDIENCE: Also, the steam causes damage to the building, 00:15:47.730 --> 00:15:50.440 and it corrodes the materials in the building. 00:15:50.440 --> 00:15:52.740 And it also causes an ice sheet on the ground, which 00:15:52.740 --> 00:15:54.330 is dangerous for employees. 00:15:54.330 --> 00:15:56.580 RICHARD SCHMALENSEE: Lovely stuff, lovely stuff. 00:15:56.580 --> 00:15:59.770 OK that's what he's got. 00:15:59.770 --> 00:16:02.370 He has three options to deal with these 00:16:02.370 --> 00:16:03.930 that he considers first of all. 00:16:03.930 --> 00:16:05.100 Do you recall what they are? 00:16:05.100 --> 00:16:06.151 Rachel? 00:16:06.151 --> 00:16:08.560 AUDIENCE: [INAUDIBLE] 00:16:08.560 --> 00:16:11.175 RICHARD SCHMALENSEE: Yes. 00:16:11.175 --> 00:16:13.333 AUDIENCE: [INAUDIBLE] 00:16:13.333 --> 00:16:15.500 RICHARD SCHMALENSEE: Lithium bromide, bromine, yeah. 00:16:19.880 --> 00:16:21.800 Anybody got the third one? 00:16:21.800 --> 00:16:22.300 [? Wyatt? ?] 00:16:22.300 --> 00:16:25.450 AUDIENCE: Everyone [INAUDIBLE] speed the flow of water 00:16:25.450 --> 00:16:26.283 between [INAUDIBLE]. 00:16:26.283 --> 00:16:28.117 RICHARD SCHMALENSEE: Speed the flow of water 00:16:28.117 --> 00:16:29.610 through, so it just comes out hot, 00:16:29.610 --> 00:16:32.220 it doesn't come out of steam. 00:16:32.220 --> 00:16:36.990 OK, why is he focused on combined heat and power? 00:16:36.990 --> 00:16:38.590 Why is he focused on co-generation? 00:16:38.590 --> 00:16:41.310 What are the issues with the others, of the advantage 00:16:41.310 --> 00:16:43.830 of this in broad terms? 00:16:43.830 --> 00:16:45.360 Kirsten? 00:16:45.360 --> 00:16:47.914 AUDIENCE: The disadvantage for speeding up 00:16:47.914 --> 00:16:50.910 the process of producing hot water was that they didn't 00:16:50.910 --> 00:16:53.160 have a good place to put the hot water, especially 00:16:53.160 --> 00:16:53.400 in the summer. 00:16:53.400 --> 00:16:54.930 They didn't want to just dump it into the environment 00:16:54.930 --> 00:16:56.800 because that might have a detrimental effect 00:16:56.800 --> 00:16:59.288 on the environment, [INAUDIBLE]. 00:16:59.288 --> 00:17:01.830 RICHARD SCHMALENSEE: And just dump it in a cool stream, yeah. 00:17:01.830 --> 00:17:03.663 AUDIENCE: Yeah, so they said, in the winter, 00:17:03.663 --> 00:17:05.550 they could heat the buildings without using 00:17:05.550 --> 00:17:08.335 too much electricity [INAUDIBLE] going to be a problem. 00:17:08.335 --> 00:17:12.560 And [INAUDIBLE] was that it would require 00:17:12.560 --> 00:17:15.759 a lot more [INAUDIBLE] changes. 00:17:15.759 --> 00:17:17.480 RICHARD SCHMALENSEE: OK, so we focused 00:17:17.480 --> 00:17:19.160 on combined heat and power. 00:17:21.770 --> 00:17:23.795 Did anybody look at this? 00:17:26.480 --> 00:17:29.330 If it saves money, does it save much money relative 00:17:29.330 --> 00:17:30.680 to the firm's revenue-- 00:17:30.680 --> 00:17:34.165 to that plant's revenue? 00:17:34.165 --> 00:17:36.422 [? Obedah. ?] 00:17:36.422 --> 00:17:41.990 AUDIENCE: In terms of, I think, power [INAUDIBLE] 00:17:41.990 --> 00:17:44.240 cleaning the water or treating the water, so that they 00:17:44.240 --> 00:17:48.590 can make it soft, because it's usually hard, you save 75%. 00:17:48.590 --> 00:17:50.480 But that's only like $10,000 or $8,000. 00:17:50.480 --> 00:17:52.865 But they make millions upon millions of dollars. 00:17:52.865 --> 00:17:55.460 And savings are in the low hundreds of thousands. 00:17:55.460 --> 00:17:57.710 RICHARD SCHMALENSEE: Low hundreds of thousands, right. 00:17:57.710 --> 00:18:00.950 If you calculate-- there's a typo 00:18:00.950 --> 00:18:06.230 in the case where it talks about five days absence being 0.01%. 00:18:06.230 --> 00:18:07.010 It's, in fact, 1%. 00:18:07.010 --> 00:18:10.100 And if you use the other numbers, 00:18:10.100 --> 00:18:13.430 that plant has an annual revenue of about $5.1 million 00:18:13.430 --> 00:18:17.180 based on the production numbers they give. 00:18:17.180 --> 00:18:18.680 You worked the numbers, Veronica. 00:18:18.680 --> 00:18:20.330 Good. 00:18:20.330 --> 00:18:23.360 So what I get is that the savings 00:18:23.360 --> 00:18:26.990 would be maybe 2% of revenue, the pre-tax savings, 00:18:26.990 --> 00:18:29.700 to compare pre-tax to pre-tax. 00:18:29.700 --> 00:18:31.475 OK, so not a big deal. 00:18:31.475 --> 00:18:33.600 We're going to talk about whether it's a good deal, 00:18:33.600 --> 00:18:36.230 and we're going to talk about whether they'll do it. 00:18:36.230 --> 00:18:41.780 Let me just do a short riff on combined heat 00:18:41.780 --> 00:18:45.650 and power and waste energy. 00:18:45.650 --> 00:18:50.240 It's interesting, if you look at the rejected 00:18:50.240 --> 00:18:54.150 energy versus usable energy by sector-- 00:18:54.150 --> 00:18:56.180 so this is waste. 00:18:56.180 --> 00:19:01.580 Transportation, 75% of what goes in comes out as waste 00:19:01.580 --> 00:19:06.110 energy, electric generation just about a third, 00:19:06.110 --> 00:19:07.850 and every place else about 20%. 00:19:11.930 --> 00:19:14.280 And you all know the answer to that, 00:19:14.280 --> 00:19:16.130 what form the waste takes, yes? 00:19:16.130 --> 00:19:20.720 Waste energy is usually heat, yeah. 00:19:20.720 --> 00:19:27.410 So, I mean, this one, transportation's tough, 00:19:27.410 --> 00:19:32.210 because cars are not all that efficient really. 00:19:32.210 --> 00:19:35.960 But for public transportation, this is a tough one. 00:19:35.960 --> 00:19:40.520 Residential and commercial, an awful lot of the energy 00:19:40.520 --> 00:19:42.120 is going into heating and cooling. 00:19:42.120 --> 00:19:45.170 You can make it more efficient of course, 00:19:45.170 --> 00:19:47.240 but it's hard to capture. 00:19:47.240 --> 00:19:50.360 What's attractive about industrial 00:19:50.360 --> 00:19:54.020 and electricity is you have high heat. 00:19:54.020 --> 00:19:55.670 You have large delta t. 00:19:55.670 --> 00:20:00.350 You have the ability to use a big temperature differential. 00:20:00.350 --> 00:20:03.560 And that's the whole combined heat and power 00:20:03.560 --> 00:20:08.660 story, that there really are two basic forms. 00:20:08.660 --> 00:20:11.070 And the case kind of mentions it. 00:20:11.070 --> 00:20:14.060 The first is called district heating, where 00:20:14.060 --> 00:20:18.980 you take waste heat, relatively low temperature, 00:20:18.980 --> 00:20:23.210 from electric generation, and you pipe it around 00:20:23.210 --> 00:20:25.280 to heat buildings. 00:20:25.280 --> 00:20:27.710 The Danes did a lot of this. 00:20:27.710 --> 00:20:29.630 One of the readings mentions that. 00:20:29.630 --> 00:20:34.820 It's also interesting, the Soviets did a lot of it. 00:20:34.820 --> 00:20:38.720 It requires you to have power plants relatively close 00:20:38.720 --> 00:20:40.640 to offices or factories or homes, 00:20:40.640 --> 00:20:42.380 so it's not the greatest thing. 00:20:42.380 --> 00:20:46.010 And of course, it makes more sense in a cold climate. 00:20:46.010 --> 00:20:48.560 Using waste heat to heat buildings in Arizona 00:20:48.560 --> 00:20:53.600 is not necessarily a great deal. 00:20:53.600 --> 00:20:56.720 We put in subsidies in 1978-- 00:20:56.720 --> 00:20:59.570 we'll talk a little bit about PURPA at some point, 00:20:59.570 --> 00:21:05.060 that we're supposed to encourage district heating. 00:21:05.060 --> 00:21:08.630 It didn't do much for a variety of complicated reasons. 00:21:08.630 --> 00:21:11.300 It's generally acknowledged as a good thing in lots of places, 00:21:11.300 --> 00:21:14.090 but we don't do very much of it in this country 00:21:14.090 --> 00:21:15.320 for a variety of reasons. 00:21:15.320 --> 00:21:19.460 The other is electricity generation, 00:21:19.460 --> 00:21:22.830 and there are two versions. 00:21:22.830 --> 00:21:27.860 The first is basic combined cycle gas turbine, 00:21:27.860 --> 00:21:31.340 which is relatively recent-- 00:21:31.340 --> 00:21:33.500 I should be able to date it, but I 00:21:33.500 --> 00:21:37.250 can't, maybe the '70s, maybe the '80s, generation technology. 00:21:37.250 --> 00:21:39.320 That's how people are building efficient gas 00:21:39.320 --> 00:21:41.300 plants these days. 00:21:41.300 --> 00:21:47.510 You run a combustion turbine which has a hot exhaust. 00:21:47.510 --> 00:21:50.370 You recover the heat from the hot exhaust, 00:21:50.370 --> 00:21:53.660 which makes steam which drives a steam turbine. 00:21:53.660 --> 00:21:57.470 Combined cycle, CC-- so you got two cycles 00:21:57.470 --> 00:22:00.390 working and basically two generation units. 00:22:00.390 --> 00:22:03.620 This is pulled off a Siemens website. 00:22:03.620 --> 00:22:07.530 This can be a very efficient technology. 00:22:07.530 --> 00:22:10.100 and it's the same notion of capturing waste heat. 00:22:13.580 --> 00:22:15.860 All you mechanical engineers more about this than I 00:22:15.860 --> 00:22:19.890 do, but others may not. 00:22:19.890 --> 00:22:22.130 And this is the proposal. 00:22:22.130 --> 00:22:25.680 This is the kind of proposal-- this is pulled from the case. 00:22:25.680 --> 00:22:29.030 This is the kind of proposal that our friend Darren 00:22:29.030 --> 00:22:32.180 is considering. 00:22:32.180 --> 00:22:35.135 This shows a boiler, but it has to do, as you know, 00:22:35.135 --> 00:22:37.820 with the heat from that exothermic reaction that 00:22:37.820 --> 00:22:40.190 makes formaldehyde. 00:22:40.190 --> 00:22:41.630 So this is what he's considering. 00:22:41.630 --> 00:22:45.590 He's considering a simple system that takes steam 00:22:45.590 --> 00:22:49.250 to drive a turbine, generate electricity for internal use, 00:22:49.250 --> 00:22:50.540 maybe for sale. 00:22:50.540 --> 00:22:53.810 You cool it down, you recycle, it you pump it through. 00:22:53.810 --> 00:22:57.320 You will have to use some water, but you'll 00:22:57.320 --> 00:23:00.170 pull a lot of the water through. 00:23:00.170 --> 00:23:04.580 And the stuff that comes out will be basically cooling 00:23:04.580 --> 00:23:06.080 the condenser. 00:23:06.080 --> 00:23:08.630 So this is what he's got. 00:23:11.420 --> 00:23:14.450 There are a lot of benefits of this kind of system 00:23:14.450 --> 00:23:16.610 in general terms. 00:23:16.610 --> 00:23:18.673 You can reduce energy expenses. 00:23:18.673 --> 00:23:19.340 You could worry. 00:23:19.340 --> 00:23:24.680 It could avoid the risk of varying energy prices, 00:23:24.680 --> 00:23:27.890 a lot of security, good environmental benefits-- 00:23:27.890 --> 00:23:30.530 mom and apple pie. 00:23:30.530 --> 00:23:36.230 But the question that Darren faces is, is it a good deal? 00:23:36.230 --> 00:23:42.020 I want to mention two concepts that the case kind of puts 00:23:42.020 --> 00:23:46.010 forward and the spreadsheet puts forward without defining them. 00:23:46.010 --> 00:23:47.570 And I'll talk about them briefly. 00:23:47.570 --> 00:23:53.330 So if you've got a vector of cash flows CT, 00:23:53.330 --> 00:23:55.130 that's the net present value. 00:23:55.130 --> 00:23:57.950 You just discount all the cash flows. 00:23:57.950 --> 00:24:01.910 The case talks about the payback period. 00:24:01.910 --> 00:24:07.910 And the payback period is the smallest time, 00:24:07.910 --> 00:24:11.480 such that basically, you get your initial investment back, 00:24:11.480 --> 00:24:14.810 assuming there's an initial investment up front, 00:24:14.810 --> 00:24:18.680 and then returns in subsequent periods. 00:24:18.680 --> 00:24:27.230 You go out as far as you need to recover the initial investment. 00:24:27.230 --> 00:24:34.070 This is a very old-fashioned way of making investment decisions. 00:24:34.070 --> 00:24:36.650 And the problem with it is stated there, 00:24:36.650 --> 00:24:40.270 because it matters what happens after that time. 00:24:40.270 --> 00:24:43.180 I tell you that you invest $100 today, 00:24:43.180 --> 00:24:45.250 you get $50 a year from now. 00:24:45.250 --> 00:24:49.540 $50 two years from now, the payback period is two years. 00:24:49.540 --> 00:24:53.050 If that's all, that's a terrible investment. 00:24:53.050 --> 00:24:56.020 You've just given me your money for two years. 00:24:56.020 --> 00:25:00.520 What really matters is, OK, what happens after that? 00:25:00.520 --> 00:25:03.890 What happens after, and the longer the payback, all else 00:25:03.890 --> 00:25:05.890 equal, it may be the [? worse ?] the investment. 00:25:05.890 --> 00:25:10.350 But you can have a really terrible investment 00:25:10.350 --> 00:25:13.840 with a short payback period because it dies. 00:25:13.840 --> 00:25:15.990 So the case talks about it. 00:25:15.990 --> 00:25:18.960 I just want to caution you, by any sort 00:25:18.960 --> 00:25:21.900 of reasonable standard, it's something 00:25:21.900 --> 00:25:25.740 you want to look at perhaps, because it may be a horseback 00:25:25.740 --> 00:25:28.480 way of thinking about risk. 00:25:28.480 --> 00:25:30.480 After two years, we're playing with house money, 00:25:30.480 --> 00:25:31.980 because we've gotten our money back. 00:25:31.980 --> 00:25:33.105 Andrew, you have a comment. 00:25:33.105 --> 00:25:36.770 AUDIENCE: [INAUDIBLE] when I was [INAUDIBLE],, 00:25:36.770 --> 00:25:40.440 I assume that even though it's not the best metric to make 00:25:40.440 --> 00:25:43.320 a decision, you could make a metric to see when 00:25:43.320 --> 00:25:46.080 your customers are coming in terms of if I have something 00:25:46.080 --> 00:25:48.990 that has a payback period of two and a payback period of 15 00:25:48.990 --> 00:25:53.760 years, I just know that I have high risk in terms 00:25:53.760 --> 00:25:55.773 of when I get my money back with the second one. 00:25:55.773 --> 00:25:57.690 RICHARD SCHMALENSEE: No, I think that's right. 00:25:57.690 --> 00:26:01.140 But you also want to just look at the nature of the risks. 00:26:01.140 --> 00:26:05.260 If I tell you it's a bond, then you don't worry about it. 00:26:05.260 --> 00:26:07.320 If I tell you it's a nuclear plant, 00:26:07.320 --> 00:26:11.220 OK, the nuclear plant has a 20 year payback. 00:26:11.220 --> 00:26:13.680 But if it runs for 40 years, it's 00:26:13.680 --> 00:26:15.600 got a high net present value you're 00:26:15.600 --> 00:26:18.880 right to say, wait a minute an awful lot can happen-- 00:26:18.880 --> 00:26:22.170 see Germany, see Japan. 00:26:22.170 --> 00:26:23.820 So maybe I don't want to do that. 00:26:23.820 --> 00:26:26.910 But that's the main argument. 00:26:26.910 --> 00:26:32.700 The internal rate of return is also sort of interesting. 00:26:32.700 --> 00:26:37.830 You can think about the net present value as a polynomial. 00:26:37.830 --> 00:26:41.910 Well, it's a polynomial in 1 over 1 plus r. 00:26:41.910 --> 00:26:46.800 And you can say, well, suppose-- 00:26:46.800 --> 00:26:48.690 we're doing this chalkless? 00:26:48.690 --> 00:27:03.390 Suppose that this is the net present value, 00:27:03.390 --> 00:27:05.400 and this is the discount rate. 00:27:05.400 --> 00:27:09.630 Then what you might expect is that if you make 00:27:09.630 --> 00:27:12.265 an upfront investment, you get returns over time, 00:27:12.265 --> 00:27:13.890 the higher the discount rate, the lower 00:27:13.890 --> 00:27:15.720 the net present value, this point 00:27:15.720 --> 00:27:20.660 would be the internal rate of return. 00:27:20.660 --> 00:27:24.090 Now, what's interesting about that 00:27:24.090 --> 00:27:27.150 is that when the picture looks like that, 00:27:27.150 --> 00:27:30.330 you don't have to get too fussy about the discount rate, 00:27:30.330 --> 00:27:33.147 as long as it's below r star. 00:27:33.147 --> 00:27:34.230 That's what it's good for. 00:27:34.230 --> 00:27:36.750 It says, well, I know it's got a positive net present value 00:27:36.750 --> 00:27:37.380 back here. 00:27:40.930 --> 00:27:43.270 So if the discount rate's somewhere in this range, 00:27:43.270 --> 00:27:46.270 but I'm not sure where it is, I know 00:27:46.270 --> 00:27:50.660 enough to know the net present value is positive. 00:27:50.660 --> 00:28:02.060 But the graph could look like that. 00:28:05.620 --> 00:28:09.170 It could look like that if [? at ?] the end of the period, 00:28:09.170 --> 00:28:12.901 it is a nuclear reactor, and we've got to clean it up. 00:28:12.901 --> 00:28:17.870 OK, then high discount rates make that cleanup cost smaller 00:28:17.870 --> 00:28:20.750 in present value terms. 00:28:20.750 --> 00:28:23.690 It's a polynomial, so the number of sine changes 00:28:23.690 --> 00:28:25.610 is related in ways I've long since forgotten 00:28:25.610 --> 00:28:29.210 to the number of real roots. 00:28:29.210 --> 00:28:31.935 If there's only one sine change, you're only 00:28:31.935 --> 00:28:33.060 going to get one real root. 00:28:33.060 --> 00:28:37.960 But if you have negative returns at the end, you can get two. 00:28:37.960 --> 00:28:40.520 I suppose you can get more than two. 00:28:40.520 --> 00:28:44.300 The normal thing, and that's what the slide says, 00:28:44.300 --> 00:28:47.090 is to call the smallest one r star. 00:28:47.090 --> 00:28:50.650 I think that's a little weird. 00:28:50.650 --> 00:28:53.860 The other thing to keep in mind-- 00:28:53.860 --> 00:29:07.090 again, if you just graph these, you can say here's project A, 00:29:07.090 --> 00:29:17.230 here's project B. A has a higher internal rate of return than B. 00:29:17.230 --> 00:29:19.480 But for discount rates back here, you'd 00:29:19.480 --> 00:29:23.770 prefer B if you have to choose. 00:29:23.770 --> 00:29:26.450 If you have limited funds, they have the same upfront cost. 00:29:26.450 --> 00:29:28.420 Your discount rate is in here. 00:29:28.420 --> 00:29:32.210 B has the higher net present value, you'd pick it. 00:29:32.210 --> 00:29:35.150 So ranking by internal rate of return 00:29:35.150 --> 00:29:37.460 doesn't give you a desirability measure. 00:29:37.460 --> 00:29:40.250 It just gives you some confidence about-- 00:29:45.260 --> 00:29:48.890 it allows you to be uncertain about the discount rate 00:29:48.890 --> 00:29:52.670 and still make a judgment about present value. 00:29:52.670 --> 00:29:55.470 OK, questions about those? 00:29:55.470 --> 00:29:55.970 David? 00:29:55.970 --> 00:29:57.678 AUDIENCE: [INAUDIBLE] [? talking about ?] 00:29:57.678 --> 00:30:01.046 the payback here, [INAUDIBLE] value [INAUDIBLE]?? 00:30:01.046 --> 00:30:02.934 RICHARD SCHMALENSEE: No. 00:30:02.934 --> 00:30:04.530 Normally, that's how they do it. 00:30:04.530 --> 00:30:04.700 [INAUDIBLE] 00:30:04.700 --> 00:30:05.930 I don't worry about interest rates. 00:30:05.930 --> 00:30:07.400 Don't give me that fancy stuff. 00:30:07.400 --> 00:30:10.400 When do I get my money out? 00:30:10.400 --> 00:30:12.500 And you could see the problem. 00:30:12.500 --> 00:30:15.720 As I say, I could give you a one year payback period. 00:30:15.720 --> 00:30:17.000 That's a lousy investment. 00:30:17.000 --> 00:30:18.690 That's pretty easy. 00:30:18.690 --> 00:30:22.160 Give me $100 today, I'll give it back to you in a year. 00:30:22.160 --> 00:30:24.080 One year payback, fabulous. 00:30:24.080 --> 00:30:27.320 Not a good idea. 00:30:27.320 --> 00:30:32.030 So it's hard to imagine, but you can read texts 00:30:32.030 --> 00:30:35.300 in the '50s that are debating the merits of payback 00:30:35.300 --> 00:30:36.500 versus net present value. 00:30:36.500 --> 00:30:38.510 And you say, wait, how? 00:30:38.510 --> 00:30:41.690 Anyway, what I want to do-- unless there are questions 00:30:41.690 --> 00:30:44.660 about any of this, or general questions about combined heat 00:30:44.660 --> 00:30:46.885 and power, I want to go to the spreadsheet. 00:30:49.640 --> 00:30:52.220 It didn't occur to me to ask, because of course this is MIT, 00:30:52.220 --> 00:30:56.280 but how many of you have played with Excel before? 00:30:56.280 --> 00:30:59.070 Oh, good, that's what I thought. 00:30:59.070 --> 00:31:00.107 I feel so much better. 00:31:00.107 --> 00:31:01.190 All right, let's go there. 00:31:04.926 --> 00:31:06.510 That accords with my priors. 00:31:09.270 --> 00:31:12.870 All right, so there we have the spreadsheet. 00:31:12.870 --> 00:31:14.790 Is that readable more or less in the back? 00:31:14.790 --> 00:31:16.400 AUDIENCE: [INAUDIBLE] 00:31:16.400 --> 00:31:24.770 OK, and let's walk through a set of questions. 00:31:24.770 --> 00:31:28.070 Let's figure out how to walk through a set of questions. 00:31:28.070 --> 00:31:29.350 Hiram, what's happening here? 00:31:29.350 --> 00:31:31.152 AUDIENCE: [INAUDIBLE] 00:31:31.152 --> 00:31:33.110 RICHARD SCHMALENSEE: That's what you got to do? 00:31:33.110 --> 00:31:35.880 Turn the side screen on? 00:31:35.880 --> 00:31:36.660 All right. 00:31:41.620 --> 00:31:42.120 No. 00:31:48.480 --> 00:31:50.100 All right, this works [INAUDIBLE].. 00:31:50.100 --> 00:31:50.670 Thank you. 00:31:54.090 --> 00:31:59.720 If you walk through this, this illustrates my point 00:31:59.720 --> 00:32:03.240 about depreciation. 00:32:03.240 --> 00:32:09.650 You get total savings, total expenses, gross margin-- 00:32:09.650 --> 00:32:12.440 that is to say what does this thing throw off 00:32:12.440 --> 00:32:16.380 in terms of total savings per year? 00:32:16.380 --> 00:32:20.460 You can subtract depreciation and get earnings before taxes 00:32:20.460 --> 00:32:22.320 if you want to. 00:32:22.320 --> 00:32:23.820 But then you'll notice what happens. 00:32:26.890 --> 00:32:29.500 They compute taxes and they add back depreciation. 00:32:29.500 --> 00:32:32.540 It appears here and it appears there. 00:32:32.540 --> 00:32:34.940 Depreciation is a game you and your accountant play 00:32:34.940 --> 00:32:37.310 with the tax people. 00:32:37.310 --> 00:32:41.500 So when calculating the after tax in your pocket savings, 00:32:41.500 --> 00:32:45.340 you have to say what depreciation do I get to take. 00:32:45.340 --> 00:32:48.450 How does that affect my taxes? 00:32:48.450 --> 00:32:49.930 That's it. 00:32:49.930 --> 00:32:51.550 That's it. 00:32:51.550 --> 00:32:54.610 If you get faster depreciation, your income is lower 00:32:54.610 --> 00:32:56.260 and your taxes are lower. 00:32:56.260 --> 00:32:58.000 Your income being lower doesn't matter. 00:32:58.000 --> 00:33:00.852 Your taxes being lower does. 00:33:00.852 --> 00:33:03.420 Is that reasonably straightforward? 00:33:03.420 --> 00:33:05.580 Because you're going to see this in later life, 00:33:05.580 --> 00:33:07.290 I'll guarantee you. 00:33:07.290 --> 00:33:09.390 And it shouldn't be mysterious. 00:33:09.390 --> 00:33:12.630 It really is-- and it's an accounting entity. 00:33:12.630 --> 00:33:14.670 You report it on taxes. 00:33:14.670 --> 00:33:17.340 Some companies use different depreciation schedules 00:33:17.340 --> 00:33:21.120 for taxes than for financial reporting, which you're 00:33:21.120 --> 00:33:24.270 allowed to do to some extent. 00:33:24.270 --> 00:33:29.610 OK, question, I talked before about the difference 00:33:29.610 --> 00:33:31.500 between doing things in real terms 00:33:31.500 --> 00:33:35.550 and doing things in nominal terms. 00:33:35.550 --> 00:33:40.980 Assuming this is Darren, not some Sloan student who wrote up 00:33:40.980 --> 00:33:44.340 the case, what's Darren doing? 00:33:44.340 --> 00:33:46.800 Is this a real analysis, a nominal analysis? 00:33:46.800 --> 00:33:48.700 Is he confused? 00:33:48.700 --> 00:33:49.950 [INAUDIBLE] what do you think? 00:33:52.896 --> 00:33:54.538 AUDIENCE: I'm confused. 00:33:54.538 --> 00:33:55.580 RICHARD SCHMALENSEE: Huh? 00:33:55.580 --> 00:33:56.910 AUDIENCE: I'm confused. 00:33:56.910 --> 00:33:57.650 RICHARD SCHMALENSEE: You're confused. 00:33:57.650 --> 00:33:58.520 OK, say why. 00:34:05.408 --> 00:34:11.659 AUDIENCE: I don't [INAUDIBLE] understand how [INAUDIBLE] 00:34:11.659 --> 00:34:12.924 depreciation [INAUDIBLE]. 00:34:12.924 --> 00:34:14.539 RICHARD SCHMALENSEE: On what? 00:34:14.539 --> 00:34:17.780 AUDIENCE: I don't understand how I will characterize it 00:34:17.780 --> 00:34:21.440 as either [INAUDIBLE] [? real ?] or inconsistent. 00:34:21.440 --> 00:34:23.960 Like, is this the nominal what things should be, 00:34:23.960 --> 00:34:26.695 or a nominal like interest rate? 00:34:26.695 --> 00:34:28.070 RICHARD SCHMALENSEE: Well, what I 00:34:28.070 --> 00:34:31.969 said last time was, if you want to assume that prices don't 00:34:31.969 --> 00:34:37.610 change, in this world, where prices do change, 00:34:37.610 --> 00:34:41.150 then you'd better use a real discount rate that 00:34:41.150 --> 00:34:43.070 measures purchasing power. 00:34:43.070 --> 00:34:47.780 If you want to use the kind of rates you see in the market, 00:34:47.780 --> 00:34:51.020 those rates are based on people's expectations 00:34:51.020 --> 00:34:52.409 about inflation. 00:34:52.409 --> 00:34:56.750 So you'd better build in expectations about inflation. 00:34:56.750 --> 00:34:58.820 What people often do-- 00:34:58.820 --> 00:35:02.480 and it's a mistake, is to use discount rates or interest 00:35:02.480 --> 00:35:06.840 rates from the market and assume prices don't change. 00:35:06.840 --> 00:35:11.135 So is he inconsistent like that, or is he consistent? 00:35:11.135 --> 00:35:12.010 I'll give you a hint. 00:35:12.010 --> 00:35:14.035 A 10% real rate would be amazing. 00:35:16.670 --> 00:35:18.190 That would be very, very high. 00:35:20.990 --> 00:35:23.900 Not amazing, it would be high. 00:35:23.900 --> 00:35:25.528 [? Mathoura? ?] 00:35:25.528 --> 00:35:28.432 AUDIENCE: [? I mean, ?] [INAUDIBLE] 00:35:28.432 --> 00:35:29.890 doing a nominal analysis 00:35:29.890 --> 00:35:31.807 RICHARD SCHMALENSEE: Doing a nominal analysis, 00:35:31.807 --> 00:35:33.640 yeah, because he builds in-- he has 00:35:33.640 --> 00:35:40.240 explicit assumptions about inflation, 00:35:40.240 --> 00:35:45.010 and he's got an interest rate that's 2003. 00:35:45.010 --> 00:35:47.560 That's a market rate in 2003. 00:35:47.560 --> 00:35:48.940 No reason you would know that. 00:35:48.940 --> 00:35:52.930 But you see the explicit inflation numbers 00:35:52.930 --> 00:35:55.220 at a fairly high interest rate. 00:35:55.220 --> 00:35:56.950 So he's doing a nominal analysis. 00:35:56.950 --> 00:35:58.000 It looks consistent. 00:36:02.340 --> 00:36:05.190 Is there any defense in the spreadsheet 00:36:05.190 --> 00:36:08.550 or in the case as to the choice of discount rate? 00:36:17.600 --> 00:36:18.600 Sarah? 00:36:18.600 --> 00:36:21.058 AUDIENCE: I don't remember there being a very specific one, 00:36:21.058 --> 00:36:23.854 but I'm assuming [INAUDIBLE] comparable risky assets 00:36:23.854 --> 00:36:24.690 on the market. 00:36:24.690 --> 00:36:25.120 RICHARD SCHMALENSEE: Yeah. 00:36:25.120 --> 00:36:26.280 He didn't say it, though. 00:36:26.280 --> 00:36:29.290 There's no discussion of where that 10% came from. 00:36:29.290 --> 00:36:32.560 After all of that incomprehensible nonsense 00:36:32.560 --> 00:36:36.360 last time about beta, I was giving you 00:36:36.360 --> 00:36:38.670 what you ought to do, not what people often do. 00:36:38.670 --> 00:36:41.580 And clearly, what he did here was 00:36:41.580 --> 00:36:43.650 to take a horseback reasonable rate. 00:36:43.650 --> 00:36:45.820 Let's say at 10%. 00:36:45.820 --> 00:36:49.290 That's pretty much in line with cost of capital you see 00:36:49.290 --> 00:36:51.750 and discount rates you see. 00:36:51.750 --> 00:36:55.440 You would like him to have done more. 00:36:55.440 --> 00:36:58.900 This is not necessarily an ideal. 00:36:58.900 --> 00:37:01.608 Are the inflation assumptions reasonable? 00:37:05.520 --> 00:37:06.900 Anybody react to those? 00:37:06.900 --> 00:37:08.190 What do you think? 00:37:08.190 --> 00:37:12.090 2% electricity, 2% maintenance, 2% chemicals 00:37:12.090 --> 00:37:13.230 to be added to the water. 00:37:16.230 --> 00:37:21.340 AUDIENCE: [INAUDIBLE] looking at interest rates 00:37:21.340 --> 00:37:22.635 on a yearly basis I don't know. 00:37:22.635 --> 00:37:24.010 RICHARD SCHMALENSEE: I'm shocked. 00:37:24.010 --> 00:37:25.762 [LAUGHTER] 00:37:25.762 --> 00:37:26.795 [INAUDIBLE] shocked. 00:37:26.795 --> 00:37:28.670 I assumed that's what people around here did. 00:37:28.670 --> 00:37:31.540 I certainly do. 00:37:31.540 --> 00:37:35.380 I mean, these are not implausible numbers. 00:37:35.380 --> 00:37:37.810 I mean, if you look historically at inflation rates, 00:37:37.810 --> 00:37:45.320 they run in this country 1% 2 and 1/2% So 2% is reasonable. 00:37:45.320 --> 00:37:48.740 What you don't see in this spreadsheet-- 00:37:48.740 --> 00:37:53.370 what you might like to see in life is you might like to see, 00:37:53.370 --> 00:37:56.810 well, does the choice of discount rate matter? 00:37:56.810 --> 00:37:57.920 You can check it easily. 00:37:57.920 --> 00:38:00.680 Enough we could put another rate in. 00:38:00.680 --> 00:38:02.570 Do the inflation assumptions matter? 00:38:05.720 --> 00:38:07.580 Is the outcome sensitive to these 00:38:07.580 --> 00:38:11.660 things that don't get defended much? 00:38:11.660 --> 00:38:14.630 If you were doing this for real, and it was your money, 00:38:14.630 --> 00:38:16.160 you'd want to do that. 00:38:16.160 --> 00:38:17.720 You'd want to say, OK, I'm not too 00:38:17.720 --> 00:38:19.880 sure about those assumptions. 00:38:19.880 --> 00:38:21.260 Are they critical? 00:38:21.260 --> 00:38:22.970 Do they drive the answer? 00:38:22.970 --> 00:38:25.740 If they do, you'd want to look harder. 00:38:25.740 --> 00:38:27.890 We don't see any of that. 00:38:27.890 --> 00:38:31.100 We may be missing a dozen spreadsheets in the background, 00:38:31.100 --> 00:38:34.000 but we don't see it here. 00:38:34.000 --> 00:38:41.290 OK, as you read the case where are there risks on this sheet? 00:38:44.470 --> 00:38:49.070 Jorge, anything here that's not certain? 00:38:56.270 --> 00:39:00.290 You think it's all pretty rock solid. 00:39:00.290 --> 00:39:01.190 Matthew? 00:39:01.190 --> 00:39:03.850 AUDIENCE: I think something that we didn't really bring up 00:39:03.850 --> 00:39:09.360 is that the company [INAUDIBLE] that the installation time took 00:39:09.360 --> 00:39:13.576 much longer, or even a day longer, [INAUDIBLE] production 00:39:13.576 --> 00:39:19.052 would set back the offset of the cost [INAUDIBLE].. 00:39:19.052 --> 00:39:21.510 RICHARD SCHMALENSEE: Yeah, we don't see the lost production 00:39:21.510 --> 00:39:25.050 here, and there is presumably some risk there. 00:39:27.630 --> 00:39:31.900 And that's related to the installation cost for which we 00:39:31.900 --> 00:39:35.740 have only an estimate. 00:39:35.740 --> 00:39:37.660 We don't have a guarantee. 00:39:37.660 --> 00:39:39.087 Rachel? 00:39:39.087 --> 00:39:41.045 AUDIENCE: Something that [INAUDIBLE] jumped out 00:39:41.045 --> 00:39:43.670 to me was that I'm assuming that they did get that grant, 00:39:43.670 --> 00:39:46.157 because there's been a lot of policy talk about getting rid 00:39:46.157 --> 00:39:49.330 of them [INAUDIBLE]. 00:39:49.330 --> 00:39:50.830 RICHARD SCHMALENSEE: Yeah, I thought 00:39:50.830 --> 00:39:55.600 that was pretty bold to say, well, I know-- 00:39:55.600 --> 00:39:58.600 the text says we're pretty sure we 00:39:58.600 --> 00:40:02.050 can get this matching grant for $172,500. 00:40:02.050 --> 00:40:06.530 So we'll just assume we get it. 00:40:06.530 --> 00:40:09.005 And there's no lost production in here. 00:40:09.005 --> 00:40:09.505 [INAUDIBLE]? 00:40:09.505 --> 00:40:11.260 AUDIENCE: [INAUDIBLE] during that 00:40:11.260 --> 00:40:14.100 time was much more reasonable [INAUDIBLE].. 00:40:14.100 --> 00:40:16.315 I think nowadays it might be much more difficult 00:40:16.315 --> 00:40:17.440 after the financial crisis. 00:40:17.440 --> 00:40:20.500 But before then, [INAUDIBLE] leading up to 2007, 00:40:20.500 --> 00:40:23.640 it wasn't very different for [INAUDIBLE].. 00:40:23.640 --> 00:40:24.660 I mean, comparably. 00:40:24.660 --> 00:40:26.090 If you-- I think about [INAUDIBLE] 00:40:26.090 --> 00:40:28.740 [? I'm ?] sure that argument was probably fair for nowadays, 00:40:28.740 --> 00:40:30.565 but not necessarily the case back then. 00:40:30.565 --> 00:40:32.315 RICHARD SCHMALENSEE: If I were a naysayer, 00:40:32.315 --> 00:40:34.740 I'd say, do you have that in writing? 00:40:34.740 --> 00:40:36.240 Do you have that grant? 00:40:36.240 --> 00:40:40.720 That's big relative to the whole upfront cost. 00:40:40.720 --> 00:40:43.240 And he didn't quite mention that. 00:40:43.240 --> 00:40:43.740 Yeah. 00:40:43.740 --> 00:40:45.870 AUDIENCE: Really, I mean, companies like Tesla 00:40:45.870 --> 00:40:50.340 and Fisker Karma got like half a billion dollar loans for their 00:40:50.340 --> 00:40:51.810 [INAUDIBLE]. 00:40:51.810 --> 00:40:54.870 RICHARD SCHMALENSEE: Yeah, but this is a New York State-- 00:40:54.870 --> 00:40:57.180 I don't know this program, or I certainly 00:40:57.180 --> 00:41:00.630 don't know what this program looked like in 2003. 00:41:00.630 --> 00:41:03.240 All I know is that the case said, 00:41:03.240 --> 00:41:06.620 can probably get the grant. 00:41:06.620 --> 00:41:10.190 I would say, gee, I'd really like to know, how does this 00:41:10.190 --> 00:41:14.370 look without getting the grant? 00:41:14.370 --> 00:41:16.080 I mean, do we know we're going to get it? 00:41:16.080 --> 00:41:20.400 Suppose installation-- in fact the installation 00:41:20.400 --> 00:41:26.380 cost, didn't they say $120,000, $125,000, and he said, 00:41:26.380 --> 00:41:30.010 I think we can get it down to $100,000. 00:41:30.010 --> 00:41:31.090 Isn't that right? 00:41:31.090 --> 00:41:32.550 Yeah, thank you. 00:41:32.550 --> 00:41:33.175 I need support. 00:41:35.780 --> 00:41:42.490 So anything else that's uncertain here 00:41:42.490 --> 00:41:45.300 that you might want to focus on? 00:41:45.300 --> 00:41:46.230 Julian? 00:41:46.230 --> 00:41:48.920 AUDIENCE: I don't see any removal costs 00:41:48.920 --> 00:41:51.522 on there [INAUDIBLE]. 00:41:51.522 --> 00:41:52.980 RICHARD SCHMALENSEE: Removal costs? 00:41:52.980 --> 00:41:55.110 You mean when you scrap it at the end? 00:41:55.110 --> 00:41:56.940 AUDIENCE: Yeah. 00:41:56.940 --> 00:41:58.750 RICHARD SCHMALENSEE: That's a good point. 00:41:58.750 --> 00:41:59.910 That's a good point. 00:41:59.910 --> 00:42:00.990 He doesn't talk about it. 00:42:00.990 --> 00:42:02.310 He runs it out for-- 00:42:02.310 --> 00:42:05.280 I forget how long this spreadsheet runs. 00:42:05.280 --> 00:42:10.380 But he didn't talk about what-- 00:42:13.350 --> 00:42:15.580 presumably, you wouldn't throw it all away, 00:42:15.580 --> 00:42:16.780 since some of it's pipe. 00:42:16.780 --> 00:42:17.790 But maybe you would. 00:42:17.790 --> 00:42:21.630 I mean, it's a pipe with water, so it should last pretty well. 00:42:21.630 --> 00:42:24.930 But the generator you'd have to replace, and the turbine you'd 00:42:24.930 --> 00:42:27.142 have to replace after a while. 00:42:27.142 --> 00:42:28.600 You're right, there's none of that. 00:42:28.600 --> 00:42:30.210 But I guess you could think about-- 00:42:30.210 --> 00:42:35.215 well, the question is, is there a disposal cost? 00:42:35.215 --> 00:42:36.090 AUDIENCE: [? Yeah. ?] 00:42:36.090 --> 00:42:36.450 RICHARD SCHMALENSEE: Yeah. 00:42:36.450 --> 00:42:38.040 The question isn't would you have to replace that, 00:42:38.040 --> 00:42:39.165 because you probably would. 00:42:39.165 --> 00:42:42.000 The question is, should there be a negative number at the end? 00:42:42.000 --> 00:42:44.980 Or could you sell it for scrap? 00:42:44.980 --> 00:42:49.180 And he didn't mention that anything else? 00:42:49.180 --> 00:42:52.720 OK, do you like his treatment of these risks? 00:42:55.055 --> 00:42:56.680 Darren is not our favorite person here. 00:42:56.680 --> 00:42:57.250 Yes. 00:42:57.250 --> 00:42:59.650 AUDIENCE: Well, the thing is, since we 00:42:59.650 --> 00:43:02.515 don't know exactly how he came up with that discount rate, 00:43:02.515 --> 00:43:05.440 then there's a possibility that he's not really 00:43:05.440 --> 00:43:07.990 accounting for the risks and the cash flows. 00:43:07.990 --> 00:43:11.380 I mean, the discount rate is low. 00:43:11.380 --> 00:43:14.980 But maybe he took that into account 00:43:14.980 --> 00:43:20.350 when he calculated the risk premium associated 00:43:20.350 --> 00:43:22.730 with his discount rate. 00:43:22.730 --> 00:43:26.140 RICHARD SCHMALENSEE: Maybe, but-- 00:43:26.140 --> 00:43:27.350 is this my next question? 00:43:27.350 --> 00:43:27.850 Yes. 00:43:31.070 --> 00:43:33.950 Did he use pessimistic figures, optimistic figures, 00:43:33.950 --> 00:43:37.250 or more or less middle of the road figures? 00:43:37.250 --> 00:43:39.180 Pretty optimistic, yeah. 00:43:39.180 --> 00:43:40.920 Chad, you agree, optimistic? 00:43:40.920 --> 00:43:55.700 OK, it's an interesting presentational choice, 00:43:55.700 --> 00:43:59.600 because Darren knows all of this. 00:43:59.600 --> 00:44:01.620 And Darren could just say, well, yeah, 00:44:01.620 --> 00:44:02.870 I've been a little optimistic. 00:44:02.870 --> 00:44:04.040 But the 10% is high. 00:44:08.670 --> 00:44:12.630 This project looks so good on his numbers 00:44:12.630 --> 00:44:16.468 that the better strategy would be to be pessimistic. 00:44:16.468 --> 00:44:18.760 So you could say, look, I mean, I was very pessimistic, 00:44:18.760 --> 00:44:21.000 and it still looked good. 00:44:21.000 --> 00:44:25.810 He didn't do that, or he didn't explore. 00:44:25.810 --> 00:44:28.660 Again, if somebody shows you one of these spreadsheets 00:44:28.660 --> 00:44:32.380 in later life, or if when you're working for McKinsey 00:44:32.380 --> 00:44:35.440 they ask you to make one, for heaven's sakes, 00:44:35.440 --> 00:44:36.970 think about the central case. 00:44:36.970 --> 00:44:38.560 Think about variations around it. 00:44:38.560 --> 00:44:39.310 He didn't do that. 00:44:39.310 --> 00:44:40.720 He took the optimistic case. 00:44:44.920 --> 00:44:46.840 Kind of a surprise. 00:44:46.840 --> 00:44:50.230 I think what he should have done is-- 00:44:50.230 --> 00:44:53.900 oops, let's get it up there. 00:44:53.900 --> 00:44:57.962 Yeah, he should have been central to the road. 00:44:57.962 --> 00:44:58.920 Here's a beta question. 00:45:03.040 --> 00:45:07.450 So the discounting applies to how do we value energy savings. 00:45:10.397 --> 00:45:11.980 Those energy savings are going to tend 00:45:11.980 --> 00:45:17.180 to be correlated with the economy, against the economy, 00:45:17.180 --> 00:45:17.920 not at all? 00:45:20.940 --> 00:45:24.970 The energy savings, probably two components. 00:45:24.970 --> 00:45:27.940 One, what's the production volume? 00:45:27.940 --> 00:45:33.180 And let's take that as fixed for the moment, because they do. 00:45:33.180 --> 00:45:36.180 You tend to run the thing flat out unless things are terrible. 00:45:36.180 --> 00:45:38.660 And the electricity price-- 00:45:38.660 --> 00:45:42.320 which way is the electricity price go with the economy? 00:45:42.320 --> 00:45:42.820 Brendan. 00:45:42.820 --> 00:45:44.695 AUDIENCE: [INAUDIBLE] [? doesn't vary ?] much 00:45:44.695 --> 00:45:45.590 for the economy. 00:45:45.590 --> 00:45:47.840 I'd say that's more [INAUDIBLE] energy in terms 00:45:47.840 --> 00:45:49.040 of gasoline and stuff. 00:45:49.040 --> 00:45:51.913 That's more of a-- that varies a lot more with economy, but-- 00:45:51.913 --> 00:45:53.580 RICHARD SCHMALENSEE: There's a lot more. 00:45:53.580 --> 00:45:56.390 But if you have high demand, there's 00:45:56.390 --> 00:45:57.800 going to be a supply curve. 00:45:57.800 --> 00:46:00.650 Particularly in New York, which is a market-driven electricity 00:46:00.650 --> 00:46:04.080 system, he'll be running up a supply curve. 00:46:04.080 --> 00:46:05.675 So a little bit with the economy. 00:46:05.675 --> 00:46:08.217 AUDIENCE: Yeah, I wouldn't say a very high beta [INAUDIBLE].. 00:46:08.217 --> 00:46:09.550 RICHARD SCHMALENSEE: No, no, no. 00:46:09.550 --> 00:46:11.660 Not a very high beta, but a positive beta. 00:46:11.660 --> 00:46:13.490 Yeah, so maybe-- yeah. 00:46:13.490 --> 00:46:17.270 AUDIENCE: But the thing is, if he was using whatever 00:46:17.270 --> 00:46:21.525 that he recovers for generating more electricity, 00:46:21.525 --> 00:46:22.650 then maybe that's the case. 00:46:22.650 --> 00:46:26.630 But if is using heat to sell to people, 00:46:26.630 --> 00:46:29.508 then he can say that that's something that's fairly-- 00:46:29.508 --> 00:46:31.550 people wouldn't [INAUDIBLE] [? vary by ?] prices. 00:46:31.550 --> 00:46:34.788 But maybe the economy-- people will need that heat regardless. 00:46:34.788 --> 00:46:36.830 RICHARD SCHMALENSEE: But what's on the table here 00:46:36.830 --> 00:46:39.050 is generation. 00:46:39.050 --> 00:46:41.030 What's on the table is generation, not heat. 00:46:41.030 --> 00:46:43.760 He doesn't have a scheme to pipe the heat away. 00:46:43.760 --> 00:46:48.790 He has a scheme to use the steam to run a turbine. 00:46:48.790 --> 00:46:50.520 So good point. 00:46:50.520 --> 00:46:53.880 It's cold in New York, even in good years and bad. 00:46:53.880 --> 00:46:57.258 But the electricity price is what's at issue here, 00:46:57.258 --> 00:46:58.300 the value of the savings. 00:46:58.300 --> 00:47:09.360 So you could argue you should use a somewhat higher discount 00:47:09.360 --> 00:47:12.090 rate than the firms over-- 00:47:12.090 --> 00:47:15.210 than the cost of capital to the firm as a whole, just 00:47:15.210 --> 00:47:18.010 because there's a positive beta. 00:47:18.010 --> 00:47:19.260 We'd have to look at the firm. 00:47:22.178 --> 00:47:26.160 AUDIENCE: [INAUDIBLE] 00:47:26.160 --> 00:47:28.320 RICHARD SCHMALENSEE: I have no idea. 00:47:28.320 --> 00:47:32.237 Does anybody know anything about the formaldehyde business? 00:47:32.237 --> 00:47:33.320 It's a very diverse group. 00:47:33.320 --> 00:47:34.760 No one does formaldehyde at all? 00:47:34.760 --> 00:47:35.880 [LAUGHTER] 00:47:35.880 --> 00:47:37.160 OK. 00:47:37.160 --> 00:47:40.460 I don't have a clue. 00:47:40.460 --> 00:47:47.270 They wrote the case as if you just ran the factory. 00:47:47.270 --> 00:47:50.000 They didn't talk about it being cyclical, 00:47:50.000 --> 00:47:52.970 and nobody talked about it none of the naysayers talked 00:47:52.970 --> 00:47:54.542 about much cyclicality. 00:47:54.542 --> 00:47:55.250 But I don't know. 00:47:55.250 --> 00:47:55.750 Brendan? 00:47:55.750 --> 00:48:00.080 AUDIENCE: Yeah, I mean, I think people are still 00:48:00.080 --> 00:48:02.750 RICHARD SCHMALENSEE: [? Necessary ?] uses, 00:48:02.750 --> 00:48:05.990 but it does have other uses, which the case discussed and I 00:48:05.990 --> 00:48:07.070 don't remember. 00:48:07.070 --> 00:48:11.960 But OK, what do you think of the most important assumptions 00:48:11.960 --> 00:48:14.953 in this spreadsheet? 00:48:20.597 --> 00:48:21.680 Rachel, what do you think? 00:48:28.000 --> 00:48:29.990 Tough call, just staring at it, yes? 00:48:29.990 --> 00:48:34.480 You'd have to go and look at-- 00:48:34.480 --> 00:48:36.280 to answer that question-- and I raise it, 00:48:36.280 --> 00:48:38.410 because that is really the key question. 00:48:38.410 --> 00:48:42.370 If I'm a naysayer and he gives me the spreadsheet, 00:48:42.370 --> 00:48:44.980 I say, well what did you check? 00:48:44.980 --> 00:48:46.960 How sensitive is this to the discount rate, 00:48:46.960 --> 00:48:50.140 to the electricity price, to the electricity inflation? 00:48:50.140 --> 00:48:53.050 How sensitive is it to variations in the installation 00:48:53.050 --> 00:48:53.920 cost? 00:48:53.920 --> 00:48:57.190 Does it matter whether or not you get the grant? 00:48:57.190 --> 00:49:01.030 I can't tell here which are the key assumptions, 00:49:01.030 --> 00:49:03.240 but a little fiddling with this can. 00:49:03.240 --> 00:49:03.740 Alex? 00:49:03.740 --> 00:49:07.564 AUDIENCE: Wouldn't the grant be the most important assumption 00:49:07.564 --> 00:49:09.320 because it's like half of your-- 00:49:09.320 --> 00:49:11.320 RICHARD SCHMALENSEE: It's half the capital cost. 00:49:11.320 --> 00:49:15.650 If you go down, though, to his net present value, you say, 00:49:15.650 --> 00:49:18.700 well, that doesn't matter, because it's $172,500, 00:49:18.700 --> 00:49:20.770 and the net present value is ginormous. 00:49:20.770 --> 00:49:23.170 So lose the grant. 00:49:23.170 --> 00:49:28.460 The question is, what assumptions 00:49:28.460 --> 00:49:31.390 would turn it negative? 00:49:31.390 --> 00:49:33.050 And he didn't answer that 00:49:33.050 --> 00:49:35.950 AUDIENCE: I mean, if it saved less 00:49:35.950 --> 00:49:38.010 than [INAUDIBLE] it would save. 00:49:38.010 --> 00:49:40.593 RICHARD SCHMALENSEE: Well, there are a lot of things it'll do, 00:49:40.593 --> 00:49:43.790 but the question is which are uncertain? 00:49:43.790 --> 00:49:46.540 They describe the technology as pretty vanilla. 00:49:46.540 --> 00:49:48.550 So I assume that was not-- you're right. 00:49:48.550 --> 00:49:50.350 That would do it. 00:49:50.350 --> 00:49:57.690 If you saved less [? if ?] the electricity price collapsed, 00:49:57.690 --> 00:50:00.280 if the discount rate were much higher, 00:50:00.280 --> 00:50:04.200 in fact for one reason or another. 00:50:04.200 --> 00:50:07.920 I mean, you could add them up. 00:50:07.920 --> 00:50:09.840 I asked this question not because I 00:50:09.840 --> 00:50:11.680 expect you to be able to answer it, 00:50:11.680 --> 00:50:15.660 but because you always have to ask that question. 00:50:15.660 --> 00:50:18.990 What's driving this answer? 00:50:18.990 --> 00:50:20.700 What's driving this answer? 00:50:20.700 --> 00:50:23.250 Finally, did anybody see the mistake 00:50:23.250 --> 00:50:25.985 in computing net present value? 00:50:25.985 --> 00:50:26.485 Sarah. 00:50:26.485 --> 00:50:28.765 AUDIENCE: He started in column C instead of column B. 00:50:28.765 --> 00:50:29.890 RICHARD SCHMALENSEE: Bingo. 00:50:29.890 --> 00:50:32.455 AUDIENCE: [INAUDIBLE] [? compare ?] savings, 00:50:32.455 --> 00:50:33.490 as opposed to cost. 00:50:33.490 --> 00:50:34.990 RICHARD SCHMALENSEE: If you go here, 00:50:34.990 --> 00:50:39.040 he takes the net present value of-- 00:50:39.040 --> 00:50:44.590 it's C45, which is here. 00:50:47.432 --> 00:50:51.040 C45, which is the after tax net cash flow, 00:50:51.040 --> 00:50:55.310 that's the right thing, all the way out. 00:50:55.310 --> 00:50:56.615 But he forgot the initial cost. 00:50:59.140 --> 00:51:03.020 That's one of the most bizarre mistakes I've ever seen. 00:51:03.020 --> 00:51:05.470 If you look, there's the formula-- net present value 00:51:05.470 --> 00:51:07.510 of all the savings. 00:51:07.510 --> 00:51:11.710 Well, what needs to happen here, it's got to-- 00:51:11.710 --> 00:51:13.435 not available in protected view. 00:51:15.960 --> 00:51:17.648 Do I trust the contents of the file? 00:51:17.648 --> 00:51:19.440 Of course I trust the contents of the file. 00:51:19.440 --> 00:51:21.090 We're all friends here. 00:51:21.090 --> 00:51:23.400 What he needs to-- 00:51:23.400 --> 00:51:25.530 I see, because I erased. 00:51:25.530 --> 00:51:31.575 What I need to do here is I need to subtract the initial cost. 00:51:40.842 --> 00:51:42.550 That doesn't turn it negative, but it did 00:51:42.550 --> 00:51:45.470 make a significant difference. 00:51:45.470 --> 00:51:47.020 You see what he did. 00:51:47.020 --> 00:51:51.280 It's one of these, you say OK. 00:51:51.280 --> 00:51:54.350 He took the after tax net cash flow. 00:51:54.350 --> 00:51:59.440 So he went down, added the savings, added-- 00:51:59.440 --> 00:52:00.790 that's maintenance savings. 00:52:04.040 --> 00:52:07.790 You got savings on electricity, maintenance, and chemicals, 00:52:07.790 --> 00:52:08.660 which gets inflated. 00:52:12.680 --> 00:52:13.850 All these get inflated. 00:52:13.850 --> 00:52:19.740 You'll see the inflation rate coming in here, 00:52:19.740 --> 00:52:21.570 coming in, coming in. 00:52:21.570 --> 00:52:25.410 Adds them up, subtracts the required maintenance, 00:52:25.410 --> 00:52:30.700 gets the net, gets the gross margin, so to speak, 00:52:30.700 --> 00:52:33.820 subtracts depreciation to get the impact on earnings. 00:52:33.820 --> 00:52:36.820 That would be the increase in earnings. 00:52:36.820 --> 00:52:43.291 Gets the taxes, adds back depreciation, does all that. 00:52:43.291 --> 00:52:45.280 Row 45 is the right row. 00:52:45.280 --> 00:52:50.730 Net present value, forgot the initial investment cost. 00:52:50.730 --> 00:52:52.470 That's a bad move. 00:52:52.470 --> 00:52:53.520 That's a bad move. 00:52:53.520 --> 00:52:57.330 OK, Darren, is not doing real well here. 00:52:57.330 --> 00:53:03.350 Did anybody look at the payback or the internal rate of return? 00:53:06.400 --> 00:53:06.900 [INAUDIBLE] 00:53:06.900 --> 00:53:08.415 AUDIENCE: I just want go back to the assumption. 00:53:08.415 --> 00:53:10.140 You're also assuming that, for 10 years, 00:53:10.140 --> 00:53:14.370 your production of formaldehyde is going to stay the same. 00:53:14.370 --> 00:53:17.940 RICHARD SCHMALENSEE: He's making that assumption. 00:53:17.940 --> 00:53:20.328 And we don't know how sensible it 00:53:20.328 --> 00:53:22.870 is, because we don't know much about the formaldehyde market. 00:53:25.500 --> 00:53:28.930 They say that they run the plant 24 hours a day, 00:53:28.930 --> 00:53:33.090 365 days a year, and it's a highly automated facility. 00:53:33.090 --> 00:53:35.460 And he's assuming that will continue. 00:53:35.460 --> 00:53:38.370 It's not clear what other assumption you ought to make. 00:53:38.370 --> 00:53:41.910 But you're right, that's a key assumption. 00:53:41.910 --> 00:53:45.540 If the plant shuts down or goes to one shift, 00:53:45.540 --> 00:53:47.601 those savings figures get cut. 00:53:47.601 --> 00:53:49.948 AUDIENCE: I meant the actual science of it. 00:53:49.948 --> 00:53:50.990 RICHARD SCHMALENSEE: Huh? 00:53:50.990 --> 00:53:52.532 AUDIENCE: I meant the science-- like, 00:53:52.532 --> 00:53:55.070 if your delta e is less and stuff like that. 00:53:55.070 --> 00:53:59.278 Like if you have [INAUDIBLE] less than [INAUDIBLE].. 00:53:59.278 --> 00:54:01.070 RICHARD SCHMALENSEE: Well, you could do it. 00:54:01.070 --> 00:54:03.320 I mean, if it's proportional to throughput-- 00:54:03.320 --> 00:54:06.380 AUDIENCE: [? In ?] the case, it specifically states that 00:54:06.380 --> 00:54:08.630 the board mainly cares about [? corruption of ?] 00:54:08.630 --> 00:54:15.456 formaldehyde vis a vis use of electricity. 00:54:15.456 --> 00:54:17.610 RICHARD SCHMALENSEE: I'm not sure I get it. 00:54:17.610 --> 00:54:19.140 They mainly care about formaldehyde, 00:54:19.140 --> 00:54:21.553 and he's assuming that we're just 00:54:21.553 --> 00:54:23.970 going to keep running it flat out, because the board cares 00:54:23.970 --> 00:54:25.320 about production. 00:54:25.320 --> 00:54:29.430 I mean, if the market dies or if there's a plant problem, that 00:54:29.430 --> 00:54:32.310 won't happen, and you just cut the savings proportionately. 00:54:32.310 --> 00:54:36.330 Well, you'd cut the savings on electricity and chemicals 00:54:36.330 --> 00:54:37.050 proportionately. 00:54:37.050 --> 00:54:40.210 I'd have to think about maintenance. 00:54:40.210 --> 00:54:45.830 Yeah, OK, internal rate of return. 00:54:45.830 --> 00:54:47.600 How did he do that? 00:54:47.600 --> 00:54:52.640 It's ROA, and the formula is up there. 00:54:55.332 --> 00:54:57.290 You could tell it's an internal rate of return, 00:54:57.290 --> 00:55:00.530 because that's what Excel calls the formula. 00:55:00.530 --> 00:55:04.760 And if you look at it, it's-- 00:55:04.760 --> 00:55:06.470 and 15% is an initial guess. 00:55:06.470 --> 00:55:10.610 It's an iterative procedure. 00:55:10.610 --> 00:55:18.920 It's B49 to R49, so it's the internal rate of return 00:55:18.920 --> 00:55:20.300 on the pre-tax cash flow. 00:55:23.300 --> 00:55:26.230 Why would you do that? 00:55:26.230 --> 00:55:30.360 Why wouldn't you take into account the effective taxes? 00:55:30.360 --> 00:55:31.920 If you look at that, that's weird. 00:55:31.920 --> 00:55:36.970 You should do it up here, and we could do it. 00:55:36.970 --> 00:55:37.720 I haven't. 00:55:37.720 --> 00:55:43.160 It's going to be significant, but that's just strange. 00:55:43.160 --> 00:55:46.340 That's just strange. 00:55:46.340 --> 00:55:48.680 And just for humor, you really have 00:55:48.680 --> 00:55:50.605 to look at the formulas in a spreadsheet. 00:55:54.340 --> 00:55:58.390 He didn't actually compute the payback per that slide I did. 00:55:58.390 --> 00:56:01.240 You didn't actually see when you get your money back. 00:56:01.240 --> 00:56:09.100 He went up here and took the installed cost, divided it 00:56:09.100 --> 00:56:13.540 by the C21 minus C29. 00:56:21.220 --> 00:56:27.740 Yeah, divided it by what amounts to G30 at the C32 divided it 00:56:27.740 --> 00:56:30.760 by the annual savings in the first year. 00:56:30.760 --> 00:56:37.470 But the savings differ year by year, 00:56:37.470 --> 00:56:41.130 and he doesn't consider taxes. 00:56:41.130 --> 00:56:43.050 So this is a good-looking spreadsheet. 00:56:43.050 --> 00:56:46.180 And what astonished me when I looked at it was, 00:56:46.180 --> 00:56:49.630 wait a minute, that's wrong, that's wrong, that's wrong. 00:56:49.630 --> 00:56:51.640 Otherwise, pretty good. 00:56:51.640 --> 00:56:53.310 Otherwise, pretty good. 00:56:53.310 --> 00:56:56.920 Any questions about the spreadsheet? 00:56:56.920 --> 00:57:01.030 OK, let's leave this. 00:57:01.030 --> 00:57:03.760 No I don't. 00:57:03.760 --> 00:57:05.710 Let's go away. 00:57:05.710 --> 00:57:06.760 And let's go back. 00:57:16.260 --> 00:57:20.550 I just put the spreadsheet with the formulas in the notes. 00:57:20.550 --> 00:57:23.850 Those are the issues we've talked about. 00:57:23.850 --> 00:57:25.770 Now let's talk about-- 00:57:25.770 --> 00:57:28.680 let's see. 00:57:28.680 --> 00:57:30.460 Let's talk about the naysayers. 00:57:30.460 --> 00:57:33.270 So I'm guessing-- 00:57:33.270 --> 00:57:37.780 I haven't spent my life doing this spreadsheet. 00:57:37.780 --> 00:57:40.890 But I'm guessing, if you run through all of the things 00:57:40.890 --> 00:57:45.070 that we've talked about, the basic assumptions look OK. 00:57:48.810 --> 00:57:53.130 The numbers, he's too optimistic, 00:57:53.130 --> 00:57:57.420 but his discount rate's probably a little high. 00:57:57.420 --> 00:58:01.110 So I'm guessing that if you fiddle and diddle, 00:58:01.110 --> 00:58:03.720 you will come to the conclusion that it does have 00:58:03.720 --> 00:58:05.100 a positive net present value. 00:58:08.910 --> 00:58:13.830 First objection-- you are now Darren, folks. 00:58:13.830 --> 00:58:16.920 First objection-- if it's such a great idea, how 00:58:16.920 --> 00:58:20.170 come nobody else is doing it? 00:58:20.170 --> 00:58:22.930 And your answer is? 00:58:22.930 --> 00:58:25.058 Obadiah, what do you say? 00:58:25.058 --> 00:58:26.350 You're going to just take that? 00:58:26.350 --> 00:58:27.520 You're not going to just take that. 00:58:27.520 --> 00:58:28.320 What's your answer? 00:58:32.568 --> 00:58:36.830 AUDIENCE: [INAUDIBLE] 00:58:36.830 --> 00:58:39.440 RICHARD SCHMALENSEE: Might be we're smart. 00:58:39.440 --> 00:58:42.150 Might be this is a chance to take a leadership position. 00:58:42.150 --> 00:58:42.650 Charlotte. 00:58:42.650 --> 00:58:44.983 AUDIENCE: It could be that the reason they're doing this 00:58:44.983 --> 00:58:47.370 is because they do all that excess heat and steam that's 00:58:47.370 --> 00:58:49.085 hurting their plant, and maybe other people's plants 00:58:49.085 --> 00:58:51.668 are designed in a way that they never had that problem before, 00:58:51.668 --> 00:58:53.628 so [INAUDIBLE] considered it. 00:58:53.628 --> 00:58:55.670 RICHARD SCHMALENSEE: Could be, although it sounds 00:58:55.670 --> 00:58:57.830 like a standard problem the way they 00:58:57.830 --> 00:58:59.330 describe the basic reaction. 00:58:59.330 --> 00:59:02.340 You just dump this stuff in a vat and it gets hot. 00:59:02.340 --> 00:59:02.840 Martha? 00:59:02.840 --> 00:59:07.610 AUDIENCE: [INAUDIBLE] have the same issue 00:59:07.610 --> 00:59:09.542 with ice and [INAUDIBLE]. 00:59:09.542 --> 00:59:11.000 RICHARD SCHMALENSEE: They might not 00:59:11.000 --> 00:59:13.220 have the same issue with ice. 00:59:13.220 --> 00:59:14.850 And the ice is kind of a big deal. 00:59:14.850 --> 00:59:15.710 You're right. 00:59:15.710 --> 00:59:17.450 If you're in the middle of the desert 00:59:17.450 --> 00:59:19.460 and nobody can see you venting a lot of steam, 00:59:19.460 --> 00:59:20.720 you might just say-- of course, if you're 00:59:20.720 --> 00:59:23.210 in the middle of the desert, you may have a water problem. 00:59:23.210 --> 00:59:26.090 [LAUGHS] 00:59:26.090 --> 00:59:28.250 Actually, I think my response would 00:59:28.250 --> 00:59:30.817 be this is an opportunity to show leadership. 00:59:33.800 --> 00:59:36.860 But let's try the next one. 00:59:36.860 --> 00:59:39.350 What's your answer to that one? 00:59:39.350 --> 00:59:44.420 This is what I got, is I estimated the revenue. 00:59:44.420 --> 00:59:46.970 Yeah, yeah, I love your net present value. 00:59:46.970 --> 00:59:48.200 That's just swell. 00:59:48.200 --> 00:59:51.020 But there's a risk here. 00:59:51.020 --> 00:59:52.250 There's always a risk here. 00:59:56.490 --> 00:59:58.230 Yes, there's always a risk. 00:59:58.230 --> 00:59:59.580 We talked about outage. 00:59:59.580 --> 01:00:01.170 We'll come back to outage. 01:00:01.170 --> 01:00:03.480 But, I mean, it's 2% of revenue. 01:00:03.480 --> 01:00:05.790 You're going to make the plant more complicated. 01:00:05.790 --> 01:00:08.760 And if you're lucky, we'll save 2% of revenue. 01:00:08.760 --> 01:00:10.160 Why should we do that? 01:00:10.160 --> 01:00:12.270 It's going to be lost in the noise 01:00:12.270 --> 01:00:15.750 as production varies, as price varies, as everything varies. 01:00:15.750 --> 01:00:19.750 Why should we complicate our lives? 01:00:19.750 --> 01:00:22.570 Now, these kinds of things come up. 01:00:22.570 --> 01:00:23.070 Sam. 01:00:23.070 --> 01:00:24.190 AUDIENCE: Well, one, you could say 01:00:24.190 --> 01:00:25.810 the whole-- you could play the whole green angle, 01:00:25.810 --> 01:00:27.950 like as if it were to make the environment better. 01:00:27.950 --> 01:00:30.500 But also you could say, like, in the future, 01:00:30.500 --> 01:00:31.220 we don't know what's going to happen 01:00:31.220 --> 01:00:32.387 to the price of electricity. 01:00:32.387 --> 01:00:35.410 And if it rises, it's a good insurance policy we have. 01:00:35.410 --> 01:00:37.260 And also, you can say the technology 01:00:37.260 --> 01:00:39.500 that we're adding has a pretty good track record. 01:00:39.500 --> 01:00:42.125 Like, it's not that complex. 01:00:42.125 --> 01:00:43.750 RICHARD SCHMALENSEE: Yeah, I mean, this 01:00:43.750 --> 01:00:47.390 is not the first time this contractor has ever done it. 01:00:47.390 --> 01:00:51.310 So the risk doesn't sound like it's that high. 01:00:51.310 --> 01:00:54.070 2% is 2%. 01:00:54.070 --> 01:00:54.610 Not bad. 01:00:54.610 --> 01:00:55.730 Anybody else? 01:00:55.730 --> 01:00:56.230 Ryan. 01:00:56.230 --> 01:00:59.197 AUDIENCE: It's actually checking the formaldehyde process, 01:00:59.197 --> 01:01:01.030 so it's not complicating it in that respect. 01:01:01.030 --> 01:01:03.880 But there's also the safety issue, and like we said, 01:01:03.880 --> 01:01:07.570 the green issue, the safety issue being the [INAUDIBLE].. 01:01:07.570 --> 01:01:08.800 RICHARD SCHMALENSEE: Yeah. 01:01:08.800 --> 01:01:09.730 Got the safety issue. 01:01:09.730 --> 01:01:10.420 That's a risk. 01:01:10.420 --> 01:01:12.820 Boy, somebody slips and falls on that ice, 01:01:12.820 --> 01:01:19.060 and we get stuck with nice negligence, big medical bills, 01:01:19.060 --> 01:01:21.220 sympathetic plaintiff. 01:01:21.220 --> 01:01:22.340 It's really depressing. 01:01:22.340 --> 01:01:22.840 Scott. 01:01:22.840 --> 01:01:25.720 AUDIENCE: So I think if you look at it in terms of percentage, 01:01:25.720 --> 01:01:27.370 it doesn't sound like very much. 01:01:27.370 --> 01:01:29.050 Like saying [INAUDIBLE] it's only 2% 01:01:29.050 --> 01:01:31.300 of our revenue, that doesn't sound very much at all. 01:01:31.300 --> 01:01:36.850 But if you say it's $300,000 we're saving, then while it may 01:01:36.850 --> 01:01:38.320 be only a small portion of revenue, 01:01:38.320 --> 01:01:44.140 $300,000 is a large amount of money to pretty much anyone. 01:01:44.140 --> 01:01:46.340 RICHARD SCHMALENSEE: To a $5 million operation? 01:01:46.340 --> 01:01:47.200 I don't know, maybe. 01:01:47.200 --> 01:01:47.890 Yeah, yeah. 01:01:47.890 --> 01:01:49.630 It's not trivial in the absolute. 01:01:49.630 --> 01:01:51.490 Anybody else? 01:01:51.490 --> 01:01:52.420 [INAUDIBLE] 01:01:52.420 --> 01:01:55.630 AUDIENCE: They're also going to use current employees 01:01:55.630 --> 01:01:57.110 to run the same thing. 01:01:57.110 --> 01:02:01.465 So I presume their salary would increase. 01:02:01.465 --> 01:02:03.730 RICHARD SCHMALENSEE: I wouldn't want to presume that. 01:02:03.730 --> 01:02:06.160 I'd say their job satisfaction would 01:02:06.160 --> 01:02:09.100 increase because it would make their jobs more interesting. 01:02:09.100 --> 01:02:11.560 That's the pitch I'd use. 01:02:11.560 --> 01:02:12.820 And it's a good point. 01:02:12.820 --> 01:02:16.150 You might want to see if you can get them behind it. 01:02:16.150 --> 01:02:18.880 You might want to talk it up. 01:02:18.880 --> 01:02:20.795 So you could say, well, I've talked up 01:02:20.795 --> 01:02:22.420 with the folks in the factory, and they 01:02:22.420 --> 01:02:23.817 actually like the idea. 01:02:23.817 --> 01:02:24.400 [? Emerson? ?] 01:02:24.400 --> 01:02:28.280 AUDIENCE: [INAUDIBLE] having those same people [INAUDIBLE] 01:02:28.280 --> 01:02:34.490 working [INAUDIBLE] because they're 01:02:34.490 --> 01:02:39.572 more familiar with the [? cost is ?] [INAUDIBLE].. 01:02:39.572 --> 01:02:41.210 RICHARD SCHMALENSEE: It helps, yeah. 01:02:41.210 --> 01:02:42.440 These people know it. 01:02:42.440 --> 01:02:44.180 They want to keep the plant running. 01:02:44.180 --> 01:02:47.420 We all want to keep the plant running. 01:02:47.420 --> 01:02:48.860 This actually is common. 01:02:48.860 --> 01:02:52.110 I mean, these paraphrase the objections in the case. 01:02:52.110 --> 01:02:55.760 I've added a little bit of what you always hear. 01:02:55.760 --> 01:02:58.960 This is another one. 01:02:58.960 --> 01:03:03.280 We can invest and grow capacity, as 01:03:03.280 --> 01:03:06.580 opposed to this complicating investment, 01:03:06.580 --> 01:03:08.680 and we want to grow the business. 01:03:08.680 --> 01:03:11.770 You're not growing the business. 01:03:11.770 --> 01:03:14.770 If we didn't have money, well, then we wouldn't invest. 01:03:14.770 --> 01:03:17.590 But if times are good and we're selling this stuff, 01:03:17.590 --> 01:03:20.230 we want to make more of it, because that's how we grow. 01:03:20.230 --> 01:03:24.820 And your investment isn't a growth investment. 01:03:24.820 --> 01:03:25.390 James. 01:03:25.390 --> 01:03:28.437 AUDIENCE: Well maybe by selling electricity and formaldehyde, 01:03:28.437 --> 01:03:32.982 you're diversifying both the [INAUDIBLE],, 01:03:32.982 --> 01:03:35.458 which is even safer, even though [? it's not that much ?] 01:03:35.458 --> 01:03:36.802 electricity. 01:03:36.802 --> 01:03:39.740 RICHARD SCHMALENSEE: So yeah, we're 01:03:39.740 --> 01:03:42.650 reducing the risk of our operation overall because 01:03:42.650 --> 01:03:44.390 of this electricity hedge. 01:03:44.390 --> 01:03:47.090 And that means growth is safer. 01:03:47.090 --> 01:03:48.320 You might try that. 01:03:48.320 --> 01:03:49.126 Yes. 01:03:49.126 --> 01:03:52.250 AUDIENCE: [INAUDIBLE] experience with the technology 01:03:52.250 --> 01:03:54.770 that's more PR-friendly, in the sense that you have 01:03:54.770 --> 01:03:56.720 less [INAUDIBLE] [? gas. ?] [INAUDIBLE] 01:03:56.720 --> 01:03:58.610 it's easier to build things where you 01:03:58.610 --> 01:04:01.010 want to get less public outcry. 01:04:01.010 --> 01:04:03.625 And so that [INAUDIBLE] to [INAUDIBLE] 01:04:03.625 --> 01:04:06.410 grow that in the future. 01:04:06.410 --> 01:04:09.170 RICHARD SCHMALENSEE: Yeah, of course, except-- 01:04:09.170 --> 01:04:10.840 I mean, we are making formaldehyde. 01:04:10.840 --> 01:04:15.380 We can't fake into flowers. 01:04:15.380 --> 01:04:17.010 [INAUDIBLE]? 01:04:17.010 --> 01:04:17.750 Yeah. 01:04:17.750 --> 01:04:21.170 AUDIENCE: I think maybe finding a better solution 01:04:21.170 --> 01:04:27.380 to get rid of the steam could allow you to increase capacity, 01:04:27.380 --> 01:04:30.440 because if it's just lying around, 01:04:30.440 --> 01:04:32.930 there's probably a maximum amount of formaldehyde 01:04:32.930 --> 01:04:37.745 that you can produce and have this [? thing ?] creating ice. 01:04:37.745 --> 01:04:39.870 RICHARD SCHMALENSEE: That's an interesting thought. 01:04:39.870 --> 01:04:43.820 So you're saying we could only do so much of this venting 01:04:43.820 --> 01:04:45.800 and ice and so on. 01:04:45.800 --> 01:04:49.310 And that may someday be a constraint on us. 01:04:49.310 --> 01:04:51.920 AUDIENCE: Yes, in finding a better solution, 01:04:51.920 --> 01:04:57.230 that maybe [INAUDIBLE] enable them to expand it even more. 01:04:57.230 --> 01:04:59.005 RICHARD SCHMALENSEE: OK, [INAUDIBLE].. 01:04:59.005 --> 01:05:01.770 AUDIENCE: So this process saving money every year 01:05:01.770 --> 01:05:05.290 can add [INAUDIBLE] to that year investment [INAUDIBLE] 01:05:05.290 --> 01:05:07.700 get your initial investment back [INAUDIBLE].. 01:05:07.700 --> 01:05:09.690 RICHARD SCHMALENSEE: Roughly year 3, yeah. 01:05:09.690 --> 01:05:10.380 Extra money. 01:05:10.380 --> 01:05:12.990 AUDIENCE: Yeah, actually [INAUDIBLE] 01:05:12.990 --> 01:05:14.698 capacity every year after that. 01:05:14.698 --> 01:05:16.240 RICHARD SCHMALENSEE: Oh, that's nice. 01:05:16.240 --> 01:05:17.890 That's nice if we play it right. 01:05:17.890 --> 01:05:20.080 I mean, you get this stuff. 01:05:20.080 --> 01:05:21.640 You're getting this. 01:05:21.640 --> 01:05:24.130 They don't specify in the case who he's talking to. 01:05:24.130 --> 01:05:27.040 But presumably, this is a middle management group 01:05:27.040 --> 01:05:29.980 that passes on capital spending requests. 01:05:29.980 --> 01:05:35.380 So your response would be, look, folks, if this plant is 01:05:35.380 --> 01:05:36.710 more profitable-- 01:05:36.710 --> 01:05:38.740 which it will be, we're going to be 01:05:38.740 --> 01:05:43.915 able to use that to get more investment money to expand. 01:05:46.520 --> 01:05:48.520 We don't necessarily get to put it in our pocket 01:05:48.520 --> 01:05:50.290 because it's all part of the corporation, 01:05:50.290 --> 01:05:52.445 but it would be a good justification. 01:05:52.445 --> 01:05:52.945 Andrew. 01:05:52.945 --> 01:05:56.980 AUDIENCE: What you could be doing with the-- 01:05:56.980 --> 01:05:59.200 that's kind of a question. 01:05:59.200 --> 01:06:00.850 What you going be doing with the money 01:06:00.850 --> 01:06:03.780 you're using to build this, [INAUDIBLE] 01:06:03.780 --> 01:06:05.860 by your discount rate essentially. 01:06:05.860 --> 01:06:08.320 So we can just argue that-- 01:06:08.320 --> 01:06:10.288 I mean because it's kind of an opportunity cost 01:06:10.288 --> 01:06:11.580 that they're mentioning, right? 01:06:11.580 --> 01:06:13.642 I mean, instead of spending the money to do this, 01:06:13.642 --> 01:06:15.100 you can spend to grow the business. 01:06:15.100 --> 01:06:17.545 But then you can answer, like, that's why I'm using-- 01:06:17.545 --> 01:06:21.130 RICHARD SCHMALENSEE: It is, except in most companies 01:06:21.130 --> 01:06:26.020 of any size, you basically do a capital budgeting process. 01:06:26.020 --> 01:06:27.550 We're going to invest x-- 01:06:27.550 --> 01:06:31.900 I mean, you shouldn't, but you do. 01:06:31.900 --> 01:06:33.790 We're going to invest x this year. 01:06:33.790 --> 01:06:36.490 Your job is to figure out how best to invest it, 01:06:36.490 --> 01:06:43.390 as opposed to saying anything that has a positive net 01:06:43.390 --> 01:06:45.850 present value, we'll figure out how to fund it. 01:06:45.850 --> 01:06:48.190 And if you a great project-- 01:06:48.190 --> 01:06:53.200 and this is a way of just doing a regular systematic budgeting 01:06:53.200 --> 01:06:53.830 process. 01:06:53.830 --> 01:06:59.770 If you come up with a great, big, big project, 01:06:59.770 --> 01:07:01.600 then you go to top management and you say, 01:07:01.600 --> 01:07:04.300 I know this is over the capital budget, but. 01:07:04.300 --> 01:07:07.060 But for little things like this, and for this company, 01:07:07.060 --> 01:07:10.270 this is probably a relatively small project. 01:07:10.270 --> 01:07:13.900 Darren doesn't have the discretion to do it himself. 01:07:13.900 --> 01:07:16.900 Routine things, he probably has a limit. 01:07:16.900 --> 01:07:22.930 You have a spending limit without approval of $20,000 01:07:22.930 --> 01:07:24.190 maybe, maybe more. 01:07:26.750 --> 01:07:29.780 For anything above that, up to some ceiling, 01:07:29.780 --> 01:07:32.060 you got to clear it with whatever this group is 01:07:32.060 --> 01:07:34.340 that is full of skeptics. 01:07:34.340 --> 01:07:38.570 Beyond that, the group has to go and say to top management, 01:07:38.570 --> 01:07:43.430 I know you only gave us $800,000 for the formaldehyde division. 01:07:43.430 --> 01:07:47.510 But we have this great idea, and we'd like to present it. 01:07:47.510 --> 01:07:56.270 So it economizes is on top management time to some extent. 01:07:56.270 --> 01:08:03.000 It also gives you an orderly budgeting process, 01:08:03.000 --> 01:08:05.250 so you can predict cash flows. 01:08:05.250 --> 01:08:08.850 But it imposes this kind of constraint. 01:08:08.850 --> 01:08:11.790 I mean, capital budgeting processes do. 01:08:11.790 --> 01:08:14.029 At some point, somebody sits in the room-- 01:08:14.029 --> 01:08:16.029 you've got a good project, I got a good project. 01:08:16.029 --> 01:08:17.910 We don't have money for both. 01:08:17.910 --> 01:08:21.330 And they're not so good that we can get money for both. 01:08:21.330 --> 01:08:23.939 We need to choose. 01:08:23.939 --> 01:08:27.533 And there is a tendency to say we want to grow. 01:08:27.533 --> 01:08:28.200 We want to grow. 01:08:28.200 --> 01:08:32.010 That is an issue that investments in efficiency 01:08:32.010 --> 01:08:35.895 and conservation traditionally face 01:08:35.895 --> 01:08:37.520 because they're not growth investments, 01:08:37.520 --> 01:08:39.222 and people like growth. 01:08:39.222 --> 01:08:39.764 [? Obeida? ?] 01:08:39.764 --> 01:08:41.347 AUDIENCE: I also [INAUDIBLE] mentioned 01:08:41.347 --> 01:08:43.319 this about the second point, but it might 01:08:43.319 --> 01:08:44.805 be 2% of revenue for one plant. 01:08:44.805 --> 01:08:46.305 But what if you have several plants? 01:08:46.305 --> 01:08:46.805 [INAUDIBLE] 01:08:46.805 --> 01:08:48.680 RICHARD SCHMALENSEE: If it's like this plant, 01:08:48.680 --> 01:08:51.110 it's 2% of revenue for all plants, right. 01:08:51.110 --> 01:08:54.149 AUDIENCE: If you install the system at a number of plants, 01:08:54.149 --> 01:08:56.040 you could easily end up with revenue 01:08:56.040 --> 01:08:58.075 like savings in the millions. 01:08:58.075 --> 01:09:00.450 RICHARD SCHMALENSEE: You could end up with a good number. 01:09:00.450 --> 01:09:03.689 It would still be 2% of revenue probably on that order. 01:09:03.689 --> 01:09:04.550 OK, yeah. 01:09:08.850 --> 01:09:11.460 Another way to do that argument-- 01:09:11.460 --> 01:09:17.760 and it's a little variation on the first one, would be, look, 01:09:17.760 --> 01:09:20.740 guys, we can lead the way for the company, 01:09:20.740 --> 01:09:23.580 whatever this group is that's approving the budget. 01:09:23.580 --> 01:09:27.240 If this works here, and we're very confident it works, 01:09:27.240 --> 01:09:30.090 we're going to get a lot of points with the company, 01:09:30.090 --> 01:09:33.840 because we led the way to 2% of revenue savings 01:09:33.840 --> 01:09:36.329 in all of our formaldehyde operations. 01:09:36.329 --> 01:09:38.590 Or maybe it's not 2% everywhere. 01:09:38.590 --> 01:09:41.840 We've got to run the numbers. 01:09:41.840 --> 01:09:44.000 Electricity is probably particularly 01:09:44.000 --> 01:09:45.500 expensive in upstate New York. 01:09:45.500 --> 01:09:46.910 It would be cheaper in Ohio. 01:09:46.910 --> 01:09:49.850 But that's where I'd go with that. 01:09:49.850 --> 01:09:54.170 I wouldn't say 2% is-- 01:09:54.170 --> 01:09:57.050 2% is big if I multiply it by a large number. 01:09:57.050 --> 01:09:59.630 I would say it's in our interest, 01:09:59.630 --> 01:10:01.610 as the group sitting around the table, 01:10:01.610 --> 01:10:07.460 to demonstrate to the guys up above that we can do this. 01:10:07.460 --> 01:10:09.210 OK, here's another one. 01:10:09.210 --> 01:10:10.130 This is a killer. 01:10:13.490 --> 01:10:16.970 Our bonuses depend on production. 01:10:16.970 --> 01:10:19.098 That's how we do it. 01:10:19.098 --> 01:10:21.140 And you're telling me it's five days of downtime, 01:10:21.140 --> 01:10:23.930 and we can recover from it. 01:10:23.930 --> 01:10:26.270 But we don't know we can recover from it. 01:10:26.270 --> 01:10:30.320 You're putting my trip to the Caribbean at risk, 01:10:30.320 --> 01:10:33.480 and it's very cold in upstate New York in the winter. 01:10:33.480 --> 01:10:36.470 I need that bonus. 01:10:36.470 --> 01:10:39.730 This is a risk. 01:10:39.730 --> 01:10:41.190 What's your response, Casey? 01:10:41.190 --> 01:10:41.920 You look ready. 01:10:41.920 --> 01:10:43.530 You are ready on this one, am I right? 01:10:43.530 --> 01:10:45.600 AUDIENCE: Well, first, they might 01:10:45.600 --> 01:10:49.020 be able to switch their production schedule to account 01:10:49.020 --> 01:10:50.790 for take those five days off then, 01:10:50.790 --> 01:10:53.340 because they're not running at full capacity all the time 01:10:53.340 --> 01:10:53.995 anyway. 01:10:53.995 --> 01:10:55.620 RICHARD SCHMALENSEE: The case leads you 01:10:55.620 --> 01:10:57.920 to some optimism, yes. 01:10:57.920 --> 01:11:02.820 AUDIENCE: And then, additionally, you 01:11:02.820 --> 01:11:05.720 can just go back to the [? handy ?] argument 01:11:05.720 --> 01:11:08.790 that businesses need to produce money, 01:11:08.790 --> 01:11:11.428 but they don't necessarily need to maximize their funding. 01:11:11.428 --> 01:11:14.360 So we can do this [INAUDIBLE]. 01:11:14.360 --> 01:11:16.850 RICHARD SCHMALENSEE: But this last point 01:11:16.850 --> 01:11:19.540 isn't about the business. 01:11:19.540 --> 01:11:21.748 It's about my trip to the Caribbean. 01:11:21.748 --> 01:11:24.500 [LAUGHS] 01:11:24.500 --> 01:11:28.370 And I care about that. 01:11:28.370 --> 01:11:29.658 This one's tough. 01:11:29.658 --> 01:11:31.700 I don't mean to put you particularly on the spot, 01:11:31.700 --> 01:11:32.575 but this one's tough. 01:11:32.575 --> 01:11:37.490 If you've got the compensation structure set in such a way 01:11:37.490 --> 01:11:41.180 that it biases toward growth and towards revenue, 01:11:41.180 --> 01:11:42.890 this is a tough one. 01:11:42.890 --> 01:11:43.418 Charlotte? 01:11:43.418 --> 01:11:44.960 AUDIENCE: You can-- back to the point 01:11:44.960 --> 01:11:48.110 that we made on the last objection, where 01:11:48.110 --> 01:11:51.430 if you're the first plant to start [INAUDIBLE] something 01:11:51.430 --> 01:11:53.390 that saves your company 2% in revenue, 01:11:53.390 --> 01:11:58.122 and adds other plants then the heads of organization 01:11:58.122 --> 01:12:03.023 will look favorably on you, and [INAUDIBLE].. 01:12:03.023 --> 01:12:04.940 RICHARD SCHMALENSEE: We can get a bigger bonus 01:12:04.940 --> 01:12:07.760 if we can sell this. 01:12:07.760 --> 01:12:09.136 Tough argument. 01:12:09.136 --> 01:12:11.120 It's one you'd try, though. 01:12:11.120 --> 01:12:11.760 David. 01:12:11.760 --> 01:12:13.865 AUDIENCE: You would get a promotion 01:12:13.865 --> 01:12:15.590 if you can demonstrate initiative 01:12:15.590 --> 01:12:17.060 among your scale of thinking. 01:12:17.060 --> 01:12:20.690 Because if you don't do it, and someone else implements it, 01:12:20.690 --> 01:12:23.872 they might displace you [INAUDIBLE].. 01:12:23.872 --> 01:12:25.580 RICHARD SCHMALENSEE: It works for Darren. 01:12:25.580 --> 01:12:28.250 It might not work for the guys one notch above Darren. 01:12:28.250 --> 01:12:28.970 It might, though. 01:12:28.970 --> 01:12:30.050 It might. 01:12:30.050 --> 01:12:32.180 Look, if you guys all get behind this, 01:12:32.180 --> 01:12:34.430 we'll all ride up the ladder together. 01:12:34.430 --> 01:12:35.772 Martha. 01:12:35.772 --> 01:12:39.550 AUDIENCE: Going back to what was said about how, 01:12:39.550 --> 01:12:41.090 after your investment was returned, 01:12:41.090 --> 01:12:42.890 you'll be continuing to save money. 01:12:42.890 --> 01:12:45.230 So your close may be less this year, 01:12:45.230 --> 01:12:47.506 but they do much greater in future years, 01:12:47.506 --> 01:12:49.890 while they're able to start expanding that growth, 01:12:49.890 --> 01:12:51.390 and we're able to start-- 01:12:51.390 --> 01:12:53.910 so maybe instead of going to the Caribbean this year, 01:12:53.910 --> 01:12:57.030 you go to Vale or something. 01:12:57.030 --> 01:12:59.490 [LAUGHTER] 01:12:59.490 --> 01:13:03.400 But five years down the road, you can go to Jurassic Park. 01:13:03.400 --> 01:13:04.210 I don't know. 01:13:04.210 --> 01:13:06.210 RICHARD SCHMALENSEE: Hey, ski in the Adirondacks 01:13:06.210 --> 01:13:07.590 instead of skiing in Vermont. 01:13:07.590 --> 01:13:08.250 I don't know. 01:13:08.250 --> 01:13:11.550 OK, anybody else? 01:13:11.550 --> 01:13:12.050 OK. 01:13:17.680 --> 01:13:18.640 How about that? 01:13:18.640 --> 01:13:21.160 The case talks about all these policies. 01:13:21.160 --> 01:13:24.512 There's this killswitch problem. 01:13:24.512 --> 01:13:26.470 There are other policies about interconnection. 01:13:26.470 --> 01:13:28.640 They're still in flux. 01:13:28.640 --> 01:13:30.610 Maybe what we ought to do-- it's a good idea. 01:13:30.610 --> 01:13:31.750 OK, you've sold me. 01:13:31.750 --> 01:13:33.290 It's a good idea. 01:13:33.290 --> 01:13:37.170 Why don't we just wait? 01:13:37.170 --> 01:13:38.550 Let's just let this stuff settle. 01:13:44.615 --> 01:13:46.310 Maybe if we do it now, we'll have 01:13:46.310 --> 01:13:48.230 to take precautions we wouldn't have 01:13:48.230 --> 01:13:51.440 to take if they apply more sensible policies down 01:13:51.440 --> 01:13:53.780 the road. 01:13:53.780 --> 01:13:54.280 David. 01:13:54.280 --> 01:13:56.260 AUDIENCE: You could argue none of the competitors 01:13:56.260 --> 01:13:57.640 are doing it now, so doing it now 01:13:57.640 --> 01:14:00.240 gives us a competitive advantage versus in the future, 01:14:00.240 --> 01:14:04.677 competitors are already [INAUDIBLE].. 01:14:04.677 --> 01:14:06.010 RICHARD SCHMALENSEE: But we are. 01:14:06.010 --> 01:14:07.990 But suppose the policy goes against us. 01:14:07.990 --> 01:14:11.020 Suppose instead of making it easier 01:14:11.020 --> 01:14:14.410 to interconnect that the policy change makes it harder. 01:14:14.410 --> 01:14:17.560 It requires us to put on more protective devices-- 01:14:17.560 --> 01:14:20.470 let's say $200,000 worth. 01:14:20.470 --> 01:14:22.210 And then, all of a sudden-- 01:14:22.210 --> 01:14:24.910 that's extreme. 01:14:24.910 --> 01:14:30.550 But all of a sudden, the policies we were counting on, 01:14:30.550 --> 01:14:32.290 the ability to sell excess power, 01:14:32.290 --> 01:14:35.350 which is still in flux at this point, 01:14:35.350 --> 01:14:36.640 it turns out we can't sell it. 01:14:36.640 --> 01:14:40.540 Turns out we need to have more protection. 01:14:40.540 --> 01:14:43.680 Maybe we should wait. 01:14:43.680 --> 01:14:47.040 Claudia, what do you say? 01:14:47.040 --> 01:14:48.780 You sold up with the skeptics? 01:14:48.780 --> 01:14:51.540 I mean, that's not a crazy point. 01:14:51.540 --> 01:14:52.330 No. 01:14:52.330 --> 01:14:58.200 AUDIENCE: If it tends to approach local regulators 01:14:58.200 --> 01:15:03.330 directly and [INAUDIBLE] make a point of [INAUDIBLE].. 01:15:03.330 --> 01:15:05.910 RICHARD SCHMALENSEE: Well, one thing Darren might have done 01:15:05.910 --> 01:15:10.350 is he might have not necessarily approached them. 01:15:10.350 --> 01:15:13.200 But he might try to get a feel from, say, 01:15:13.200 --> 01:15:14.460 his local representative. 01:15:14.460 --> 01:15:18.000 A lot of this stuff is going on at the state level. 01:15:18.000 --> 01:15:20.268 He's running a pretty big operation. 01:15:20.268 --> 01:15:21.810 He's one of the great polluters-- no, 01:15:21.810 --> 01:15:24.900 one of the great operations in the area. 01:15:24.900 --> 01:15:27.130 He might make a phone call and say, look, 01:15:27.130 --> 01:15:29.380 can you tell me where this stuff stands? 01:15:29.380 --> 01:15:32.970 I mean, is it going to get resolved in six months, 01:15:32.970 --> 01:15:35.040 or is this a five-year marathon and it'll 01:15:35.040 --> 01:15:36.930 get changed every so often. 01:15:36.930 --> 01:15:37.650 That matters. 01:15:37.650 --> 01:15:40.260 If it's going to get resolved in six months, let's wait. 01:15:40.260 --> 01:15:44.650 If it's going to be debated for the next 10 years, why wait? 01:15:44.650 --> 01:15:45.150 Ariana. 01:15:45.150 --> 01:15:46.590 AUDIENCE: I think this is where it 01:15:46.590 --> 01:15:48.780 would have come in useful for him to have made 01:15:48.780 --> 01:15:51.690 a more pessimistic analysis. 01:15:51.690 --> 01:15:54.300 And so maybe you do that first. 01:15:54.300 --> 01:15:56.227 And then you say, like, OK, well-- 01:15:56.227 --> 01:15:57.810 because, I mean, when we looked at it, 01:15:57.810 --> 01:15:59.952 it looked like, even if some of the estimates 01:15:59.952 --> 01:16:01.410 were a little bit more pessimistic, 01:16:01.410 --> 01:16:04.410 or you couldn't get the grant that you wanted maybe, 01:16:04.410 --> 01:16:06.930 or you estimated it with some of the policies 01:16:06.930 --> 01:16:08.370 not falling your way. 01:16:08.370 --> 01:16:11.370 And you could still-- maybe the profit wouldn't be as large. 01:16:11.370 --> 01:16:13.440 But in the long run, it's still worth it. 01:16:13.440 --> 01:16:15.040 And you could come and say like, look, 01:16:15.040 --> 01:16:17.430 this is what I think is going to happen. 01:16:17.430 --> 01:16:18.730 I mean, you never really know. 01:16:18.730 --> 01:16:20.460 And even if it goes a little bit sour, 01:16:20.460 --> 01:16:22.930 like we still are making some kind of profit. 01:16:22.930 --> 01:16:26.410 So it's worth it anyway. 01:16:26.410 --> 01:16:30.720 RICHARD SCHMALENSEE: OK, let me go to one last one. 01:16:30.720 --> 01:16:33.930 Who'd like to make the elevator pitch? 01:16:33.930 --> 01:16:35.610 Is there a spin he can put on this. 01:16:35.610 --> 01:16:39.690 So he walked in with his spreadsheet. 01:16:39.690 --> 01:16:45.600 He got all these arguments, all these nay-saying nitpickers. 01:16:45.600 --> 01:16:48.750 What do you stand up and say? 01:16:48.750 --> 01:16:50.130 What do you stand up and say? 01:16:50.130 --> 01:16:52.297 Caroline, are you ready with an elevator pitch here? 01:16:52.297 --> 01:16:54.210 You ready with a one minute speech 01:16:54.210 --> 01:16:57.330 to make the committee turn around and charge out the door 01:16:57.330 --> 01:17:00.584 and go to the CEO and do it? 01:17:00.584 --> 01:17:03.783 AUDIENCE: [INAUDIBLE] 01:17:03.783 --> 01:17:05.750 RICHARD SCHMALENSEE: Not quite ready, OK. 01:17:05.750 --> 01:17:07.240 Anybody? 01:17:07.240 --> 01:17:08.620 [? Albina, ?] you're ready today? 01:17:08.620 --> 01:17:09.370 AUDIENCE: OK. 01:17:09.370 --> 01:17:10.710 that's good. 01:17:10.710 --> 01:17:11.710 Sorry to disappoint you. 01:17:11.710 --> 01:17:13.793 I don't have an elevator pitch, but I'm curious as 01:17:13.793 --> 01:17:16.420 to what the outcome was of this case, because it's not 01:17:16.420 --> 01:17:17.030 [INAUDIBLE]. 01:17:17.030 --> 01:17:18.550 RICHARD SCHMALENSEE: Let me fish one more time 01:17:18.550 --> 01:17:19.630 for an elevator pitch. 01:17:19.630 --> 01:17:22.930 And then I'll tell you what I think happened, which is not 01:17:22.930 --> 01:17:25.000 unrelated to that question. 01:17:25.000 --> 01:17:26.246 Max? 01:17:26.246 --> 01:17:28.704 AUDIENCE: You want to appeal to the interests of the board, 01:17:28.704 --> 01:17:30.496 and their interest is always the production 01:17:30.496 --> 01:17:31.610 and maximizing profits. 01:17:31.610 --> 01:17:36.490 So emphasizing the fact that this short-term investment will 01:17:36.490 --> 01:17:40.600 save a lot of money in the long run, which you can in turn 01:17:40.600 --> 01:17:43.780 invest in greater production in the future, which 01:17:43.780 --> 01:17:45.190 will give them bigger bonuses. 01:17:45.190 --> 01:17:47.230 You can also appeal, I think-- 01:17:47.230 --> 01:17:50.380 it deals with a couple of points to the safety of the workers 01:17:50.380 --> 01:17:53.020 and to the integrity of the whole plant. 01:17:53.020 --> 01:17:54.740 In the article, it talked about the ice 01:17:54.740 --> 01:17:56.740 being a hazard for the workers and the corrosion 01:17:56.740 --> 01:18:01.008 of some of the structure of the building [INAUDIBLE] as well. 01:18:01.008 --> 01:18:02.800 RICHARD SCHMALENSEE: What I think happened, 01:18:02.800 --> 01:18:06.040 and it's not unrelated, to that my understanding-- and I've 01:18:06.040 --> 01:18:09.850 tried to verify it and I'll see if I can do it next time, 01:18:09.850 --> 01:18:12.100 is that in fact, when he presented it 01:18:12.100 --> 01:18:15.820 to the review operation, it was turned down 01:18:15.820 --> 01:18:19.120 for all of those reasons. 01:18:19.120 --> 01:18:24.850 And he managed to get the ear, one way or another, of the CEO, 01:18:24.850 --> 01:18:29.930 and he pitched it as industry leadership, 01:18:29.930 --> 01:18:32.900 green public relations. 01:18:32.900 --> 01:18:34.520 Economics are OK. 01:18:34.520 --> 01:18:37.755 Economics are pretty good, so we're not 01:18:37.755 --> 01:18:39.380 going to lose money on this investment. 01:18:39.380 --> 01:18:42.920 But moreover, think about what we can say to the community. 01:18:42.920 --> 01:18:44.960 Think about what we can say to the workers. 01:18:44.960 --> 01:18:47.720 Think about what you can say at the next industry convention 01:18:47.720 --> 01:18:51.590 when you stand up and give your leadership speech. 01:18:51.590 --> 01:18:52.553 We'll get benefits. 01:18:52.553 --> 01:18:53.720 I mean, we're venting steam. 01:18:53.720 --> 01:18:55.845 It's not hurting anybody, but it doesn't look good. 01:18:55.845 --> 01:18:57.510 It's got to look better. 01:18:57.510 --> 01:19:01.400 So he went around these guys, is my understanding, 01:19:01.400 --> 01:19:05.270 and pitched it as an opportunity-- 01:19:05.270 --> 01:19:08.918 and not just an economic opportunity. 01:19:08.918 --> 01:19:10.085 He overstated the economics. 01:19:10.085 --> 01:19:12.740 The economics are OK. 01:19:12.740 --> 01:19:15.080 But he pitched it as an opportunity. 01:19:15.080 --> 01:19:21.410 And we'll see next week, and we will see after the vacation, 01:19:21.410 --> 01:19:26.060 that whether you view something as a threat or an opportunity 01:19:26.060 --> 01:19:29.510 makes a lot of difference as to how you act on it. 01:19:29.510 --> 01:19:31.660 Thank you very much.