Congressional Leaders Agree to Lift 40-Year Ban on Oil Exports

    Congressional Leaders Agree to Lift 40-Year Ban on Oil Exports

Dec 16, 2015 By Amy Harder And Lynn Cook

Accord is a key component to deal on tax, spending legislation
WASHINGTON—In a move considered unthinkable even a few months ago, congressional leaders have agreed to lift the nation’s 40-year-old ban on oil exports, a historic action that reflects political and economic shifts driven by a boom in U.S. oil drilling.
The measure allowing oil exports is at the center of a deal that Republican leaders announced late Tuesday on spending and tax legislation. However, Democrats haven’t confirmed the agreement. Both the House and Senate still must pass it and President Barack Obama must sign it into law.
The deal would lift the ban, a priority for Republicans and the oil industry, and at the same time adopt environmental and renewable measures that Democrats sought. These include extending wind and solar tax credits; reauthorizing for three years a conservation fund; and excluding any measures that block major Obama administration environmental regulations, according to a GOP aide.
By design or not, the agreement hands the oil industry a long-sought victory within days of a major international climate deal that is aimed at sharply reducing emissions from oil and other fuels, a deal opposed by the industry and one that will arguably require its cooperation.
More than a dozen independent oil companies, including Continental Resources CLR 2.29 % and ConocoPhillips , COP 2.08 % have been lobbying Congress to lift the ban on oil exports for nearly two years, arguing that unfettered oil exports would eliminate market distortions, stimulate the U.S. economy and boost national security.
A handful of Washington lawmakers representing oil-producing states, including Sens. Heidi Heitkamp (D., N.D.) and Lisa Murkowski (R., Alaska), have been working to convince once-wary politicians to back oil exports and allay worries that they will be blamed if gasoline prices were to rise.
Some U.S. refineries oppose oil exports, saying their business would be hit if crude oil is shipped overseas to be refined and warning that higher costs might be passed along to consumers. The U.S. government doesn’t limit exports of refined petroleum products, and those exports have more than doubled since 2007.
To address the refiners’ concerns, expressed most vocally by Democrats from the Northeast where several refineries are located, the spending bill changes an existing tax deduction for domestic manufacturing to benefit independent refineries in particular.
President Barack Obama had threatened to veto separate legislation lifting the export ban, but the White House isn’t expected to oppose the overall spending bill simply because it includes the measure, according to congressional aides.
Congress moved to ban oil exports under most circumstances following a 1973 Arab oil embargo that sent domestic gasoline prices skyrocketing.
With the increased use of fracking and other drilling technologies in recent years, U.S. oil production has shot up nearly 90% since August 2008, helping lower gasoline prices to levels not seen since 2009. Gas prices are less than $2 a gallon in many regions of the country, and the U.S. Energy Information Administration forecasts the price will average $2.04 this month and $2.36 next year.
It took this dramatic drop in oil prices, hovering below $40 a barrel, to catapult the policy change to the top of the Republican agenda. It helped prompt lawmakers of both parties to consider pairing renewable energy support with oil exports, a type of grand Washington deal-making that hasn’t been seen for years on the highly divisive issues of energy and environment.
The same low prices that generated momentum for lifting the ban could reduce its short-term economic impact, however, because the global market is saturated and U.S. oil companies have already slowed drilling in response.
John Hess, chief executive of Hess Corp., said low oil prices have increased the urgency for Congress to lift the ban, but he declined to say whether his company would immediately begin exporting oil if given the opportunity.
“It would be a function of market conditions,” Mr. Hess said in a recent interview. “But I think over time, definitely; If the market signals were there, we would have that option.”
The U.S. is already exporting nearly 400,000 barrels of crude a day to Canada, the biggest exemption under the ban. That is more than nine times as much as in 2008 but still just 3.8% of the U.S. oil produced every day.
A certain type of light oil is also already starting to flow overseas thanks to permission granted in 2014 by the Commerce Department, which allows producers to reclassify a certain type of oil as a refined fuel, similar to gasoline, which is legal to ship abroad.
The logistics of a new surge of oil exports would be relatively manageable, especially compared to exporting natural gas, which takes years of federal permitting and billions of dollars in technology to liquefy the gas.
Extensive networks of oil pipelines and storage tanks already stretch along the Gulf Coast from Corpus Christi, Texas, to St. James Parish, La. Those oil ports, where nearly a third of U.S. refineries are located, are for now geared toward unloading crude from tankers, not loading them. So initially there would be some constrained capacity that caps energy companies’ ability to ship crude out to foreign buyers.
But retrofitting those facilities—adding more deep-water dock space and equipment to load oil tankers—could happen quickly in a place like Texas, where permitting is easy and such projects face little community opposition. The ports of Corpus Christi and Houston are already undergoing dramatic expansions.
Several companies, including Enterprise Products Partners EPD 1.17 % LP, have already been ramping up their ability to export oil from Texas, and Enbridge Energy Partners EEP -0.55 % LP, based in Canada, plans to spend $5 billion to construct three new oil terminals between Houston and New Orleans.
—Kristina Peterson contributed to this article.

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JPMorgan Chase Chief Says ‘Banks Are Under Assault’

By NATHANIEL POPPER
JANUARY 14, 2015

As JPMorgan Chase reported sluggish earnings and potential new legal costs on Wednesday, its chief executive, Jamie Dimon, lashed out at regulators and analysts, including some who are calling for the breakup of what is the nation’s largest bank.

The bank announced that both its revenue and profit were down during the fourth quarter of 2014, with few bright spots across its many business lines.

The bank’s profits were also dragged down by $1 billion it put aside to deal with a government investigation of wrongdoing on its foreign currency trading desks. The bank has also begun preparing for new rules that are expected to be tougher on JPMorgan than any other financial firm.

During conference calls with reporters and analysts, Mr. Dimon sounded like a chief executive under siege.

“Banks are under assault,” Mr. Dimon said in the call with reporters. “In the old days, you dealt with one regulator when you had an issue. Now it’s five or six. You should all ask the question about how American that is, how fair that is.”

This is not the first time that Mr. Dimon has publicly criticized the new scrutiny and rules that banks have dealt with since the financial crisis. But in the past, Mr. Dimon was often confronting skeptics from outside the banking world. On Wednesday, he faced off against several industry analysts who questioned whether the costs associated with JPMorgan’s heft are outweighing the benefits.

“This is not Elizabeth Warren asking the questions,” said Mike Mayo, a bank analyst at CLSA, referring to the Massachusetts senator and outspoken critic of big banks. “Investors are talking about this.”

Mr. Dimon and Marianne Lake, JPMorgan’s chief financial officer, rebutted any suggestion that JPMorgan would need to be broken into smaller parts to be more valuable, and argued that the bank’s size gave it many advantages against competitors — “the model works from a business standpoint,” Mr. Dimon said.

But some of the analysts questioning Mr. Dimon and Ms. Lake did not seem to be satisfied by the answers and suggested that they expected to hear more about the bank’s efforts to change itself.

The company’s share price ended the day down 3.5 percent, at $56.81.

Mr. Mayo, who was one of the first analysts to call for the big banks to be broken up, pointed out on Wednesday that as JPMorgan had continued to grow it had actually become somewhat less efficient, as measured by the ratio between its expenses and revenue.

When the questions about the bank’s future kept coming on Wednesday morning, Mr. Dimon sounded increasingly frustrated with the analysts.

“This company has been a fortress company,” he said. “It has delivered to clients and its diversification is the reason why it’s had less volatility of earnings and was able to go through the crisis and never lost money ever, not one quarter.”

The bank’s fourth-quarter results, while disappointing, were not terrible for shareholders. The bank said its earnings fell 7 percent, to $4.9 billion, or $1.19 a share, from $5.6 billion, or $1.30 a share, in the period a year earlier. The results fell short of the $1.31 a share expected by analysts surveyed by Thomson Reuters.

Net revenue at the bank dropped 3 percent, to $22.5 billion, from the fourth quarter of 2013. On a so-called managed basis, revenue was $23.55 billion, slightly below the $23.6 billion anticipated by analysts.

For 2014 as a whole, JPMorgan reported profit of $21.8 billion, a 21 percent increase over 2013, and the highest ever annual profit for the company.

In the third quarter of 2014, JPMorgan’s Wall Street operations bolstered the results of the bank. But in the fourth quarter, the difficult trading conditions that have hurt profits at Wall Street firms over the last few years returned.

Revenue from JPMorgan’s once-lucrative fixed-income trading business fell 32 percent from the previous quarter and was down 23 percent from the period a year earlier. Much of the decline was because of businesses that JPMorgan had sold. But core trading was also down 14 percent.

“Banks are under assault,” Mr. Dimon said in the call with reporters. “In the old days, you dealt with one regulator when you had an issue. Now it’s five or six. You should all ask the question about how American that is, how fair that is.”

This is not the first time that Mr. Dimon has publicly criticized the new scrutiny and rules that banks have dealt with since the financial crisis. But in the past, Mr. Dimon was often confronting skeptics from outside the banking world. On Wednesday, he faced off against several industry analysts who questioned whether the costs associated with JPMorgan’s heft are outweighing the benefits.

“This is not Elizabeth Warren asking the questions,” said Mike Mayo, a bank analyst at CLSA, referring to the Massachusetts senator and outspoken critic of big banks. “Investors are talking about this.”

Mr. Dimon and Marianne Lake, JPMorgan’s chief financial officer, rebutted any suggestion that JPMorgan would need to be broken into smaller parts to be more valuable, and argued that the bank’s size gave it many advantages against competitors — “the model works from a business standpoint,” Mr. Dimon said.

But some of the analysts questioning Mr. Dimon and Ms. Lake did not seem to be satisfied by the answers and suggested that they expected to hear more about the bank’s efforts to change itself.

The company’s share price ended the day down 3.5 percent, at $56.81.

Mr. Mayo, who was one of the first analysts to call for the big banks to be broken up, pointed out on Wednesday that as JPMorgan had continued to grow it had actually become somewhat less efficient, as measured by the ratio between its expenses and revenue.

When the questions about the bank’s future kept coming on Wednesday morning, Mr. Dimon sounded increasingly frustrated with the analysts.

“This company has been a fortress company,” he said. “It has delivered to clients and its diversification is the reason why it’s had less volatility of earnings and was able to go through the crisis and never lost money ever, not one quarter.”

The bank’s fourth-quarter results, while disappointing, were not terrible for shareholders. The bank said its earnings fell 7 percent, to $4.9 billion, or $1.19 a share, from $5.6 billion, or $1.30 a share, in the period a year earlier. The results fell short of the $1.31 a share expected by analysts surveyed by Thomson Reuters.

Net revenue at the bank dropped 3 percent, to $22.5 billion, from the fourth quarter of 2013. On a so-called managed basis, revenue was $23.55 billion, slightly below the $23.6 billion anticipated by analysts.

For 2014 as a whole, JPMorgan reported profit of $21.8 billion, a 21 percent increase over 2013, and the highest ever annual profit for the company.

In the third quarter of 2014, JPMorgan’s Wall Street operations bolstered the results of the bank. But in the fourth quarter, the difficult trading conditions that have hurt profits at Wall Street firms over the last few years returned.

Revenue from JPMorgan’s once-lucrative fixed-income trading business fell 32 percent from the previous quarter and was down 23 percent from the period a year earlier. Much of the decline was because of businesses that JPMorgan had sold. But core trading was also down 14 percent.

JPMorgan’s enormous consumer bank also had a drop in revenue in several areas, including credit cards and mortgages, which has slowed down as the national housing market has cooled off.

The bank has been able to attribute some of its disappointing results in recent years to the enormous fines that it has had to pay for wrongdoing before and during the financial crisis.

But while those legal expenses were expected to eventually recede, they have kept coming. This quarter, JPMorgan set aside $1.1 billion — $990 million after taxes — to deal primarily with an industrywide investigation of manipulation in the foreign currency markets. It set aside a similar amount in the previous quarter, but the potential severity of the wrongdoing appears to have increased since then.

Mr. Dimon said that the bank was still bracing for more fines. “It’s going to cost us several billion dollars more somehow plus or minus another couple billion before we get to normal.”

Mr. Dimon said the bank took responsibility for some of the problems that have led to penalties, but he complained that it had been unfair when multiple regulators had come after the bank for the same issue.

The more enduring challenge for the bank, though, may be the new requirements that the bank maintain higher levels of capital than other banks because of its size.

A Federal Reserve official said in December that JPMorgan would most likely to have to raise over $20 billion of new capital, either by holding on to profits or selling more shares to investors. The bank is the only one that is expected to have to raise significant amounts of new capital.

A bank analyst at Goldman Sachs said this month that because of the price that JPMorgan was paying for its size, it may be worth less in its current form than it would be if it was broken apart. On Wednesday, multiple analysts said that regulators seemed to want JPMorgan to be smaller.

Mr. Dimon acknowledged that there could be a point when the additional costs could force it to spin off some businesses. “If the regulators at the end of the day want JPMorgan to be split up, then that’s what will have to happen,” he said. “We can’t fight the federal government if that’s their intent.”

But Mr. Dimon said that his team was confident that the bank would manage to comply with the rules as they have currently been outlined without any major changes. Invoking patriotism, he warned that if his company was forced to shrink, it could open the door for foreign competitors, especially those from China.

“America has been the leader in global capital markets for the last 50, 100 years,” he said. “I look at it as a matter of public policy. I wouldn’t want to see the next JPMorgan Chase be a Chinese company.”

Currency Markets Jolted After Months of Calm

Currency Markets Jolted After Months of Calm

Volatility Rises as Investors Focus on Interest-Rate Divergence

By ANJANI TRIVEDI and IRA IOSEBASHVILI WSJ

After months of calm, currency markets have sprung back to life, as investors scramble to take advantage of the divergent paths taken by major central banks.

Bigger and more-frequent shifts in the foreign-exchange market are a welcome relief for investors, many of whom struggled to make profitable trades when currencies weren’t moving as dramatically.

Banks, whose currency desks execute trades on behalf of clients and companies, also see revenues grow when choppier markets drive up demand for their services.

“This definitely brightens my day,” said Chris Stanton, who oversees about $200 million at California-based Sunrise Capital Partners LLC. “It’s a welcome return to what feels like a freer market.”

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The size of daily trading swings across currencies has jumped 55% since hitting its lowest in at least a decade on July 31, according to Deutsche Bank AG. During that time, the dollar climbed to a six-year high against the yen, the euro fell below $1.30 for the first time since July 2013 and the pound tumbled to a 10-month low against the dollar. On Wednesday, the Swiss franc saw its biggest drop against the euro in six months.

Driving the price swings is a shift in policies at some of the world’s largest central banks. A burgeoning recovery in the U.S. has brought the Federal Reserve closer to raising rates, a move that would make the dollar more attractive to investors. At the same time, European and Japanese central banks are still trying to kickstart their economies and relying on policies such as bond buying that tend to drive down interest rates and reduce the value of a currency.

Implied volatility, which tracks the price of options used to protect against swings in exchange rates, has surged 45% in September to an eight-month high, according to Deutsche Bank. Higher implied volatility suggests money managers are buying options in anticipation of a more-active market.

Some money managers are buying the dollar ahead of next week’s Fed meeting, where policy makers could send firmer signals on their outlook for interest rates. Mr. Stanton’s fund is betting that the dollar will continue to strengthen against the yen and emerging-market currencies as the Fed gets closer to raising interest rates.

Citigroup Inc., C +1.11% the world’s largest currencies-dealing bank, on Monday said its markets revenue, which includes currency trading, is on track to be roughly flat in the third quarter compared with the same period in 2013, ending a decline that started a year ago.

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Until recently, unusually calm markets had left investors with fewer opportunities to trade and led to the demise of several large currency funds. FX Concepts LLC, founded in 1981 and considered a pioneer in currency investing, closed its doors last year after assets shriveled to $660 million from $14 billion before the financial crisis.

Currency volatility plummeted after the financial crisis, as the world’s biggest central banks cut interest rates to near zero. That gave traders little incentive to try and capture the difference in interest rates between various currencies, a key driver of activity in the foreign-exchange market.

That status quo has started to crack. Minutes from the Fed’s July meeting showed growing support for raising rates, spurring gains in the dollar when they were released in August. Earlier this month, the ECB surprised investors with a rate cut, bringing down the euro. Meantime, the pound tumbled on concerns over the repercussions from Scotland’s possible secession. On Wednesday, the Swiss National Bank said that it could introduce negative interest rates to halt the franc’s rise.

Trading bands of some major currencies have widened this summer, opening the door to bigger profits for investors. So far in September, the dollar is moving on average by 0.70 yen a day, the biggest range since February and up from 0.35 in July. Daily moves in the euro this month are averaging 0.79 U.S. cent, compared with 0.4 cent in July.

“Now, there are more opportunities to make money,” said Masafumi Takada, vice president of currency trading at BNP Paribas SA BNP.FR -0.39% in New York. Business volume at the bank’s New York currency-trading desk has quadrupled since July, Mr. Takada said.

Currency volatility can be a double-edged sword. Investors can profit by riding the dollar’s steady move higher against a variety of currencies. But a sudden reversal—such as a surge in the pound if Scotland votes against independence—could catch traders off guard. Goldman Sachs Group Inc. GS +1.39% took a loss on an options trade involving the dollar and yen about a year ago, people familiar with the matter said. Last summer, the yen’s months-long decline had stalled.

Federal Reserve Chairwoman Janet Yellen attends a Board of Governors meeting at the Federal Reserve in Washington last week. Associated Press

Some traders believe the current bout of volatility may die down. The large moves seen this week are unusual, analysts say.

On Wednesday, the euro fell 0.2% to $1.2917, while the dollar rose 0.6% against the yen to 106.85. The pound rebounded, with the dollar falling 0.64% against the British currency.

“The question is whether or not this much of a jump [in volatility] is sensible,” said Geoff Kendrick, head of foreign-exchange and rates strategy in Asia at Morgan Stanley MS +1.24% in Hong Kong.

Still, many find it hard to imagine that the magnitude of the Fed’s policy shift won’t continue sending waves across currency markets.

“The dollar’s on a tear, and there is more of this to come,” said Kit Juckes, a strategist at Société Générale SA.

—Justin Baer and Saabira Chaudhuri contributed to this article.

Write to Anjani Trivedi at anjani.trivedi@wsj.com and Ira Iosebashvili at ira.iosebashvili@wsj.com

U.S. Oil Exports Ready to Sail Tanker of Texas Oil Heading to South Korea in First Sale Since 1970s Embargo

By CHRISTIAN BERTHELSEN and LYNN COOK WSJ

Updated July 30, 2014 11:26 p.m. ET

A tanker of oil from Texas set sail for South Korea late Wednesday night, the first unrestricted sale of unrefined American oil since the 1970s.

How that $40 million shipment avoided the nearly four-decade ban on exporting U.S. crude is a tale involving two determined energy companies, loophole-seeking lawyers, and an unprecedented boom in American drilling that could create a glut of ultralight oil.

The Singapore-flagged BW Zambesi is the first of many ships likely to carry U.S. oil abroad under a new interpretation of the federal law that bars most sales of American oil overseas. Analysts say future exports appear wide open: as much as 800,000 barrels a day come from just one of the many U.S. oil fields pumping light oil.

Though U.S. policy on oil exports hasn’t changed, production of this kind of oil, known as condensate, is surging. This early shipment “is the wedge that’s pushing the door open” for more ultralight oil exports, said Daniel Yergin, vice chairman of consulting firm IHS. IHS +0.87%

Under rules Congress imposed after the Arab oil embargo of the 1970s, companies can export refined fuels like gasoline and diesel but not oil itself except in limited circumstances that require a special license. Such licenses, often for oil destined for Canada, are issued by the Bureau of Industry and Security, the unit inside the U.S. Commerce Department.

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Until recently, domestic oil production had been declining and exporting oil wasn’t a hot issue. All that changed as new techniques for tapping oil from shale formations have sparked an oil boom in Texas, North Dakota and elsewhere. Since the end of 2011, U.S. oil production has jumped by about 48%, to about 8.4 million barrels a day, according federal data.

That has been good news for companies including Enterprise Products Partners EPD -1.80% LP in Houston, a $47.7 billion company that processes, ships and stores oil and gas. Last summer, the company noticed a troubling trend: ultralight oil flowing from South Texas was flooding the market and pushing down prices. It predicted volumes would swell and prices could fall further as oil companies ramped up drilling and production.

Energy companies and lobbyists had started advocating for ending or at least relaxing the ban; Exxon Mobil Corp. XOM -0.29% , the nation’s biggest oil company, openly supported lifting export restrictions in December.

But neither Congress nor the Obama administration appeared willing to do more than study a change, which some lawmakers fear would result in higher gasoline prices in the U.S.

Green-decked BW Zambesi is preparing to sail from Texas with an oil cargo destined for South Korea. DigitalGlobe/Microsoft

The industry embarked on a subtle, behind-the-scenes review of the regulations, discovering an opening for exports under existing definitions of the law. Enterprise and its lawyers found language that they believed would allow them to argue that the processing to remove some volatile elements from oil would be enough to make the resulting petroleum qualify as exportable fuel, even though it is a far cry from the traditional refining process.

The processing, which peels off fuels like propane and butane, is commonly done in oil fields across the U.S. Companies that manufacture the equipment involved say it costs between $500,000 and $5 million, a fraction of the expense of building a refinery.

When Enterprise made its case to the government, it said the equipment that its customers use to treat oil for shipment on its pipelines chemically alters the condensate in a way that makes it an exportable fuel. However, several industry executives say the equipment is not special.

“Early this year, we became very confident, extremely confident, that this was indeed a petroleum product that could be exported,” Bill Ordemann, a senior vice president at Enterprise, said in an interview.

In late February, Enterprise representatives gave a private presentation to Commerce Department officials and answered a battery of questions.

Oil executives who have met with Commerce say five to 10 department officials are involved in the talks and decisions on export rulings. When energy companies began to plead their cases with the department in earnest, an official asked one company representative how to spell condensate, said a person at the meeting.

“I look for practical solutions. I looked over the regulations, said, ‘What is my client trying to do, what windows do we have?’ ” said Jacob Dweck, a partner at Sutherland Asbill & Brennan LLP hired by Enterprise to press its case.

Pioneer Natural Resources Co. PXD -0.80% executives also were looking for a way around the ban. Pioneer, which drills across Texas, hired a former deputy secretary of the Commerce Department to represent it.

Ted Kassinger, a partner at law firm O’Melveny & Myers, zeroed in on existing oil field equipment and asked whether it might meet federal regulatory criteria. “We suddenly realized we had existing infrastructure that, at least in part, goes through a distillation process and is producing a product that’s not crude oil,” he said.

Jeff Navin, a partner at Washington, D.C.-based policy consultants Boundary Stone Partners, said that the final decisions rested on specific language in the export ban that didn’t define a refined product but rather said oil had to pass through a “distillation tower,” traditionally found at refineries, before it could be exported.

“So the question became, ‘What constitutes a distillation tower?’ ” said Mr. Navin, a former acting chief of staff to the Energy Secretary. “The more narrowly you define that question, the easier it is to get the administration to side with you.”

Commerce gave Enterprise the green light for exports at the end of March and Pioneer received its ruling soon after. Both companies said their applications weren’t coordinated.

The decisions mean unrefined ultralight oil can now be exported from the U.S. in some cases, because the processed condensate that comes from field-level equipment is considered chemically altered enough to skirt the ban.

The White House was caught off guard by the news of the department’s actions, which weren’t coordinated with other parts of the administration, according to senior White House counselor John Podesta.

Pioneer said its ruling is narrowly drawn to fit its own operations. But Enterprise said its ruling isn’t specific to its own operations or processing equipment. Any company that processes condensate in a manner that adheres to Commerce’s ruling can sell it to Enterprise for export, the company said.

As many as 10 other companies have since applied for their own rulings on oil exports, according to people familiar with the matter. All those requests are on hold for now.

The 400,000 barrel shipment leaving the U.S. from Enterprise’s terminal in Texas City, south of Houston, was purchased by GS Caltex Corp., a South Korean refiner. Oil traders and executives say negotiations are already under way for additional sales to Asian buyers.

— Amy Harder, Eric Yep and Alison Sider contributed to this article.

Write to Christian Berthelsen at christian.berthelsen@wsj.com and Lynn Cook at lynn.cook@wsj.com

Grid Terror Attacks: U.S. Government Is Urged to Takes Steps for Protection

Groups Say Industry Response to Potential Threats Is Insufficient

July 6, 2014 2:53 p.m. ET

An attack on a PG&E substation near San Jose, Calif., in April knocked out 17 transformers like this one.Talia Herman for The Wall Street Journal

Two research groups urged the federal government to take action to protect the electric grid from physical attacks, rather than leave security decisions in the hands of the utility industry.

The Congressional Research Service recommended that Congress examine whether a national-level analysis of the grid’s vulnerabilities is needed or if individual power companies’ internal security assessments are sufficient.

Separately, a nonprofit research group said efforts proposed by utilities to harden the grid fall short because they don’t account for how one region might depend on others. The report from the Battelle Memorial Institute, which operates six of the U.S. Energy Department’s laboratories, said attacks could occur across more than one electric system, destabilizing large areas.

The Federal Energy Regulatory Commission is considering new safety regulations proposed by an industry-dominated electric power organization. FERC, which regulates the nation’s high-voltage transmission system, told the industry in March that it must act to fortify the grid, after a series of articles appeared in The Wall Street Journal detailing how susceptible the electric system is to attack.

The first article described an April 2013armed attack on a substation near San Jose, Calif., which threatened electricity supplies to Silicon Valley. Other articles pointed out that transformers are especially vulnerable to damage and that an analysis by federal experts said an attack on as few as nine critical substations could result in a nationwide blackout.

The Congressional Research Service, essentially a think tank for federal lawmakers, last month said there is widespread agreement among experts that high-voltage transformers—the most costly pieces of equipment in electrical substations—are “vulnerable to terrorist attack, and that such an attack potentially could have catastrophic consequences.”

Attacks could cause blackouts lasting weeks, or even months, because it is difficult to obtain replacement transformers, the report said. Utilities keep relatively few spare transformers on hand because they can cost millions of dollars apiece. Each transformer is custom-built for its location so units aren’t easily swapped. Transformers are also heavy, often weighing hundreds of tons, so are hard to move.

The rules proposed to FERC by the industry-controlled North American Electric Reliability Corp. would require utilities to assess their own vulnerabilities and draft security plans for substations. But the proposal doesn’t define the threats against which utility assets should be protected, nor do they require any specific defenses, such as ballistic shields for transformers. The rules would require third-party verification of assessments and security plans, although utilities would be allowed to perform that service for each other.

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With over 160,000 miles of transmission lines, the U.S. power grid is designed to handle natural and man-made disasters, as well as fluctuations in demand. How does the system work? WSJ’s Jason Bellini has #TheShortAnswer.

NERC has said that its proposal gives utilities flexibility to respond to differing situations.

Jason Black, who wrote the Battelle report, which was published in May, said a utility-by-utility assessment is a flawed approach.

It would be better to determine which U.S. facilities are critical by looking across many utilities’ systems, he said. A blackout in New York, for example, might require electricity to be rerouted from the Midwest, making some substations in that region critical to the Empire State. But an insular assessment by an Ohio utility might not identify the importance of certain locations to New York.

“Assessments to determine critical facilities would be more rigorous if undertaken at a regional level,” Mr. Black said.

Write to Rebecca Smith at rebecca.smith@wsj.com

 

Why SolarCity and Tesla are going to replace your utility

POWER PLAY

Why SolarCity and Tesla are going to replace your utility

By Todd Woody @greenwombat 9 hours ago

The power plant in your garage. Tesla Motors

 

Millions of California homeowners and businesses have installed solar panels on their roofs to generate their own electricity. Now a small but growing number of them want to pull the plug on their utilities by storing that energy in batteries and tap that power when the sun isn’t shining. And that has set off a fight over who will ultimately control the state’s power grid—California’s three big monopoly utilities or their customers empowered by companies like SolarCity and Tesla Motors.

SolarCity, the Silicon Valley solar installer, has quietly begun to offer some homeowners a lithium-ion battery pack made by electric carmaker Tesla to store electricity generated by their rooftop photovoltaic arrays. Stem, another Silicon Valley company, will sell or lease a $100,000, 54-kilowatt-hour battery pack to businesses so they can arbitrage the grid by storing electricity when rates are cheap and then using that energy when they’re high.
 
The state’s utilities, however, are refusing to hook up solar-powered batteries and other home energy storage systems to the grid without charging connection fees that can run $800 or more. Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric argue that homeowners that cut the cord will saddle other customers with the cost of maintaining the transmission system.  (In a preliminary ruling issued in October, regulators ordered the utilities to connect solar battery systems for free while the issue is sorted out.)
 
But SolarCity customers like Marco Krapels pose a far more existential threat to a century-old power system. Six years ago Krapels put a 2.4-kilowatt solar panel array on the roof of his Marin County, California home. Last April, SolarCity installed a 10-kilowatt-hour Tesla battery in his garage to store electricity generated by the panels. “I should technically be able to function with solar and just the battery indefinitely as long as the sun shines,” Krapels, a renewable energy financer, told me as he stood by his Tesla Model S electric sports sedan. “I don’t want to have to buy power from PG&E at peak rates, I want to use my own power. You see this power line going from the street to my house? I look forward to the day when I cut that wire.”
 
It certainly makes economic sense for Krapels to do that, especially as a hedge against rising electricity rates. State subsidies pay 60% of the cost of the Tesla battery and Krapels leases the system for less than $40 a month. That’s even less than his lease payments to SolarCity for his solar array. So far SolarCity has signed up more than 300 customers for its solar battery system, according to Peter Rive, the company’s co-founder. As of July 1, there were 667 applications for energy storage systems in California that could store 33 megawatts of electricity, according to the state Public Utilities Commission.
 

“The long term goal for us is to basically integrate storage systems with solar power systems by default,” says Rive. “Over the next five years you’ll find an increasing percentage of our customers will be getting solar with battery storage.”

So just how much a threat do SolarCity and Tesla pose to utility hegemony? Time will tell but a look at the companies combined market cap compared to those of the parent companies of California’s Big Three utilities should give utility executives pause. So should the fact that a Tesla Model S battery pack can store six to eight times the electricity of the Tesla home unit. It’s relatively simple to engineer car batteries to store solar electricity and provide power to a home on demand, say at night, when the car is parked in the garage.

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SolarCity:Tesla:utilities

“I see the solar companies and companies like Tesla converging,” says Krapels. “Soon their market value will exceed that of utilities that are fighting them. That’s when it’s going to get interesting.”

 
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Reforming banking’s risk culture requires breaking “accountability firewall”

Reforming banking’s risk culture requires breaking “accountability firewall”

September 11, 2013 @ 8:09 pm

By Guest Contributor

By Henry Engler, Compliance Complete

NEW YORK, Sept. 11 (Thomson Reuters Accelus) – If there is one part of the cultural makeup of Wall Street that remains firmly in place despite the financial crisis and subsequent avalanche of regulations, it is the reticence among those who lose money to come clean early.

Many of the most spectacular losses in recent years — whether the JPMorgan “London Whale” episode, the UBS “rogue trader” incident, or Jerome Kerviel’s manipulation of internal systems at Société Générale — have all had one thing in common: concealment of trades gone badly wrong, or at a minimum, a lack of transparency and early acknowledgement of losses. And if one can point to a single reason for such behavior, it is the well-known fact that raising the red flag would mean the individual responsible would be shown the door.

The blowup at JPMorgan was noteworthy not just for the size of the loss ($6.2 billion), coming in a unit that was supposed to hedge risk, but also for senior management’s role in cultivating a culture that discouraged individuals to identify problems.

“Ina (Drew) never wanted to hear bad news,” said a JPMorgan bank executive familiar with the management style of the former Chief Investment Officer where the loss was incurred.

In a lengthy piece by the New York Times [1] last year that examined the failure of controls at JPMorgan, CEO Jamie Dimon said: “Honestly, I don’t care what second-guessers say in life If anyone in the company knew, they should have said something. No one came to us beforehand and said we have a problem we should be looking at.”

Dimon’s comment could well have been made by other chief executives. In a scathing review of banking practices by the UK Parliamentary Committee on Banking Standards [2] earlier this year, the panel highlighted a disturbing lack of awareness and accountability by senior managers:

“Too many bankers, especially at the most senior levels, have operated in an environment with insufficient personal responsibility. Top bankers dodged accountability for failings on their watch by claiming ignorance or hiding behind collective decision-making… Ignorance was offered as the main excuse. It was not always accidental. Those who should have been exercising supervisory or leadership roles benefited from an accountability firewall between themselves and individual misconduct, and demonstrated poor, perhaps deliberately poor, understanding of the front line.”

The “accountability firewall” might well have been facilitated by management practices that hindered the type of information flow necessary in an effective risk culture. In a separate survey [3] by the London School of Economics, the findings of which are due to be updated in coming weeks, researchers pointed to the fear of punitive action as a primary concern. The study quoted one individual who summarized the views of many:

“One of the things that helps greatly with the flow of information through the organization is how it’s reacted to when it gets to the next level. So being able to report risks openly and honestly without getting your head bitten off from the second that’s done is crucial […] For example, if I told you something that might be happening you do not want your directors on your back saying ‘What have you told them? Why?’ So managing the flow of information through an organization to ensure key stakeholders are properly engaged is quite important […] to avoid the wrong reaction happening.”

What has led us to this state of affairs? And how might it be corrected?

Excesses of short-termism

Establishing a robust risk culture is a subject that management consultants have written volumes on. And when one scours the long list of recommendations, embedding risk awareness across the organization and fostering an environment in which people are comfortable challenging others without fear of retribution are critical components.

But this ideal state would appear far from the current reality at many institutions. In understanding what has led us to an environment of fear and lack of accountability, some argue that the finance sector has taken short-termism to the extreme. The enormous pressures that individuals are under to meet their financial targets, and how those goals are wrapped-up in the quest to meet quarterly revenue and profit objectives, create disincentives to identify risk events early.

“The connection that hasn’t been made is how short-termism invites corrupt behaviour — lawful, but corrupt” says Malcolm Salter of the Harvard Business School, who has written extensively on institutional corruption [4] on Wall Street. In order to rectify the problems, many banks have taken a much closer look at compensation policies, but this may not be enough. “Who is modeling the behavior at the banks?” asks Salter. “There is the cultural aspect of the business: how do you change that culture short of the firm having a breakdown.”

In the UK, the Committee on Banking Standards proposed a series of sweeping reforms aimed at establishing much great accountability on senior management. Among these would be the “replacement of the statements of principles and the associated codes of practice, which are incomplete and unclear in their application, with a single set of banking standards rules to be drawn up by the regulators. These rules would apply to both senior persons and licensed bank staff and a breach would constitute grounds for enforcement action by the regulators.”

The rules proposed, and which have been embraced by the UK government, are intended to shift the burden of proof of management failure away from the regulator and onto senior management, who will have to “demonstrate that they took all reasonable steps to prevent or offset the effects of a specified failing.” But the new regulatory standards are only UK-specific. International coordination is needed to guard against regulatory arbitrage.

Indeed, what Salter and others see within the industry are ongoing attempts to “game” the system, and legally circumvent many of the regulations that have been piled on since the 2008 crisis. It is this legal gaming, if you will, that remains problematic when envisioning an enhanced risk culture and ethical banking environment. To change that type of behavior requires the type of leadership from the top that we have yet to see, and a regulatory environment that enforces accountability.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus [5]. Compliance Complete provides a single source [6] for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Accelus compliance news on Twitter: @GRC_Accelus [7])

[1] New York Times: http://www.nytimes.com/2012/10/07/magazine/ina-drew-jamie-dimon-jpmorgan-chase.html?pagewanted=all&_r=0

[2] UK Parliamentary Committee on Banking Standards: http://www.parliament.uk/documents/banking-commission/Banking-final-report-volume-i.pdf

[3] separate survey: http://www.lse.ac.uk/researchAndExpertise/units/CARR/pdf/Risk-culture-interim-report.pdf

[4] institutional corruption: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2247545&download=yes##

[5] Thomson Reuters Accelus: http://accelus.thomsonreuters.com/

[6] provides a single source: http://accelus.thomsonreuters.com/solutions/regulatory-intelligence/compliance-complete/

[7] @GRC_Accelus: https://twitter.com/GRC_Accelus

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