Fallout from '05 Energy Policy Act Pt. 3: The Nuclear Option

June 18, 2008

By Diane M. Grassi

In this third chapter of this ongoing discussion and analysis of United States energy policy and its ramifications both realized directly and indirectly from the U.S. Energy Policy Act of 2005, (EPAct 2005) it would be irresponsible not to include U.S. nuclear energy policy in such analysis.

As such, the EPAct 2005 and its previously referenced and unprecedented mandates, in prior chapters of this report, play a role with the reformulation of the regulation of U.S. nuclear energy and its projected and rather overwhelming imminent comeback.

The nuclear energy industry has become a global proposition given the changing geographic demands of energy needs in newly industrialized nations such as India and China. And it would be foolish for the U.S. to assume that it operates in a vacuum and that its future energy needs and demands will not be impacted by such changes in a global economy; one in which the U.S. is now primarily at the receiving end of offshore manufactured goods, including more and more of America’s food supply.

But the global economy has but given the U.S. government and in particular in this case, the U.S. Department of Energy, (DOE) an excuse to take the proverbial lid off of sound national security policy which has necessarily dictated U.S. energy policy for decades, until now, for the safety of the American people and the integrity of its critical infrastructure.

Although the first large scale civilian nuclear plant started providing electricity in 1957, it was basically between that time and the late 1970’s when all of the current operating nuclear reactor facilities were constructed. And with an average lifespan up to 60 years for each, most of the currently operating 104 U.S. nuclear plants are either in or have applied for their 2nd 20-year licensing period extensions.

Since the last U.S. nuclear reactor was ordered in 1973, those handful that were completed, after 1978 and post-3 Mile Island, were ordered prior to 1973. To wit, in 1996, the last U.S. plant constructed, the Tennessee Valley Authority’s Watts Bar 1 reactor in Tennessee, was the result of a revived dormant license from 1970. And there are plans to build the Watts Bar 2 from another previous license from dating back to1973.

Since U.S. nuclear energy policy has nearly come full circle today, it is important to take stock of its history. The Atomic Energy Commission, (AEC) was formed through the Atomic Energy Act of 1946, originally to specifically oversee the military’s and civic atomic energy programs. And it was given the expanded responsibility, for the first time, to assume dual oversight and regulation of atomic energy both militarily as well as commercially through the Atomic Energy Act of 1954.

But it was through the Energy Reorganization Act of 1974, that created the Nuclear Regulatory Commission (NRC), the present U.S. nuclear regulatory agency, to assume the oversight authority from the AEC. It now regulates most U.S. commercial nuclear activities, including nuclear power reactors and the use of radioactive materials in industry, medicine, agriculture and scientific research as well as fuel cycle facilities and nuclear waste management.

The 1974 law was seen as an opportunity to put trust back into the oversight agency which took on the dual task of both promoting nuclear power while safeguarding the American people, initially in 1954. And it was after that point in time that the American people had already begun to lose trust in the agency’s ability to do so. Apparently, the U.S. government thought that changing the acronym of the agency would calm the public’s displeasures.

But it was during the late 1960’s and early 1970’s when the nuclear plant construction boom was in full gear and simultaneous reassurances from the federal government to keep safeguards in place fell on the deaf ears of energy consumers. Most importantly, the agency was designated to walk a fine line of both promoting commercially viable nuclear energy as well as handling all of the required licensing for new construction of nuclear power plants.

And in this global economy, at a time when the U.S. is seeing extraordinary growth in the foreign direct investment and acquisition in U.S. critical infrastructure, it appears reaped with conflict for the licensing agency to also be able to independently assess potential security risks both civilly and criminally.

Unfortunately, the notorious Browns Ferry Nuclear Plant fire in 1975 in Decatur, AL could have been avoided and was the result of human error rather than an unexpected meltdown. A mechanical technician foolishly was looking for reported air leaks within the reactor with a lighted candle which ultimately started the fire.

But Three Mile Island Unit 2 (TMI-2) nuclear power plant near Middletown, Pennsylvania, on March 28, 1979, was the most serious nuclear plant fiasco in U.S. history. The reactor sustained the melting of half its core, which was later found to be a combination of technical and human error and allowed for released radioactive gases into the atmosphere and putting its employees immediately at risk.

The 3 Mile failure was followed in 1986 by the misfortune of Unit 4 of the nuclear power station at Chernobyl, Ukraine in the former USSR. It emitted radioactive material, far more deadly an accident that 3 Mile Island, affecting 52,000 people in the vicinity, immediately killing 30 people and possibly impacting up to 5 million others.

Nevertheless, it was 3 Mile Island that provided the final nail in the coffin for skittish investors in U.S. nuclear technology, although nuclear facilities throughout the U.S. still provide 20% of electrical power generation. It remains very low in greenhouse emissions and is considered a form of clean energy.

In spite of the NRC’s own damage control to restore safety measures in nuclear plant facilities over the past 30 years, its ill-repute remains along with remnants of trepidation in reinvesting in nuclear energy. Therefore, the apparent overnight reverse course by the DOE in lining up investors to submit license construction applications for nuclear energy plants, with some 20 expected by mid-2009, has set off alarm bells of another sort.

And that brings us back to the EPAct of 2005 which provides for a vast assortment of givebacks, subsidies and federally subsidized loan guarantees including risk insurance packages to the brokers and investors who come a-callin’, totaling billions of dollars worth of incentives. And once again, foreign owned holding companies, foreign government-owned entities and foreign-U.S. joint ventures, acquisitions and mergers will be the recipients of these U.S. taxpayer provided benefits.

The nuclear energy industry not only remains a hot-button issue because of its sullied past, but because of a heightened internal as well as public awareness of its ever-present national security risks it now poses in a post-9/11 world. In addition, there is the issue of the failing power grid infrastructure, which has not been improved in decades, and minimally maintained, along with a continued U.S. deregulation policy from which the American economy may never recover.

All of the aforementioned but creates for a perfect storm, all the while U.S. foreign policy dictates to other nations and regions on the ways in which they may engage or use nuclear material, whether for weaponry or for electrical power distribution.

The first step in trying to comprehend this multi-faceted and current energy policy, based upon both its history as well as current law, is to understand the revised NRC application process. Although the regulation revisions date back to 1989, the most recent and final rules were not certified and published in the Federal Register by the NRC until August 2007 (10 CFR Part 52).

The revisions have changed the entire regulatory review process and framework for the construction of new nuclear reactors and facilities. And over the next 18 months, such changes in the regulation process, with ink barely dry, will be tested in a paint-by-numbers fashion.

The EPAct 2005 while not intrinsic to the actual changes in NRC rule making, has played a consequential role in incentives for investors and ultimately the NRC’s seeming rush to finalize regulation revisions over a matter of months, after many years they were held in virtual abeyance.

And now the one time 2-step licensing process created for its thoroughness and for compliance with the Environmental Protection Agency (EPA) as well as providing enough time to have the appropriate number of public hearings, has been whittled down to a 1-step process; one that appears less investigative in scope and more equivalent to drive-through governance.

In order to supposedly bring an improved regulatory model for U.S. nuclear energy construction, which the NRC believes to be more efficient, the COL, or combined license application, early site permits (ESP), and standard design certifications pushes the process along more quickly. However, also cut in the process will be preoperational hearings on plant construction qualification that would be limited and not required by the NRC, and minimizing public input.

The ESP procedure includes site safety issues and emergency plans apart from the plant design. The NRC’s and nuclear industry’s reasoning is that the new process will cut down on delays, cost overruns and reduce the application process down to 42 months. In that regard, there is some speculation that the next nuclear plant could break ground in the U.S. by the end of 2010 and perhaps be completed by 2015.

In the final part of this series, the actual players or investors in new U.S. nuclear plants construction will be addressed as well as who and from where from these entities hale. And the mechanisms mandated in the EPAct 2005 for lucrative financial rewards to these corporations will be discussed. Whether or not such investors will be even remotely close to ensuring the fiscal as well as environmental health of the American people is an important question which will be asked.

And finally, that which is most crucial in this entire changing energy landscape, that being the national security of the U.S, was etched into law in the Atomic Energy Act of 1954 in 42 U.S.C. Sec. 2011 (1954) as follows: “Aliens and entities owned, controlled or dominated by aliens or foreign governments may not engage in operations involving the utilization of energy. This restriction applies primarily to nuclear reactors and reprocessing plants extracting plutonium.”

Yet, as will be analyzed in Part 4 of this series, we will see that through the use of joint ventures, foreign holding companies, license transfers and majority subsidiary investment mergers, rubber-stamped by virtually all branches of the U.S. government, historically held energy law no longer remains the watchdog it was once meant to be. Therefore, the best interests of the American people are now marginalized and the future national security interests of the U.S. may be forever compromised.

Copyright ©2008 Diane M. Grassi
Contact dgrassi@cox.net

Fallout from the Energy Policy Act of 2005 Pt. 2

Energy Department Trumps States' Rights

(Part 2 of A Series)

By Diane M. Grassi

As discussed in Fallout from the Energy Policy Act of 2005 Part I of a Series, the United States federal government is taking a more and more integral role in the distribution and transmission of electricity and in the energy sector throughout the U.S.

And such is the result of both federal regulations and laws mandating the deregulation of public utilities as well as the repeal of the Public Utilities Holding Company Act (PUHCA) of 1935, as mandated in the Energy Policy Act of 2005 (EPAct 2005). It will prove to have profound impacts on the future of not only the fiscal health of public utilities but the oversight of their maintenance and the future construction of transmission lines.

This Part II continuing report, on the exploration of EPAct 2005, will focus upon a section of the law which has not been clearly articulated for the American people by either the Department of Energy (DOE) or members of either the U.S. House of Representatives or the U.S. Senate. Yet, this complex and important body of law represents but an ad hoc and unilateral takeover of not only the direction of energy policy but the very delivery system which Americans rely upon in order to live.

EPAct 2005 sets forth specific mandates whose ramifications are unprecedented with respect to U.S. energy law, states' constitutional rights and sovereignty, as well as interstate commerce. Specifically, Section 1221 of EPAct 2005 updates Section 216 of the Federal Power Act (FPA).

It provides for, among other things, the requirement of a National Electric Transmission Congestion Study, first completed in August 2006, a year after enactment of EPAct 2005. Such a Congestion Study will then be repeated every 3 years thereafter.

And it is the National Transmission Congestion Study which paved the way for the mandated National Interest Electric Transmission Corridors (NIETC). According to Section 1221(a) of EPAct 2005 (Section 326 of FPA, 16 U.S.C. Section 824p) the Secretary of Energy may designate "any geographic area experiencing electric energy transmission capacity constraints or congestion that adversely affects consumers as a national interest electric transmission corridor."

And the DOE then proposed as a direct result of the study two transmission corridors which consist of the Mid-Atlantic Area National Corridor and the Southwest Area National Corridor. The draft NIETC was issued in April 2007 and finalized in October 2007 by the DOE.

Why you may not be aware of such transmission corridors and their intended purpose can be answered simply because the public and consumers of public utilities were given little or no notice of opportunities to weigh in and attend very limited public hearings, abruptly announced in May 2007 by the DOE to take place in the very same month. That gave little time for proper public notice for participation by residents, lawmakers, ratepayers and consumer advocates, to name but a few.

Even more disconcerting is that the DOE claims that EPAct 2005 does not require it to hold any public hearings regarding the NIETC. And in spite of over 2000 written comments and reports submitted to the DOE by state governors, U.S. state and federal elected representatives, consumer advocacy organizations, and environmental and historic preservation organizations, which all protested such corridors because of the lack of public input, the DOE would have none of it.

Instead, the DOE made no changes or acted upon any of the recommendations it received on its draft proposal by finalizing the NIETC in October 2007, as originally drafted.

In terms of the enormous implications in the construct of the Mid-Atlantic Area National Corridor, on paper at least, there now exists an exact list of those states which are encompassed by it and will be impacted in a variety of ways; legislatively, constitutionally, economically, environmentally and historically.

Following is a list of those states and counties designated in the Mid-Atlantic Area National Corridor: the entireties of New Jersey, Delaware, and Washington, D.C.; 22 of 24 counties in Maryland and all of Baltimore City, MD; 47 of 62 counties of New York; 7 of 88 counties of Ohio; 52 of 67 counties of PA; 15 of 95 counties and 7of 39 independent cities of Virginia; 42 of 55 counties of West Virginia.

By contrast, the Southwest Area National Corridor includes 7 of 58 counties of California and 3 of 15 counties of Arizona, albeit the most heavily populated areas of these states.

The NIETC lays the groundwork for transmission siting approval in the construct of High-Voltage Direct-Current (HVDC) Transmission lines above ground and throughout all NIETC designated states, and whether or not that particular state in fact has an electricity congestion problem. Initially problematic is that nearly the entirety of the U.S. power grid, as it presently exists, uses High-Voltage Alternating-Current (HVAC) Transmission lines and allows current to automatically reverse direction at regular intervals if necessary. HVDC requires an operator to reverse direction and its current flows in one direction only.

Only 2% of all electrical transmission line miles in the U.S. are presently HVDC. While the DOE insists that HVDC technology includes lower costs over long distances, in reality constructing HVDC lines costs more than construction of HVAC lines for short distances over a wide expanse of area. And according to the Government Accountability Office Report of February 1, 2008, (GAO-08-347R) with respect to HVDC, there will be "higher costs for short-distance lines due to the cost of equipment needed to convert DC into AC electricity used by residents and a lack of electricity benefits to consumers living along these lines –unless converter stations are installed at intermediate locations – because such lines are generally not connected to local electricity lines."

The rationalization for designation corridors is not to facilitate or dictate how the states' regions, transmission providers or electric utilities should meet their own energy challenges, according to the DOE. But truth be told, it is quite the opposite.

"The process is geared more toward expediting the approval and siting of transmission corridors than it is geared toward respecting states' rights about their residents' energy future and needs…and by a heavy-handed centralized one-size fits all approach..," according to Congressman Maurice Hinchey (D-NY). And it is precisely such sentiments that have been raised to the Secretary of Energy, Samuel Bodman, by both federal and state lawmakers on both sides of the aisle in all 10 states and Washington, D.C. that will be directly impacted by NIETC.

And most crucial to note, EPAct 2005 enables eminent domain law over states by the federal government on a scale unlike the U.S. has ever seen.
In its effort to modernize the transmission lines infrastructure, EPAct 2005 provides for the DOE to assign the Federal Energy Regulatory Commission (FERC) siting authority.

To review from Part I of this series, FERC is central to the regulation of energy policy both fiscally as well has been given oversight authority on the applications of new construction of transmission line sites.

Under Section 216(b) of EPAct 2005 –Back-Stop Siting Authority –FERC is given authority "to issue permits for the construction or modification of transmission facilities in a National Interest Electric Transmission Corridor if FERC finds that: (1)(A) a state in which the facilities are to be constructed is without authority to approve the siting of the facilities or to consider the interstate benefits expected to be achieved by the project; (B) the applicant for a permit is a transmitting utility that does qualify for a permit federally but does not qualify for a permit under state law because it does not serve end-use customers; or (C) the state has siting authority but (i) it has withheld approval for the later of one year after the filing of an application; or (ii) conditioned approval in such a way that the proposed construction will not significantly reduce transmission congestion or is not economically feasible."

And to add insult to injury, Section 216(e) of EPAct 2005 on Rights-of-Way, "If a permit holder cannot obtain the necessary rights-of-way for the project, the permit holder can acquire the rights-of-way through an eminent domain proceeding in the federal district court where the property is located."

And furthermore, in Section 216(f), "A right-of-way acquired in an eminent domain proceeding is a taking of private property for which the landowner must receive just compensation, which is the fair market value on the date of exercise of eminent domain."

Therefore, any fluctuation or rise in real estate property values during the course of the proceeding and including any period of time due to litigation arising from such a proceeding to the time of completion of the project, if finally approved, would not be taken into consideration.

And the compensation or fair market value of the property to its owner would be locked in by the date of the initial date of the proceeding, which could potentially be years, as in the case of Kelo v. City of New London, CT 545 U.S. 469 (2005).

Crucial in understanding the bone of contention raised primarily by the 10 states within the Mid-Atlantic Area and Southwest Area National Corridors, is that historically, federal jurisdiction of the siting of transmission lines in states has been reserved for federal lands within respective states. It has been the state utility commissions of each given state which have otherwise been the regulators of siting permits and applications.

And it is only reasonable to understand the indignation and concerns by state governors and state representatives to learn that FERC has been granted a new breadth of authority that many believe is counter-productive to the best interests of their respective states and citizens which they believe they know best.

As discussed in Part I of this series, with the repeal of the Public Utilities Holding Company Act of 1935, (PUHCA) holding companies both foreign and domestic will now be the applicants for siting permits in both the Mid-Atlantic Area and the Southwest Area National Corridors for aboveground HVDC transmission lines which will range from 150-160 feet high. That is roughly three times the height of our present HVAC lines throughout the U.S. And they will cover thousands of total miles throughout NIETC, or these 10 states and Washington, D.C.

And in what could be the first official challenge to back-stop transmission authority given FERC, as prescribed by such EPAct 2005 mandate, has been pre-filed for consultation with FERC. A Southern California Edison (SCE) application to the Arizona Corporation Commission, (ACC) the public utility commission of Arizona, was rejected in May 2007 by ACC. SCE merely wanted to run a 230-mile transmission line from Arizona to California at a cost of $242 million to Arizona ratepayers. And the benefit to Arizona? None, as it would specifically be to serve Californians and their growing energy needs.

The ACC described SCE's project as "a 230-mile extension cord" into Arizona's generation supply. And likewise in his letter to Secretary Bodman in November 2007, after the NIETC was finalized, Pennsylvania Governor Ed Rendell wrote, "These transmission lines will be on our land and depreciate our property values, but they may not offer any benefit to Pennsylvania consumers. This designation and action by the federal government is a blatant abuse of states' rights," Governor Rendell said.

Yet, this is likely just the beginning, exemplifying a dysfunctional remedy, to "fix" the U.S. power grid and growing domestic energy needs, by way of EPAct 2005. It will essentially be a power grab for power both literally and figuratively, the sights of which the U.S. has never seen.

Part III of Fallout from the Energy Policy Act of 2005, will take a look at: the various federal and state laws which the NIETC either directly or potentially violate or conflict with; proposed or pending pieces of legislation in Congress in order to amend specific sections of EPAct 2005; and the mechanisms that the DOE and FERC either already have or expect to have in place in the future in order to maintain effective oversight of such a massive body of law and its unprecedented changes in U.S. energy policy.

Copyright ©2008 Diane M. Grassi
Contact: dgrassi@cox.net

Fallout from the Energy Policy Act of 2005

By Diane M. Grassi

(Part 1 of a Series)

"Energy independence from foreign sources."

A mantra repeated over and over again by Al Gore, by the Hollywood elite and by candidates running for the 2008 Presidential nomination. But rarely is it ever pointed out how this phrase is but an oxymoron with respect to United States energy policy, which becomes ever more vulnerable, not just as the result of its failing infrastructure, but from misguided public policy decisions.

But never is the topic broached publicly in how much of the U.S. energy infrastructure and lines of transmission have been consumed by a constant stream of foreign direct investors and diversified holding companies. Also unbeknownst to most consumers is that such activity was hailed from Wall Street to Capitol Hill as the answer to resolving U.S. energy woes.

And now those very foreign investors have been granted even greater leeway as now realized by such mandates of the Energy Policy Act of 2005 (EPAct) which essentially eliminated the Public Utilities Holding Company Act (PUHCA) of 1935.

And in 2007, barely after the ink dried from EPAct 2005, the Energy Independence and Security Act (EISA) of 2007 was passed by federal lawmakers and signed into law. EISA conveniently serves to obfuscate critical issues that continue to stress the U.S. electrical power grid, its energy generation and transmission capacity. Yet, EPAct 2005 has continually escaped public scrutiny and a lack of accountability in both houses of the U.S. Congress.

But U.S. energy policy and the generation of power is a complex web of public policy, law, economics, infrastructure and ever-present globalization. So for purposes of this report, and in order to best comprehend current U.S. energy policy, it will be helpful to take stock of the more recent evolution of such and to examine its many and varied elements which have changed again post-2005.

In addition to the repeal of PUHCA 1935, EPAct 2005 amended Section 203 of the Federal Power Act (FPA) which will have an unprecedented and profound impact of its own on how future transactions in the energy industry will be handled by the federal government, impact matters of states' sovereignty and regulating costs to consumers.

For over 70 years, federal laws have played a vital and critical role in the operation, production, distribution and protection of the U.S. electrical power grid. Federal laws in concert with state laws and regulations have necessarily dictated that the power grid be shielded from market manipulation and criminal behavior.

But as the nearly 100 year old power grid has aged, facing a growing population and higher load demands for power, the industry has simultaneously become more and more deregulated by mandate.

And deregulation has led to less and less necessary preventative maintenance, upgrades in technology as well as necessary investment in research and development. And the poorly maintained grid in many of the areas of the country, predominantly the mid-Atlantic and northeast states, has but put even more stress upon its transmission lines.

The basic structure of the North American transmission system is made up of over 140 control centers and approximately 3500 utility providers covering over 200,000 miles. Utility generating plants, transmission and sub-transmission systems, distribution systems and customer loads travel over a two-part power grid; one in the east and one in the west. Texas has its own grid.

Compounding the vast network and intricacy of the grid is the interconnectivity and delivery of power that in many cases is incompatible with widely varying levels of equipment integrity, data systems and personnel training. It is the secondary system which supplies the distribution of electricity to consumers, where most of the power failures occur, and that which require time to repair.

And the network of sub-stations feeding electricity to neighborhoods, via feeders which flow to transformers, is where supposed problems arise during local outages, further exacerbated by non-maintained equipment.

But although deregulation of the utility industry began over two decades ago, it was the 1992 Energy Policy Act which changed the way electricity was sold to local consumers for the first time. Energy companies were permitted to install their own plants and sought customers throughout the country, but not necessarily in the same geographic region. Energy brokers then entered into the picture and utilized the open market to buy and sell power.

And thus began the potential unreliability of energy delivery.

Purchasing power from plants hundreds of miles away from a respective region put unprecedented burdens upon the transmission system, raising the likelihood of power failures at the local level. Most importantly, the electrical grid, as it was originally envisioned, was never designed to absorb the transmission of high voltage capacity across the continent, and especially in absence of comparable and upgraded systems in place.

Although Enron became the poster child for electrical power market manipulation, which came to light after the rolling blackouts of California in 2000 and 2001, U.S. public policy and lawmakers must be held responsible for even further erosion of federal regulations and mandates now realized in EPAct 2005.

The initial most striking change that EPAct 2005 provides is the repeal of PUHCA 1935, now amended as PUHCA 2005, and now administered by the Federal Energy Regulatory Commission (FERC). PUHCA 1935 became law after the height of the Great Depression and after the stock market crash of 1929 and was a cornerstone of President Franklin D. Roosevelt's New Deal industry legislation.

It called for the prohibition of market manipulation, specifically to prevent then super-sized utility conglomerates, to prevent mega-mergers and to prevent monopolies from overtaking geographic regions. And just as importantly, PUHCA 1935 made it unfeasible for non-energy corporations to purchase a public utility.

Such abuses led to severe problems in the electric and gas industry in the 1920's and in the 1930's when three utility holding companies owned one-half of the electric utilities in the entire U.S. Thus, the emergence and formation of the Securities Exchange Commission (SEC) in 1934, which preceded PUHCA1935, and together became essential in safe-guarding the public trust and in protecting consumers and investors alike, as PUHCA 1935 delegated multi-state utility ownership regulation to the SEC.

Fast-forward to February 8, 2006, six months to the day of the enactment of EPAct 2005, when the official repeal of PUHCA 1935 was realized. As a direct result, the SEC vacated its regulatory authority over multi-state utility ownership by holding companies and only retains the ability to protect investors, not utility consumers or to prevent mega-mergers from consolidating. And now the FERC will assume cursory merger authority over generating plants and holding companies.

The repeal of PUHCA 1935 will not only allow multi-state transactions but also mergers of distribution facilities, utilities merging with non-utility corporations, and including foreign ownership over domestic utilities.

Furthermore, oil companies may now own electricity and natural gas utilities, paving the way, yet again, for the formation of cartels. In addition, construction and infrastructure companies, especially those from abroad, are eager to partake in being afforded carte blanche in the acquisition of U.S. public utility operations.

In the post-PUHCA 1935 era, no individual state or federal agency will have the jurisdictional teeth to effectively regulate the finances of U.S. public utility assets totaling more than one trillion U.S. dollars. Nor will there be required oversight of such holding or parent companies such as investment banks from speculating and investing in far riskier businesses, with utility rate-payer revenues. - We have already seen evidence of such with the current sub-prime mortgage loan crisis.

At cost? The reliability standards of U.S. public utilities, which could have grave ramifications on U.S. national security, the U.S. economy and the well-being and safety of the American people; all with the blessings of the U.S. Department of Energy, the U.S. Congress and the global stock market.

To be continued in Part 2 of a Series. Next Up: Energy Department Uses Power to Trump States' Rights

Copyright©2008 Diane M. Grassi
Contact: dgrassi@cox.net

SAUDI TAKEOVER OF GE PLASTICS FLIES UNDER RADAR

By Diane M. Grassi

The announcement on May 21, 2007 that the largest public company in the Middle East, by market value, would be acquiring a division of the world’s second-largest corporation, by market value, and based in the United States, could not have been any less publicized. But in the world of corporate governance, the largest transaction ever completed in the Persian Gulf, seemingly trumps all laws of reason.

However, there is little precedence established for a foreign owned totalitarian government controlled corporation acquiring a corporate entity in the U.S. Such brings us to the General Electric Co. and the sale of its GE Plastics, based in Pittsfield, MA. It has been one of its most successful divisions for over half a century. It includes numerous U.S.-based manufacturing plants and research and development offices, with additional locations spanning 20 countries. Employees total nearly 11,000 worldwide, with several thousand located in the U.S. New operational control, however, will be via offices in Saudi Arabia.

The Saudi Basic Industries Corporation, known in the Middle East as SABIC, is one of the world’s 10 largest petrochemical manufacturers and is 70% owned by the Saudi Arabian government, controlled by the Royal Saudi Kingdom and 5 other states of the Gulf Cooperation Council, including private Middle Eastern investors.
It employs approximately 17,000, worldwide, and shortly expects to be the new owner of GE Plastics in the U.S.

After GE Plastics was put on the market in January 2007, it got bids from Apollo Management, Inc., a U.S.-based private equity firm as well as Bassell, a Netherlands-based Access Industries plastics maker. Both proposed bids of GE Plastics were upwards of $10 billion. But it was the Saudi Arabian’s offer of $11.6 billion in cash and the promise of future energy ventures with its parent company, GE, which gave SABIC the upper hand in the acquisition of GE Plastics.

Wall Street portfolio managers will liken those opposed to this deal, still pending approval by the U.S. government through the Committee on Foreign Investments in the U.S. (CFIUS), as protectionist, nativist and alarmist. And the U.S. has seen propositions like this before recently, such as the Bush Administration’s desire in 2005 to allow foreign ownership of U.S. airlines; the proposal by the People’s Republic of China’s state-owned CNOOC in the summer of 2005 to acquire UNOCAL of California, the ninth largest oil company in the U.S.; Dubai Ports World, of Dubai Holding, a United Arab Emirates (UAE) government-owned corporation, and its buyout of the United Kingdom corporation, Peninsular and Oriental Steam Navigation Co. (P&O), for its port operations of six major U.S. East Coast ports in early 2006.

All of the aforementioned never came to pass, after much Congressional and public opposition, although the Bush Administration promises to revisit foreign airline ownership. However, Dubai Holding, the same UAE controlled company yearning to takeover U.S. ports was successful just months later in 2006 in acquiring the U.S. operations of Doncasters Group Ltd., a UK company based in Connecticut, and a manufacturer of precision aircraft engine parts for U.S. military and commercial aircraft engine parts manufacturers, like its competitor, GE Aviation.

GE claims that the prohibitive cost of petroleum, especially over the past year, has necessitated its sale if its plastics division, as it requires petrol for the manufacture of plastics and its various composites and resins. And although GE made a fair profit in 2006, it fell short of its 10% projected goal.

Less important to GE Plastics, however, is that there has been nothing firmly documented by SABIC, other than through verbal overtures, that they will continue to maintain GE plants in the U.S. According to SABIC CEO, Mohamed Al Mady, “We have no other plans at this time.” On the other hand he notes, “SABIC’s intention is to grow globally.” At least one of the U.S. plants is non-union, that being the one located in Selkirk, NY and over the long haul questions remain as to whether or not SABIC will move all operations to Saudi Arabia, closer in proximity to its oil fields, or to China where it currently has petrochemical operations.

Questions must also be asked when it comes to the rights and wages of American workers, who will take directives not just from a Chairman of the Board but from the Saudi Royal Kingdom, which presently restricts the rights of women in the workplace in Saudi Arabia. They are only allowed to work, and in limited industries, provided permission is granted by a male relative. And although technically Saudi Arabia must obey U.S. laws pertinent to ownership of a corporation located in the U.S., cultural differences steeped in a totalitarian regime practicing Shariah law may not properly translate to the American way of life.

Additionally, SABIC would have to adhere to the regulations of the Environmental Protection Agency (EPA), such as the 1980 Superfund Law, holding corporate toxic waste polluters accountable. Such requirement is non-existent in Saudi Arabia or China. GE Plastics was mandated to clean up the PCB’s in the Housatonic River in Massachusetts and GE the Hudson River years ago, both fighting the federal government for years until a settlement was reached with the EPA and the U.S. Department of Justice in 2005. Ongoing completion and monitoring of said cleanup still remains in both bodies of water. But will SABIC fulfill GE Plastics’ obligations?

Founded in 1930 as a division of GE, GE Plastics arose from the initial results of Thomas Edison’s experiments with the use of plastic filaments in the electric light bulb as early as 1893, followed by the success of its Bakelite® synthetic plastic created in 1909. The plastics industry, however, primarily blossomed after former GE CEO, Jack Welch, assumed control of the plastics division in 1960 and with the birth of its world famous patent Lexan ® polycarbonate.

GE Plastics specializes in plastic polymers, plastic composites and insulating resin polycarbonates, among others, used in both government and commercial sectors in nearly every industry including building and construction, transportation, aviation, auto body manufacture, defense, law enforcement, healthcare, telecommunications and computer and semi-conductor technologies. And it is doing business in such lucrative and specialized areas which SABIC opines. While its consumer product contracts are extensive, they are but part of GE’s vast plastics’ business portfolio.

SABIC was established by Royal Decree in 1976 as instituted by King Khalid Bin Abdulaziz, and the present Saudi Kingdom or government claims it has a hands-off approach to the business operations it owns. SABIC was originally set up to operate the hydrocarbon and mineral-based industry in the Kingdom of Saudi Arabia. It has had an operation named SABIC Americas in Houston, TX, for many years, which employs 200 and where it houses the SABIC Technology Center. Details on its exact business operations in the U.S. presently, however, remain scant.

Although the polycarbonate and plastic resin composites industry has been gaining steam over the past 10 years, in light of continual rising oil costs in the U.S. and continued U.S. dependence upon oil, primarily in the Middle East, it has quickened the pace of growth over just the past two years. And with less U.S. oil refineries expected to come online in the near future, in order to mitigate high fuel costs, lighter weight components are desired for automobiles, and commercial, transport and military aircraft in their manufacture.

GE commercial and military aircraft engines have long utilized polycarbonate composites for fan blades and fan cases, since 1995 with the GE90 engine, and the soon to be released GENX engine for commercial wide-bodied jets. Composites are not only light in weight, but corrosion resistant, heat resistant and their longevity and reduced maintenance, as opposed to metal parts, are preferable. Semi-conductor technology as well as use in watercraft, such as submarines, are other examples of the use of plastic composites. The historical integration of composites used in both military and commercial aircraft engines however, originally stemmed from military aircraft engine use of polycarbonate components.

Nevertheless, financial market experts as well as political prognosticators have already decided that CFIUS will give the SABIC-GE Plastics deal its seal of approval with no national security issues at all to arise. Therefore, the deal is expected to close in the 3rd quarter of 2007. And while GE Plastics may not be a direct contractor or supplier to either government or commercial entities, it still could have national security implications.

And it does not completely dismiss the fact that the U.S. government will be dealing with the Saudi Royal Kingdom-state government as it assumes the laws and regulations of the U.S. Any contracts which GE Plastics previously had and which remain active, with either its parent company GE or directly with other corporations or government agencies, would supposedly transfer to SABIC. Such government agencies for which GE Plastics could have existing contracts with are the Department of Transportation (DOT), the Department of Defense (DOD), the Department of Homeland Security (DHS), the Federal Emergency Management Agency, (FEMA), the Federal Aviation Agency (FAA) and the National Aeronautics and Space Administration (NASA), to name but a few.

And based upon the lack of underlying history of this more than unusual corporate arrangement, a more thorough review might be warranted by CFIUS, which is an inter-agency committee chaired by the Secretary of Treasury. Rather than its routine 30-day investigative period, it could self-impose the more thorough 45-day review process. For as much as the U.S. government as well as the government’s industrial complex wishes to favor the promotion of global trade above that of national security, in an age of political correctness, the fact is, the U.S. military is engaged in two simultaneous wars in the Middle East. And it would perhaps be better to use more deliberation and discretion rather than to rubber-stamp such an acquisition.

The Exon-Florio Amendment, which emerged in 1988, amended Section 721 of the Defense Protection Act of 1950, as part of the 1988 Omnibus Trade and Competitiveness Act of 1988. The statute authorized the President of the U.S. to block or suspend a merger, acquisition or takeover by a foreign entity if there is credible evidence that a “foreign interest exercising control might take action that threatens to impair the national security” in the event existing law does not provide “adequate and appropriate authority for the President to protect the national security in the matter before the President.”

Equally deceptive in the process, whereby foreign governments or foreign owned corporations purchase a U.S. owned entity is that they then become indirect stakeholders in U.S. public policy as well. They not only access capital gains but gain political clout on Capitol Hill too. Such opportune objectives of a foreign nation do not just begin during the corporate bidding process, however, but requires a methodology of lobbying dealmakers otherwise known on Capitol Hill as the U.S. Congress. To wit, the Saudi Arabian government spends $20 million annually to lobbying organizations and law firms representing them in order to gain exclusive access to lawmakers in advancing such financial interests or specific foreign trade policy agendas.

For example, former Secretary of State, James Baker, a senior partner in the law firm, Baker Botts, LLC, of Houston, TX, is legal representative to Saudi Prince Sultan bin Abdul Aziz, one of several Saudi persons, entities, Islamic foundations and financial institutions named as defendants in a pending lawsuit brought by the 9/11 Families to Bankrupt Terrorism.

And lastly, but no less important, in the last frontier of U.S. fire sale economics, concerns the type of financial instruments which will be used for the SABIC-GE Plastics transaction promising GE $9 million in cash, after taxes. In mid-2006, SABIC set up an Islamic finance arm to oversee its domestic Islamic bond issues. Since the United Kingdom is home to two Islamic banks, sukuks, or asset-based Islamic bonds, are readily marketed to international investors. SABIC plans to finance $2.2 billion of the GE Plastics deal by issuing bonds. The finance group and underwriters for the SABIC-GE transaction are the combined CitiGroup, Inc., HSBC Holdings Plc, Amro Holding NV and GE Capital, a division of GE, GE Plastics’ parent company. Bonds are expected to be sold in Europe and in the U.S.

Of note, is that in April 2006, Dow Jones and CitiGroup launched the first Islamic Bond Index, created specifically to assess global bonds’ compliance with Shariah investment guidelines. Shariah law dictates that such money be used for only those purposes compatible with Islam. But there are potential difficulties with such transactions in that they are specifically Shariah law compliant instruments and may conflict with U.S. law.

Presently, it has not yet been decided by SABIC if in fact it will exclusively issue Islamic bonds for the purchase. But the complexities involved in the GE Plastics sale is anything but straight forward and for that very reason is deserved of more scrutiny, analysis and caution from not only CFIUS but from the U.S. Congress.

And U.S. Congressional representatives should be far less mindful about critics’ scorn and far more concerned with their dutiful obligation to govern in the best interest of the American people and their responsibility to use foresight in order to best preserve America’s future and its assets.



Copyright © 2007 Diane M. Grassi
Contact: dgrassi@cox.net