Risk

by Art Woolf

Policymakers often forget that entrepreneurs take risks.  When risks pan out, they are rewarded, sometimes handsomely, and when the risks of a new venture are underestimated, the endeavor goes belly up and someone has to pay--the entrepreneur, investors, or lenders.  If you see businesses only as a guaranteed cash machine, you forget about the ones that never make it.

Two cases in point.  Case one is Burlington Telecom (BT).  The Burlington City Council appears to have doubled down on a venture that is not doing as well as anticipated, i.e. it is riskier than it was thought to be.  According to the Free Press

BT owes about $33 million from those initial costs, plus the $17 million it has borrowed from the city.

Republican City Councilor Vince Dober, explaining his vote to put the city's taxpayer's on the hook for $17 million, said

BT needs more money now, to expand, and deserves council support. “They are doing something no one else is doing,” he said. “If we can master it — and we are at the edge of that — and get it out to everyone, everyone will be smiling. This is not the time to quit.”

Without going into the details of BT's plans, note the "if".  That's known as risk.  With taxpayers' money on the line. 

If BT's plan works, Burlington taxpayers will be made whole.  If not, and there are a lot of ifs, then that's $17 million that can't be used for something else to benefit Burlington taxpayers--whether it's paving roads, repairing schools, or lowering property taxes. 

Making decisions based on risk is generally the private sector's calculus.   We're all too familiar with what happens when the (U.S.) taxpayer gets saddled with the results of bad decisions made by the private sector, which is why it's a good idea to keep those decisions squarely in the private sector and not have taxpayers get involved, whether it's GM, Freddie Mac, Fannie Mae, AIG, Bear Stearns, or possibly the fiberoptic network in Burlington.

Case 2 is CVPS's Cow Power program whereby customers can voluntary agree to pay about 30% more for electricity generated from cow manure, giving farmers a nice additional source of revenue, albeit at a very high capital cost. Things aren't going so well for the farmers who took a risk and invested in the capital needed to generate electricity.

Vermont Public Radio notes that 

When electricity prices were high, the cow power sales brought some additional money to the farm operations. That changed dramatically when prices fell.

CVPS spokeman Steve Costello says

This year the market price of energy in New England has plummeted because of the drop in the natural gas price. So farms that previously have been getting as high as 11 or 11.5 cents a kilowatt hour at times, have been receiving 3 or 3.5 cents, and that's just not a workable number."

Farmers signed a contract pegging the price they would get to the wholesale price of electricity.  Presumably, they could have negotiated a fixed price contract at a lower price to them.  They took a risk, and now the price is "not workable." 

And Costello said that power sale contracts are being renegotiated to help farmers cover their costs in the long term [,saying] "What we're really looking for is a price that will take those highs and lows out and give them a more stable price."

Fortunately for the farmers, CVPS (either its shareholders or its customers) is absorbing those costs and the risk.  The state is now guaranteeing up to 30 cents per kwh for "green" power.   Back in the 1970s, the state did something similar with small scale hydro.  When energy prices did not rise as expected, Vermont electricity customers (who are hard to distinguish from taxpayers) were left holding the bag. 

It's worthwhile to remember that the future is always uncertain and someone will be either highly rewarded for making good decisions or pay the price for bad decisions.   I'd prefer to keep as many of those decisions as possible in the hands of people willing to make those bets, not the taxpayers of Vermont or Burlington.

Comments

[Vermont Woodchuck]

When the entrepreneur takes the risk and scores that's capitalism, also known as one of the foulest things a person can do, since you know they are making it on the backs of others.

Need more capital; ask the investors. Fail and who cares.

When the public sector takes risks, the investment is called a subsidy; failure isn't an option, everyone is on the hook!

Bail them out whether you watch TV or use the cow poots!

[Shaking My Head]

Burlington's sins include not just embarking on a fool's errand to compete against nimble, well-capitalized, forward-looking private companies . . . it is also that they completely failed to take into account the internet's next great leap, which is that you won't need a cable coming into your house to get online.

Google and others are actively exploring the possibility of offering free community wireless wi-fi systems . . . systems that would help support and enhance the 3G wireless phone systems already in place. The amazing developments in cell phone / PDA technology will only fuel this transition.

Within a few years, you won't need a "landline" for internet service anymore than you (well, most of us) need a "landline" for phone service.

Godspeed, Burlington!

[aynerand]

Good job VT Tiger. Not a good day to be a taxpayer of the Queen City, if there ever is one. "We have found ourselves in a hole and have ordered out for more shovels".

[Paul]

Makes you wonder if there is even one person with any business experience on Burlington's leadership or City Council. We know the mayor has no experience. And no, nonprofit experience doesn't count. As someone said earlier, they never fail...just ask for more money.
Seems a regulation has been broken in using the first 15M and not paying it back in a timely fashion. Wonder what the reaction will be to that?