Tag Archives: Leucadia

Champions of Free Enterprise…Not

The phrase that sums up so many of the sweetheart deals our elected officials seem to favor is “socialization of risk, privatization of profit.” It’s a phrase that perfectly describes the boondoggle that is the Rockport Coal Gasification project in Southern Indiana.

I first heard about Rockport when the plant was being built, from a relative whose company has a contract to work on the construction. He couldn’t believe the waste he encountered. As he noted, however, construction managers can afford to get sloppy when they know the burden of cost overruns will be borne by the rate-payers.

Then I had lunch with an acquaintance who’s spent 30+ years in the energy business. In the course of our conversation, he referred to the deal as “crony capitalism,” and explained how it began and how it will work: When gas prices were high, Leucadia National Corporation proposed building a plant in Rockport to turn coal into synthetic natural gas. The company would then enter into long-term, fixed-price contracts to sell that synthetic gas to utilities. This would provide a hedge against volatility and escalating prices–at the time, those rising prices were thought to be inevitable. Instead, thanks to fracking and other measures taken by the gas and oil companies, gas prices plunged, and the deal didn’t look so good. The utilities lost interest.

Mark Lubbers, a longtime confidante of Governor Daniels, is CEO of Leucadia. He evidently prevailed upon the Governor to enter into a deal that will protect Leucadia from the pesky risks of that free market Republicans claim to revere. The State stepped in to buy Rockport’s gas at a fixed price for 30 years; the state will then turn around and sell it to the utilities on the open market. “Profits” from the sales will be split between the company and the state. Losses–which are far, far more likely–will be eaten by the ratepayers. In other words, you and I assume the risks. Leucadia gets the rewards.

According to The Indianapolis Star, the deal will add $1.1 billion to Hoosier energy bills over eight years.

If the financial chutzpah this deal represents weren’t enough, environmental advocates are highlighting environmental and health risks attendant to the project. Yesterday, representatives of the Sierra Club, Citizens Action Coalition and Community Action of Greater Indianapolis called on Citizens Energy to defend its ratepayers and join Vectren in objecting to the deal. (Since Indiana’s Court of Appeals recently overturned the contract between Indiana and Leucadia, on grounds not relevant to the basics of this cozy deal,  folks who object to going forward have another “window of opportunity” to derail it.)

The economic justification for high returns on investment, high salaries and big profits, is the element of risk. It’s a truism of genuine markets: No risk, no reward. When entrepreneurs invest in new enterprises, they put those investments at risk. If and when the new enterprise succeeds, they deserve to profit.  This is called capitalism, and it has produced higher standards of living than any other economic system yet devised.

I don’t know what you call incestuous arrangements like Leucadia, or all the other cozy deals where well-connected businesses get to use taxpayers as hedges against market risk.

But it sure as hell isn’t capitalism.