Frozen Out

Texas, Student Risk Scores, WeWork, Clothing Brands, and Nikola

Texas

By now, most of the world has had time to point and laugh at Texas. The brief backstory is that Texas has its own state power grid, which it walled off from outside power sources years ago to avoid federal regulation. What that means during a catastrophe, though, is it doesn’t have anywhere to go for electricity when its capacity is dramatically reduced. The Texas Tribune reported on how close the state was to complete grid collapse:

Texas’ power grid was “seconds and minutes” away from a catastrophic failure that could have left Texans in the dark for months, officials with the entity that operates the grid said Thursday.

As millions of customers throughout the state begin to have power restored after days of massive blackouts, officials with the Electric Reliability Council of Texas, or ERCOT, which operates the power grid that covers most of the state, said Texas was dangerously close to a worst-case scenario: uncontrolled blackouts across the state.

The quick decision that grid operators made in the early hours of Monday morning to begin what was intended to be rolling blackouts — but lasted days for millions of Texans — occurred because operators were seeing warning signs that massive amounts of energy supply was dropping off the grid.

That is a scary thought - the country’s second-largest state without power for months, because of a decision its politicians made two decades prior. It’s like a lot of stories I write about - state politicians only marginally accountable to their voters, making dumb laws that screw their populace over, and suffering no consequences. So, how’s it going to play out for the actual citizens of Texas? Not great:

Now that the lights are back on in Texas, the state has to figure out who’s going to pay for the energy crisis that plunged millions into darkness last week. It will likely be ordinary Texans.

The price tag so far: $50.6 billion, the cost of electricity sold from early Monday, when the blackouts began, to Friday morning, according to BloombergNEF estimates. That compares with $4.2 billion for the prior week.

Not only did Texas cut off its grid from the rest of the country, it also deregulated huge parts of it, meaning that the $50 billion dollar bill it’s now facing is entirely a crisis of its own making - electricity providers jacked wholesale prices through the roof because they could under state law, it wasn’t a plot hatched by evil outsiders.

Some of the burden of those crazy prices fell to Texas residents, who’d signed up for variable rate electricity providers like Griddy, a name now forever tied to 4-figure power bills:

[David] Astrein is one of a swath of consumers facing sky-high payments in the aftermath of the storm -- many took to social media to show electricity bills ranging as high as $8,000. According to their screen shots, most are customers of Griddy, a supplier with a unique business model.

Griddy had actually contacted its customers to warn them in advance of the storm, and strongly suggested they switch to another power provider until the storm was over, which really is something. As for the poor saps who couldn’t switch in time, Griddy used its auto-debit function to withdraw hundreds or thousands of dollars from their bank accounts as their bills skyrocketed, while they tried to keep the heat on in their homes.

So, yeah, things suck right now for those people. But that $50 billion isn’t all coming from Texans - most of it was bought and sold on the (mostly) unregulated wholesale market, and, well, that’s not going great either:

Electricity prices reached the maximum allowable $9,000 a megawatt-hour last week, far above typical levels of about $25, as the winter storm shut down half the state’s generating capacity.

The bill is now coming due as buyers — such as electricity retailers, municipal utilities and power generators — have to post collateral as a down payment on purchases Some retailers have failed to deliver it, Kenan Ogelman, Ercot’s vice-president of commercial operations, told the agency’s board.

“Defaults are possible, and some have already happened,” he said.

If buyers are not able to cover their bills, Ercot will pay the generator and the charges will ultimately be spread out to other market participants, including other generators and traders, as permitted by regulations.

I have to say, I could not have written a more perfect libertarian self-own. We’ve heard a lot about collateral requirements lately, and now is energy companies are suddenly getting cash calls as their outstanding debt went through the roof during the storm, and most of them don’t have the money. So, the state regulator is going to step in and pay and distribute the losses to everyone else. Oh, also, they halted collections for a bit, so they didn’t put a bunch of companies immediately out of business. Suddenly the energy companies are clamoring for help…from…regulators? Surely not.

Oh, and it turns out the entire stupid experiment didn’t work and is more expensive than regulated markets:

For two decades, its customers have paid more for electricity than state residents who are served by traditional utilities, a Wall Street Journal analysis has found.

Nearly 20 years ago, Texas shifted from using full-service regulated utilities to generate power and deliver it to consumers.

[…]

Those deregulated Texas residential consumers paid $28 billion more for their power since 2004 than they would have paid at the rates charged to the customers of the state’s traditional utilities…

It’s another reminder that when politicians and free market capitalists pitch something as good for people, what they really mean is that it’s good for the people who charge for it. That $28 billion dollars went directly from Texans to power companies, and presumably those same companies stand to make billions from the storm, despite the grid going down and killing dozens of people. The governor of Texas has called for reform of the state regulatory agency, which is like the fox calling for an immediate investigation into the henhouse murders.

Student Risk Scores

I’ve written about the many ways software and algorithms exacerbate problems for disadvantaged communities. Anywhere there’s an institution serving people, there are dozens of tech firms claiming their software can improve results or create efficiencies or whatever. It turns out student advising at universities is no different:

Major universities are using their students’ race, among other variables, to predict how likely they are to drop out of school. Documents obtained by The Markup through public records requests show that some schools are using education research company EAB’s Navigate advising software to incorporate students’ race as what the company calls a “high-impact predictor” of student success—a practice experts worry could be pushing Black and other minority students into “easier” classes and majors.

[…]

More than 500 universities across the country use Navigate’s “risk” algorithms to evaluate their students.

Ah, excellent. Why are universities spending millions of dollars on risk software to evaluate whether their students will drop out or not? Because a software company tells them it’s going to make things more efficient:

The rise of predictive analytics has coincided with significant cuts in government funding for public colleges and universities. In 2018, 41 states contributed less money to higher education—on average 13 percent less per student—than they did in 2008. 

EAB has aggressively marketed its Navigate software as a potential solution. Boosting retention is “not just the right thing to do for students but (is) a financial imperative to preserve these investments,” the company wrote in a presentation prepared for Kansas State University.

Truly the most American solution - we’re cutting funding for schools, so let’s buy software to try to keep kids from dropping out. I can think of a better use of that money! Anyhow, EAB’s software was used to encourage schools and student advisors to steer students of color to “easier” majors and discourage them from taking on challenges in college. Very cool!

Or, rather, the software can be used in racist ways by schools who factor in race, because one school decided not to and it actually…worked pretty well?

From the 2010–11 school year to the 2019–20 school year, Georgia State increased the number of degrees it awarded by 83 percent, and the groups that saw the largest improvement were Pell Grant recipients and Black and Latinx students. The school has also seen a 32 percent drop in students changing majors after their first year, according to Tim Renick, executive director of Georgia State’s National Institute for Student Success.

But close examination reveals important differences between Georgia State’s predictive models and retention efforts and those at other EAB schools. Perhaps most significant: Georgia State does not include race in its models, while almost all the schools from which The Markup obtained model documentation do. And many of them incorporate race as a “high-impact predictor.”

So is the software racist, or are the school administrators who categorize race as “high-impact” racist? Apparently it’s a bit of both. It feels to me like this software is attempting to take a different approach from some of the most damaging racially biased programs I’ve written about in the past, but even the best of intentions can be thwarted if not applied properly.

WeWork

It’s been awhile since I’ve written about WeWork, which makes sense because we’re still in a raging global pandemic and most companies are not sending anyone back to work right now. But! The renewed popularity of the SPAC - “special purpose acquisition company” - on Wall Street means WeWork investors may have a way out of their predicament. You’ll recall that when WeWork tried to IPO last time, it got laughed out of the room, Adam Neumman got fired, and everyone started suing each other.

Now, with the promise of going public via SPAC on the horizon, the parties have agreed to a cease fire, and the terms are, of course, somehow very good for Neumann:

As The Wall Street Journal reported earlier this week, the parties are closing in on a deal in which SoftBank, WeWork’s majority shareholder, would buy about $1.5 billion of stock from other investors, including nearly $500 million from Mr. Neumann. That is about half as much as it previously planned to buy.

But part of the deal not previously reported sets Mr. Neumann apart from other shareholders. It calls for SoftBank to give the 41-year-old the $50 million special payout and extend by five years a $430 million loan it made to him in late 2019, the people said. SoftBank is also slated to pay $50 million for Mr. Neumann’s legal fees.

This really is a case of owing the bank too much money, because Neumann still controls a huge chunk of WeWork’s shares, and the other investors desperately need him to play ball so they can recoup what they surely thought was a complete writeoff a year ago. In other news, he’s also going to leave the WeWork board for a year:

The agreement, which hasn’t been finalized and could still change, would remove Neumann’s seat as a board observer for a year, after which he could request to attend meetings again without a vote or designate someone to take his place, said the people, who asked not to be identified because the details are private.

This does make sense - if you’re a WeWork investor who’s preparing to take the company public, you may feel it’s not a good look to have the disgraced former-CEO still on the board, and still holding a lot of stock and making decisions about the company’s future. But, again, because Neumann holds so much WeWork stock they can’t just kick him out and pretend he never existed, so they have to pay lawyers a lot of money - $50 million in legal fees! - to negotiate lots of pleasant-sound agreements to both pay Neumann off and hopefully placate future investors in WeWork, soon-to-be public company. 2021 is shaping up to be a very weird year.

Clothing Brands

When the pandemic hit in 2020, few industries were spared its economic impact. Clothing manufacturers and retail brands were initially hit hard as supply chains were disrupted and workers were kept home under lockdown.

Another thing that happened was clothing companies cancelled orders en masse and used the pandemic as legal justification to not pay their bills:

To date, brands still owe their supplier factories some $22 billion, says Scott Nova, executive director of the Worker Rights Consortium (WRC), a labor rights advocacy group based in Washington, DC. This has resulted in a “cascading effect” throughout the supply chain, including layoffs and increased incentives for factory owners to illegally reduce payroll costs by, say, forgoing government-mandated benefits. “Some suppliers went out of business and some are struggling to survive,” Nova says.

Of course! For low-wage workers - who make most of the world’s clothing - this is nothing new, since many live in countries without strong employment law. Some companies went a step further, and used it as an opportunity to redistribute cash to shareholders rather than workers:

Kohl’s, one of the deadbeat buyers on the WRC’s “naughty list,” canceled millions of dollars worth of garment orders from Bangladesh and South Korea in mid-March yet was able to fork over $109 million in dividends to shareholders the following month.

Even if these jobs come back at some point, putting tens of millions of workers into deep poverty will have long term consequences - malnutrition alone can have generational impacts. The jobs that do return may pay even less, because savvy capitalists have used COVID-19 as a negotiating tool to shave down already tiny margins from their suppliers:

Only three — Aldi Nord, Aldi Sud, and Lidl, all supermarkets that happen to sell clothes — made it a new policy not to ask factories for price reductions or discounts on similar items commissioned during the previous season. In other words, brands are now paying less for the same items of clothing than they did before the pandemic, even though the margins were already razor thin.

So while it’s a feel good story that workers in Western countries are going fully work-from-home and wearing sweatpants to the office, the reality for the people who stitched those sweatpants could not be more different.

Nikola

Since we’re playing the hits today, let’s check in on Nikola, the hydrogen-or-maybe-electric vehicle company that went public promising to make vehicles that it couldn’t really make. In response to a variety of federal investigations - they’re a public company - the company conducted an internal review and found that founder Trevor Milton’s statements were…inaccurate:

Following Hindenburg’s report, Nikola hired Chicago law firm Kirkland & Ellis to investigate internally. The firm found that nine statements made by Milton were wholly or partly inaccurate when he made them, Nikola said on Thursday.

The list includes Milton’s claims in 2016 that Nikola had engineered a zero-emissions truck and in 2019 that it could produce cheap hydrogen, as well as a notorious 2017 video that seemingly shows a Nikola truck “in motion”, when it was actually rolling downhill.

This sort of behavior is fine for a privately held start-up - just ask Adam Neumann! - but not so good when you’re publicly traded, because it’s maybe securities fraud?

The company is also paying Milton’s legal fees and closing down their recreational vehicle division. Their stock is still trading at around twenty bucks, which is down a lot from pre-fraud-claim times, but Nikola seems determined to try to run itself as an actual company. This is not a week for those of you who enjoy con artists being held accountable for their misbehavior, I tell you what.

Short Cons

Bloomberg - “A., who left the firm in 2015, is one of the first traders to cooperate with an investigation into what German lawmakers say is one of the biggest tax heists in European history.”

WaPo - “But later that night, Klacik’s staff told her it would be best to stop disclosing how much money the ad had raised for her campaign against Rep. Kweisi Mfume (D) — because she wouldn’t be keeping much of it…”

Variety - “For years, Disney has been keeping 80% of the revenue from older shows that it distributes to streaming platforms, leaving only 20% to be available to stars and other profit participants.”

Bloomberg - “The central bank’s payment services website noted the disruptions were discovered around 11:15 a.m. and Strader declined to comment on whether they were a result of system updates or human error, but confirmed that the system maintains operations in other locations.”

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