Bret Kugelmass [00:00:05] So we are here today on Titans of Nuclear with Edgardo Sepulveda, an economist out of Canada and obviously a great friend of a friend from Chris Keefer's Decouple Podcast, where I've enjoyed listening to you several times. I mean, you must've been on there a half dozen times already, and I always learn something new. So thank you so much for coming on our show.

Edgardo Sepuvelda [00:01:16] Oh, thank you, Bret. I mean, as I was saying just before we started recording, before there was Decouple, before there was [00:01:22]Exhaust, [0.0s] before Nuclear Barbarians, there was [00:01:25]Titans of Nuclear. [0.5s] And so I've been a big fan for a couple of years now, so it's great to have the invite and get to meet you at least this way anyway, virtually.

Bret Kugelmass [00:01:37] Yeah, that's awesome. So before we get into brass tacks, tell us, where did you grow up?

Edgardo Sepuvelda [00:01:42] Well, I was born in Chile, so my first language is Spanish. And then we immigrated here to Toronto, Canada. I did high school here.

Bret Kugelmass [00:01:54] Any reason for the immigration?

Edgardo Sepuvelda [00:01:58] My parents were traditional, what we call in Canada, economic immigrants. They felt that for themselves and for the kids at the time that they would have a better economic life.

Bret Kugelmass [00:02:13] Did they play an influence on what subject areas you got interested in?

Edgardo Sepuvelda [00:02:19] They certainly wanted me to do... I was always sort of quantitatively oriented at school, you know, math and science and that kind of stuff. So I think they would have always encouraged me to do that, to do the hard sciences or the hard social sciences. That's what I enjoyed doing, so I think in that regard, doing economics, which is the more sort of quantitatively-oriented, traditionally, less so now, of the social sciences, would not have surprised them. But like a lot of immigrant kids from developing countries, an engineer, a doctor or a lawyer would also have been good. Being an economist was okay, I guess, as well.

Bret Kugelmass [00:03:30] Cool. Okay, so how did your studies and your career evolve over time?

Edgardo Sepuvelda [00:03:37] So again, I had started university. I did university here in Canada. I originally started doing engineering, well actually, science. I got into engineering and I just found that a little too dry, too quantitatively based, and then took some time off, did a kind of traditional year, year and a half off to kind of think about things, do some part time work, do a bit of traveling. After which, and by doing a lot of reading, I decided on economics. I decided because it was a nice marriage of the kind of quantitative stuff, the social policy that I've always been interested in, and that it could potentially have good career prospects. So I went back to school and did both a bachelors and a master's in economics and then started working. My first gig out of school was with, at the time, monopoly, privately-owned, regulated telephone company called Bell Canada. And a lot of Americans don't know this but Alexander Graham Bell, the inventor, is Canadian, the inventor of the telephone.

Bret Kugelmass [00:05:13] I did not know that. I thought he was one of ours. Oh my god!

Edgardo Sepuvelda [00:05:16] And so he actually made the call here in Ontario. And so hence the Bell Companies, and originally the original Bell Canada. So I did that in the economics shop. At the time it was very large. At the time I think we had... Bell Canada was kind of like the AT&Ts of the world, the Bell South, the newer telephone companies were pretty large. We had maybe 50,000 people in terms of organization. And I was just one little cog in that.

Bret Kugelmass [00:05:55] Yeah what'd they need an economist for? What role did you play there?

Edgardo Sepuvelda [00:05:59] Well, at the time, and even to this day, like any regulated utility, there are regulatory shops within any large regulatory utility. And so in there you would have the lawyers, you would have the accountants in terms of rate base and stuff like that, and you'd have the economists who would do, among other things, demand forecasts. So whenever you go and you do, and we can get into this in terms of like a regulated rate of return, which is kind of a traditional way in which utilities are regulated both in North America and around the world, is that you have to go to a regulator and show what your costs are, show what your expected demand is, what is your cost of capital, how much debt you have and you have to forecast demand, and anyway a series of other things. So that's how you learn about Regulatory Economics 101. You do it in a shop where you're working in a multidisciplinary team of lawyers, economists, accountants and engineers. And you're in the nitty gritty, right? Like you're in the crossing T's and dotting I's, running large computer models for forecasts, for demand, for costing and a series of other things. So I did that for four years, and then I found that a little on the dry side, after which I did a stint with the U.N. in the Dominican Republic. The U.N. Development Program, UNDP, hires, at the time, younger people to get them into the U.N. system. And so I administered the economic reform program in the Dominican Republic. One of the reasons it was there is because, having grown up in Spanish and I was bilingual, it was easy for me to do that being stationed there for, it was two and a half, three years.

Bret Kugelmass [00:08:18] Is it the same Spanish or is there like a bit of a learning curve between each?

Edgardo Sepuvelda [00:08:23] No, no, so there are, there are probably more Spanishes than there are Englishes, if I can say it in that way. You've got your South African English, you've got Australian English, you got New York English, Canadian, etc..

Bret Kugelmass [00:08:52] Scottish doesn't even sound like English.

Edgardo Sepuvelda [00:08:54] Scottish. And then, so within Spanish there is from Spain, and then there's within the Americas a great deal of variations. And there are some distinct ones. Like, for example, if you're from Argentina or Uruguay, it's a very specific set of of accents that you open your mouth and anyone around Latin America says "That guy is from Buenos Aires or he's from Montevideo," etc., etc., etc. Chile has another distinct accent. The Caribbean generally has a distinct accent, so Puerto Rico, Dominican Republic, Cuba would have sort of a generic accent from the Caribbean that you could probably if you knew how to really attune to it, you could tell the difference. A long way of saying, it's the same language just with the different accents and specific words that may or may not be different. The hood, the bonnet, a lorry truck, that kind of stuff would be variations in Spanish from Chile and Spanish from the Dominican Republic.

Bret Kugelmass [00:10:07] So, sorry we went on a little bit of a detour there. I'd love to learn about when energy became a subject of interest for you. Obviously I get the whole utility thing through telecom, that makes a lot of sense now in your history. So when did you switch over to energy?

Edgardo Sepuvelda [00:10:20] I mean, I haven't switched over yet. I'm sort of half-half now.

Bret Kugelmass [00:10:26] But you know a lot about it.

Edgardo Sepuvelda [00:10:28] Yeah, I know, I know. I came back to Canada after the stint at the UN and I started doing consulting. And doing 100% telecoms consulting first within a kind of large law firm, consulting firm, and then independently. And so, I've been doing this for 20 years, 25 years now. So I've been doing this for a bit. And then over the last, I want to say maybe six or seven years, Bret, I've been thinking about, I want to continue doing this, but I also want to... I've been doing this for 25 years, I want to do other things beyond just telecom consulting. And so at the time, I kind of committed to kind of saying, listen, as you know, for anyone who's been doing consulting for that many years, especially as an independent consultant, there are peaks and troughs. And 15 years ago, if I was in a trough of a consulting, I would say, "Oh my God, I'm never going to be able to work again. It's a drought. This is it. This is my career," and all that kind of stuff. And I used to stress about it because I was at the beginning of the process. Now I said to myself, "You know what? I've got enough experience, I've got enough of a track record that if there's a slowdown, I'm going to go and study another field." And so six or seven years ago, I had one of those troughs. And in Ontario, as you know, as having interviewed so many people from here, including Chris, we had a bit of an electricity crisis and had been in a sort of on and off electricity crisis for about seven or eight years now. And what I mean by crisis is that, kind of like in California and kind of in a lot of other specific states and jurisdictions, for some reason, electricity seems to be always at the top of the political agenda here. Not just now, in the current economic sort of energy crisis, but just for a very long time. And people always used to say to me, "Hey, you're like a telecoms economist, like, what the hell? Explain to us what is going on with the electricity grid and why are prices skyrocketing?" And I'd go, "I don't know, it's not my field." So anyway, I decided to make it my field. On my part, on my own, volunteer.

Bret Kugelmass [00:13:10] Can I just stop you and tell you what I love so much about that?

Edgardo Sepuvelda [00:13:13] What's that?

Bret Kugelmass [00:13:14] What I love about that is that when people are brought into... You know this whole thing, this whole expression, like, "You can't make a man understand something when he's paid to not," or something like that? It's like, when people come from outside on their own volition, just out of curiosity, I think that they're able to see things that people who have been inside the industry and kind of been trained since day one to think a certain way, like their brain is literally carved up, by the time they have enough experience, like make some critical claims, their brain has already been divided for that. But like you coming in with fresh eyes to an area, obviously having a tremendous amount of experience in a comparable industry, but with none of the biases of the new one, are able to formulate entirely original thoughts. I just love it so much.

Edgardo Sepuvelda [00:13:59] Yeah, yeah. And that's what I mean. It's a steep learning curve, as you can appreciate.

Bret Kugelmass [00:14:05] Especially the grid. I mean, I think you can go a whole lifetime because there's so many models across the world, you could go a whole lifetime and not know what's going on.

Edgardo Sepuvelda [00:14:11] Yeah, yeah. And so, kind of like 5,000 hours later of learning, 12 podcasts. I don't know, I've probably written 40 or 50,000 words and blogs and articles.

Bret Kugelmass [00:14:28] What do you write? What's your medium? Do you submit to journals? Do you write to blogs? What do you do? Op-ed?

Edgardo Sepuvelda [00:14:35] So originally I started writing in kind of like a shared blog called the Progressive Economic Forum. Which is a Canadian, I mean, it's very descriptive. It's by progressive economists, progressive economists, and we all write about areas of interest. And so I started writing there. And it was mostly about the Ontario grid and how messed up it was and how expensive it was and how it was becoming more unreliable and the politics of it. But fundamentally, as you were saying, Bret, I brought my own kind of set of interests in it. And one of the things that I found within the electricity and energy space was that very few people had training or interest in, again, not when we talk about regulation, not the regulation that 99% of people in the nuclear space refer to, which is NRC, and the other safety...

Bret Kugelmass [00:15:36] Not safety licensing.

Edgardo Sepuvelda [00:15:38] Not safety licensing.

Bret Kugelmass [00:15:40] But rather, market regulation.

Edgardo Sepuvelda [00:15:41] Correct. Correct. The electricity markets and the regulation of markets. So that's one of the things I brought, because I'd been doing that for 25 years professionally. And so the way I think about when I write, it's basically I've kind of transferred my clients, and I have a new set of clients, and those are people like yourself, like policymakers, like decision makers and other people who are interested in the conversation in the ecosystem. You are my clients, and it's all for fun, quote unquote. And these are my clients now. And so I write for a client base on areas that I'm interested in and I can choose whatever I want. And those are the sort of two or three things that I wanted to talk to you about, because I think it's one of the things that I've found interesting. I think that there's been a fair bit of good reception among energy people about the kinds of insights that, like you said, I've been bringing from outside. I'm not so much outside now, I'm sort of more inside now or as much as inside as I'm going to get, on those areas from an economic perspective because I mean, I know you've had some people on Titans who have some economic background and some regulatory. But, you know, it's certainly, as you say in economics, you've got to follow the money. If you don't follow the money...

Bret Kugelmass [00:17:16] Totally. I think incentives drive everything so much more than people realize. You never even realize how people are being controlled or manipulated or are leading to it by broader market forces.

Edgardo Sepuvelda [00:17:27] That's exactly it. That's exactly it. And that's one of the things that I you know, so like, that's the first thing that I've been writing about, especially in the last 18 months. And so just in terms of where people can find me before we get into the nitty gritty, so again, there's a lot of my writing, and I'll put it in the show notes on that Progressive Economic Forum. I've been doing this for about six or seven years now, and then I decided to set up my own website. So it's called Electrification Decarbonization, short for edcarb.org. And so that's where I'm doing the writing mostly now. But people who go there will see this wall of data. One of the things I did, Bret, is I did a deep dive on 30 countries and their decarbonization journey over the last 50 years.

Bret Kugelmass [00:18:35] What's the highlight? Give us a tease here. Like out of that analysis, what did you find that other people didn't know before you compiled that data?

Edgardo Sepuvelda [00:18:42] Well, there are two things that are different. Because there's a lot of databases that do this. But the first thing that I did was I went back 60 years. And so what happens is that often the case is that you see a snapshot and you compare a Germany and a France. How many times have we seen that? Or an Australia and a U.S., etc., etc.. But that gives you the snapshot. It doesn't tell you the actual transitions that have occurred. Like for example, even if you go back to 1990, France and Germany looked very different because by that point in France, they had rolled out, I want to say, 95% of their nuclear free by now. And so they look fundamentally different. It's as if it had fallen from the sky and that there was no hard work to be done in France to get to where they were.

Bret Kugelmass [00:19:43] And what was the key metric that you were analyzing? Was it cost or carbon or what was it?

Edgardo Sepuvelda [00:19:49] So just to finish that thought, but if you go back to 1960 or 1970, France and Germany are identical. So first of all, things can change. And so when you think about the narrative now, Bret, of how hard things are, but if you go back to that, we've actually made these changes. So that's one of the things that make me relatively optimistic is that there are countries in the world that were more or less, you know, pretty dirty from a carbon perspective and were able actually to change it within a generation. And everyone makes it so difficult. It's so difficult, it's so difficult. It isn't. It does require concerted effort. And we'll talk about what that is, but it's totally feasible and you can see that. So what I did was, you'll see in the chart, it's basically I take four or five technologies, hydro, nuclear, gas, oil, and then I track them as they change their relative generation mix over 60 years. And at the same time, for every single year, I'm tracking what are emissions. So you can track 1 to 1 the change in generation mix and emissions. So you can see, for example, as France rolls up their nuclear rollout, you can see emissions going down at the same time. France has not always had low emissions. And if you go far back enough, it was actually relatively dirty. The other thing that I'm able to do is I've been tracking prices. One of the things that often is the case is that, economists the first thing we do is look at prices. And so that's something that hasn't really been looked at. It's been kind of like, because it is so hard to track. So I've got prices there back to 1976.

Bret Kugelmass [00:21:46] Because prices and costs are two different things. And then there's other stuff in between also.

Edgardo Sepuvelda [00:21:50] Exactly. Oh, yeah, for sure. For sure. Ultimately, and I want to be doing some further kind of like academic work on this is, ultimately you want to do some inference testing, some check your hypotheses. What empirically can you show? What technologies actually decarbonize and which do not, which ones increase prices and which ones do not, etc., etc.. These are ultimately the way in which social scientists work. You can have opinions, but ultimately you have to have a hypothesis and you have to be able to test it and put it in a peer reviewed journal and add to the academic discussion, because that's one of the other things that I'm trying to do. I think every single thing I've ever written has been, first you do the data work, you set your hypothesis, you present your proof, and then you write about it, rather than the other way around. And that's just because that's the way that I've always worked as a consultant, because, when you're doing this for a client, the client going to say, "Well, show me. Don't just tell me, show me. Show me and sell it to me and persuade me that this is the right policy. And where has it been done before?" Like it's not something that Edgardo has dreamt up on the plane, when we used to get on planes.

Bret Kugelmass [00:23:17] Yeah, I've been flying for a year now.

Edgardo Sepuvelda [00:23:19] Oh, have you? Okay. All right.

Bret Kugelmass [00:23:21] The minute they lifted those travel restrictions, I was on a plane every other weekend.

Edgardo Sepuvelda [00:23:25] Well, yeah, and for my business, the number of miles that I've logged over the years, decades, yeah, exactly. So, yeah. So that's sort of the kind of stuff that I've got. And then I'm doing more and more, articles being published in magazines, interviews, etc., etc.. So yeah, yeah. That's mostly what I'm doing.

Bret Kugelmass [00:23:52] I was just gonna ask what you, I think you're going to reference two different insights that you gathered. One was around the data set that you collected tracking different countries over time, going back 60 years, looking at their carbon emissions and the relative breakout of energy sources. Was there another primary paper that you feel super proud about that impacted or coincided?

Edgardo Sepuvelda [00:24:13] Yeah, yeah. I mean, that's the analysis. But I mean it's all part of a process, and so earlier this year I was asked to put the newsletter together, a monthly newsletter for a French nuclear advocacy group called Voices of Nuclear. And so that's one that I want to talk about today, among other things. And there I did, at the back end of it, I did two things. First of all, I kind of looked at to get to the point of sort of where are the incentives and what are the market systems that are going is that I think one of the things that are overlooked in the history of nuclear and therefore the future of nuclear has been growth and market incentives. There is a narrative that we put a lot of the demise of nuclear due to sort of the safety and overregulation, like the criminalization of nuclear and the NRC, etc., etc.. We also tend to focus on people who are anti-nuclear and their political successes. And I think those are all important. But from my perspective, given sort of my set of skills, one of the things that I have thought about that has been relatively overlooked, Bret, is the idea of markets and growth.

Bret Kugelmass [00:26:03] And may I try to draw a thread that ties a lot of these together because I think they're just so interrelated, because I've seen in studying the history is when the industry moved towards this model of more regulatory capture and that became the business model, it so disincentivized other players to come in who would have lobbied for market reforms. So you see what I'm saying? Nuclear just became so difficult that legitimate, big Fortune 500 companies just bowed out and they said, "We're not going to touch this." But they also bowed out all of their lobbyists, too, who might have fought for the market reforms that you espoused.

Edgardo Sepuvelda [00:26:49] Look, I mean, as an outsider, you go in and you try to disassociate all of these multiple issues and try to understand what is signal and what is noise. What is a story we tell ourselves versus what the underlying reasons are. And what we know about nuclear specifically, but also the electricity markets in the West, in the developed, in the industrialized countries, is that from when Edison set up the Pearl Street Generating Company down in 1882, 83, basically to the late 60s or early 70s, 1970, 1980, what you see is you have this phenomenal growth of electricity. Year in, year out, decade after decade. And so if you look at sort of what the planners and the owners of these companies were doing, did they ever have an economist in there? Virtually no.

Bret Kugelmass [00:27:57] Because they always knew they were going to be able to build more.

Edgardo Sepuvelda [00:28:01] That's exactly it.

Bret Kugelmass [00:28:01] The decision's already made for us. Build more.

Edgardo Sepuvelda [00:28:04] That's right. Build more. And so what you did is we said, okay, you know, you put your finger out and you said, "Okay, what's going to happen next year?" Well, you know, you may have a recession or whatever, but ultimately you're going to do what you've been doing for 100 years, which is that you're going to grow at 6 or 7% year over year, your demand. And if we build it, they will come. And so what you get is you get this... and it's 7, I think it's at 7.2% annual growth, if you do that for ten years, you double your grid. So we were doubling our grid in the West, our respective grids, in the 50s and the 60s and the 1930s, etc.. So the idea, Bret, that we are all kind of like freaked out now that we have to double the grid by 2050, and you go, how hard is that? The reason is that's an ahistorical perspective, because over the last 20 years, we've actually shrunk our grid. So for somebody who doesn't have the history of 100 years of literally doubling your grid every ten years, but you've only known shrinkage, degrowth, and what I'm going to call grid austerity, over the last 20 or 30 years, the very idea that you can grow something, including nuclear, and this is where I'm getting to, including that you can grow and it's so impossible that we can't do it is a totally ahistorical approach to not looking at this properly, which is that for 100 years we grew the grid and doubled the grid literally every ten years.

Bret Kugelmass [00:29:51] Totally, totally. And when I hear people push back on the "can we grow the grid or not," I'll tell you the most common frustration that I hear, maybe this is just a selection bias of people that I talk to, but it's the same type of people who would naysay why we can't build like high speed rail. It's all about like, we have become so bad at allowing any permit and anyone can sue any project and derail it and cost billions of dollars that people have just kind of given up. They're like, "Listen, in the West, we can't do development anymore. Our NGOs are too powerful to sue us to heaven. They've already gotten into all of the regulators and promoters on the local level, on the state level, on the federal level. And they just have made development impossible."

Edgardo Sepuvelda [00:30:39] Yep, yep. I don't deny that. I don't deny that. I don't deny that that is a political constraint, but my point is that I think that part is a reflection that we haven't had to grow.

Bret Kugelmass [00:31:05] Okay. I think I see you what you mean.

Edgardo Sepuvelda [00:31:10] Think about what is happening in Europe now in the context of the energy crisis. Things that were virtually politically impossible a year ago are now becoming politically possible because we need to grow. So, you don't push back on, I'm going to call it the NIMBYs. You don't push back on the NIMBYs because there's no political consensus or will to fight about. And so you kind of say, "Okay, fine, whatever, we don't need it." And so you make it so difficult, right?

Bret Kugelmass [00:31:41] Do you have policy ideas on structural ways to literally fight against the NIMBYs? Is there a provision in any given modern constitution where government, if they declare it to be an emergency, they can just say "Sorry, like you don't get a say in transmission corridor. Like, we don't care. We're building this transmission corridor and that's it."

Edgardo Sepuvelda [00:32:06] Yeah, I'd have to get back to you on that. Like, in terms of legally, it's not my area. But one of the things that I wanted to talk about is that what is it about growth? And we're not going to talk about what happened in the 1970s and 80s that kind of stopped that growth. Other than a couple of things, Bret, because I think one of the things, one of the reasons I'm optimistic because if this hypothesis is right whereby the primary cause of nuclear's relative demise in the West has been as a result of lower growth overall in the grid, in the electricity generation. If that is the case, and then everything else is secondary about markets, about the environmental regulations, about NIMBYism, I think that once we start to recognize that and focusing on those issues, I think a lot of the other secondary constraints will weaken as we've seen in Europe.

Bret Kugelmass [00:33:20] Perfect. So, elaborate on this thesis a little bit. So let's look at the growth, what comes next?

Edgardo Sepuvelda [00:33:25] Right. So let me explain what happened. Why is it that we stopped growing? Because then that's the diagnosis. And then you start thinking about how you start to grow. So without repeating, the whole economic crisis, the 1970s, and stagflation and all that kind of stuff that we're seeing now, basically what happened is that again, in the 40s, during the Second World War, 1950s, 1960s, grid planners, utility companies, the state owned enterprises, because it was done by sort of combination of those three, could basically say, "Listen, we're going to grow at 6 or 7% year in, year out, and we can plan." In that context, you could build an expensive hydroelectric dam project that's going to have a 50 year life, and say confidently that I'm going to be able to recover the costs of that over a 50 year life, because I'm going to have demand for 50 years. And so, therefore, the idea that I have to go either use it going to private capital, and this is private patient capital, or go to the state coffers for if it's a publicly owned enterprise like it is in most of Canada, like Electricite de France is in France, etc., etc., where you go, you have to go to cabinet basically and say, "Listen, I need to borrow, like the prime minister of France, Messmer saying "Listen, guys, I'm going to do this rollout, and I'm going to endebt the French government to billions of francs because I want to build out 50 nuclear reactors." And so like the cabinet ministers who would have been sitting around the table said, "Are you crazy? Like, what are we doing here? Like, that's a huge amount of commitment. You're going to mortgage the company and mortgage to the nation." And so, it's in that context that you had to have been pretty certain to be able to borrow for 40 or 50 years, whether it's a hydroelectric dam or anything that is long lived, and you had to have certainty. And you couldn't be thinking that, and you had to be certain over two things, that if you build it, they will come. That is there's going to be demand, and the expansion of demand. And you have to be certain about the amount of money that you're going to be able to recover. So if you're in the 1970s, and you have been growing at 6 or 7 or 8% year over year, and you had monopoly utilities or monopoly state owned enterprises where you basically set the price to recover your cost, you had pretty much a de-risked investment where you could get somebody to sign on to a 50 year bond, like an institutional or a public pension fund, and you could sell that at 2 or 3% in real terms. Think about that proposition now in 2022. In most markets, you don't know what price you're going to get today, let alone in 5 minutes because it's spot prices. So you can't guarantee you're public investor or even private investment what's going to happen in 50 years, let alone in 50 minutes. So the derisking associated with some kind of system, whether it's either a rate of return or some kind of long term contracting, has been totally lost. And so that's what we call in economics a market failure. Our system has dissuaded long term private capital and public capital to invest in the long term patient capital because we're all looking now for payback periods of 2 or 3 or 4 years, whereby most of your marginal cost is on fuel, such as, for example, on gas, rather than on the upfront investment.

Bret Kugelmass [00:37:49] So as you explained, I mean, you explain very clearly, it seems obvious. So why don't countries just do that? Why don't they value long term price stability in their market construction?

Edgardo Sepuvelda [00:38:03] Right. And that gets to the second point which is that we have 100 years basically of a model, and then you get into the whole reform structure in the 1980s. It first happens in Chile, my home country. Then Margaret Thatcher liberalizes, and then, you know, the U.S., California, New York, etc., start putting in these wholesale markets. And so that's the second part that I'd say is that this experiment in market reform of wholesale real time auctions to be able to determine for a public service such as electricity what is to be invested for how long, and allowing a five minute clearing market to determine your electricity grid including that long term investment is a policy mistake. Among economists, this is one of those I wish we had the one hand economist because you can't say, there's a disagreement among telecoms economists and among energy economists about the relative failures and benefits of those wholesale clear market. So what I'm telling you is my own view. It's not a consensus view, but it is definitely increasingly, even the people like the Paul Joskows and all the other huge proponents of market reform in the 1996, especially after what happened in Enron and what is happening in Texas, people are recognizing that these energy only clearing markets are not sending, because of a market failure, are not sending the proper signal for long term clean investment.

Bret Kugelmass [00:40:07] So who does it right? In the Western world, who has the right, who has closest to the right market rules that you would agree with?

Edgardo Sepuvelda [00:40:19] Look, I think the evidence is that in the United States, we have half of your states have been reformed and half have not. For example, the Californias and New Yorks have restructured, and the Floridas and the North Carolinas haven't. And so you have a real experiment whether the promises of market reform have actually born fruit. And the answer is no, they're virtually the same. And so the traditional rate of return provision is a hundred year institution that has provided for us. All those 6 or 7 or 8% growth that occurred over 100 years was under that traditional methodology. What we've seen under the market methodology is 20 years of stagnation. It's not that one drives to the other, it's that the market system was not inconsistent with a market that wasn't growing. But once you actually expected the growth, this is where the challenge occurs.

Bret Kugelmass [00:41:31] So how come someone can't just set up a system of rules that has here all of the values that we care about in a grid. Long term, clean, and just list them out. You got eight or nine, you list them out, and then you just put a different weighting on each one and you can maybe make it adjustable. So every 2 or 3 years you can just, I'm allowed to twist any one of these up to 10%. You know, just set it that way and that way you're not like defining the rules up front, but you're defining a framework that allows you to be responsive to learnings over time and to how things change. So maybe we were in relatively secure world, but maybe we get into a non secure world. So you need to crank up the long term fuel security aspect year over year by 5%. How come that doesn't exist? A framework written into law that has flexibility built into it.

Edgardo Sepuvelda [00:42:25] Yeah, yeah. Look, people have tried, right? People have tried and in the realpolitik world of economic interests and trying to make sure that investments you made 20, 30 years ago still are being paid off and that you recover them, I think reform oriented people are asking that very same question, Bret. And people are thinking, some are optimistic that, yes, that we can add like a capacity factor in such a way that we have basically two markets. One is we have like a five minute clearing market that is based on like a marginal cost, and that deals with the price component, the short term price component. But at the same time, we have to have what are called capacity mechanisms to make sure that in next year or the year after that, we have sufficient capacity in 2 or 3 years time that we're not going to go into blackout situations. What happens under that situation is that you get into, politics aside and financial interests aside, you get into, which is always very difficult to do, you get into a situation where the complexity of market design and all the little add ons become so complex that it defeats the very purpose of having market mechanisms. Because what you're dealing with is you're dealing with a series of market failures that you have to correct at every single time, and you get into like a second or third best where you start thinking, "Look, let's go back to the old system where you had, an integrated resource plan and you dealt with it on a monopoly basis with a single clearing, and you didn't have to have like this wholesale price." So at some point, you're going to get different levels of what we call state failure, whereby the designers of the system cannot design a sufficiently complex and understandable and ungameable, because remember, this is what Enron was about. They were gaming the system. And so, how do you know that the very system, the very rules that you're doing are not going to be gamed, versus more of a top down approach. I'm of the view that we have provided sufficient, of an experiment, of a natural experiment. We have half the country's doing something, half the country's doing something else, and you kind of compare after 20 years, you look at the results. The promises of market reform and wholesale markets have just not borne fruit. We're not getting the kinds of huge decreases in prices. Actually, states in the United States that have reform actually have prices that are higher than the ones that are traditional rate of return regulation. So that's an important thing and that's an area that in nuclear specifically, we have tended not to focus on. That is that we have now a market like market clearing where the nuclear industry is, it gets paid is... You know, if you're going to get paid your marginal cost in a wholesale free market, you're virtually never going to have new nuclear. Because your marginal cost is going to be... What nuclear does really well is that it has a very low average cost, which is the sum of the fixed costs and the sum of the...

Bret Kugelmass [00:46:33] Can I ask a question? Why can't the private sector then just fix this because individual companies that buy power have economists and can look long term and try to secure power on a long term basis to tell you that average. How come you don't see that? How come we don't just say, "Okay, so the market structure as is today has these crazy fluctuations, but you know what? I'm going to build a nuclear plant. I have a sales team that goes out and signs a gigawatt worth of 10 year long term PPAs."

Edgardo Sepuvelda [00:47:01] You could totally do it. That's exactly it. And in fact, I mean, this is one of those funny things, Bret, is that even in free markets, no one wants to be in a clearing market. Like wind doesn't want to be in that market. They are in the market, but they have all kinds of out of market revenues. The production tax credit and the investment tax credit, they're all out of market revenues that, if you put the question as, would you actually ever enter this wholesale market, is you're crazy, I wouldn't.

Bret Kugelmass [00:47:38] Because then there'd be negative prices.

Edgardo Sepuvelda [00:47:40] Correct, correct.

Bret Kugelmass [00:47:42] The other auxiliary subsidy is they actually distort the market even more.

Edgardo Sepuvelda [00:47:46] Well, this is exactly it. If you actually look at what's happening in the U.S. and in Europe, virtually no truly merchant investments have come in. I think it would be like 10 or 15%. Everyone comes in either on the one of two things, Bret, which is you've identified it. Everyone skirts the pure market and says, "Forget that, that's for suckers. I want to go in with guarantees." So you go in with an investment tax credit or a production tax credit or you go in with a PPA. Virtually no one is going in the way that it was designed to go in is that you kind of say, "Hey, what's today's rate? And I'm going in." So the very idea of the designers that are going and saying "Listen, the way in which we will determine investment, where, how and what," no one is using that because it's a sucker's game. Everyone is doing exactly what you're saying, that you're avoiding the market and you're going into PPA.

Bret Kugelmass [00:48:46] This is so bizarre because of how foundational energy is to every other industry.

Edgardo Sepuvelda [00:48:54] Exactly.

Bret Kugelmass [00:48:55] And like national security and everything, it's like you'd think countries would care a little bit more to get it right and adjust from their mistakes a little faster. You just think, given that you can't make steel without energy. You can't make concrete without energy.

Edgardo Sepuvelda [00:49:11] Exactly. Well, but I mean, this is ideology trumping pragmatism.

Bret Kugelmass [00:49:18] So what do we do about these crazy ideologies?

Edgardo Sepuvelda [00:49:19] Well, think about what happened in the whole liberalization in the United States under Reagan and, you know, you go through. We're talking not unsmart people who said, "Oh, yeah, let's do this in California and we'll set up a market here. We'll set up in New York, and we'll set up these markets and they're going to solve everything. We're not going to be involved in this. We're not going to pick winners and then we're just going to let it market." But when you go in there, no one goes in there. Everyone goes in with a minder, a bodyguard. No one goes in to fight the lions by themselves to see whether they're the ones who are going to be able to fight the lions. You take in your PPAs, you take in your ETCs, you take in your PTCs, [00:50:04]you take in your rate of returns, your side cards, your ZETs, your RECs, [5.4s] your investment tax credits. No one is going in on a pure merchant market the way it was designed to be. So that's why these rules are so thick. It's because you have a market. How hard is a market? A market is super easy, right? You know, the market to do it is you just put it out. But the reason it's so difficult is you have the set asides, because no one wants to play the market because it's a sucker's game.

Bret Kugelmass [00:50:39] That's a bit discouraging, like how do you get out of that system, given all of the... you called it the realpolitik, right? So it's like, how do you get out of it?

Edgardo Sepuvelda [00:50:48] Well, you know, I mean, it's not easy. The people who advocated for these wholesale reforms, that was like a 40 year intellectual exercise of seeing a crisis and then saying, "Hey, here's my solution." Aand then, with the politicians, the decision makers who actually are there saying, "Actually, that's a good idea." You're like, I don't want to be responsible for the grid. I'm going to let the market decide on the grid. And, Bret, I'm going to make some money by selling my state owned enterprises in a privatized new firm. So that's pretty win win, right? So you've got to then think about and show, and that's one of the things that I'm trying to do is try to say, "Listen, we've had this experiment. We now have the evidence to show that it certainly did not deliver on the huge promises that were made and is barely keeping up and is just not fit for purpose for what we need to do in the future." It's fit for purpose in a stagnant market where growth... like very few people know this, like in the United States, electricity demand has dropped year in, year out for the last 15 years. So to go to anywhere and persuade people to buy nuclear or anything else other than something that can have a two or three year turnaround is a very hard sell because you're saying, "What for? What am I going to sell it? Am I going to be able to sell it five years from now, let alone 50 years from now?" So one of the things you have to be thinking about is how is it that we got into this shrinkage of the grid. One of them is deindustrialization. The biggest driver of growth in the grid in the 50s and 60s traditionally was industry. Industry used to be, I don't know, 30% of the GDP in the United States in the 50s, and now, I was just looking this up a couple of days ago, it's now, you know that manufacturing in the United States accounts for 11%, 11% of the GDP in the United States.

Bret Kugelmass [00:53:14] Wow, I thought it was still at 30%. Oh, my God. Thank you for waking me up, that's crazy.

Edgardo Sepuvelda [00:53:18] So in the 50s and 60s it used to be 30%, and now it's down to 11%. So what's happening is that, you can get another iPad, I can get another TV, but us little residential guys, we're not going to grow the grid. So we continue to go along, but it's going to be industry and the heavy users of industries that are going to grow the grid, and that have traditionally been responsible for the grid. Look, the residential component of the grid in terms of growth grew as you know, we actually got connected. And then we got the washing machines and all that kind of stuff. But it was really industry that was growing it. And in the West, industry, for most countries, it has actually been shrinking. We become more efficient and the industry goes somewhere else. With that industry migrating and becoming more efficient, there goes the electricity. So what we're going to have to do in the future is we're going to have to electrify areas that to date have not been electrified. Like that's the electrification process, whereby instead of heating my home with natural gas, I'm going to have to heat it with electricity, like in a heat pump. Instead of driving an internal combustion engine, I'm going to be driving an EV. The steel that is right now used as metallurgical coal to build the steel that goes into my electric vehicle, that's going to have to be done through like an electric arc furnace, etc., etc., etc.. So that's the way in which we're going to be growing the grid again, or that's the way we should want to grow the grid again, and becoming more industrial, if we can, to build all the things that we need to do to be able to shift our energy demands from fossil to clean electricity and to be able to start thinking about growing our demand, maybe never to the 6 or 7 or 8% that we used to do, but, you know, certainly more than population growth and hopefully more than GDP growth, so that we can provide the market basis and the right incentives and the right market signals to an investor, some of your clients, for example, or other people who are saying, "Listen, I'm pretty confident that I'm going to have 30 or 40 years of steady, not fantastical growth, but steady 3 or 4% growth, whereby I have great certainty that I'm going to have sufficient revenues and sufficient demand in my 49th year and 50th year of a 50 year investment in nuclear to be able to actually pry money from the banks to lend me the money to then say, yeah, actually, that's a pretty good bet." So that's what you're going to be, that's what we need to be doing. We need to make sure that if we want nuclear to grow, we need to have the grid grow in terms of generation in the way that it used to grow before. So that's one of my kind of like hypotheses, is that we grew in a situation where we were pretty certain that we could grow robustly for 40 or 50 years to have the revenue stream that you could then bank and borrow that money, whether it's private capital or public capital, and we just have lost that ability. If you say to somebody, "Listen, I'm going to grow the grid and double it," they're going to laugh you out of the bank because it's not credible. We need to have the policy tools and the right incentives, as you mentioned, to be able to actually credibly grow the grid. If you have the expectation of doubling the grid every 15, 20 years and certainly by 2050, that is going to be a fundamental driver of growth across all technologies, but in particular for long lived capital intensive technologies such as nuclear.

Bret Kugelmass [00:58:01] Amazing. Couldn't end on a better note than that. Edgardo Sepuvelda, thank you so much for joining us on Titans of Nuclear. It's been a real pleasure and I hope for many more conversations to come.

Edgardo Sepuvelda [00:58:10] Excellent. Thank you very much, Bret. I've really enjoyed it. Again, I've been a long time fan, so I was very pleased that I was able to join you today.