 All right, morning everybody. Welcome. My name is Steve Calender. I am a professor over in the business school. As I understand it, you are all new arrivals for grad school at Stanford. Is that right? All right, excellent. Well, this is an exciting time in your life. All right, you're probably a little nervous and tentative. All right, but it's a tremendous time in your life. I can remember back to when I started grad school. I'll give my age away. 22 years ago, almost exactly to the day I was sitting in a similar chair to what you're sitting in, and I was very excited. All right, I did my PhD at Caltech down in Southern California. I didn't get into Stanford, so I had to move downstate a little bit. And when I think back to that time, it was really a sort of life-changing experience for me. Coming to grad school was the first time I'd ever been in a place where it was cool to be into learning, where it was cool to be a bit of a nerd. I mean, some of you may have had that experience before, but I'm sure many of you share my experience that sort of learning was something people weren't into. And then you get to grad school, you get to a place like Caltech or Stanford, and it's a whole different world. And it's a very exciting time. It was really a life-changing experience for me. The other thing that I remember when I think back to the start of my grad school experience, which came back to me this weekend, was you look around and the people around you are very likely to be your friends for a long time. All right, I just got back from a camping weekend in Santa Barbara with a bunch of my friends from graduate school who I met, and I'm thinking about it, who I met pretty much in the first week of graduate school. All right, so the people around you, you don't know them yet, you may not be too familiar with them, but they're going to be your friends for your life. Maybe you want to switch seats after a while and pick some different friends if you look around and you don't like what you see, but it's that sort of formative experience, and it's really a great time. So I hope you're excited about starting at Stanford, and I expect you'll have a great time. All right, you're sitting in this room, you're interested in energy. Stanford is a great place to do energy. All right, the set of people who are interested in it and the variety of things that are going on is just mind-blowing. It encompasses everything, and so wherever you are interested in it, wherever they head to, you'll be able to find somebody who is working on it. You'll be surprised to find someone who's working on that aspect of the industry. All right, you take me for example, suddenly I'm sitting here in the engineering building talking about energy. I did my PhD at Caltech, but I am not an engineer, and I'm not even a real scientist according to the definition of probably most of you over here. I am a social scientist. I'm a political economist. I work at the intersection of political science and economics. I use economic tools to understand the questions at this intersection. So what do I have to say about energy? Well, let me tell you about a little bit about the kind of things I do and what I'm interested in. I'll start outside the energy industry and we'll come back to energy industry. All right, so over in the business school, we study a lot of business strategy, business cases, and so one case I wrote a few years ago, and we teach in the business school, is about a startup here in the Bay Area that works in the transportation industry, and they're looking in a few years to pivot and to get into autonomous cars. They're based up in the city. They get by the name of Uber. Have you guys heard of this company? All right, absolutely. So this is what Uber does. So Uber had the idea to create an app to match drivers and passengers and do it a lot more efficiently and expand this network and start a company this way. This was a great idea, but then suddenly when they started to develop this idea, they went and talked to the lawyers, told the lawyers draw up the contract for this company, the documents for this company, and the lawyers said to them, this sounds awesome, but there's just one little problem. And the one little problem is that your business idea is illegal. So fancy that, you got this great new startup idea, you're out to change the world and these nerdy lawyers are telling you, this is illegal. All right, what a bummer that is. So Uber and the founders of Uber at this point had suddenly discovered regulation. They'd suddenly discovered policy and they'd suddenly discovered politics. So what is interesting about Uber is they're great innovators that created this app. They're moving into food delivery, maybe autonomous vehicles in the future and all this sort of stuff. What is also of interest in what they've been up to and where they've been very innovative, particularly from my perspective is they didn't let this fact that their business idea was illegal stop them. All right, so they entered the market. All right, they said, well, thanks lawyers, but we'll enter anyway. But then what happened? What did they do? All right, you can't just enter an illegal market and then say, you know, they're all with the laws. You can't get away with that for very long. And so what did they do? They changed the law. Did they go up to the legislature and say, excuse me, Mr. Legislatures, legislators, can you please change the law? We would like to make lots of money and your law is getting in the way of us making money. That was the goal to change the law and in many jurisdictions they have succeeded in changing the law. But how did they go about changing the law? They couldn't just go and ask to change the law. What did they do? Say that again. They made people like Uber. Yep, we all want people to like them. All right, so what did that get them? Leverage. All right, leverage to do what? They hired some lobbyists. All right, lobbyists are very good at taking your money. All right, the fact that you don't understand politics means they've got an advantage and they will tell you to give them all your money. All right, then they've got to do something for you, but they may not do it. All right, so it's good to hire qualified people in this area, but the lobbyists just can't turn up to the legislature and say, excuse me, Mr. Legislature, please change the law for my clients. All right, they need some leverage. So how do you go about getting leverage? Say that again. You work with the drivers. You create public demand and you work with the drivers. What do you mean by working with the drivers? You've got to work with them. They're not your employees technically. Maybe next week they'll be your employees, but they're your contractors at the moment. What does it mean to work with the drivers? Absolutely, yeah, and so you recruit them to drive for you. All right, this is what a business does. You've got to generate. You've got to find employees. You've got to find users. You've got to add some value somehow, but you've still got this problem that what you're doing is illegal. All right, you've got to pay them. But how does this relate to changing the law? You're still doing something that's illegal. All right, why are the Uber guys also rich now when they had their business idea was illegal? All right, I've got an idea. I'm going to sell heroin. How's that business idea going to work? Switch to another country. They could challenge the laws in court. These laws are pretty airtight. However, that's one thing. You've got to see whether the law is constitutional or there's something wrong with it. Well, you're trying to create a business, users to make money. You've also got this other problem of what you're doing is illegal. All right, so what are you going to do? You've got to get your drivers to not only drive for you, but you're going to get them to help you politically. You're going to make your product popular so that they use your product and then you're going to get those users to help you politically. All right, this is where your leverage is going to come from. All right, so the point is if Travis Kalanick and turns up at the city council and says, please change the law, they're going to laugh him out of the building. If he turns up with 10,000 drivers and 100,000 users and they all say, please change the law, politicians are going to start listening. That's the leverage that Uber had over the legislature. All right, and in many jurisdictions they were able to use that leverage to change the law. All right, so what's very interesting about Uber is they had a business strategy that was clearly going to win in the market. They were first in with this sort of ride-hailing app that was going to sort of have an expansive network and then benefit from network effects to leverage to win in the market. Their problem was whether this market was legal. All right, so what they did was they used their business strategy to build up users and drivers in a way that will also gave them not just market power, but political power. Then they use that political power to change the law. All right, so that's what Uber had to do. All right, they've got a great business idea. They're going to innovate, they're going to disrupt, but those who are getting disrupted don't want to be disrupted. And so you need to have a strategy to win against them. And what's really interesting and where I come at from studying markets, studying society, studying businesses, that this competition is not just in the marketplace. It's in what we call beyond the marketplace, in the media, in the government, in the courts, within public opinion. And so Uber needed to use their strategy to not only just win in the market, but win beyond the market. All right, worked out really well for them in San Francisco and a bunch of US cities. There's still some cities that they haven't been able to compete in. If you're from Austin, Texas, they got driven out of there. And if many of you guys are from around the world, they've had more checkered success in other countries around the world. And so part of their ability to succeed, to disrupt, to change the world has been to participate in politics, to participate beyond the market. All right, this is great for Uber, that's one example. But what is important is what important for your perspective is that this example and these sorts of ideas happen in every industry all across the country and all across the world. And I'll give you just one other example of another Silicon Valley darling that I talk about in my class, which is Tesla. Tesla is a transportation company, they're going to reduce energy usage and do all of this sort of stuff. They're great innovators. They just sort of dived in with a fully electric car. Another aspect where they've been great innovators is how they sell their cars. You may not know it, it may be a surprise to you, but in most of the United States, it's actually illegal for Tesla to sell their cars to customers. What kind of business is that? You make a product and you're not allowed to actually sell it to your customers. You've got to sell it to a dealer who then sells it to the customer. And this has been a big constraint on Tesla's ability to roll out their product, roll out their new cars all around the country. So even in that industry, even in that disruptive innovative industry, the constraints of politics, the constraints of government are pinning them down. I could give you a hundred other examples of other industries where this is relevant, the one you're most interested in is energy. The news for you is energy is not immune from these forces. You all know energy is a regulated industry, but a lot of the times you'll think about how can we build a business that conforms with those regulations. What I'm interested in and what's going to be important for you guys is those regulations, those laws themselves are in play. They don't just come out of the sky from sort of some designer who says here are the laws for the electricity industry. Those laws are the result of competitors, Ubers, Tesla's car companies, the taxi companies competing to get laws written that favor them. So if you have a great idea or you want to enter a space and it disrupts, those you're going to disrupt don't like it, they're going to get laws in place to pin you down and to limit your opportunities. I can tell you endless stories of young sort of idealistic aspirational people like yourself who start companies that get squashed by politics. So whether you like it or not, you have to participate in the political world. You might be sitting here thinking I'm a scientist, I'm an engineer, I'm going to build great product and that's all that matters. I can tell you now that's not all that matters. And your company will have a difficult time succeeding or your efforts, even if you don't want to start a company, your efforts to improve social outcomes, induce usage of renewable energy around the world or what have you, are going to be very limited by the fact that if you're not participating in politics, participating in what we call beyond the market environment. A good test of this is you're all young and just beginning your careers in energy. This week and over the next few years you'll meet a lot of seasoned professionals in the energy industry. A good test of what I'm saying is you ask any of them about politics and you will be amazed at how knowledgeable and how fluent they are about policy and politics. They'll often get frustrated when they talk to you, so be prepared for them to get annoyed while they're answering your question. If you want to keep them in a happy mood, don't ask them about this, but they do know about it because they've been forced to deal with it. So what you want to do is start figuring about this stuff early. You don't have to become a politician, a lobbyist yourself, but if you're going to work in this space, do research in this space, do whatever, knowing about these issues is going to be important. So I mentioned earlier, I do teach a class on energy, a two-week elective class. I'll say a little bit more about it in a few minutes, but I'll give you two examples from that class that we talk about. We have the founders and the CEOs of these companies come into the class. One of them is Sunrun, which is one of the largest solar panel companies here in the western United States. So they put solar panels on the roofs of houses. A big issue when you have solar panels on the roofs of houses is they, as you know, suck in the energy during the day, but then it gets dark or it's cloudy, they're not producing any energy. So what you need to do is ideally store that energy and use it at different times. We're starting to see more penetration of batteries, but the traditional way of doing this and still the overwhelming way of doing this is you pull in that solar energy, you ship it to the grid and then when you need it later, you just get it back from the grid and you use the grid as a battery basically. So the defining issue in that industry is at what price do you sell it to the grid when you produce it and what price do you pay when you get it back? And the predominant way of doing this has been what's called net metering, that basically it's the same price you sell it and you get back. Because you just ship it, they send it back. What do you think the utilities think about net metering? They hate it because they're just providing a free battery to all of these people with solar panels on their roofs. So the utilities want to, this is usually in a law saying that the rate of electricity pricing is by net metering, the utilities don't like this. So they are now going to legislatures all around the country and all this is happening in many countries around the world, changing the laws or trying to change the law about what rate is, what the net metering rate is. If you remove net metering and you make it the retail rate, so you send it to the electricity company at the wholesale rate and you buy back at the retail rate, solar panels are not economical anymore. That whole industry goes away. So Sun Run is a company that started out of the GSB and tried to energize this industry, so to speak, about 10 years ago to create this industry about solar panels and it was based on the calculation of net metering. This was all going well but then once they started to get a lot of penetration, of course the utility companies are not very happy about this, so the utility companies respond, they're losing money in the market to these guys, they respond by going to the political legislatures and trying to get the law changed. One day a few years ago, Sun Run woke up to discover that Nevada, the legislature in Nevada had passed a new law that wiped out net metering. So you wake up one day, your whole business that you'd invested 10 years of your life doing and building up, suddenly your whole profit margin has disappeared. So Sun Run had to figure out what to do about it and so what they had to do was educate themselves and participate in this political process to try to get an outcome that made their business viable. They're trying to do this to have a successful business, make some money but they also think this is what part of their goal of having, of increasing the penetration of renewable energy and turns on this political outcome. So they had to get expert at this. Another example is ChargePoint, this company that makes charging stations for electric cars all around the US. They were created because the government and the utilities didn't want to do these charging stations because the utilities are sort of, I don't want to disparage them too much but they're a little staid in their thinking and their planning. So ChargePoint started and raised a hundred, something million dollars and have been a leader in this space. A couple of years ago, they discovered that in the big bill in the California legislature, the law was going to get changed where it was mandated only the utilities could build these charging stations. Suddenly their business was going to get wiped out and this is a common pattern. No one cares about you, you start, you innovate and just as you start to get traction, the people you're disrupting get the law changed. So it's essential if you want to succeed to be thinking about these issues. You may not want to think about them, it may not be what you came to Stanford to think about and you don't have to think about them a hundred percent of the time. But the point is these issues are important. All right, so that's what I do. I'm a political economist. I do political science and economics, so I use economic tools to study this intersection. Technically, I'm a game theorist. I do applied mathematic models of these sort of strategic interactions. In the business school, this translates to business and government, the intersection of these two things. So as Peter mentioned, I teach a first-year class called strategy beyond the market, how businesses can strategize beyond the market. And I now teach, we've taught it two years so far, we're going to teach it again this coming spring, a two-week class that's an elective class in the second year that applies some of these ideas to the energy industry. So we do a deep dive into the energy industry to look at the industry itself, the structure of the industry, and the players in the industries, the stakeholders, and these political forces that are at play. We look at Sun Run, we look at Charge Point, we look at a bunch of other companies and we try to understand more deeply why do the regulations look the way they look? How can we make them look differently? And what are the opportunities for innovation and entrepreneurship and new business models within this space? It's open to everyone in the university, it doesn't presuppose any knowledge. The more knowledge you have, the better of course, but it's open to anyone and I think if you come for a two-week stint during your time at Stanford, you'll learn something about this perspective that is going to be important. I'm not going to try to turn you all into political economists, but what I'm going to try to convince you of is that this is something you need to know about and the sooner you know about it, the better off you'll be. I also think it's interesting, but that can be up to you after you hang out for a few weeks. So that's all I want to say about me, so I'm in the business school. My email address, if you want to email me, is SJC at Stanford. It's the San Jose airport code at stanford.edu. It may be a bit late for you already, but pick an easy email address. That's a good wise choice. It makes it easy for the rest of your life. All right, very good. I am also the faculty director of what's called the Policy and Innovation Initiative over at the GSB where we try to do more work and build up a capacity around this intersection more generally between policy, politics and innovation. If you're interested in this sort of stuff, shoot me an email, look at our website. We're doing all sorts of different projects from writing cases about companies to try to write white papers, do research in various things. So if you're interested in this stuff, shoot me an email and we can find something to talk about, perhaps work on if you have the time for that sort of thing. Let me stop there. Does anyone have any questions? Up the back, I can see a hand. All right, thank you for the talk. I have a question about the Uber, the Uber's business model and the strategy and how they essentially got into market. So you said they were essentially illegal for a while and they got a lot of customers and drivers to be on their side to push their political cause. But how were they able to ramp up so fast to avoid being shot down if they were illegal? Excellent question. You need to come to my class and we'll talk about it at length. So that's where it gets really interesting and that's the tension. You hit upon it nicely, which is it's a sort of a race. You come in, you're illegal. If they shut you down straight away, it's all over. But they're going to try to shut you down. And so what you need to do is you need to build up this user base who's going to provide political power, but you need to delay the amount of time before they shut you down. So Uber had three product lines that they've entered, Uber Black, Uber X and Uber Taxi. They were very deliberate at the start about only entering Uber Black because it was less illegal, so to speak, than the other products, but also because enforcement was a lot slower. And that's what provided them the time to get the users to lobby on their behalf. But that's the business strategy. Can you stay in business long enough to build up that business, that supporter base to change the law? And so their business strategy was all built around that. It was about making money, it's pretty clear Travis wants to make money, that's what his motivation is. It was about making money, but it was making money in the long term. And so in the short term, it wasn't about maximizing profit. The short term was about solving this political problem. And once they can solve that, then they can make money in the long term. So that's sort of, I'm not advocating you break into illegal industries. And there are reasons why this work for Uber and it won't work for others. But the point is, more generally, every industry has these regulations and constraints in place that you're going to need to navigate. What is the point of laws if people can stand up one day and go change them? I'm not from here and I'm also far from politics. Yeah, that's a good question. There are also laws that just don't get enforced as well. So marijuana, which might be an issue you personally encounter sometime in the next couple of years, it's legal in California. At the same time, it's illegal in the United States. California hasn't yet seceded from the United States, so there's a little bit of a tension there. So even the issues we have, things like we have that sort of tension. What's the purpose of having laws? Well, we could talk for hours about this, but basically laws are about serving the public and serving the community, making it a better place to live. So we have laws, things are illegal. Uber showed, their hope is to show that this law is a bad law. And the challenge was, the way they can show it's a bad law is by starting a business and showing people it can work better. And then their challenge is showing it's better before they get shut down. I don't want to equate Travis Kalanik with social activists, but basically sort of, this is what Martin Luther King did. All right, civil disobedience. I mean, they're very different motivations, but they try, his challenge was to show that these Jim Crow laws, these racist laws were bad laws. And sometimes you need to do things that are illegal. So it's a more fluid conception of what a law is. But at the same time, I'm not advocating you go break lots of laws this weekend. All right, I'm going to add a message to the bottom of this tape. Up the back. Who's got the microphone? Hi, Steve. My name is DJ. I'm at GSB. So you're probably seeing me in your class. I wanted to say, with the rise of renewables, right, especially in the energy industry, you mentioned that, you know, basically people that have state industries try to change the laws. So I was trying to see the big oil majors try to influence, you know, decision making in the Congress to kind of decelerate the rate at which renewables is, you know, I was trying to see that. I'm sure you probably talk about that. Yeah, absolutely. The big oil companies are very active. The constraint on them is nobody likes the big oil companies. And so they, they're not going to mobilize public opinion on their behalf. And so they keep a very low profile. But they've been absolutely, they've been in play in trying to limit the rollout of renewables. What the oil companies have come to realize is even 10 years ago, they were like, yeah, let's keep renewables out. They've come to realize renewables are coming. That's going to happen whether they like it or not. We've had peak fossil fuels at least. There's going to be a long ramp out of it, but they know renewables are coming. So what their strategy is about now is delaying renewables. And they're delaying it in a way until they can basically capture all of the value around renewables. So they know renewables are coming, but they don't want to give them up to people like you. They want to capture them. And so they're going to have a, they're pushing for laws within states and all across the U.S. that basically make it difficult for innovators to come in and make it in a way that the big companies, because they're trying to catch up technologically such that at some point they'll say, all right, we're now ready for renewables. They'll have the technology and the capability to take advantage of that. All right. So they absolutely act people on that front. And so if you're going to get into that space, you need to know what's happened. Any more marker puns? Up the back. All right. Thank you so much for that talk. It was really interesting. So I'm still pretty curious about the Uber situation. And I think it was a similar situation with the electric scooters that penetrated New York City, DC, where at first they just put in these scooters on the road and they weren't legal, but then eventually some cities legalized them. So my question is, aren't there any retrospective punishments that are assessed to these companies like, or it's once you're, you're good in the eyes of the Lord, everything's forgiven? Or can they say that, oh, you were, you were, you weren't, you weren't, I mean, you were, you're breaking the law for like six months or three months. And so we're going to assess these fines, these punishments or it's all forgiven. Travis's punishment is that he's a billionaire. It's a good question. It's got to come back to this question. What is a law? They broke the law. In some places the law changed and some it didn't. And so, I mean, it's a good question about how to design a legal system, a legal system and laws to appropriately allow the opportunity for this sort of civil disobedience but punish appropriately. But in this case, there has been no retrospective punishment in other countries there has been. So in South Korea, Travis Kalanig was charged with a crime and he actually appeared in court there, I think it was last year, this track of time a little bit last year, he flew over and appeared in court to sort of come to some settlement agreement. Because the Korean said, you broke our law. You're a criminal. And so he couldn't go there for a long time and then they finally broke it in agreement and he went. And this comes back to this enforcement. So the enforcement violation that Uber was often faced with was about $5,000 per instance and 90 days in jail for the executive. And so the $5,000 isn't much of a threat because if you lose, you lose your company. But if you go to jail, that's more of a threat. I think the judicial system is not fair in the punishments it meets out, I think is the short answer. But it's a good question about how to design these punishments to induce the right amount of business experimentation. And what we learned around the world is the taxi companies realized that this was the strategy they needed to play on. And so they would get the enforcement punishment changed to try to deter Uber by using jail rather than money. One more question. This guy in the corner, he's got his hand up. Thank you. Jordan at the GSB also looking forward to taking your class. My previous background was in state politics interested in pivoting into energy. And so my question for you is for those who have a passion or interest in politics and want to work in the energy sector, what is the demand in the industry for that kind of skill set, or is it just something helpful to know? Quite a man. So I didn't mention, I co-teach the energy class with an alum who has a background in congressional politics, who now works for Bloom Energy, the fuel cell company here in Palo Alto. So there's a lot of opportunity in this space. And part of this policy and innovation initiative is to try to create more of a career track for people like you, like Josh Richmond, who I teach the class with, to combine this interest in policy, interest in society, so you want to do good in the world with business. I think for a long time these roles were kept separate in companies, but increasingly we're seeing an awareness in Silicon Valley that these skills are valuable and to try to build, it's still a little bit sort of ad hoc how you forge your career, but there's certainly a lot of demand for these skills now, there's an appreciation. And Josh is the person to talk to about how to forge a career with these interests in the energy space. All right, fantastic. Good to meet you all. Have a great time. It's David.