 First, I wanted to just say how wonderful I think it is that you're all here. I remember when I started graduate school just a little over 20 years ago, which is hard to believe it's been that long. And it was just such a wonderful time in my life to come and arrive at graduate school and have so much new stuff, so much information, so much knowledge to learn, and so many new people to meet. And it's really a wonderful time. As I was walking over here, it actually occurred to me last weekend, I went camping with a bunch of my friends from graduate school, who I'm still in touch with and have been sort of lifelong friends, and it occurred to me that I met all of them in the first few weeks of graduate school. So look around, choose good friends while you're here in these first few weeks. They'll be your friends for a long time, so you want to choose wisely, not just your classes. All right, so why am I here? So I'm a political economist. What exactly is a political economist? Well, it's what it says, it's the intersection of politics and economics. So I'm somewhere between what you would see in the economics department and the political science department. All right, so really I'm a theorist, so I sort of look like an economic theorist, but I study questions that not just look at markets, consumers and firms, but it looks at politicians, regulators, and how these two things intersect. All right, so I'll write down models where there's a legislature making policies that affect the market and then firms will interact in that market. All right, and I try to understand that intersection and that interplay. Why am I in a business school? Well, the GSB is actually a little unique, it is unique amongst business schools and having a group of people who are devoted to this intersection. All right, so what I do is I teach classes over there about this intersection. All right, so we all know politics matters to business, and business can do something about it. And so the classes we teach look at that intersection about how government regulations, government policies shape the rules of the game of market competition and how the firms themselves can participate in that process and affect those rules themselves. All right, and so that's the intersection we look at. I teach a first-year class that's an introductory class in the GSB, it's usually in the spring quarter to all of the MBAs. All right, so there's probably some GSB types there, that's a class you'll have in your foundations menu that you can choose for the spring. All right, what's this got to do with energy? Well, I started a new class last year that's an extension of that class or a conglomeration of that class called policy polycom 5 on 5 strategy beyond the market innovation in the energy industry. And so it's natural, I'm sure you guys all know that regulation is an important part of the energy industry. And so what we're looking at here is that intersection that I just described as it applies to the energy industry. All right, so rather than just sitting back and saying, oh, there's a regulation, what do we do about it? The question is, there's a regulation, like how does that affect our business? The question is, where did that regulation come from? All right, who are the people making those decisions? And how can I interact in that process and shape that process in a way that's favorable to me? All right, the thing you notice when you start looking at this area is all sorts of firms are participating in this process. All right, if you're not participating in the shaping of these rules of the game, somebody else is, and they're going to shape them in a way that are just not favorable to you. And you aren't going to have much opportunity to succeed in the marketplace if the rules of the game are shaped in a way that's unfavorable to you. All right, very good. All right, so this is the class I teach it's a two unit two week class. So we meet six times for three hours over that two weeks. So it's a pretty intense class. All right, it's co-taught. We have this model in the GSB where we co-teach with the research faculty and practitioners. I teach with one of our alums, Josh Richmond, who works here in Silicon Valley in an energy startup in Bloom Energy that just went public, had their IPO a couple of months ago over the summer. All right, so they're all rich now. So maybe Josh will be in a good mood next year when he comes to class. All right, he's been working there for a long time. So good for him. And he's their senior vice president, running business development strategy alongside the government relations, government interaction part of this. All right, so they take this part so seriously, it's part of their strategic thinking, part of their business development. It's not just there's all right, regulation out there, let's abide by it, but it's how do we actually influence that regulation itself. All right, so this class, it's at the GSB, but it's open to everyone on campus. And in fact, we really design it to try to bring together the business school students, the engineers, earth sciences, people from all over the university, all right, for us all to develop this together. Because this is, there's a lot of innovation, a lot of technological development in this space. There's also a lot of policy development as well that's going to shape the market in the future. And it's also going to shape the nature of that of that market as it goes forward. All right, so that's the class I teach. It's going to be in the winter quarter. I hope to see you all over there at the GSB. We're not too scary for everyone who's outside the GSB. We have a lovely cafeteria, lovely grounds. Everyone's very relaxed over there. So if you want to break from hard science, come hang out at the GSB for a couple of weeks. All right, I did my PhD at Caltech, by the way, so I know what it's all about, intense hard science. All right, so that's the class I'm going to teach. I'd love to see you over there in the winter. All right, so what do I want to tell you about this morning? I don't have too much to tell you, but I wanted to just give you a taste of the sort of issues and how they come up and what you can do about it. All right, so two things I wanted to, or three things I wanted to talk about, is one is sort of to show you how important politics is to the energy industry. I want to talk about the regulation of utilities themselves. All right, so you guys all know that regulation exists in the energy industry. I understand you're going to do a simulation right after this, where you are negotiating with a regulator. But a question you might ask yourself is where did those regulations come from in the first place? All right, why is the energy industry so regulated and why do the regulations look the way they look? It never used to be this way. You go back more than 100 years ago, there was just people, you know, digging stuff out of the ground, burning it, creating energy. All right, and then we had the creation of the regulated utility, this concept of a utility that has a right of a certain guaranteed rate of return, but is subject to regulation of the government. And that's where most utilities operate and that's how that's what's shaping innovation around that space, around those utilities. But you might ask, where did that idea of the regulated utility come from? Did it come from the government itself? Could you believe the idea for a regulated utility came from the utility itself? It's not going to work. The origin of the regulated utility, here we go, came from this guy who created the electricity grid in Chicago and created the utility there. So there wasn't any government saying that started with a regulation. We started with the electricity grid and then it was the electricity grid itself, the owner of the grid who said, I want to be regulated. You go talk to any utility company now, they're all like struggling with, you know, utility regulations, it inhibits it so much, what can we do about it? So why do you think it was that the utility itself asked to be regulated? Why would you do that? Yeah, you want monopoly status, all right, you get the government to protect you from competition. You're worried about competing in the marketplace, you get the government to ban anyone else from entering. There was another reason why Insul wanted regulation. What else do you think he might have been worried about? Yeah, if you're going to get regulated, you might as well get the government to give you some more money, but he was going to make enough money in this market because he was going to be a monopolist. He was just putting power on. Putting power on his market, the users. So in terms of like, the people would produce it, the regulation says, all right, everybody that produces this, so it cleans up what he asked for. Oh yeah, so it makes a very simple business for him, right? It says, this is what you got to do and you're the only one who's allowed to have right to do that. All right, so that's the shape of his monopoly market. The other reason why he wanted to be regulated was he was worried about politics. He was going to be a monopolist in Chicago. He was going to have a monopoly utility over the company, over power in this big city that was growing. All right, if you're a monopolist, you can charge a lot of money, make a lot of profit. What happens when you do that, particularly in an industry like energy where people really sort of need it and benefit from it? They might get upset, they might get angry. And then what might they do? They might ask their government to take over this company. So what he was worried about was politics that was going to nationalize his business. It was going to be too good that the government wouldn't let him operate and they would actually nationalize his business. So he was terrified that he had such a good business model that the government was going to come in and take it over. So he actively went to the government and said, here's the solution. Regulate me. And in the regulation, not only do I have a monopoly, but it will limit my ability to make monopoly profits in this market. And if I don't make monopoly profits, I'm essentially promising this is my credible way of promising to behave myself. You don't have any reason to nationalize me. So what he was worried about was this politics political movement rising up to nationalize his business. And so regulation was his solution to that. That was over 100 years ago for the next 120 years. That decision, that structure that was put in place then has shaped the nature of electricity grids in the United States and all around the world subsequently. So what we're thinking and we're looking at this is that it's not just the regulator sits there independently. It's a function of politics. The regulator is part of the political process and answers to politicians. And so in that case, it was a solution to his problem. All right. And ever since that structure has remained in place. And let me give you another example. It moves this, my clicker is not working, moving to the more recent times. And this concerns another utility. And this is net metering in particular in Nevada. You guys all know what net metering is. All right. So what's net metering? There's been innovation in solar panels. You put solar panels up on your roof. It generates a lot of power. You don't want to use it that power all the time yourself. So you've got to store it. One place you can store it is back on the grid. And so you send it out through the wires out to the electricity grid, out to the utility, who then ships it off to whichever customers need it. Then later on, you need to turn on your washing machine. You turn it on, you suck some power back. At what price do you send that power to the grid and back? Is it free? Do they just hold it for you for free before sending it back? Or do they charge you some money to do that? That's the issue of net metering. Basically, if you do it for free, you get to use the grid as a free battery for you. And this is why we're seeing a lot of action around that. Well, one reason why we're seeing a lot of action around batteries to get around this net metering issue. So for a long time in this country, around most states, the law was net metering, which was all you do is you measure what your net use of electricity is over the month. So if you generate this much power, ship it off to the grid, and then use this much power later on in the night or later in the month, you only pay for the difference. So in other words, you got to store your energy on the grid for free. That was the law. Why was that the law in most states? Well, the governments wanted to encourage solar panels and the use of solar products. And so what they do, they created a policy to encourage that. Net metering is really favorable to you at the home because your house is generating solar power in the middle of the day while you're at school or at work. You get home, turn on your washing machine, and you get to use that power for free without having to store it yourself. So this gave rise to the whole industry around solar power. It wouldn't have happened without net metering. If we didn't have net metering, if you didn't get to store your power for free on the grid, this whole industry wouldn't have risen up. So that's how much policy and politics can shake this market. What do you think the utilities thought of this? They're providing a free battery to the whole industry, which was all right when there was just sort of a few people installing half a dozen solar panels on people's roofs and things like that. But then the industry started to mature and we started to get tens of thousands of installation and companies like Sunrun, which came out of the GSP, start raising a billion dollars in capital to go out and build all of these solar panels. Elon Musk and Tesla is now into this market. And we can talk about that. Well, we'll run out of time. Talk about that in a section as well later on. Suddenly the utilities look around and they see this whole business rising up and they're acting as a free battery for all of these companies. So what do you think the utilities did? They went to the regulator and said, please change this regulation. The regulator did that. And they essentially abolished net metering and this has happened in a bunch of states, but it's particularly happened in Nevada. And so it happened in Nevada, they abolished net metering. This was going to wipe out this whole industry. Sunrun announced they were going to fire 3,000 people and we're going to pull out of Nevada. All of the other competitors in the market said the same thing. So I'm sure you've all got ideas for great innovative companies in your head that you're going to build here at Stanford. And many of you will probably succeed. It ain't going to be much fun if you devote 10 years of your life to it. You're out there working like a dog on it and then suddenly the policy gets changed and you just get wiped out. That can happen. Sorry to break you hard, but that sort of thing can happen. So what does Sunrun do about it? They go complain to the regulator. The regulator says, no, we think this is fair now. So what Sunrun can do about it is they realize this is part of a political process. They can't win with the regulator, but the regulator answers to the politician. If the Sunrun and the other solar companies can get the politician to tell the regulator to make a different decision, everything will be different. So what Sunrun has to do is launch a political strategy to try to influence the Nevada legislature. You go from being a startup entrepreneur, tech innovator to basically a political lobbyist. And this is not something you can just throw some money at and hire someone else to do. You basically have to do most of this yourself. And so that is the reality of being an innovator, being an entrepreneur in this space. You've got to participate in this process and you've got to understand it. So Sunrun started to participate in this political process and they started to try to influence the legislature. How do you influence the legislator? You try to amass political power. Instead of market power, you're now trying to figure out how can you amass political power. So we need to understand what political power is to figure out how you can accumulate it. I'm sure you've all heard of Uber and used Uber and are aware that Uber, part of their business strategy, is to amass political power to change regulations to shape their marketplace and give them an opportunity. The same sort of dynamic, the same sort of calculation, the same sort of strategies are happening in the energy industry, even more so because it's so regulated because it's such a political issue. And so that's the kind of thing we're going to deal with. Fair one thing I'm interested in at the moment, which is my home country, Australia. Australia is a mess when it comes to energy. It's also sort of in some sense ahead of the game. We're a giant company that's resource rich. We're good at digging stuff out of the ground and nowadays shipping it off to Asia, particularly China, for a lot of money. We're also suffering prematurely from drought conditions, global warming effects and so on. So we're lacking water. We're lacking energy. It's a huge issue. Energy is a huge source of wealth in Australia. And so this is a giant issue in the country. If you've paid any attention, if you've seen any about Australia, you probably noticed a couple of weeks ago, we lost another Prime Minister. This is like the fifth or sixth in the last few years. And one of the biggest issues and what's causing many of them to fall is energy policy. There was this national energy guarantee that the last Prime Minister tried to implement. It didn't really catch and it fell apart. And this is affecting the entire energy industry in Australia. The big players, the retailers, the transmission and so on. Because they don't know what's going to happen. And why is it such a mess? It's because energy policy is so difficult. Are we going to have renewable energies? What's that going to mean for things like solar industry, net metering? What's that going to mean for transmission? You might have seen last year, Elon Musk exploited this chaos in one of the states in South Australia by riding in and announcing he was going to build a giant battery within 90 days. Otherwise it would be free. And so he saw an opportunity in this chaos. So this is a big deal in Australia. In a way, Australia is a little ahead of the game. So you look at the normal electricity grid and industry. And there's sort of four points along that space. There's the generation. There's the voltage transmission. There's the distribution. And then there's the retail level of this. We can set aside the commercial customers for a while. And so traditionally, this was all integrated, all regulated, all four steps along this process. And different models around the United States and around the world have regulated it in different ways. The model in Australia, all right, so in the US, there's one regulated does generation and transmission and different regulators to distribution and residential and retail. In Australia, the model is that the two middle stages are regulated and the two ends are unregulated. And then the industry through market competition has evolved in a way that both this end has, yikes, has accommodated and this end has consolidated as well. And now actually both ends have consolidated together. And we have what's known as the Gentailer model, where there's three or four giant companies that both produce the energy, sell at the customers. But in between the two ends of their business are shipping it through a regulated utility in the middle. All right. So it's sort of ahead of the game. A lot of countries are kind of considering this model. We did it quite a while ago. We're ahead of the game going down that track. All right. So a question that is of interest to me at the moment, and I think is important, it's not just in Australia but beyond, is how is this model going to evolve? How is this going to affect the politics in Australia? All right. And consequently, how is that going to shape the market going forward? All right. So these are the sort of questions I'm interested. I wanted to raise this one question in particular in Australia because we're working on this actively now over at the business school at the policy and innovation initiative. So if there's anyone out there who has a particular interest in Australia, or are there any Australians out there, any of my compatriots out there? Hello? Very good. Make friends with those guys, by the way. All right. Let us know. We're trying to understand this a bit more and do some research. We're going to write a case for the class that I teach and try to work this out a little better. I think it's important in its own right in Australia, but it's important beyond. All right. So I've used up enough time. That's what I'm interested in. If you want more information, just go to our website, thepolicyinnovation.stanford.edu, or just give me an email. You can find me on the web at the GSB. All right. But these are the sort of inter-set issues we're interested in. All right. I don't mean to discourage you, but I think it's absolutely true. You guys want to do great stuff, probably create companies or work for exciting companies in this space. A reality of this career is you're going to be involved with regulators and with politicians. All right. So you might as well understand it and participate in it actively before it comes and squashes you. All right. Any questions? I'll take that as a success. Yes. Do you study how to deal with policy innovations related to the energy market when the politics of a different country has widespread corruption? Absolutely. Yeah. So that's the reality. You come up with an idea. In basic business strategy, we talk about this. The key thing is you've got to create value and you've got to be able to capture that value. And so you can innovate, come up with an idea, but to be able to capture that value, you've got to solve this political problem in many respects. Solve the market problem and the political problem. And so that's an absolute challenge. How do you deal with corruption? It's a tough one, but yeah. I'm standing here. I don't want to, you know, they're filming me here. I can't do it. I can't say too much. But yeah, you've got to figure it out. Like, and you don't want to give up, right? You don't want to just say, I want to ignore that country because there's corruption, but how do you manage that process? All right. We can understand these processes and we can incorporate them into our business strategy and develop a response. So we don't have a world government. And so it operates at a sort of think of it as a multi-domestic level. And so what you want to understand is the way you want to understand the institution that has the power to make these decisions. And at this level, it is national governments that have this power. And so you need to understand domestic politics in each country to figure out how are they going to deal with this issue? Because the politicians who are making the decision are responsive to their voters and their voters are just in their country. We don't have a global parliament. And so it's a function of just sort of given that, you know, I've got to understand the domestic politics in each of these countries to figure out how they're going to make decisions and then how it's going to aggregate. We can study these supranational institutions, but to understand how behavior is going to happen there, we need to go back to these, to the domestic countries to understand the incentives of the politicians who participate in it. And that's what we do. We try to understand those institutions, those incentives, just like you would in a market, just like you would in any other setting, understand who the players are, what's the rules of that institution, how do they make decisions, and what do they care about. And then you can start to predict their behavior. And that's what we try to do. Well, that's going to, yeah, that's going to give a different outcome in the market. It's going to give a different outcome for the people who own the utility that got nationalized. But what we're going to understand then is, so if you're asking, so that's going to perform differently in the market, whether it's a privately owned utility versus a nationalized industry, what it's also going to affect is the opportunities for anybody else to come into that market. Because what you're going to come, you're going to try to enter that market, there's a political process that sits over top of it. And the question is, who can amass political power to influence that political process? And if this industry, if this utility is part of the national government, that they're going to have different power in that institution than if it was a privately owned regulated utility. And so that's going to provide different opportunities for entrepreneurs to come into this market. And it's going to lead to them choosing in all likelihood a different strategy for how they enter that market. Yeah, exactly. Because the question always is, how much political power can you accumulate? Uber was able to do it through their user base. So you can ask for any company or any stakeholder, any interest, how much political power can they amass? And then work through it that way. And then you can start to predict what the outcome will be. And so consequently, how might you want to enter the market? So basically, do you want to cooperate with the existing players or do you come in and try to disrupt them and drive them out? If they can get more political power than you, trying to disrupt them is going to be very difficult. All right, I think one more question. I think I'm out of time. So compared to markets in North America, it seems like Australia, there's a high degree of potential for generators to exercise market power. Do you see that as a problem in DCH? Yeah, absolutely. So we're just a smaller country with a smaller population. And so the efficient scale for these utilities means there's a smaller number of utilities. And so they do have the opportunity for more market power. I think the government has been negligent in allowing that power to accumulate too much. I think they've been negligent in allowing this gentiler model to grow. I ask those big power generating companies, are they exercising their market power? And they're very adamant to me that they're not exercising their market power and that this is a super competitive market. But I don't believe them so much. I think it's well, in a normal industry, I think I'd be much more worried about it. But precisely because there's so much innovation in this industry, I'm less worried about it. But if this was a stable market with no innovation, they're just going to lock down the market and ramp up their market power. But because there's so much changing and because there's so much innovation in Australia, particularly at the retail level, I think I'm less worried about it. But it's a tough problem for policymakers to try to figure to navigate that. And these companies have a lot of political power now given their scale. And so it's going to shape the politics going forward. All right, I'm out of time. Great to meet you all. I think you've come to the right place for energy. Stanford is awesome in many respects, but particular in energy, even over at the business school. So I hope to see you over there sometime during your studies. Thanks.