Profit Motive + Intelligent Regulation = True Innovation

Nov. 2.09 | About: Suncor Energy (SU)

Government doesn't innovate. There is no reason for it to do so and every reason not to. Bureaucrats are promoted not because they can trim their overhead, but because they increase it. The more projects you can garner, no matter how ill-conceived, and the more employees you have, no matter how extraneous or poorly-motivated, the more money you get from Congress.

Neither does the government have a profit motive. It has a status quo motive. Dont upset any applecarts. Dont try anything that would make you stand out. Administrate. What kind of words areadministerandadministrate”? What kind of philosophy do they lead to?

Individuals can innovate. Small business can innovate. Big business can innovate. Government? Government can only take and give. In that order. It must first take from those that produce via taxes, licensing fees, regulatory fees, tolls, registration fees, and so on. Then and only then can theygivein the form of grants, food stamps, incentives, credits, welfare and other vote-buying schemes for favorite constituents and causes.

So what is needed if big government can only divert GDP to the IRS, the Post Office, Social Security, Medicare, the VA bureaucracy, junk science projects like wasting 50 gallons of water to produce one gallon of ethanol, billions for bankstoo big to fail”, a euphemism for too-greedy-to-stay-out-of-trouble and too- cowardly-to-compete-on-a-level-playing-field, and bridges to nowhere?

The profit motive. But the profit motive left unchecked can lead to excesses, as well. So one of the best actual uses of government is to have the legislative branch create regulations that prevent excesses, the executive branch enforce those regulations, and the judiciary interpret the grey areas that inevitably arise.

Let me give one example of the profit motive meeting responsible regulation that has created very important technological innovation. Thousands more could be used, but this one is both recent and telling:

Suncor Energy (SU) is the oldest oilsands company working to extract oil from the bitumen deposits in Alberta. It is also, because of the environmental sensitivity of the extraction process, one of the most highly regulated sub-sectors of the energy business. Tailings managementis a huge issue for SU and all the other companies involved in oilsands production. That means they leave a lot of gunk and polluted water behind when they extract oil from tarry rock and sand. (Tailings typically consist of water, sand, silt, clay and residual bitumen.)

To their credit, the Alberta Energy Resources Conservation Board ((ERCB)) didnt tell the oil companies how to clean up their processesas was the case in the US, for instance, when Congress -- rather than passing legislation insisting upon cleaner tailpipe emissions however the private companies could do it -- instead dictated that henceforth ethanol would constitute 10% of the gasoline delivered at the pump. Or, rather than the current administration determining that carbon emissions must be lowered by industry, they have chosen to push just one (for them) "true path": cap and trade.

But when government says that you must do something rather than how you must do something, it brings out the best and the brightest in search of innovation. In Suncors case, the ERCB initiated stronger regulations on tailings ponds last February. These regulations required operators to prepare detailed tailings plans, report on tailings ponds annually, and reduce fine particles in liquid tailings by 20% by June 2011, and by 50 per cent by 2013.

It might take decades for the fine solids to settle out naturally, so most companies today use a technique in which coarse sand and gypsum are added to accelerate the release of water and clean up the land. This is calledconsolidated tailings” ((CT)) technology and it reduces those decades to just a few years.

Suncors innovation, made possible only after the ERCB, at the request of industry, removed their requirement that CT technology be used and opened up the range of possibilities to whatever industry could come up with to reach the end state.

Suncors new process, calledtailings reduction operations” ((TRO)), mixes the tailings with a chemical polymer flocculent, with the tailings then deposited in thin layers over man-made sand beaches with shallow slopes. The resulting product is a dry material that is capable of being reclaimed in place or moved to another location for final reclamation, with the drying process occurs over a matter of weeks, not years.

One of the first lessons I learned as a young officer is that men will do more if their leader tells them what the end-state we want to achieve is rather than instructions on each step to get there. The former shows trust in the experiences and knowledge of the NCO cadre, the other is for pathetic micro-managers.

If our greenest lieutenants get this training out of the box, why does our government still believe a people who tamed a continent, fought two world wars, and built the largest economy in the world need a nanny to tell us how to do everything?

Intelligent and responsible regulation is needed as a check-and-balance on raw capitalism. But intelligent and responsible regulation tells us what we want to achieve, then gets the hell out of the way while those with deeper knowledge, greater experience, and a profit motive roll up their sleeves and actually get the job done.

Full Disclosure: No position yet in Suncor (33 today). However, the stock traded at 18 in February and 26 in July. At 26, we’ll nibble; at 18-20 we’ll buy aggressively.

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