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Theory and observations of the dominant thermal continuum emission in AGNsare examined. After correction for reddening, the steady state AGN optical--UVspectral energy distributions (SEDs) are very similar. The SEDs are dominatedenergetically by the big blue bump (BBB), but this bump never shows thenu^{+1/3} spectrum predicted for a standard thin accretion disk with ar^{-0.75} radial temperature gradient. Instead, the observed optical-UV SEDimplies a temperature gradient of r^{-0.57} independent of the thickness of thedisk. This means that there is some flow of heat outwards in the disk. The diskis large and the region emitting the optical continuum is as large as the innerbroad-line region (BLR). Because optical variability is seen in all AGNs on thelight-crossing time of the BLR, variations must propagate at close to the speedof light, rather than on dynamical timescales. This argues that theenergy-generation mechanism is electromagnetic rather that hydrodynamic. Sincethe velocities are near the speed of light, there can be significant localanisotropy in the emission. The large rapid variations of the BBB imply thatthe magnetohydrodynamic energy generation is fundamentally unstable. Because ofthe inevitable radial temperature gradient in the accreting material, differentspectral regions come predominantly from different radii, and variations indifferent spectral regions correspond to variability at different radii. Thisexplains the frequently observed independence of X-ray and optical variations,cases of variability at lower energies leading variability at higher energies,and rapid changes in emission-line reverberation lags. Some observational testsof the local variability hypothesis are proposed.

Accretion Disks and the Nature and Origin of AGN Continuum Variability