Confusion and bitterness about corporate decision making that is bad for America
I had an opportunity to chat with David Hollein, a man who has been campaigning to reopen the Zion Nuclear Power Plant for more than a dozen years. His efforts were the initial inspiration for Nancy Thorner, a lady who is working hard to convince Exelon to operate a nuclear plant in her hometown. David has been bending as many ears as he can find at Rotary Clubs, local community events, and inside local news rooms, trying to find anyone who will listen and take action to correct what he sees as a huge, wasteful injustice.
He has worked so hard for so long that he has become bitter and disappointed. His health is also failing – he is no longer able to walk due to a long and inevitably unsuccessful battle with MS. From personal experience, I know that feeling like you have failed can be debilitating and can lead to rants and writings that can be dismissed as coming from a kook, even when those works and words contain a lot of valuable information inside an emotional package.
David was a Pittsburg area native who earned his undergraduate degree in mechanical engineering and landed a job with Westinghouse in 1968. At that time, the US was building a dozen or more ships or submarines powered with nuclear reactors each year and there were several dozen commercial nuclear plants under construction. The industry was growing rapidly and Westinghouse was a proud, dominant American manufacturing company that was leading the entire world with a newly developed and powerful technology. The company and its subsidiaries employed about 28,000 people in David’s hometown – the Pittsburg area.
During his career with Westinghouse, David led a number of projects and became acquainted with some powerful people. At one point, he was in charge of Westinghouse’s Commonwealth Edison projects and had the lead for at least three two-unit power stations – including the one at Zion. He was intimately familiar with the quality of the plants’ construction and their first couple of decades of operation.
David also experienced the decline of Westinghouse’s nuclear business. He was with the company for 22 years, from 1968 – 1990. When David left his engineering job with Westinghouse to pursue a career in real estate, it had been almost 20 years since the last order had been placed for a new unit in the United States – though its overseas sales were still quite healthy.
Westinghouse had lost track of its industrial roots and started a program of diversification into media enterprises, defense, soda bottling operations and financial services. The company’s leadership had struggled for a decade in court with a lawsuits from its uranium customers and a countersuit against uranium suppliers. It was also being sued by customers who claimed that the company had not properly designed and built its steam generators.
The steam generator story is part of the Zion story because one factor in its initial shutdown was the fact that both units had four steam generators that had begun experiencing tube leaks and were deteriorating to the point of needing to be replaced. They had been in operation for about 25 years, but there were only 15 years remaining on the initial operating license. Replacing steam generators is not easy or cheap, so the company had to weigh the projected cost of a little less than half a billion dollars against the revenue that the plant could earn in its remaining operating life.
That decision was complicated from a financial perspective because the electrical power market in the mid to late 1990s was soft and well-supplied with power coming from burning really cheap natural gas. At that time, the going price for 1000 cubic feet of gas was less than $2.00. Nuclear plants receive no credit, no value and no love for the fact that they produce power without producing any pollution – natural gas had already been well marketed and branded as “the cleanest burning fossil fuel.”
When David moved into the Chicago area in the late 1990s, he learned that Commonwealth Edison had decided to permanently close the Zion units. Though he had not worked in the nuclear industry for a few years, he was pretty sure that the plants that he and his team built still had a lot of life left in them, so he began his vocal questioning of the decision process. No where else in the country is there an example of a large, completed, relatively modern, two unit pressurized water reactor that was shut down with so much potential operating life remaining. One of the slow-moving events that kept David focused on questioning the Zion decision was the inexorable rise in natural gas prices throughout the period from 1998-2008.
David discovered that there had been some non-public agreements about Zion’s steam generators between Commonwealth Edison and Westinghouse that settled the ongoing suits. He found out that some local political leaders had been invited to closed-door meetings about the plant’s fate and later swore that they would never reveal what had been discussed. He received a letter from Exelon that dismissed his inquiry with a cryptic sentence that stated that Northern Illinois did not need the power that the plants could produce.
As an engineer with a questioning attitude, David simply could not believe that he was being told the truth. He spoke to operators and managers with first-hand knowledge of the plant’s actual conditions and determined that there was nothing wrong that could not be fixed with a bit of money and elbow grease. The total investment required would almost certainly amount to far fewer resources per unit of power output than those necessary to build new wind turbines or continue to operate high pollution coal plants needing significant modifications to meet Clean Air Act standards.
David has received personal phone calls of encouragement from old friends who are still leaders within the electrical power industry, but those friends are reluctant to support his efforts in public. After all, there is an unwritten rule within the boardroom circuit – you do not question the already “settled” financial decisions of companies that provide a significant portion of your sales volume.
After my conversation with David, which admittedly rambled a bit from topic to topic, I promised him that I would try to tell his story. I also promised to find out as many answers as I could to the questions that have bothered him for so many years. Why does Exelon refuse to revisit its decision to close Zion in the light of a different market, a different understanding of the environmental impact of burning fossil fuel and a different political situation? Why won’t Exelon offer the plant for sale if it considers restoring it too much of a deviation from its current capital investment strategy? Why shouldn’t the customers who paid for the facility have a say in its future?
I have one more question that David has not really asked – why are American businessmen so focused on short-term money making instead of long term strength building? I saw a quote at the bottom of an article about the Chinese wind industry that I want to share. I hope it makes some people think about the importance of focusing on the long term good when you are in a position of responsibility.
Meanwhile, the Chinese government is intent on turning its wind energy industry into the global leader, helping manufacturers coordinate export strategies and providing various sorts of technical assistance.
Mr. Li, the overseer of the Chinese renewable energy industry, publicly exhorted the leaders of the nation’s biggest wind turbine makers at the China
Wind Power conference, a three-day event that drew hundreds of executives from around the world.
“You cannot be called a winner if you are the leader for three or five years,” Mr. Li told the Chinese executives. “You can only stand on the top line if you are the leader for 100 or 200 years.”
The Chinese presidents sat quietly and respectfully, chins down. Senior executives from the foreign manufacturers — including Vestas, G.E. and Gamesa — sat alongside them, staring straight ahead in stony silence.
Why is it that American business and political leaders think that taking action now that will provide almost certain benefits in 10-20 years is too hard? It is a darn good thing that the parents of future doctors, concert pianists, Olympic athletes, and research engineers who are in elementary school today do not take such a short term view of the world.
Unfortunately is is likely to get worse, before it gets better. Business in the U.S. is going through the same decline in long-term planning that the U.K. experienced after WWII, and for the same reasons. In the Fifties, investors saw clearly that Britain had lost its status as the leading Great Power, and watched as British interests slowly became subordinate to American ones, realized that solving deep systemic social and economic problems were going to change the domestic business environment, and concluded that long-term investments in the productive sectors were too risky. As a consequence, the U.K. effectively de-industrialized, shifted to a service economy, and suffered accordingly.
There was much hand-wringing over this at the time, (and still today on the Left) but ultimately this is capitalism at work, a inevitable feature of an economic system dominated by the pursuit of profit. The short-term thinking of capital will change, only when uncertainties about the long-term future are resolved. The tool for doing that is legislation. It is just that simple.
Rod,
The Wall Street Journal answered your question yesterday on the front page. If the tax deal goes through, “…the U.S. will have no permanent regime governing the levies on salaries, capital gains and dividends, the Social Security tax, as well as a slew of targeted breaks for families, students and other groups. This on top dozens of corporate-tax provisions that already were subject to annual renewal.
The level of uncertainty, unusual for developed nations, complicates planning and discourages hiring and investment, many economists and corporate executives say.”
These are self-inflicted gunshot wounds.
This is a scary story for me. I have been talking to friends recently about the difficulty of keeping campaigning, seeing the other side get away with lie after lie after lie. And still not becoming bitter. I guess I looked at this story and thought about how it might apply to me, personally. A warning, as it were.
However, in the case of Vermont Yankee, Entergy WANTS to keep the plant open, and only the opponents want to close it. So I have no reason to be bitter about the industry, just the opponents. No bitterness there. Just opposition. I can deal with that!
“why are American businessmen so focused on short-term money making instead of long term strength building?”
Heh … do you have to ask? I would think that the answer is obvious. Long term strength building involves an exceptional amount of risk.
First, there’s the risk of technology. Nobody wants to be the buggy-whip manufacturer when Henry Ford opens his new factory. On the other hand, technology risk is often overstated. Technical breakthroughs don’t happen nearly as often as most people think.
The real risk is that government will come along and pull the rug out from under you. Anyone with any sense in the energy sector remembers what happened in the late seventies and early eighties, when gross incompetence at the NRC resulted in senseless rule after rule being piled onto a relatively new nuclear industry that was still trying to work out its growing pains. The result? All of that “long term strength building” that was planned in the late sixties and early seventies was driven to stagnation within a decade.
Look at what political fortune and the whims of politicians have done to long-term planning in Vermont and New Jersey.
Look at Germany. The utilities in Germany had built an impressive fleet of nuclear power plants, which should have run for many decades. Yet all of this long-term planning was undone when the German government enacted a nuclear phase-out. Even though the phase-out has been overturned (perhaps), the German government still wants to raid the “windfall profits” that these plants generate, so that this money can be wasted on worthless wind turbines and solar panels. If that isn’t punishment for taking the long-term view in planning, then I’d like to know what is.
So, if you have steadfast government support, like in France, you can plan for the long term. Thus, France has the most stable nuclear economy in the world. Meanwhile, a serious contender for the Democratic nomination in the last US Presidential election made crippling the US nuclear industry one of his campaign pledges.
In an environment such as this, any businessmen who hopes to be successful will take a cautionary approach and will hedge his bets as much as he can. Short-term bets hold much less risk of government interference. The smart businessmen who are making money these days are riding the waves of government “stimulus” for as long as the money lasts.
Live by the numbers and die by the numbers! This has been the downfall of many companies. Metrics developed by Wall St. promote certain kinds of business conduct that is at odds with many things. For instance, many cellular carriers dropped their lower priced rate plans because the metric on Wall St. for cellular is the average revenue per customer, thus the lower priced plans are more stingy with the minutes to encourage upgrading plans. I wish I knew the Wall St. key metric for utilities.
Many human activities are not served well with the capitalist model. Health care for instance should never be a profit seeking enterprise, only a break-even one. I feel the same way about power generation for the most part. That said, I hope this could be a lesson for the NRC and for America about nuclear. I think if you build a multi-billion dollar nuclear infrastructure piece that supplies a million or more people with energy, companies shouldn’t be allowed to dump it in the trash heap for the sake of the bottom line. If the structure is more or less salvageable but a company doesn’t want it anymore, they should be required to sell it. Nuclear plants are too important for the greater good to be subject to Wall St. metrics.
@Jason — As a provider of health care services, I’d like to know how you would expect me to stay in business if I do not make a profit but just “break-even”? Who decides what my “break-even” point is? In a larger sense, who would pursue that multiple additional years of education, at great expense in time and money, if the result will be to “break-even”?
Doc, first of all, I don’t want to get into a tangent discussing health care, this is not the place. Second, you’re reading too far into what I wrote, I’m not talking about doctor salaries. Whether the term is “break-even”, not-for-profit, non-profit is not really important. I’m a believer that no one should have to have their life or death be decided by an insurance desk jockey seeking his next bonus check.
“I’m a believer that no one should have to have their life or death be decided by an insurance desk jockey seeking his next bonus check.”
Careful. The flip side of this is that no one should have to have their life or death be decided by a soulless bureaucrat, whose only purpose is to justify his own existence within the bureaucracy.
I’m a believer that serious topics should be discussed without resorting to melodramatic caricatures. 😉
@DocForesight – like Jason, I do not want to get off on a tangent, but please understand that there are other models for health care both in history and around the world than the profit driven business model. As is the case for electricity, there is a worthwhile discussion about just how well that capitalism model works.
Please understand, I am a strong believer in freedom, in personal responsibility, and in making a good living. I just do not worship at the alter of capital as the only important thing in life, so I guess I do not consider myself a capitalist.
Though many people love black and white arguments – you are either a capitalist or a communist – my economic philosophy is a multi-hued shade of gray. Money just is not that important to me since it is something that can be accumulated by stealing, selling drugs, being born into the right family, making corrupt decisions, or stepping on a whole bunch of toes while climbing a corporate ladder.
Here is what I hope is a thought provoking question – what would you say about a medical system where going to medical school is not a huge expense of money, but a compensated portion of a worthwhile, well paid and noble career in service of your fellow man? (I have been served by that kind of medical system of and on for the past 33 years. My Navy doctors made a good living with excellent benefits, but their pay would not have been enough to cover the malpractice insurance bills as a private practitioner.)
The situation here seems be combination of the worst part of politics and the worst parts of capitalism. Reading between the lines, one would have to say that these two groups colluded to close the Zion plant. The obvious gain for Commonwealth Edison was short-term profits. I am not sure what was in it for the politicians who allowed this to happen, but it sure smells.
I am not sure when this might change. I always like to think that if you offer nuclear energy that is cheaper than coal, the world will beat a path to your door. But this doesn’t seem to be necessarily true. Take California. One might think that the high price of electricity in California would be a wake-up call, but this doesn’t seem to be the case. Except for a few enlightened souls in that state, it looks as if the majority of the people and their elected representatives cannot make the association between the high cost of electricity and the high rate of unemployment in the state. This syndrome has the all the signs of taking over the whole nation. Perhaps a few of those “benighted” southern states will have the testicular fortitude to go in a nuclear direction for their electricity, though they will need to battle the Federal government to do so.
“Perhaps a few of those ‘benighted’ southern states will have the testicular fortitude to go in a nuclear direction for their electricity, though they will need to battle the Federal government to do so.”
We down heah in the South ha’ been known to do that. Let’s hope we win this time ’round.
The South will rise again!
If the results of the last election are any indication, Californians will not wake up until the state is declared bankrupt and all contracts, from employment to retirement pensions, are renegotiated. Don’t hold your breath.
So what I’m gathering is that Zion’s steam generators were more degraded than most plants, and ComEd might have thought – accurately or inaccurately – that they had been sold a “lemon”. This, combined with labor problems at the plant, overcapacity in supply of electricity, and perhaps a large settlement check that might cover either decommissioning or replacing the steam generators, could have led ComEd to mothball the plant, and let the future decide for itself whether or not to reopen it.
The deregulated future arrived, and generating ever-increasing amounts of power – and finding new markets to sell that power in – so as to grow the dividend was no longer in the game plan. Instead, growing one’s profits was. Demand growth was slow due to historically high electricity prices, and slow demand growth meant that capital investments could be put off, and the share price or dividend increased. Increasing supply by reopening an old power plant, and investing a substantial amount of capital in repairing the plant would not lead to outstanding returns for shareholders. Instead, it would probably cost less to do nothing.
“Why shouldn’t the customers who paid for the facility have a say in its future?”
I can understand the sentiment, but that’s just not how ownership works in the U.S. or most(all?) developed nations. Customers don’t own the McDonald’s Restaraunt, or any of the equipment inside, customers don’t own airplanes, or cruise ships. The company(ies) who pay to build the plants own them, and they are theirs to do with as they see best.
I don’t want to see a basically good Nuclear plant torn down either, but I do think that there is a fundamentally *important* reason for “owernship”. Would you reallly appreciate the government telling you what you can and can’t do with your house, car, boat, or other property? Should your employer have a say in what you do with your property, since the money to pay for your house (or whatever) came from the money your employer pays you for doing your job? Oh, “But,” you might say, “that’s different – my employer isn’t paying for my house – they are paying me to do a job, which I do.”
Well, electric utility customers aren’t paying for power plants, they pay for kilowatt-hours of electricity. As long as the utility delivers the electricity, that’s the end of the transaction. You payed for electicity, you got it, end of story. The customers have no rights to the facilities and equipment that the company buys with the revenue from selling that electricity, and that is how it *should* be.
At the end of the day, if Zion does get torn down prematurely, that’s a (probably) bad business decision by one company. The more important issues, in my admittedly limitedly-informed opinion, would seem to be getting the price to build safe nuclear plants down so that they can really benefit from the fuel-cost disparity and aggressively compete with coal, gas, and ‘renewables’; reforming nuclear regulation to clear away regulatory burdens that drive up the cost of nuclear power with almost no real benefit, dealing with endless lawsuit-harrassment by anti-nuclear groups that make it almost impossible to get nuclear plants built, and pursuing small-modular reactor approaches so that smaller plants can be built with lower up-front capital costs.
It seems to me that Zion is more. . . symbolic . . . than anything else. It frustrates nuclear advocates to see a good plant torn down, and I understand that, but at the end of the day, the issues I mention above are 100X more important to our nations future than the fate of a single plant, and if we can address those political problems, you’ll see capitalism kick into high-gear with people and companies lining up to share in the profits from cheap nuclear power being sold at market rates (I mean, both short-term AND long-term strategists must agree that if you can build a plant that can generate large amounts of electricity at, say, 3 cents/kWh and sell it at a market rate of, say, 8 or 10 cents/kWh, they’ll be making lots of both short- and long-term profits . . . well, at least until supply catches up with demand, and market rates drop down to 4-6 cents/kWh).
@Jeff – the difference in this case is that the customers who paid for Zion did so under a system that was not a free market system. Commonwealth Edison was a regulated monopoly electricity supplier. Their “customers” had NO OPTION for getting electricity anywhere else. They had to pay whatever the regulators decided was fair. For the most part, the decision was based entirely on paying the cost of the capital investment plus a certain percentage profit.
The rate determination based on building a power station like Zion would be substantially different if the capital investment was able to be spread over a 40 or 60 year operating period instead of just being spread over a 25 year operating period. Though I do not know the details, I am pretty sure that the customers in Illinois were actually paying rates that included the capital cost of the Zion nuclear power plant even AFTER the company made the decision to permanently shut it down in something called “stranded cost recovery”.
Under the monopoly electricity model, the customers are IN FACT paying for power plants, power lines, storm responsiveness, etc. They are not just paying for the electricity that they are buying today, but for the infrastructure that will supply them with reliable electricity tomorrow, next month, and for the next few decades. They make that investment partly because nearly all of them would have difficulty selling any home or business property if it was in an area that did not have reliable electricity.
@Rod, well, thanks for the response. I admit I don’t know all the ins-and-outs of how the electricity market has worked over the years. I’ve always been pretty profoundly uncomfortable with the notion of regulated monopolies, because on the one hand, I don’t like monopolies, and on the other, it often seems like regulators do a poor job of regulation.
But, at the end of the day, whether a company is a regulated monopoly, or an unregulated free-market competitor, customers *always* pay for all the assets that a company owns, ultimately. Investors may make investments and the company may take out bank loans or issue bonds to borrow money to initially pay for the plants (which is likely also true with the regulated monopolies, I would think?), but then the company recovers those costs through the rates/prices that their customers pay. That still doesn’t make the company any less an owner.
However, I will concede that, if the plant *started* as a regulated entity with the power of government being used to maintain a monopoly position, even though the market has been deregulated, I do think you have a point that the *regulators* should probably still have some amount of say in decisions regarding that asset. It doesn’t seem a good deal for consumers that during the capital payment period, the company got the benefits of a regulated monopoly, but once the plant is payed for (more quickly than it ‘naturally’ would, as you suggest, with higher, protected rates than the free market would otherwise bear), suddenly it’s a completely private asset.
I dunno, I’m sure this is just one of many examples of the problems inherent in switching from a ‘regulated monopoly’ system like we used to have, to an unregulated competitive system like we’ve moved to – there’s going to end up being some companies who benefit from the switch, perhaps a bit unjustly. In the end, I think we’re probably over-all better off now with competition than we were in the days of monopolies, despite such transitional problems.
@Jeff – I have operated and owned businesses. Outside of regulated monopolies or sweetheart government contracts, there is NEVER a guarantee that customers will pay for enough of your product at a high enough price to cover the cost of the investments that you make. Prices and sales volume in a competitive market are set by forces that have nothing to do with your cost of production or your capital investment.
If someone else knows they can do a better job, they can set up shop and make offers that your customers decide not to refuse.
The expectation of that kind of competition helps focus the attention of business owners on making prudent investments and in paying attention to making the right kinds of investments in proper training and maintenance for the equipment that you do purchase. There is a reason why you can find some very well maintained and still quite functional 30 year old pick up trucks at farms around the country or why the injection molding shop I used to run was able to make a profit with 20-40 year old machines that needed a bit of TLC – the company owner himself was a great mechanic who rolled up his sleeves now and again.
Without the fact that the customers were on the hook to pay the capital cost of Zion whether or not it ran, the company never would have shut it down to spite a recalcitrant union work force. Without the mandated decommissioning fund, they would have never determined that it would provide a better return on investment for their current short term stockholders to destroy it rather than operate it or sell it.
Finally, I am not an ideological believer in “the free market.” I think that history is full of examples where certain products – like electricity – are natural monopolies that are too important to be left to the short term profit making decisions of corporate leaders with no obligations or responsibilities to anyone other than their financial “owners.”
Competition works well to provide goods and services where the barrier to entry is manageable, but the barrier to entry in electricity is so high that only the giants who dominate the market can cross it.