I have been around the electric utility industry for as long as I can remember. Dad was a lifer at Florida Power and Light and often brought home discussions of his company, its people, and their plans for the future. These discussions often bored my mom to tears, but for some odd reason I enjoyed learning about the activities and thoughts that kept Dad engaged for so long each day. A number of Dad’s closest friends were also FPL people, so family picnics and vacations were additional opportunities to learn more about the company and electric power industry.
The industry is very different from many others. Mind you, what I am about to say pertains to the regulated monopoly portion of the industry; there are some places where things have changed quite a bit in the past twenty years.
In general, the people that I met from the electric power industry are solid, conservative folks that love numbers, feel strongly that they have an obligation to serve their customers, and understand that incredibly dependable electricity is the expected standard. I can think of no other set of employees in private industry that more closely resemble the people that I have met in the military service – utility people sometimes willingly go out and work round the clock in dangerous conditions in order to restore customer’s access to their vital product.
On a personal note, they were generally not thinking of quick wealth but planning for long careers with monthly savings programs that resulted in comfortable retirements. When my mom visits the vacation home that she and Dad purchased from another former FPL employee in Western North Carolina, she sometimes attends gatherings of FPL retirees. I clearly remember her talking about such events that attracted hundreds of people even in the rather sparsely populated region near Franklin and Highlands. Most of these people are summer residents with two homes. It can be a pretty good life.
The most common investment strategies that I heard about in conversations with Dad and his friends was “dollar cost averaging” and “thrift plans”. There was no discussion of flipping, options, hedging, or derivatives. In other words, risk is not one of their favorite words. I think that might be because they deal with large projects, potentially dangerous machinery, and a product that is always just a thin layer of insulation away from causing fires or directly killing its users.
What does all of that have to do with the title to this comment – “Is the second Atomic Age leading to another costly Bandwagon Market?”
In general, conservative people take a long time to reach a decision. They try to consider all angles, run the numbers with numerous scenarios, and really seek the “right” answer. I find that method quite attractive and reliable myself – I like to do my homework and hate the philosophy often expressed by my more impatient colleagues that any answer is better than no answer. The hazard of working towards the right answer in a changing business environment, however, is that the computation is dependent on a number of input assumptions, all of which can change depending on the decisions made by others.
In the electric utility industry, many of the inputs for big decisions like building new power plants are reasonably visible, publicly available metrics like fuel cost, materials, labor, land, and fuel availability. When you have a bunch of smart, numbers oriented engineers and accountants putting similar numbers into similar spreadsheet models, it should be no surprise that they come up with the same answers. (That statement held true long before there were spreadsheets, by the way.) In other words, the industry tends to have major movements that can be viewed almost like schools of fish where they suddenly all change direction.
Some have called this the “Bandwagon Effect”. The utility industry has gone through this before (see, for example Bandwagon Gas Market or 1960s: Great Bandwagon Market
(Excerpt courtesy of Google Books from Nuclear Power, Both Sides: Best arguments for and against the most controversial technology. Edited by Michio Kaku and Jennifer Trainer published by W Norton and Company, New York, NY. in 1982).
The risk of bandwagon behavior is that the engineers, planners and accountants fail to understand the effects their own decisions and those of others just like them have on the inputs that they used in their computational models. If everyone decides to buy nuclear plants at the same time, the suppliers gain enormous pricing power.
If everyone stops buying nuclear plants at roughly the same time, labor costs and construction times for the last few plants increase because humans will naturally try to stretch lucrative employment as long as possible. If a substantial portion of the utility herd shifts to buying natural gas plants because they can be built in a factory with less local labor and greater project predictability that action will also provide the suppliers with increased pricing power and lengthen delivery schedules as the factory capacity limits production.
As a growing number of gas plants come on line and begin burning fuel, the planners then get surprised by the fact that the fuel costs predicted in their models are no longer in effect.
The balance between supply and demand should always be a consideration, even if it is difficult to predict. Planners also seem to depend too much on predictions based on insufficient history – data from average fuel costs over a two years time frame can lead to a wildly inaccurate rate of increase as a prediction for the cost of fuel for a plant that will operate for 30-60 years. If fuel cost history is expanded to cover a much longer time scale with greater detail than annual averages, it is much easier to see just how jagged the actual market price can be.
My bottom line is this – if you are in charge of projects that are designed to last for a very long time, please take the time to do your homework but do not forget to put in ever wider bands of uncertainty. Do not get seduced by the fact that your spreadsheet can take computations out to numerous decimal places – the farther out your model reaches, the less important those insignificant digits are because they are based on initial assumptions.
Make your decisions in such a way as to give you and your company the flexibility to deal with uncertainty and to move a bit faster than your competition, but watch out for hasty decisions that lock you into a long term path based on drawing a straight line between two data points and projecting that out into the future. I sincerely wish you good luck in figuring out ways to implement these suggestions – the decisions that you make will have a huge impact on a number of customers, employees and suppliers.