Carl from Chicago

Business executive interested in history, economics, taxation and energy policy.

Military Vehicle Technology Foundation

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Dan and I recently traveled to San Francisco and visited the Military Vehicle Technology Foundation. This museum is privately owned (a foundation) and was founded by Mr. Jacques Littlefield, who sadly died in 2009 after a long battle with cancer.

The original intent of the museum was to restore the vehicles to original working order status – the restoration of the Panther tank (the only operating Panther tank in the US, I believe) was covered in a great TV show called “Tank Overhaul“.

The museum is in Portola Valley California; Dan and I were completely astounded as we ascended the windy hills near the estate to envision dragging 70 ton tanks up these roads. And yet they are all there, in buildings atop a hill.

In addition to the tanks there is a wide variety of period military equipment including machine guns and other gear from the era. The attention to detail from the facility is amazing.

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Chicago And Illinois – Home of the Unions

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Sigh – compared to Indiana and Wisconsin where the legislators are “on the run”, in Chicago and Illinois it is just the usual “tax and spend”. Unions here don’t have to worry about any pesky regulations or laws that might limit their behavior because they own the city and the state and can pretty much do as they please. I’m sure that has nothing to do with the fact that Illinois has among the most under-funded pensions in the US and that our governor is making noise about having the Federal government backstop our pension obligations, as you can see here:

Gov. Pat Quinn included the backstop proposal in the 2012 state budget he released last week. Critics said it would amount to a federal bailout of underfunded state pension programs and pronounced it dead on arrival in Washington. “Hell no–not happenin’,” a House Republican aide said.
 
But one expert said policymakers could consider the idea in the future, as states lobby Congress and the White House for help in tackling their growing pension obligations. A federal guarantee would allow Illinois and other states with fiscal problems to sell pension bonds at lower interest rates.
 
Illinois faces an $80 billion pension shortfall. Quinn’s proposed budget said “significant long-term improvements will come only from additional pension reforms, refinancing the liability and seeking a federal guarantee of the debt, or increasing the required state contributions.” Quinn claims previous state pension reforms will save Illinois taxpayers billions of dollars.

While the Federal government backstop of state pension debt went nowhere, it clearly is a strategy that will be tested at some point in the future, since Illinois has not implemented any of the policy changes necessary to sufficiently fund our obligations or reduce future requirements. Our unions will be on the vanguard of bankrupting Illinois to the point where there is no choice but to apply for Federal aid while the state is flat on our back.

Complex Management Structures Spell Doom

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Recently John Chambers, the CEO of CISCO, came out with a memo that discussed failings in the company. Over the last decade or so CISCO (CSCO) has lagged performance of its peers on NASDAQ and recently they haven’t participated much in the broad market rally (down 20% or so in the last 6 months while NASDAQ is up by 16%). I read how the memo was portrayed in the media, but then I found the actual memo here and cite it directly.

You’ve also made it very clear that we must make it simpler to do the work we love to do, and to accelerate the impact we know we are making for our customers… As I’ve said, our strategy is sound. It is aspects of our operational execution that are not. We have been slow to make decisions, we have had surprises where we should not, and we have lost the accountability that has been a hallmark of our ability to execute consistently for our customers and our shareholders. That is unacceptable. And it is exactly what we will attack.

What is interesting to me is that I was just sort of waiting for this to occur. Back in 2009 I read about CISCO’s new team based model here in this WSJ article titled “CISCO CEO John Chambers Big Management Experiment“. From the article:

Now executives work on committees—dubbed councils and boards in Cisco-ese—and the company makes 70% of its decisions collaboratively, up from 10% just two years ago.
 
The moves have been controversial at Cisco. About 20% of the company’s senior leaders have left since the shift began in 2007—a percentage organizational experts call unusually high. Chambers compares the executives who’ve departed to basketball stars who don’t fit into a team’s system and adds that Cisco is better off without them despite their talent. He says the old Cisco, which relied on a handful of people to oversee new efforts, would never have been able to pursue so many opportunities.
 
Critics of the new structure say that it adds bureaucracy and strips away accountability. Cisco has lost market share in key product categories recently, and some people who have worked under the new structure draw a line between these losses and the management-by-committee approach.

The core idea of the business enterprise and entrepreneur-ship is all about leadership, accountability and personal responsibility. Businesses aren’t non profit organizations, they aren’t schools, and they aren’t after-school specials. They are serious efforts, with salaries and families and cities on the line, and people need to be given roles and held to the results that they committed to. These aren’t concepts that can be maintained through revolving committees where no one is responsible. Trying isn’t good enough.

And another reason this is doomed…

Chambers says the idea for the new management structure came to him while participating in a collaboration exercise at the 2007 World Economic Forum in Davos, Switzerland. He was on a team with Arianna Huffington, among others, and the group was told to present a vision for life in 2015.

Awesome. Getting ideas for how to run a world-class company from dilettantes in Davos and a blogger, albeit one who was able to turn her re-posted “content” into actual cash through the dying AOL banner (don’t ever underestimate the power of cashing out at the right time).

It is odd that Chambers thought that he was big enough to stand the lifetime of experience on management on its head and go with this ludicrous team concept. Not team in EXECUTION, which is critical, but in RESPONSIBILITY, which is doom. Someone has to stand up and make decisions and take the heat or fall for bad decisions, and you can’t fire everyone in a committee.

This isn’t the first time Chambers has been blinded by faddish ideas. I was with a consulting firm that was a partner with CISCO in the first dot-com boom and at the time CISCO was touting their “fast close” and their ability to rapidly forecast sales and earnings. This occurred right before the markets crashed and they had to write off millions of dollars in unsold inventory, basically proving that their forecasts weren’t worth the paper they were printed on (or the internet space taken up explaining them, since this is now a virtual world).

Cross posted at LITGM

New York Power Authority and Nuclear Generation

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The United States today runs the world’s largest fleet of nuclear reactors. However, we have not started construction on significant additions to our nuclear fleet since the 1970’s.

I often get questions on why we are having such difficulty in executing on new nuclear facilities, especially when compared with China or even France. One important answer to that question, however, starts in an odd place – public power entities (by public I do not mean publicly traded, but owned by a governmental entity of some sort).

Many of the nuclear plants that exist today were started with the help of public entities. While many public entities have sold off their ownership to mainly shareholder-owned entities that run groups of utilities, if you go back to the 60’s through the 80’s when the financing was originally started for these units, you need to look to the public entities. Let’s pick one to start with – NYPA.

New York Power Authority (NYPA):

NYPA today runs 1) hydro electric plants in upstate New York that provide some of the cheapest power in the USA, since hydro is run with an almost zero incremental cost 2) a huge transmission network, built decades ago but at least partially renovated, that brings down power from Canada and the hydro facilities into the densely populated NY metropolitan area 3) some gas fired plants near NYC.

Looking at their web site here, you see a “typical” web site of a utility or a public power entity; lots of talk of green power, sustainability, and pretty pictures with lots of green in them. From the web site:

We’re the country’s largest state public power organization, producing some of the cheapest electricity in North America. Our 17 generating facilities and over 1,400 circuit-miles of transmission lines produce the power to help sustain more than 380,000 jobs statewide. We are a national leader in promoting energy efficiency and the use of renewable-fuel and clean-energy technologies.

And everything said up above may be true. But that is NYPA today, as a neutered, green and publicity friendly entity.

Back in the day, however, NYPA had grand plans. Where did that “cheap” electricity come from? It came from hydro electric power, mainly 2 facilities – one near Niagara Falls and one up north on the St. Lawrence Seaway. It is simply unimaginable for an entity like NYPA to do anything like that today, actually damming up a river and impacting the scenery. These dams may well have been built by ancient Egyptians or Romans for all the chance that today’s NYPA would ever attempt anything that impactful. And without these dams? NYPA doesn’t have “cheap” power, and they mainly are just a transmission lane of power from Canada to the US (where the Canadians actually do “tap” their hydroelectric resources). Not to denigrate the effort to create a new large transmission line; this is also likely far beyond their grasp.

According to their capital plans, during the period 2010-14 NYPA plans to spend $1.6B on capital projects, but only about 1/4 of this is for “generation” activities, and it mostly is related to extending the life of existing generating facilities. For strategic initiatives not included in the capital plans, they mention the following on p15 of the NYPA 2011-2014 Four-Year Financial Plan:

The Authority is considering several projects… an offshore wind generating facility in the New York waters of the Great Lakes and a second off-shore wind generating facility in the Atlantic Ocean off of Long Island; and the potential development of 100 MW of solar photovoltaic systems throughout the state.

But what is mentioned nowhere in NYPA’s documents, except through an oblique reference to decommissioning funds? Nuclear power!

NYPA was a leader once as far as nuclear power, owning the James FitzPatrick nuclear power plant and the Indian Point 3 Nuclear Power Plant. Over the years these plants have changed hands and now are operating by Entergy.

Entities like NYPA were crucial partners in providing low-cost funding (they could issue bonds cheaply and had implicit or explicit backing of governmental units) and support for disruptive and riskier enterprises like hydro and nuclear generation projects.

But now, as you can see, NYPA has sold off their nuclear units and now is content to run existing hydro assets and transmission lines and consider “trendy” investments like solar and offshore wind farms.

It is the absence of entities like this as far as financial and moral support for nuclear power that makes the challenge of the nuclear power “renaissance” even more difficult to pull off. In the current Texas project, the cities of Austin and San Antonio Texas, who provided crucial financial support for the original facilities built at South Texas Project, balked at support for new generation.

As I get time I will go through other public entities that have had a history of support for nuclear generation (decades ago) and helped build the units that make America the largest user of nuclear power but who now, today, shy away from these sorts of investments and instead make a trendy “sop” towards solar and wind power.

Cross posted at LITGM

Gaddafi’s Only Mistake – Two Words

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While Gaddafi was taken aback by the scale of the initial uprising and it seemed that he was on the ropes, his forces managed to rally and with armor, artillery and air power was just about to enter Benghazi, the headquarters of the opposition in the East of Libya, when NATO air power smashed his tanks and turned the tide of the (civil) war.

While no one knows the final outcome it appears that with NATO air power ruling the skies and the fact that his tanks are easy targets from the air on the mostly flat and sparsely populated Libyan coastline, the tides of war can only appear to go against Gaddafi. He can’t sortie out from his strongholds of Sirte and Tripoli but the rebels are free to move up the coast, take the oil rich areas, and start to plan some sort of siege against the remaining areas in Gaddafi’s hands.

The reason for the huge groundswell against Gaddafi that allowed the West to pass a security council resolution allowing for armed intervention are two words that Gaddafi said in a speech as his forces appeared ascendant and heading towards Benghazi:

No mercy

By effectively telegraphing IN ADVANCE that he INTENDED to commit atrocities against civilians in Benghazi, Gaddafi gave the coalition the perfect “smoking gun” that enabled them to rally the Arab and the Western world against him.

If he wouldn’t have given this “gift” to the opposition it seems clear that he would have utilized his air power and heavy weaponry to crush the rebels and reassert control over Libyan oil. With that and the passage of time (Gaddafi had huge foreign reserves) it is likely that someone like the Chinese or Russians (who abstained from the Security Council resolution) would have become partners with him in order to leverage his oil and it would have been some sort of “business as usual” for Gaddafi, although he would have a hard time shopping at the finest stores in London and Paris.

I never thought my knowledge of Libya, gained from playing years of WW2 military simulations related to the 8th Army and the Afrika Korps, would ever amount to anything useful or relevant in today’s terms, but in fact the situation Gaddafi faces is similar to Rommel’s last attempts at advancing on the British before the tide turned when he faced overwhelming air power.

Anyone who has to fight, even with the most modern weapons, against an enemy in complete control of the air, fights like a savage

Gaddafi is finding that out fast and his forces are likely to disintegrate much faster than the Germans in WW2 in the same situation since their morale and cohesion is far lower.

But for those 2 words, it is highly likely that Gaddafi would have won.