When Does “No” Mean “No”?

Note: This article was published in The Globe and Mail on March 3, 2015. The version below includes additional hyperlink references not published in the original.

gam-masthead

On big resource projects, when does ‘no’ mean ‘no’?

By Joel Gehman and Michael Lounsbury
March 3, 2015

A recent column lamented that getting to “yes” on energy projects in Canada has never been tougher: Fossil-fuel developments, pipelines, mines, dams, transmission lines, and even wind turbines “are frequently contested, delayed or blocked.” But do such outcomes mean there is a problem? And if so, what kind of problem is it?

The argument – ‘Getting to Yes’ – assumes that “yes” is somehow on the side of angels. But a critical element of any great strategy is saying “no.” It’s Strategy 101. No organization – whether a corporation, a nation-state or a non-profit – can say “yes” to everything. Choices must be made. In his classic article “What Is Strategy?,” Harvard professor Michael Porter put it bluntly: “The essence of strategy is choosing what not to do.”

Clearly then, “no” is often the better strategic choice. And yet, organizations often fall into a “yes” trap. This is because, once set in motion, strategies are hard to reverse. There are sunk costs, learning effects, organizational inertia and network externalities, among other issues. And so, an organization can easily escalate its commitment to a losing course of action. But in real-time, as these strategic decisions are unfolding, the folly is often hard to stop.

One famous example is New York’s Shoreham Nuclear Plant. First proposed in April, 1966, the plant was expected to cost $75-million and come online by 1973. The plant was eventually completed in October, 1985, only to be decommissioned in March, 1989, having never sold any electricity. By that point total costs had ballooned to $5.5-billion. Predictably, the plant’s owner, Long Island Lighting Company, was unable to survive as an independent company. All because it refused to take “no” for an answer.

On the heels of President Obama’s recent veto, some advocates of the Keystone XL pipeline have proudly proclaimed they won’t take “no” for an answer. Perhaps their persistence in the face of “no” will prove prescient. Or perhaps Keystone XL is another Shoreham Nuclear Plant in the making. Only time will tell. But all of this suggests that perhaps Canada doesn’t have a “yes” problem; perhaps Canada has a “no” problem.

Entrepreneurs in Silicon Valley have a saying: “If you’re going to fail, fail fast.” By comparison, getting to “no” on Canadian energy projects has been taking longer and longer. That prompts some interesting questions. Why has Canada been taking so long to get to “no”? How can we get to “no” faster? Why do so many organizations keep chasing “yes” in the face of “no”? And, perhaps most importantly, what are the costs to Canada of not taking “no” for an answer?

Joel Gehman (@joelgehman) is assistant professor of strategic management and organization and Southam faculty fellow at the Alberta School of Business. Michael Lounsbury is associate dean of research, professor of strategic management and organization and Thornton A. Graham chair at the Alberta School of Business.

US Nuclear Power Update

According to the World Nuclear Association’s Weekly Digest first concrete was poured on two new US nuclear power reactors — the Summer 2 and the Vogtle 3. I previously discussed some of the dynamics behind this nuclear “renaissance.”

The concrete basemat for South Carolina Electric & Gas’ (SCE&G) Summer-2 reactor has been poured in a 51-hour operation. Three days later that for Vogtle-3 was undertaken in 41 hours. The pours had been delayed for months because of discrepancies between construction plans and the original design documents. The NRC approved license amendments earlier this month that allowed the concrete pour of the 1.8m thick foundations to proceed. These are the first such construction starts in the USA in three decades. SCE&G is building two Westinghouse AP1000 reactors at the Summer site, each 1117 MWe net. Southern Nuclear is building another two AP1000 units at its Vogtle site. Reactor pressure vessels and steam generators for all units will come from Doosan in South Korea. The four units are expected to enter commercial operation in 2017 and 2018 in each case. There are also four Westinghouse AP1000 reactors under construction in China, at Sanmen and Haiyang, the first two of which are expected on line next year.

This comes on the heels of the February 2013 decommissioning of Duke Energy’s 860 MWe Crystal River PWR in Florida due to damage to the containment structure sustained when new steam generators were fitted in 2009-10, under previous owner Progress Energy. Its 40-year operating licence was due to expire in 2016. Some $835 million in insurance was claimed. Additionally, Dominion Energy’s 566 MWe Kewaunee PWR in Wisconsin is due to be decommissioned in May 2013, after 39 years operation.

For more, see Nuclear Power in the USA.

Categorization by Association Paper Reviewed in ASQ

My first publication — Categorization by Association: Nuclear Technology and Emission-Free Electricity — was coauthored with Raghu Garud and Peter Karnøe and appeared in Research in the Sociology of Work, Volume 21: Institutions and Entrepreneurship, edited by Wesley D. Sine and Robert J. David. Other contributors to the volume included W. Richard Scott, Howard Aldrich, Mary Ann Glynn, Candace Jones, Stephen J. Mezias, Theresa K. Lant, Paul Ingram, Chad Navis, Jason Owen-Smith, Paul Ingram, Philippe Monin and others.

The entire volume was reviewed in the latest issue of Administrative Science Quarterly by Klaus Weber of Northwestern University. According to Weber, the eleven chapters “work well as a collection, balancing diversity with a clear sense that the contributors are indeed part of the same conversation.”

Regarding our chapter, Weber writes:

In “Categorization by Association: Nuclear Technology and Emission-free Electricity,” Garud, Gehman, and Karnøe examine entrepreneurial meaning-making. Their study documents changes in the associative meanings of nuclear technology over several decades and provides an account of the agents and material arrangements that influenced this evolution.

Categorization by Association can be downloaded for free at SSRN.

Of Markets, Regulated and Deregulated

I’ve been studying the history of nuclear power for some time now. With that in mind, I found Fortune’s November story on “Southern’s Big Nuke Bet,” in which Geoff Colvin interviewed Tom Fanning, CEO of Southern Company, to be quite interesting. In the article, Fanning responds to the following question from Colvin:

[Geoff Colvin:] A couple of other utilities have decided to get out of nuclear. Constellation got out of plant development earlier this year, and NRG pulled out of its nuclear project in Texas. Is this just a case of differing business judgments, or is there something else?

[Tom Fanning:] It goes back to scale, credit quality, and credibility. When you think about the challenges that a small company will face building a $14 billion deal, that gets rather daunting.

The U.S. really is divided into two electricity markets. Some years ago many states deregulated, and they have what’s called merchant markets, where the price for electricity is largely set a day ahead or week ahead or month ahead. Remember this is going to take 10 years to build, and it’s going to be the largest capital asset in your portfolio, and you’re going to need to run it 30 to 50 years to earn that money back. Putting that magnitude of capital in a deregulated merchant market is exceedingly risky. Thankfully, Georgia Power operates in a vertically integrated regulated market where legislation and regulation are stable and constructive and will support this over time.

In other words, the major reason Southern Power is able to undertake the construction of a new nuclear power plant is because it operates in what looks a lot like a planned market. This is a point that some in the U.S. seem to ignore. For instance, in an article for the Heritage Foundation, Jack Spencer claimed that federal loan guarantees were not essential to the continued development of nuclear power in the United States, but that instead, free markets could be counted on to intervene in the government’s place.

But rather than being driven by “market” forces, history reveals time and again that the construction of nuclear power plants depends almost exclusively on state intervention. For instance, in recent years, EDF, Rosatom and China have been three of the most active developers of nuclear power projects worldwide. All are essentially state entities. As of January 2010, the French government owned 84.48% of EDF. While Rosatom and the Chinese nuclear industry are entirely owned by their respective governments.

Meanwhile, in the US, the nuclear “renaissance” is now essentially limited to Southern Company’s planned Waynesboro, GA facility. Of the other approximately two dozen applications submitted over the past few years, none are being actively being pursued at this time. By comparison, not only has Southern Company received $8.2 billion in loan guarantees from the federal government, as the interview above makes plain, the economic viability of the project additionally hinges on the fact that Georgia remains a regulated energy market, meaning that the ultimate costs of the project (whether the currently projected $14 billion, or more) will ultimately be borne by Georgia electricity ratepayers. This effectively offers the company a state-level guarantee on top of its federal loan guarantee.

In short, the preponderance of the evidence from both the US and the rest of the world suggests that heavy governmental subsidies, loan guarantees and/or liability exemptions — either explicitly or de facto — are essential to the development of nuclear power. By comparison, all of the literature I have read on the topic suggests that the market has yet to build a single nuclear plant.