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About the Author
Peter Grose is a former New York Times and Foreign Affairs editor. His latest book is called Operation Rollback: America’s Secret War Behind the Iron Curtain, following upon his biography of Allen Dulles, Gentleman Spy. He periodically appears on the History Channel, CBS News, and C-Span to comment on the history of intelligence.
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Power to People
The Inside Story of AES and the Globalization of Electricity
By Peter Grose
ISLAND PRESSCopyright © 2007 Peter Grose
All rights reserved.
Strategy of the Founders
The little venture that became known among giant energy conglomerates as the AES Corporation opened its doors for business the first day of October 1981, from rented rooms in the Rosslyn neighborhood of Arlington, Virginia, across the Francis Scott Key Bridge from Georgetown. Once a run-down community of pawnshops and used-car lots, Rosslyn was embarking upon gentrification, transforming itself into an office building complex inside the Beltway of Washington, DC.
At start-up, the company claimed no proprietary technology, no hard assets, no capital base. Its two founders, Roger Sant and Dennis Bakke, had no management record in heavy industry. They were not even clear at the outset about what their company's first "product" would be. All the young AES had going for it was a fortuitous opening to launch the free market in the old electricity industry, an entrenched monopoly ever since its creation nearly a hundred years before. The economic benefits of privatizing bloated regulated and state-owned industries were being argued around the world. Seizing upon a program of deregulation offered by Congress in 1978, the company's freethinking entrepreneurs set about to realize a vision of what private enterprise is all about—or should be: to serve an important public need; to make a sustaining profit in doing so; to bring satisfaction to customers and employees alike as they go about their daily lives.
Over the next two decades, their corporate experiment took a series of dramatic turns; it flourished in the stock market bubble, and it faltered, nearing the point of extinction, when the bubble collapsed. AES never sought the publicity of its competitor in the electricity business, Enron Corporation of Houston, nor did it suffer the subsequent fate and incur the odium that made the name "Enron" a symbol of corporate malfeasance and disgrace. The ambition that drove AES was, at base, the creation of a nurturing corporate culture that would allow all the people involved to do their best.
Sant and Bakke were Harvard Business School graduates from the far West seeking career fulfillment out East. Emerging from the federal bureaucracy during the so-called energy crisis of the 1970s, Sant had established the Energy Conservation Center (Bakke later came on board), sponsored by Carnegie Mellon University, to design an energy policy that could promote a growing national economy and, as well, enhance the lifestyles of generations to come. Excited by the possibilities they had discovered during their government and academic experience, they turned to the private business sector as the means to realize their vision of such a policy.
They incorporated their new enterprise under the name Applied Energy Services, Inc. (Eight years later, as they moved into the heavy industry of electricity generation, they shortened the corporate identity to AES—no superfluous and distracting periods.) Their purpose was modest, at least compared with what it later became: to offer their customers methods for using energy more efficiently.
"The typical energy consumer has neither the technological expertise nor the time or capital to concentrate upon energy efficiency, even when it recognizes the economic sense of doing so," they wrote in their first business plan. Instead of imposing on consumers "the burden of choosing between energy alternatives," they offered "a new approach which makes the provision of energy services the responsibility of a third- party specialist."
Choice of fuel—oil, gas, coal, or uranium; wind, wood, or the rays of the sun—was only one step, and not necessarily the most important. The equipment and management needed to convert raw energy into the many services consumers required were what mattered—starting with provision of the ducts, thermostats, and insulation and growing into the calculation of usage, the hours actually working versus downtime. "What is really important," they argued, "is putting together all the components in such a way as to minimize the total cost of delivering energy services." The third-party specialist, as they called it, was to be none other than the company Sant and Bakke presumed to establish.
Applied Energy Services, Inc., offered to identify, create, and market "innovative energy delivery systems that reduce the cost for energy services for major energy-using entities"—industrial firms and commercial buildings in particular, but even the giant utilities, which historically had not assigned a high priority to energy efficiency.
The important enterprise began, in short, as an attempt to elevate the idea of energy conservation into a profitable business—through efficiencies in the ways that energy was produced and then consumed. At start-up, Sant and Bakke presented themselves to corporate America as consultants in an untried endeavor. Sant called the concept behind it the "least-cost energy strategy."
It is difficult, nearly three decades later, to appreciate the novelty of this notion when it was first presented, so obvious and commonplace has become the practice of using energy efficiently.
Back then, "conserving energy" was branded a quixotic endeavor; it flew in the face of all the assumptions that energy industry economists had grafted onto the public and political awareness. To leaders of entrenched industries, the point of energy policy was—and for many still is—simply to secure access to more oil, gas, uranium, or whatever is required to shore up what they call the American way of life. Sant's argument to the contrary was that securing a reliable fuel supply was not the relevant or even the necessary goal of energy policy, neither for government nor for private enterprise. The more valid goal was to make better use of the energy already available.
The politics of the moment were not auspicious. The Republican administration of Ronald Reagan was coming into office, bringing the traditional assumptions of energy policy: the various industries are the experts, and their executives know more about energy than any professor. Sant's proposition risked oblivion. But the New York Times caught the drift. "Although the least-cost approach sounds simple," explained a business reporter in April 1981, "it represents a sharp departure from much energy analysis and the Reagan administration's overwhelming emphasis on fuel production. Under the Mellon approach, improvements in the efficiency of energy use are viewed in exactly the same light as increased production of oil."
The research team at Carnegie Mellon had generated data to demonstrate that, with improved energy productivity from the least-cost strategy, the United States could theoretically reduce its imports of foreign oil through the 1990s, as the Times reported, to none at all after 2000—without threatening economic growth or living standards. "While it's a physically feasible future," said a skeptical electricity industry analyst, "it's an unlikely future." He nonetheless conceded that the concept was "quite a good one." Other analysts were less charitable; one commented, "It's a lot easier to get off foreign oil in a think tank than it is in the real world."
Sant had published his first academic paper about the concept in 1979, after leaving government but well before finding the opportunity to translate his ideas into a business. During the energy crisis, he wrote, American consumers had responded nobly: "turned down thermostats, bought smaller and less comfortable cars, made fewer trips at slower speeds and joined car pools." But such sacrifices hardly went to the root of the problem, nor were they sustainable as a structural matter of energy policy.
"People simply want comfort in their homes at the least cost to them," Sant and Bakke would explain in briefings to prospective clients. "Similarly, industrial users need services like steam for chemical or refinery processes, or shaft power to run machines and equipment. They care little whether they use natural gas, oil, or coal, as long as they feel they are reliably obtaining the services they need at the lowest possible cost."
This change of focus to energy services rather than energy supplies allowed them to refute, one by one, assumptions that had been enshrined as established wisdom in the energy crisis of the 1970s and that, indeed, persist decades later.
Regularly heard, for instance, was—and is—the warning that the United States has become too dependent on imported oil, which is volatile in price and politically insecure in source. "Dependence on foreign oil is merely a symptom—a symptom of a much broader energy market imbalance," Sant and Bakke argued from their Carnegie Mellon post. "The belief that imports are the starting point from which all energy policy should flow is a myth, and perpetuating that myth will exacerbate the real problem rather than contributing to its resolution."
Oil may remain essential for transportation; ingenuity still falls short in devising practical and economical alternatives for gasoline or diesel fuels. "Yet, like the other energy myths, the focus on fuels results in misleading conclusions." For if oil and gas demand is reduced for other energy services, such as space heating and industrial processes, the aggregate volume and cost of the petroleum supplies still required for transportation services will naturally fall.
To the contention that energy is scarce, they retorted:
While a scarcity of oil and gas is at the root of the present energy transition, there is no scarcity of ways to provide energy services.... Not only are substitutes for current energy sources technically available, many of them are less costly than oil, natural gas, and other fuels that have been considered essential and irreplaceable.
While future economic growth will require growth in energy services, it does not follow that economic growth requires additional energy use.... The cost of saving energy through improving vehicle mileage and furnace and lighting efficiency is lower than the cost of most sources of energy supply....
Energy conservation and energy productivity mean the same thing.
Are higher prices for energy inevitable? So the experts warned the government and the public. Sant and his colleagues found, to the contrary, that competition among different systems directed to the end use of energy would actually reduce the cost of energy services to the users.
Business leaders and politicians comfortable with the arguments of the traditional energy industries complained that "environmentalists are causing the problem." But the Carnegie Mellon analytic models had factored in the costs of meeting environmental standards. In their briefings, Sant and Bakke declared flatly, "There is no basis to the argument that environmental standards must be weakened to meet national-security or economic-growth requirements." They proposed an alternative formula to measure the trade-off between environmental values and energy needs:
Whether particular federal off-shore oil tracts or coal-mining lands are opened for exploration, for example, should depend on the perceived value of that land in its present state versus how much the exploration and resource extraction are likely to reduce the total cost of energy services.
Such was the flavor of the energy debate at the start of the Reagan administration as Sant and Bakke, both lifelong Republicans, sought to keep their contrary and unorthodox arguments alive. As it happened, support eventually came from across party lines.
The work of Sant's research team "is economic and factual—not a religion," said an energy policy maker from the retiring Carter administration, dousing the notion that energy conservation was something exotic. Then came a comment from David A. Stockman, nominated as Reagan's director of the Office of Management and Budget. Showing his familiarity with the academic literature and giving the concept bipartisan respectability, he stated during his congressional hearing that "we want to meet the energy needs of the country in a least-cost way." Within the decade, "least-cost energy" had become the common theme of state legislatures across the country.
Sant and Bakke continued exchanging ideas while completing the research project for Carnegie Mellon. In the practice of Washington networking, they kept up with like- minded people in and out of government—John C. Sawhill and Russell Train, on their way up to icon status in the environmental movement; Bill Hogan, later a professor heading the electricity policy institute at Harvard; and Dick Darman, who rose in the budget office of the George H. W. Bush administration and long afterward succeeded Sant as chairman of AES. From the earliest years, they knew, or knew of, one another and kept in touch. But for Sant and Bakke, in particular, there lingered the vision they devised after leaving the Washington bureaucracy: their own company, a place where they would want to work and where they could motivate people to do their best.
One early autumn day in 1980, Sant was driving Bakke back to town after one of those academic retreats where big ideas are considered and often forgotten. Under discussion had been a congressional initiative to reform the nation's electricity industry, and the established (and threatened) electric utilities were girding for a fight all the way to the Supreme Court. Cutting through the abstract discussion, Sant saw a practical opening. Turning to his colleague, he said, "This is our chance. Let's do it."
The partnership of Roger Sant and Dennis Bakke survived for two decades of AES, through triumphs and setbacks in the business of building a more energy-efficient electricity industry. In personalities they seemed an odd couple; their differing styles and priorities repeatedly caused tension within the company. Yet Sant could declare, "I don't believe a stronger partnership could ever have been created." The doors of their adjoining offices all those years were always left open.
Aged fifty, Roger Sant was courtly and soft-spoken. His kind manner (sometimes interrupted by flashes of irritation) inspired confidence even among those who could not quite fathom his abstract ideas about energy policy, much less grasp how radical they were. Dennis Bakke, his junior by fifteen years, a rugged blond of Norwegian descent, came on strong with the eloquence of an evangelical preacher in his zeal for doing God's will—not through charity alone but also through hard, competitive work.
Sant, an only child in a modest old Mormon family, was born in Los Angeles on May 24, 1931. His father had been accepted at the California Institute of Technology but had no money to attend; his mother attended the University of California, Los Angeles, for a year or so but had to drop out when the money ran out. Sant was a cheerful boy, without much sense of direction or intellectual stimulation, enjoying the usual newspaper routes and odd jobs for pocket money. He shrugged off his "average-mediocre" report cards in the public schools. Without much caring, he was admitted to Brigham Young University, where he supposed, still without much caring, that he might become something like a civil engineer.
Two years of missionary work was the defining rite of passage for a Mormon adolescent. After his freshman year at BYU, Sant was dispatched to an Oneida Indian reservation in Wisconsin, farther east than he had ever been before. His mission was to proselytize for the Mormon faith; a few months of that led him to think of a more down- to-earth undertaking.
Living with Oneida families who had broken away from their elders in upstate New York to make new lives, the sheltered young Sant concluded that what this lonely community really needed was not more numbers to add to their faithful. They needed a common home, a building to serve as a community center as well as a sanctuary for professing their new faith. With general approval from the church elders in Utah, Sant spent the next six months of his mission wielding hammer and saw to spur the Oneida flock into building their own little church.
Excerpted from Power to People by Peter Grose. Copyright © 2007 Peter Grose. Excerpted by permission of ISLAND PRESS.
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