Friday, May 04, 2007

NOT Getting Things Done

As part of being a stock owner I receive annual reports from companies every year. I try to read through them because I usually learn something, even if it is not what was intended.

Today I received the 2006 annual report for American Electric Power (AEP). AEP is the largest private company generating electricity in the United States and operates the biggest electrical transmission system, as well. From the report:

"Our company met a major milestone last summer when AEP's Wyoming-Jacksons Ferry 765 kV line entered service 16 years after it was first proposed. The 90 mile line strengthens the transmission system... demand in this region has skyrocketed since the previous major transmission upgrades more than 30 years earlier"

This sort of paragraph is nothing new to AEP and passed without notice. But let's think about this for a minute:

- AEP went THIRTY YEARS before upgrading transmission infrastructure
- It took AEP SIXTEEN YEARS from the time they proposed this transmission upgrade until it was completed and in service

The electricity transmission infrastructure isn't an afterthought or a "nice to have". Our transmission network is absolutely critical to the country since everyone depends on electricity and generating plants are NOT located near major populated centers (usually). Look out your window and see if you can spy a generation plant - you probably can't, because they are out in a cornfield somewhere, and a transmission grid is necessary to bring you the power.

Since everyone uses power and the utility is just trying to serve that need, you'd think that we'd develop some sort of process to facilitate the delivery of this infrastructure. That is far from reality. At every step in the process we tie down the utility in community meetings, environmental impact statements, hearings and red tape. This process, which in the end changes nothing (the transmission line was probably built close to what was original proposed) costs the utility millions of dollars in permitting and time as well as costs consumers millions in higher rates as they 1) suffer from unreliable electricity 2) will pay for these costs in the future (plus interest).

In parallel, I am reading a very interesting book called "Last Harvest - How a Cornfield became New Daleville" by Witold Rybczynski. The book follows a developer in the northeast as he goes through the cumbersome, expensive and time consuming process of attempting to turn a piece of land into a development with housing. Per the book:

"From a developer's point of view, the United States is divided into two areas, not rich and poor, or rural and urban, but pro-growth and anti-growth. The South, Southwest, Texas and Florida embrace development, while the Northeast, Northwest, and California discourage anything that threatens change."

The book describes zoning and the control of zoning in great detail; local residents cannot explicitly ban new developments (due to supreme court rulings) but they can implement laws like minimum lot sizes and tie up projects in years (or decades) of red tape until the developer just gives up and goes elsewhere.

I recently was down in Florida and I can attest to the vast pace of housing development in that state; I used to live in Texas and was struck by the humongous scale of Houston - there are two "ring roads" that circle the giant metropolitan area. In Illinois we have two worlds; the suburbs of Chicago are expanding 60+ miles out of downtown but the (rich) inner suburbs make it difficult to implement new developments. Daley (mostly) stays out of the way as builders design and execute on new high rises in areas like River North.

If you think about it, the cost of building a house is pretty much the same around the country; it is the value of buildable land, controlled mostly by local zoning, that brings the development cost. A house that is $200,000 in a far suburb would be $1M + in California or New Jersey. Of course, the high end house will have better amenities (if you are spending that much you might as well pay the rest for high end fixtures and features) but the difference in cost is driven by the cost of buildable land.

What do both of these items have in common?

Many areas of the United States are making it prohibitively expensive to do business, through laws, regulation and red tape.

Think about it this way; did holding up that transmission line for 16 years result in any changes to the original design that were significant improvements? Do houses built in the Northeast fare that much better than houses in Texas due to the endless zoning processes? The answer, in both cases, is no.

And this is a real problem in America, because the inability to make improvements, to build new facilities, and to meet demand locally makes us all less productive. I frankly am astounded that the utilities even bother to try to build new facilities, given the years and billions required to make even the simplest improvement to the system. And anyone who tries to set up a new subdivision in California must either have the patience of Job or be connected to local authorities.

There are other countries, like China, where things DO get done, even if the results are messy. The Chinese recently completed a long railway to Tibet that is, by all accounts, a marvel of engineering. A different post I wrote recently described how India built a new subway in a densely populated downtown while Chicago's proposed improvements remain distant dreams.

America needs to regain the can-do spirit that once characterized our nation, rather than the type of country that can't get even the simplest and critically needed infrastructure project completed. Like the transmission line cited above...

1 comment:

Frank from Delavan said...

Re: "Daly stays mostly out of it"

The pols do get involved, but on a lower level. When we lived in Chicago I used to occasionally swap beers with a guy who worked tirelessly for alderman Mel. He also came up here on fishing trips with the alderman.

He once remarked that he took a Tribune test and came out very Republican, just below Ollie North.

"So why do you stump the voters for the alderman?" I asked.

He then gave an example. He's got new conduit runs laid out and needs a dept of electricty inspection before he can pour concrete. He calls the local office.

"We're running a little behind," the inspector says, "We should be able to get to you next week."

"But alderman Mel and I were planning on a long weekend fishing trip" my buddy replies.

"Oh... I just checked, and one scheduled inspection fell thru. I'll have an inspector there this afternoon."