Synopses & Reviews
"Fifteen years before the Enron, WorldCom, and Parmalat debacles, another company embarked on a strategy that appeared to be driven more by the allure of short-term profits and compensation for management than by the long-term interests of shareholders. In this case, though, the risks those managers took extended beyond the purely financial to the safety of several large nuclear power plants. A sobering tale, told fairly and skillfully."
--Paul Portney, President, Resources for the Future"MacAvoy and Rosenthal paint a vivid picture of a board of directors ignoring not just red flags, but explicit warnings of the impending calamity, while being calmed by a complacent management. Their book serves as a warning to be absorbed by all boards that diligence, surely post-Enron, requires more than probing the bottom line; it includes all risks to the enterprise, probing beyond management assurances, and appropriate information flow to, and leadership of, the board."--Ira M. Millstein, Senior Partner, Weil, Gotshal and Manges LLP and Chairman of the Private Sector Advisory Group of the World Bank/OECD Global Corporate Governance Forum
"This story is important for anyone with an interest in corporate governance. It makes clear the conflicts that develop and the danger to shareholders when an industry structure changes, but executive compensation systems do not. MacAvoy and Rosenthal provide a penetrating analysis of Northeast's nuclear negligence. At Northeast, an electric utility, regulation was giving way to competition, but no change was occurring in nuclear safety requirements. Northeast executives, whose short-term compensation incentives were based on income, cut nuclear operating and maintenance costs, making safety violations and plant shutdowns inevitable in the long term. Shareholders suffered while executives were unscathed."--Richard Bower, Leon E. Williams Professor of Finance and Managerial Economics, Emeritus, Tuck School of Business at Dartmouth College
"This book provides an entertaining and informative look at the implications of competition for nuclear safety. It should be read widely."--R. Preston McAfee, J. Stanley Johnson Professor of Business, Economics, and Management, California Institute of Technology, author of Competitive Solutions: The Strategist's Toolkit
"Paul MacAvoy and Jean Rosenthal offer an interesting discussion of one of the unforeseen problems associated with deregulating the electric utility industry. Their book will serve as a useful warning to other nuclear power plant operators--and operators in other safety-critical industries, such as airlines--that safety is a constraint, not a variable, in maximizing profits."--Geoffrey Rothwell, Stanford University
Review
"This is an interesting, well-argued addition to the current discussion of corporate governance."--Choice
Review
This is an interesting, well-argued addition to the current discussion of corporate governance. Choice
Synopsis
Northeast Utilities Company adopted an ambitious new competitive strategy in the mid-1980s, seeking to become the low-cost supplier in New England electric power markets bracing for deregulation. Given its high-cost nuclear facilities, doing so required a corporate turnaround. For a decade Northeast faced increasing public and employee resistance to cost cutting at its nuclear plants. Though management achieved many of its goals, curtailing outlays on nuclear operations meant high risk that the Nuclear Regulatory Commission would close the plants because of frequent, prolonged outages. This is just what happened in 1996. Did management's deliberate cost-containment strategy take nuclear operations to an inevitable regulatory shutdown, and if so, why? Was it the pursuit of executive compensation tied to cost containment that caused undue risk of regulatory shutdown?
Paul MacAvoy and Jean Rosenthal describe ten years of corporate performance preceding the shutdown, detailing aggressive executive decisions, mounting regulatory actions in response to increasingly severe operational failures, and--at the same time--overall improvement in corporate earnings, stock prices, and executive pay packages. They relate the complexities of managing declining nuclear plant operations under ever more pressing budgetary targets. Their discussion of the increasing risk of outages raises the issue of the tradeoff of profit and conservative management of hazard operations.
All the more timely in light of the massive 2003 East Coast blackout, Corporate Profit and Nuclear Safety represents a powerful and cautionary commentary on industrial practices that goes to the heart of effective corporate governance.
Synopsis
Northeast Utilities Company adopted an ambitious new competitive strategy in the mid-1980s, seeking to become the low-cost supplier in New England electric power markets bracing for deregulation. Given its high-cost nuclear facilities, doing so required a corporate turnaround. For a decade Northeast faced increasing public and employee resistance to cost cutting at its nuclear plants. Though management achieved many of its goals, curtailing outlays on nuclear operations meant high risk that the Nuclear Regulatory Commission would close the plants because of frequent, prolonged outages. This is just what happened in 1996. Did management's deliberate cost-containment strategy take nuclear operations to an inevitable regulatory shutdown, and if so, why? Was it the pursuit of executive compensation tied to cost containment that caused undue risk of regulatory shutdown?
Paul MacAvoy and Jean Rosenthal describe ten years of corporate performance preceding the shutdown, detailing aggressive executive decisions, mounting regulatory actions in response to increasingly severe operational failures, and--at the same time--overall improvement in corporate earnings, stock prices, and executive pay packages. They relate the complexities of managing declining nuclear plant operations under ever more pressing budgetary targets. Their discussion of the increasing risk of outages raises the issue of the tradeoff of profit and conservative management of hazard operations.
All the more timely in light of the massive 2003 East Coast blackout, Corporate Profit and Nuclear Safety represents a powerful and cautionary commentary on industrial practices that goes to the heart of effective corporate governance.
Synopsis
"Fifteen years before the Enron, WorldCom, and Parmalat debacles, another company embarked on a strategy that appeared to be driven more by the allure of short-term profits and compensation for management than by the long-term interests of shareholders. In this case, though, the risks those managers took extended beyond the purely financial to the safety of several large nuclear power plants. A sobering tale, told fairly and skillfully."--Paul Portney, President, Resources for the Future
"MacAvoy and Rosenthal paint a vivid picture of a board of directors ignoring not just red flags, but explicit warnings of the impending calamity, while being calmed by a complacent management. Their book serves as a warning to be absorbed by all boards that diligence, surely post-Enron, requires more than probing the bottom line; it includes all risks to the enterprise, probing beyond management assurances, and appropriate information flow to, and leadership of, the board."--Ira M. Millstein, Senior Partner, Weil, Gotshal and Manges LLP and Chairman of the Private Sector Advisory Group of the World Bank/OECD Global Corporate Governance Forum
"This story is important for anyone with an interest in corporate governance. It makes clear the conflicts that develop and the danger to shareholders when an industry structure changes, but executive compensation systems do not. MacAvoy and Rosenthal provide a penetrating analysis of Northeast's nuclear negligence. At Northeast, an electric utility, regulation was giving way to competition, but no change was occurring in nuclear safety requirements. Northeast executives, whose short-term compensation incentives were based on income, cut nuclear operating and maintenance costs, making safety violations and plant shutdowns inevitable in the long term. Shareholders suffered while executives were unscathed."--Richard Bower, Leon E. Williams Professor of Finance and Managerial Economics, Emeritus, Tuck School of Business at Dartmouth College
"This book provides an entertaining and informative look at the implications of competition for nuclear safety. It should be read widely."--R. Preston McAfee, J. Stanley Johnson Professor of Business, Economics, and Management, California Institute of Technology, author of Competitive Solutions: The Strategist's Toolkit
"Paul MacAvoy and Jean Rosenthal offer an interesting discussion of one of the unforeseen problems associated with deregulating the electric utility industry. Their book will serve as a useful warning to other nuclear power plant operators--and operators in other safety-critical industries, such as airlines--that safety is a constraint, not a variable, in maximizing profits."--Geoffrey Rothwell, Stanford University
Synopsis
Northeast Utilities Company adopted an ambitious new competitive strategy in the mid-1980s, seeking to become the low-cost supplier in New England electric power markets bracing for deregulation. Given its high-cost nuclear facilities, doing so required a corporate turnaround. For a decade Northeast faced increasing public and employee resistance to cost cutting at its nuclear plants. Though management achieved many of its goals, curtailing outlays on nuclear operations meant high risk that the Nuclear Regulatory Commission would close the plants because of frequent, prolonged outages. This is just what happened in 1996. Did management's deliberate cost-containment strategy take nuclear operations to an inevitable regulatory shutdown, and if so, why? Was it the pursuit of executive compensation tied to cost containment that caused undue risk of regulatory shutdown?
Paul MacAvoy and Jean Rosenthal describe ten years of corporate performance preceding the shutdown, detailing aggressive executive decisions, mounting regulatory actions in response to increasingly severe operational failures, and--at the same time--overall improvement in corporate earnings, stock prices, and executive pay packages. They relate the complexities of managing declining nuclear plant operations under ever more pressing budgetary targets. Their discussion of the increasing risk of outages raises the issue of the tradeoff of profit and conservative management of hazard operations.
All the more timely in light of the massive 2003 East Coast blackout, Corporate Profit and Nuclear Safety represents a powerful and cautionary commentary on industrial practices that goes to the heart of effective corporate governance.
Synopsis
"Fifteen years before the Enron, WorldCom, and Parmalat debacles, another company embarked on a strategy that appeared to be driven more by the allure of short-term profits and compensation for management than by the long-term interests of shareholders. In this case, though, the risks those managers took extended beyond the purely financial to the safety of several large nuclear power plants. A sobering tale, told fairly and skillfully."--Paul Portney, President, Resources for the Future
"MacAvoy and Rosenthal paint a vivid picture of a board of directors ignoring not just red flags, but explicit warnings of the impending calamity, while being calmed by a complacent management. Their book serves as a warning to be absorbed by all boards that diligence, surely post-Enron, requires more than probing the bottom line; it includes all risks to the enterprise, probing beyond management assurances, and appropriate information flow to, and leadership of, the board."--Ira M. Millstein, Senior Partner, Weil, Gotshal and Manges LLP and Chairman of the Private Sector Advisory Group of the World Bank/OECD Global Corporate Governance Forum
"This story is important for anyone with an interest in corporate governance. It makes clear the conflicts that develop and the danger to shareholders when an industry structure changes, but executive compensation systems do not. MacAvoy and Rosenthal provide a penetrating analysis of Northeast's nuclear negligence. At Northeast, an electric utility, regulation was giving way to competition, but no change was occurring in nuclear safety requirements. Northeast executives, whose short-term compensation incentives were based on income, cut nuclear operating and maintenance costs, making safety violations and plant shutdowns inevitable in the long term. Shareholders suffered while executives were unscathed."--Richard Bower, Leon E. Williams Professor of Finance and Managerial Economics, Emeritus, Tuck School of Business at Dartmouth College
"This book provides an entertaining and informative look at the implications of competition for nuclear safety. It should be read widely."--R. Preston McAfee, J. Stanley Johnson Professor of Business, Economics, and Management, California Institute of Technology, author of Competitive Solutions: The Strategist's Toolkit
"Paul MacAvoy and Jean Rosenthal offer an interesting discussion of one of the unforeseen problems associated with deregulating the electric utility industry. Their book will serve as a useful warning to other nuclear power plant operators--and operators in other safety-critical industries, such as airlines--that safety is a constraint, not a variable, in maximizing profits."--Geoffrey Rothwell, Stanford University
About the Author
Paul W. MacAvoy is the Williams Brothers Professor of Management Studies at Yale University and former Dean of the Yale School of Management. The author of nineteen books, he served on President Ford's Council of Economic Advisors and was an economic advisor to George H. W. Bush before his vice-presidential election. Jean W. Rosenthal, a former manager at Pacific Gas and Electric, is Senior Olin Research Fellow at the Yale School of Management.
Table of Contents
List of Figures vii
List of Tables ix
Preface xi
Chapter One: Strategic Challenge at Northeast Utilities 1
An Overview of Strategy and Performance at Northeast Utilities 2
Chapter Two: Northeast's Competitive Strategy 7
Visions of a Changed Future 8
The Strategic Response 10
Financial Conditions at the Beginning of the New
Competitive Strategy 13
Constraints: Price and Safety Regulation 18
Alternative Strategies: Other Electric Utilities Cope with
Threats of Deregulation in the Mid-1980s 22
Comparative Nuclear Strategies: Pacific Gas and Electric 26
The Northeast Competitive Strategy in Context--Was
It at Inception the Dominant Strategy? 27
Chapter Three: The Nuclear Power Context for the New Competitive Strategy 31
The Complexity of Nuclear Power Systems 31
Safety Regulation at the Nuclear Regulatory Commission 35
Self-Regulation in the Nuclear Industry 37
Safety Culture and "Management Style" 38
Cost Containment in the Context of Safety Regulation 41
A Conceptual Framework for Analyzing Responses
to Regulation 45
Initial Results: The 1990-91 Millstone Nuclear
Plant Shutdowns 48
Nuclear Regulatory Commission Early Warnings 53
The LRS Report and CT DPUC After-the-Fact Appraisal 57
Strategic Focus: Acquisition of Public Service of
New Hampshire 57
Initial Results: Financial and Nuclear Plant
Operating Performance 61
Chapter Four: Revisiting Competitive Strategy in the Mid-1990s 64
Northeast Strategy and the Competitive Threat 64
The PEP Process for Improving Nuclear Plant Performance 73
Operating Problems at Millstone in 1993 75
The Strategy of Northeast and the Board of Trustees 79
The Financial Success of Cost Containment 80
Strategy and Management Compensation 83
Another Look at Alternative Strategies 86
Chapter Five: Northeast Strategy and Regulatory Shutdown of the Millstone Plants 88
Failing Operations at Millstone 88
Shutdown at the Millstone Site 97
Increasing Public Concern 98
The Role of the Board in the Northeast Utilities Collapse 101
CODA: The End Game 105
Strategy as the Cause for Shutdown 108
Notes 113
Bibliography 135
Index 147