About Lee Devlin

I'm Lee Devlin from Greeley, Colorado.

What really happened at Enron?

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The word Enron is now nearly synonymous with corporate misgovernance. But what really happened there? It’s easy to remember the news sound bites, but those seemed to address only the more egregious and sensationalistic aspects of the debacle. Namely, they focused on rich corporate executives plundering a company while at the same time the investors and employees were left with nothing. Is that really what happened? Yes, that did happen, but if that’s the only lesson we take away from it, we’ll have missed the real reasons behind what went on there.

I recently saw a movie and later read several books about Enron. The movie entitled Enron: The Smartest Guys in the Room, was based on a book by the same name by Bethany McLean and Peter Elkind. The other books were entitled Power Failure: The Inside Story of the Collapse of Enron by Mimi Schwartz and Sherron Watkins and Conspiracy of Fools: A True Story by Kurt Eichenwald. Between them all, they paint a story that you won’t get from reading just one of the books or by watching the movie. Terri saw the movie and read the books as well and she felt the same way. Reading about Enron is like watching a train wreck. It is hard to look away.

Can what happened at Enron be traced to a single root cause? I think it can. The root cause of the most spectacular bankruptcy in the history of business can be distilled down to one key issue. And that is that the reward system within Enron was not aligned with the long term financial health of the company.

The system at Enron rewarded executives who did ‘deals’ with large bonuses and, in some cases, an equity stake based on the absolute size of the deal, not on how well it served the long term financial goals of the company. As a result of this policy, several executives walked away with many millions of dollars in personal wealth after helping to sew the seeds of Enron’s destruction. Despite the size of their financial windfalls, these people seemed like minor players in the affair, partly because they were gone from the company before Enron’s collapse. Those held most responsible for the actual collapse, and whose names were mentioned in all the news reports, were primarily Ken Lay and Jeff Skilling. They are certainly culpable for their part in fostering a culture that encouraged behaviors that were at odds with the investors’ and employees’ long term interests. But they steadfastly maintained their innocence, thinking what had happened on their watch was nothing more than a ‘run on the bank’, or the fault of their subordinates, and that they personally felt company was actually still financially healthy. But the balance sheet told quite a different story. They just weren’t really paying attention to it. Whether they believed their testimony or not is anyone’s guess, but they were the ones in charge and thus needed to be held accountable for the malfeasance of their underlings. Both of them had been warned on numerous occasions about accounting irregularities and both tended to defend, deny, or ignore the warning signs.

When executives are awarded sizable stock grants and stock options, it can cloud their judgment. There are a number of ways to get a stock to increase in value temporarily while at the same time jeopardizing the long term financial health of a company. A few of the more notable accounting tricks used at Enron were counting profits years before they were actually due to accrue and hiding expenses in off-balance sheet entities. These two techniques, which go against everything a reasonably intelligent person should understand at an early age, were the most damaging accounting frauds perpetrated at Enron. These accounting techniques skirted legalities while flouting any semblance of sound fiduciary judgment.

In addition to these accounting irregularities there was a perceived need to expand the company at any expense and so a lot of money was poured into risky third world energy projects which ended up losing hundreds of millions of dollars. This was unrelated to the fake accounting, yet still an important factor in Enron’s eventual demise. It was the executives’ reward system in striking these deals that caused them to get involved in questionable ventures where their own personal wealth would increase even if the deals went sour afterwards.

Another thing that wasn’t necessarily responsible for the company’s financial woes, but did expose Enron’s toxic culture, was traders’ willingness to engage in schemes to bilk the California out of billions of dollars by exploiting some flawed deregulation laws that left that state exposed. This blatant disregard for ethics exposed a rather laissez faire attitude on the part of the management as long as lots of money was rolling in. The movie features incriminating audio recordings of Enron traders conspiring to overcharge for power using schemes with self-incriminating names such as ‘Death Star’ ‘Fat Boy’, and ‘Ricochet’. Again, this alone did not bring down Enron, but it certainly exposed and reinforced the absence of ethics that permeated the company.

I think that these books about Enron should be required reading for all corporate executives and the story of Enron should be a mandatory case study for all MBA programs as a cautionary tale. I found the stories behind the fall of Enron to be as fascinating as they were educational.

Motorcycle hazards

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Silvio at the Splugen Pass near the Swiss border

I got an email from my friend Silvio in Monza to tell me that he crashed his motorcycle last week and hurt his knee. He thinks it will be a few weeks before he is able to walk on it again. I wrote about Silvio in the blog last summer when we visited Italy. We spent a day motorcycling in the Italian and Swiss Alps. He had loaned us his Honda VFR (the same one that was involved in the crash) and we had a great time riding it. I know this his lovely wife, Luisa, reads this blog and so please tell Silvio to get well soon and to be careful on that bike. He needs to stop scraping his footpegs around the turns because you never know when there will be gravel on the road.

Bill Dube with the Killacycle

Today I came across a story about the inventor of the Killacycle, Bill Dube, nearly getting killed while demonstrating it. The Killacycle is an electric drag racing bike with the equivalent of 400 HP. It goes from 0 to 60 mph in less than 1 second. This is going to be one of those videos that gets viewed millions of times, and his sponsor, A123 Systems, will get a lot of free publicity as a result. It appears that it’s already crashing the server at TGDaily.com. It may be time to put it on YouTube. It turns out that Bill got scraped up, but is otherwise OK. I found out he must live not far from me, because Killacycle is based in Denver. It appears that he’s also an experimental airplane enthusiast because he designed some LED position light kits that he sells on the same website that hosts the Killacycle information.

Terri’s Ducati is for sale

The last hazard I have related to motorcycles is that of swapping bikes with someone. A few weeks ago Terri and I were out riding and she swapped her Ducati Monster for my BMW R1150RT. Previously she had never ridden the BMW on the highway and she quickly became accustomed to the comfort of riding behind a streamlined fairing, especially when the weather turns cool and it begins raining. The end result is that the Ducati Monster is now for sale and she’ll be looking for something more like the Beemer for her next bike.

Cozy spar and wings status

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Here’s a short posting to show some of the progress on the Cozy. The Cozy was derived from the LongEZ and uses identical construction techniques. The main difference is that it is a 4-place airplane whereas the LongEZ is a 2-place.

This is the jig in which the main spar is built. The main spar is a box beam that is very strong. The wings attach to the spar and it is a major structural component of the airframe.

The part that makes up the shape of the spar is just foam, but it’s covered with many layers of fiberglass and epoxy which give it tremendous strength.

The wings are made of foam, fiberglass and epoxy. The shape of the wing is cut using airfoil templates with a ‘hot wire’ saw to give it an airfoil shape. This is probably the most fun part of building a composite airplane. In just a few minutes you go from a block of foam to something that looks like it belongs on an airplane.

The wing needs to be assembled in a jig to maintain proper dimensions. The jig also helps to set the sweep and twist of the airfoil.

The spar and wings attached to the rest of the fuselage.

The Bottomless Well?

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I recently read a book entitled The Bottomless Well written by Peter Huber and Mark Wills. The book is about energy and written from a contrarian point of view. I enjoyed it because it was well written and contained lots of data related to energy usage and trends. It was obviously meant to be provocative because its premise is that energy is not scarce, the price of energy doesn’t matter very much, and ‘waste’ of energy is both necessary and desirable. With heresies like that, I figured it would be like watching a train wreck in progress. I could hardly put it down.

There are several factors at work today that make a book like this particularly timely. The first is that energy is at the center of a heated political debate. This is driven primarily by the fear that human activity is causing a change to the climate due to our use of fossil fuels. These fuels release carbon dioxide into the atmosphere from sources that had been buried for millions of years, and that has the potential to affect our global climate. Burning fossil fuels can change concentrations of atmospheric carbon dioxide, which is a greenhouse gas, and even a change of a few degrees on the climate could make the earth inhospitable for humans. The danger is that if there is something like an atmospheric ‘tipping point’ which we are approaching, we won’t know about it until it’s too late. There is evidence that the CO2 concentrations have been increasing ever since we began using hydrocarbons as fuel and that the concentrations are higher now than at any time in history.

Another part of this debate is that we are involved in a war to attempt to stabilize countries in a region that controls the world’s largest deposits of oil. Many people think that this war is unnecessary and should be abandoned, and we would be able to do so if we were not so dependent on the unimpeded flow of oil from that region.

The book starts out with 7 ‘heresies’ and then proceeds to support them with evidence. These heresies are:

  • The cost of energy we use has less and less to do with the cost of the fuel.
  • “Waste” is virtuous.
  • The more efficient our technology, the more energy we consume.
  • The competitive advantage in manufacturing is now swinging decisively back toward the United States.
  • Human demand for energy is insatiable.
  • The raw fuels are not running out.
  • America’s relentless pursuit of high grade energy does not add chaos to the global environment, it restores order.
  • The parts of the book I liked best were those showing analytical data, much of it in the form of graphs of quantities such as consumption rates, efficiencies, power densities, etc. Even if you don’t agree with any of the ‘heresies’ the authors espouse, you’d be hard pressed to find a more concentrated form of hard data related to energy.

    The book doesn’t really take sides on the issue of global warming put mentions that anyone concerned with global warming should be more accepting of nuclear energy. I found that to be at odds with the way many environmentalists feel about nuclear energy. In my experience, I have found most, but not all, environmentalists are less enthused about nuclear energy than they are about increased consumption of fossil fuels. It would take a major crisis to get approval to build a new nuclear plant in the U.S. and the ones that do exist are beginning to reach the end of their design lives. The book indicated that the amount of uranium reserves exceed those of coal reserves. Coal reserves are currently estimated to be about 275 years in the U.S. at current consumption rates. But it doesn’t take much of an increase per year to reduce that number. For example, if we increase consumption at a rate of 3% per year, which is the average historical increase, the coal reserves fall to about 80 years. However, accounting for nuclear energy reserves is a complex issue which I’ll discuss in a future posting.

    Energy can be a difficult subject to wrap one’s mind around. But the book does a great job by showing in fine detail how much energy humans consume. Humanity consumes about 400 Quads (quadrillion BTUs) of energy per year and it’s rising annually. This is a lot of energy, but is only about .02% of the amount of energy that arrives to the earth from the sun each year.

    Although the U.S. comprises about 5% of the world’s population, we consume approximately one quarter of the world’s energy. A lot of people may find this alarming, even revolting, and something that must be corrected. But it’s important to note that as we strive to reduce our per capita energy consumption levels to better match that of other nations, the rest of the world is steadily increasing its per capita level of energy consumption as other countries modernize their own standards of living. So the overall result is that demand for energy is rising.

    A concept that came up over and over again was the fact that most of the energy is wasted as it is converted and used for its intended purpose. One of the most eye-opening diagrams in the book is the ‘energy squid’ first published in 1937 and updated many times since then, a version of which is shown below. It shows the flow of energy in the U.S. from start to finish and you can indeed see that most of it ends up wasted. It gives you a sense of how much energy is used just to ‘purify’ energy itself. For example, conversion of coal to electricity loses most of its thermal energy to waste heat, somewhere about 60%, which cannot be easily recovered. It also takes energy to mine and transport the coal to where it will be used. We accept this energy loss because electricity is a much more valuable form of energy than coal. For example, you can reshape the cornea of an eye with a laser. That requires electricity. You can’t do it with coal alone. So we shouldn’t be focused solely on the efficiency of energy conversion. If we do, the result could be to outlaw useful technology like lasers because they are not very ‘efficient’ if you consider efficiency simply as a ratio of energy output divided by energy input.

    The ‘Energy Squid’ showing energy flow in the U.S.
    Click on image to see larger version of it.

    Automotive engines have similar energy losses. About 65% or more of gasoline’s energy is lost in waste heat. This is simply a limitation of internal combustion engines. Also, when you take into consideration that the end result is often transporting a single person, you can make an argument that the energy to move the entire vehicle’s gross weight is wasted because if you’re moving nearly 3000 lbs of vehicle to transport a 170 lb. person, you’re wasting over 90% of the energy. So ‘efficiency’ is not a very easy concept to describe, let alone mandate or regulate. You could also make the argument that a lot of transportation, such as leisure travel, is unnecessary and therefore inefficient and should be outlawed.

    Another thing to consider is that when you make something more efficient, it lowers its cost and people end up using more of it because they can afford more of it. So chasing after efficiency often results in increased overall consumption.

    I think it is important to listen to people whose viewpoints are well researched, yet sometimes contradictory to my own. That’s how I learn. If you only pay attention to people telling you what you already know, or think that you know, you cannot become any better informed. So even if you are a self-proclaimed tree hugger, it would
    be a good idea to pick up this book and read it, so that you may better understand why everyone doesn’t believe the same things that you do. It may not change your point of view, but at least you’ll be able to evaluate the veracity of the logic behind the assertions the authors make in the book.