Non-profits, Consulting and the Service Sector

How many non-profits are too many? Is there a point of diminishing returns in the number of non-profit firms created? Do all non-profits benefit the public well enough to warrant treatment as tax exempt organizations? Are non-profits competing with each other for scarce dollars? What are the metrics for non-profit organization performance? Do non-profit firms take personnel and resources away from the private sector?

Non-profit corporations have grown at an astounding rate; there are now twice as many non-profit US corporations as there were as recently as 2005, and the number is now approaching two million. At first it would seem that the non-profit public sector would be taking jobs away from the private sector, and that there would be a direct, correlating drop in income from the for-profit sector; but the growth of non-profits does not directly correlate with a decline in productivity.

Why not?

The enormous growth in the service sector offers an explanation for the negligible effect of non-profits on the economy. Nearly all non-profits find their employees and founders in the service sector, and it is an exceedingly rare event for a person to come from the manufacturing sector to join or create a non-profit. Instead, it is usually a person coming from the field of consulting, a service sector activity, that joins or creates a non-profit firm.

Consulting over time has morphed into something very different from the post-war efforts of the RAND corporation and McKinsey and Company. The logic has been that if these large firms are profitable by selling human talent, then shouldn’t every small firm and individual have an equal opportunity to do the same? These smaller firms are definably small business, and as we tell ourselves endlessly, most jobs are created by small business.

Now, every unemployed college graduate likes to describe him or herself as a consultant, using consulting to dignify under-employment and unemployment. Underlying this phenomenon is the move to a service sector economy, and an inability to gauge when we have reached a saturation point in that portion of the economy. It is a very short journey from being a consultant to becoming a non-profit firm. It would seem, in fact that a significant reason that we see so little measureable effect from the efforts of the non-profits is that the damage to the economy has already occurred with the expansion of the service sector.

Non-profits have a clear and compelling role in our society, championing many worthy causes that are in the public interest. The question in our minds should be how many no-profits firms are too many.

And here is why:
At their present rate of growth, all firms will be non-profit firms - in less than 20 years.

Colorado’s Underground Economy

It’s too bad Coloradans don’t look underground.

Underground technology in drilling and mining has been ignored in our pursuit of sustainable solutions in energy and transportation. We need to look at these old technologies creatively, with a new set of reference points. The ‘Geolithic Thermocline’ can provide reliable sustainable energy; transit tunnel construction offers weatherproof transit paths lasting for centuries. The early leaders of Colorado, who foresaw the need for water resources, would be disappointed that we have not capitalized on everything we know how to do in mining and tunneling.

Energy First – The Geolithic Thermocline

Humans have understood the ‘Geolithic Thermocline’ since they lived in caves. Adobe and other types of earth construction are modern analogs of living in caves, using earth construction to manage interior temperature for heating and cooling. Ground Source Heat Pump (GSHP) technology uses the earth as a resource for heating and cooling by using water pumped through pipes or drilled wells to collect the ambient temperature of the earth. GSHP (the above ground portion) concentrates the collected energy to heat or cool as required.

GSHP is available everywhere that a building stands on the earth. Unlike wind or solar, Ground Source Heat Pumps work 24/7, and do not require energy storage to function perfectly. GSHP can be used in every part of the United States, and it is compatible with all existing mechanical equipment via heat exchanger technology. It is completely scalable, and can be installed in single home systems or in large mechanical system installations. GSHP has been reaching rates of installation of 12-15% primarily in new home construction in Texas and Oklahoma over the past decade. Underground collection piping can function for decades with virtually no maintenance, and could conceivably be used efficiently for a century.

Tunneling Creates Safe, Efficient Transit Paths

Tunnels are weatherproof highways for transit systems, perfect for major urban transit solutions, and good for some suburban applications. Trains can be routed in nearly straight paths from station to station. Impacts with surface owners are generally by-passed. Tunnel designs can be optimized to meet the needs of every type of train from light rail through high speed rail, and even maglev. Tunnels and underground transit ways completely and safely separate all surface traffic from the trains, allowing them to run faster and perform without the risk of snow, track debris or incidents with automobiles or freight trains. Best of all, tunnels permit true last mile solutions, delivering the passenger directly to his destination with an elevator or escalator.

Two primary types of tunneling are available, cut and cover, and drilled tunnels using either Tunnel Boring Machines, or more traditional road header cutting machines. Cut and cover is more suitable for areas in open country, some suburban locations and along highway paths. It is cheaper, generally, than bored tunnels, and the first choice of underground construction should be use as much cut and cover tunneling as possible.

Real Sustainability – How Do We Get There?

Real sustainability means forever. As close as we can get to it.

Tunnels are among the most permanent and durable types of construction known to man; piping systems supporting GSHP are similarly nearly permanent. What is missing from our toolbox in the sphere of sustainable economics are the tools we have already, not the uncertain rewards of technologies not developed.

The Colorado School of Mines, CSM, has been leading generations of engineers from all over the world in underground construction. The same skills that CSM’s miners use in mining work equally well in tunneling.

Colorado is also home to dozens of drillers, large and small, with many more available in surrounding states. Drilling technology is many decades ahead of fuel cell and PV technology; shouldn’t we use that technology to pursue GSHP? We don’t necessarily need ‘Black Swan’ scientific discoveries as much as we need breakthrough thinking and organization.

Our solutions are already at hand.

The Utility Revenue Model Restrains Distributed Energy Development

Utilities and Their Revenue Model

Advocates for clean, renewable, and sustainable energy sources are often unaware of the reasons for utility industry opposition to renewable and distributed energy. It is useful to explore some of the factors affecting rate issues in the regulated utility industry, and to begin to formulate approaches that deal with utility opposition to distributed energy generation.

Utilities and the Regulatory Compact

The Regulatory Compact (RC) is an agreement by the utility to provide service on demand, with fines imposed for failure to maintain adequate service. Under the RC, the utilities are granted a monopoly by state regulators to supply electricity and natural gas to clients in their service area. The utilities also agree to build and maintain generation facilities and a distribution network and to pay for all initial invested capital costs (CAPEX). The utility is then allowed to operate the utility for an ‘all costs in’ operating expense (OPEX) – plus a return to investors.

The problem is with the current model for utility revenue generation

Utilities generally only make money for selling gas and kilowatts. Conservation in the present model actually encourages the utilities to raise rates because they do not earn any revenue on kilowatts and therms of gas that never get sold, and the remaining service base (CAPEX) of utility customers carries a proportionately larger percentage of CAPEX. Conservation does help reduce additional CAPEX in generation, but reducing consumption for existing generation facilities means that under current regulations, the utility is allowed to recover CAPEX across fewer units sold, which translates into a higher cost for service.

Stranded Costs & Grid Connection Fees

Not only do remaining ratepayers pay higher costs, but the utilities believe that they should be able charge distributed energy generators using renewables charges for stranded costs, i.e., the costs of plants and distribution who have costs that are not being defrayed via the normal rate structure, and connection fees related to being connected to the grid, even though they customer may be net neutral or even adding power to the grid.

The RC extends to the effect on CAPEX of mandating a percentage of generation from wind and solar power. Until a reliable and cost effective means of storing electrical power is developed, the usefulness of these two prominent, renewable, but intermittent, energy sources will be limited.

Why?

The regulatory compact requires the utility to provide power even when supplies of wind and solar are not available, and forces the utility to build redundant generation capacity that would not be required without the mandate. For example, if 20% renewables is required by legislative mandate, then the utility builds the renewable facilities equal to 20% of their demand, plus 100% normal capacity, for a total CAPEX build out of 120%. Combining reduced demand through conservation with a declining base of ratepayers due to distributed generation, means the remaining ratepayers are required to pay for the entire 120% of capital construction, according to current regulations.

Utilities, and the developers of distributed generation, need proposals regarding updating the utility revenue model to reflect conservation and distributed generation. The current iteration of the utility revenue model is a major obstacle in the path of adoption of sustainable, renewable energy.

Sustainable Accounting Practices for Durable Infrastructure

We are beginning to face the contradiction between the need for personal savings and investment on one hand, and a consumption based economy on the other. Increasing personal savings decreases disposable income; with less disposable income, people buy fewer consumer goods, and in our current measures of economic productivity, any decline in consumption decreases economic indicators. Without personal savings, we need to borrow to purchase consumer goods.

Borrowing is useful when the economic life of what you buy exceeds the period required to pay it off. Issuing bonds to build a road that lasts over 100 years, when the bonds are repaid in 20 years, is a pretty clear economic win; 80 years of benefit from the road. The benefit is not nearly as clear when the economic life of what you’ve purchased is less than the period of the loan. Everyone knows that cars depreciate as soon as you drive them out of the showroom. Who knew that homes could do the same thing, declining in value as Adjustable Rate Mortgages drove home payments through the roof?

The fault is not in the systemic risk we facilely blame for the current economic crisis, but in our accounting practices, and in our economic treatment of infrastructure. We make only hazy distinctions between economic activity with long term benefits, like building roads, schools, and sustainable energy infrastructure, and the consumption of candy bars and flat screen TVs.

Although the useful life of these expenditures are vastly different, we lump them together as economic activity primarily because the effort to categorize them has appeared to be too much work. Along with this is the limitation in practice of the useful life of infrastructure by current accounting standards, and public sector infrastructure does not get a treatment of depreciated value or beneficial use that it should. On the books of the public sector, the initial cost is all that is carried as the value, and no viable tools are available in GAAP to define the long terms benefits of infrastructure that lasts for decades.

This problem with our economic metrics leads to a failure to effectively distinguish long term, beneficial economic activity from short term, consumptive activity. The entire period of benefit of the goods purchased should be included not at cost, as they are now, but valued for the depreciated replacement cost over the entire period of benefit, less maintenance expenses.

With all of the efforts toward sustainable infrastructure of various types in the built environment, we need a mature accounting standard for the long term benefit and value of sustainable systems.

200 years might be a good start.

Public-Private Partnerships & Their Tolerance for Risk and Failure

In the private sector, 6 out of 10 new venture capital investments end in failure; some investors say the rate is even higher.

In the public sector, new ventures never fail; they simply get more money.

A flood of ink has been spilled in the past year or two regarding the need for and the virtues of Public-Private partnerships. Not much thought seems to go into what that actually means, however.

There is a drive to engage the public sector in many new business ventures, especially in the renewable energy and clean tech sectors, but little understanding of the risks, and almost no comprehension of the penalty for failure. In large part this is due to the point of view that risk of failure does not exist for the public sector projects.

At first, this would seem to be an argument of Libertarians and Conservatives to rally around the goal of smaller government, but it is not - far from it, in fact. The objective instead is to put in place standardized metrics and include processes in public-private partnerships with respect to goals, stakeholder interests, and pre-project risk assessment. Then, with eyes wide open, proceed with projects when the risk assessment is outweighed by the potential rewards.

The public sector already takes on the riskiest projects, in space exploration, research, and a multitude of other projects; it is, in fact, taking on many more risks than the private sector, because it needs to and can afford to, both points based in the public interest.

What is missing, however, is a non-partisan approach to analyzing project performance, (benchmarking) and determining a sensible course of action when public sector projects fail. The current position in the public sector is to use money to paper over a project failure. The project gets completed, and the public sector managers keep their positions, in spite of the failure. In many cases, the failure is not recognized or studied, and the failure is forgotten.

This amnesia in the public sector is unfortunate; many critical lessons learned are available in failed projects, and our collective project performance could be vastly improved by studying them. Engineers routinely study every failure, and failure analysis, 'test to failure' and a host of other disciplines are standard tools of engineers in their Best Practices. Why doesn’t the public sector do the same?

In the public sector the most telling risk management question you can ask is, ‘what rate of failure is acceptable to you?’. When the manager does not look at you like you have just grown another head, their response is generally, "we don't have any failures". We know they do, and they know they do. The standard solution, however, of ‘spend more money’ has obscured the real issue, project failure, and led to a superficial debate over the cost of the government sector.

(Don’t believe it? Look at the DIA baggage claim project)

Regulated utilities may represent the best example of a public private enterprise; the utility is granted a monopoly and all rates and charges are reviewed and approved by the regulating authority. A second example is quasi-private enterprises which involves establishing and government sponsored entity that then functions like a private company. Here in Colorado, Pinnacol Assurance is the most public example, but there are others. Tennessee Valley Authority (TVA) comes to mind, as do many of the Rural Electric Associations.

For new and risky tech sectors, the utility approach, and the quasi-private approach, will generally not work. If we are going to try to foster small business growth and technical innovation, the public sector will need to adopt a mature understanding of risk and failure, and adjust it's tools and metrics accordingly. We can invest public funds in the new business and risky ventures, but it needs to occur with some good sense regarding benchmarking, process management and best practices.

Just as it should in the private sector.

Zoning Policy is Energy Policy

Zoning Policy is Energy Policy
Have you ever seen a LEED energy efficient building surrounded by acres of parking lots and miles of highways? This LEED structure, admittedly energy efficient, is only accessible by using enormous amounts of energy over the life of the building to use it. It is not a fault of the engineering, which is first rate; it is instead a continuing defect in zoning policy.

Many community zoning codes in Colorado were written for an age when there were fewer Americans using cheaper fuel to go places that were much closer together. Now that the spread of cities and suburbs has shown us a future of expensive automobiles and fuel, hours of time wasted in commutes and continuous potential for violating clean air standards, we may need to rethink the zoning policies that have lead us to put miles and highways between homes, schools, stores, and jobs.

Colorado communities are not alone in these zoning policies; the prevailing zoning codes of most American cities intentionally created residential, industrial and retail districts that were miles apart from each other and which could only be serviced with automobiles. It was a worthwhile objective for the decades before and after WWII, when urban homes and the inner city housing stock were in terrible condition, and the smokestack industries of the past two centuries were hardly anyone’s first choice for a neighbor if they could move to the cleaner, newer suburbs.

Zoning separated suburban homes from everything, except other homes; whatever might detract from an individual home’s value by it’s proximity was banished to remote locations. Cars were cheap then, and incomes were rising. New and used automobiles were inexpensive, credit was cheap, and the total cost of owning a car was relatively low. It was easy to foresee buying at least a used car for each driver in a family, and it was a necessity for many families who lived miles from anything except their neighbor’s homes.

What happened?

Several trends have converged at the same time, some economic, others demographic. Vehicles have become increasingly expensive in initial purchase cost, excise taxes, fuel, insurance, parking and HOV fees, and other costs of urban auto ownership that have made owning multiple automobiles increasingly less desirable. Economics has also led to a declining pool of potential suburban home buyers and hence, automobile buyers, due to lowered expectations in income and lifestyle. A generation just coming of age cannot find jobs that would allow them to purchase homes and cars; they are looking for a lifestyle that will let them live comfortably without an auto.
The suburbs in many areas have often proven to have as many problems as the inner city areas. In turn, inner city zones, after reaching their limit of decline, have been recovering population and a tax base. Efforts to escape from cities on racial and ethnic grounds have been muted by further demographic changes and several generations of a more fully integrated society, along with the influx of newer ethnic populations. Smokestack industries in the cities have been largely replaced, and old structures in urban areas have been recycled with mixed use redevelopment.

These changes in economics and demographics are leading to a change in lifestyles and spending that will not return to previous patterns for the foreseeable future; a wholesale move back to cities seems unlikely, however, and is undesirable. A substantial population move back to cities risks an enormous loss in the value of suburban housing.

For zoning boards, protecting home values in suburban areas should become a primary focus, not by maintaining previous practices, but by permitting the suburbs themselves to evolve with a sensible policy of re-zoning. Suburban communities could actually buy and tear down houses in some areas to create zoned areas that permit walking to schools and retail areas. Zoning policy that encourages mixed use development is critical to making communities desirable from an economic standpoint, and a focus on making communities walkable and liveable without an automobile, is easily the most effective way of creating a sustainable community energy policy.

There are precedents in the Denver area for teardown and reconstruction of communities, most recently in the shopping malls, and many communities could purchase houses at the current market value to tear them down and redevelop the resulting vacant land for mixed-use.

Communities that engage in ‘suburban renewal’ could qualify to receive substantial revenue from carbon cap and trade policies; re-zoning can create permanent reductions in their carbon footprint, and under the current program proposed in congress would qualify for monetization. Permanent energy sustainability is within each community’s grasp in it’s zoning policy.

Create a Single Intermodal Transit Agency for Colorado

Colorado is at a key crossroads with respect to our future transport systems, and we need to carefully evaluate our next steps to insure that we get as close as possible to a successful plan for keeping people and commerce moving efficiently in Colorado in the next century. The issues include the Fastracks budget excess, the new nationwide initiative for high speed rail systems, traffic congestion in most urban areas, volatile prices for gasoline, and seasonal congestion on our primary East-West connection, Interstate 70.

Previous decades have seen the extensive growth of communities all across the Front Range, with additional growth occurring in the central mountain ski areas and on the Western Slope. CDOT, RTD, DIA and all of the other transit agencies large and small throughout Colorado have done their level best to deal with their portion of the transit mix; kudos to all of them. But we have grown each of these agencies and their systems independently, with different funding sources, competing management, and with no effective attempt to integrate transit systems into an effective whole.

There is a word, and a precedent for this type of system, and it is ‘intermodal’.

Intermodal freight has proven to be the most efficient means of moving freight over the decades since WWII, and we now would question any freight system that functioned in the same way that we permit the human transport system to operate. Why does Colorado tolerate competing human transit systems, when intermodal planning, development and construction would prove to be so much more effective?

The answer lies in old-fashioned system of creating multiple authorities for airports, highways and city transit systems. With the creation of each of these agencies has come a bureaucracy that is compelled to compete with other agencies and has no incentive to work with others; their funding, and their management, are all dependent on maintaining as much autonomy as possible. A further incentive for separation is the valid concern that a unified transit authority would distort spending and effort to serve some constituencies at the expense of others.

The solution to future planning for transportation in Colorado is to work with the legislature to create a single inter-modal transit agency chartered by the state, and combine CDOT, RTD, DIA, and all other airport and transit authorities, under a single transit agency. No single agency in Colorado can do this – only a unified transit authority can carry out coordination at this level.

For example, frequent seasonal bus service to the ski areas from all Front Range towns would be by far the most cost effective solution for transit to and from the ski areas. Service can be ramped up for weekends and holidays, tamped down for off-peak periods, and implemented with an extremely low initial capital cost relative to increasing the width of I-70, which won't work to solve the problem, or building high speed rail which not only won't work, but also won't happen.

With the bus solution would need to come automated tolling for personal vehicles (with local vehicle exclusions) and different classes of bus service so that rowdy shredders on their way to Mary Jane are not sharing buses with families headed for their condo for a quiet weekend in Breckenridge.

How about Front Range High Speed Rail? It might work - if they could build the train system to terminate directly under existing airport terminals; then taking the train to the plane would be as simple as an elevator ride to the check in counter. Further, an airport to airport rail system allows air traffic to an airport that is shut down by weather to be re-routed to another airport with minimum traveler inconvenience and delay. Current plans in mass transit at Denver's Union Station, at the light rail terminus at DIA, and in virtually all other mass-transit solutions is to make the traveler change modes frequently and with substantial delays, automatically making the transit system undesirable.

Freight was made intermodal decades ago - because it makes sense.

Shouldn't human transit be at least as efficient as freight?

Sustainability 2.0 - Making Sustainability Sustainable & Bi-partisan

Renewable energy, Cleantech and sustainability have acquired a patina of political bias over several decades of our 20th-21st energy policy development. The current advocates of the Clean, Green economy in Colorado describe a pristine world of the future where we are free of the bad old energy sources in fossil fuels, and renewable energy supports us all. But this advocacy has come with a cost - it has created a political backlash that defeats many efforts toward creating a sustainable energy industry, and makes sustainable energy policy...unsustainable.

The drive for energy independence began in the 1970s under President Jimmy Carter. But beginning with the Reagan administration, the push toward renewables and energy independence was abandoned, then revived under Clinton, lost under Bush, and revived under Obama. Again.

In the ebb and flow of efforts to achieve energy independence, we have been defeated by two essential factors: changes to the political leadership, and periodic troughs in the prices of gas and oil.

A truly sustainable energy policy would be able to hold it's own against these two factors. The requirements for truly sustainable policy are, (A) that it has achieved bi-partisan support, and, (B) that it is economically viable in long term competition with fossil fuels.

Sustainability must mean sustainability during changes political administrations, and during periods of price volatility in the fossil fuel sector. Sustainability means absolutely nothing if every time the governor's office changes parties, the will to construct renewable and sustainable sources of energy evaporates.

The cap and trade program, or carbon taxes, are a step in making renewables more competitive with fossil fuels, but we will be complacent to a fault if we do not -(A) begin looking at the current menu of renewables,(B) start making the harsh evaluations of what seems to be working now, and what remains experimental, and(C) sensibly include fossil fuels in our calculations of future energy sources.

Ethanol? Doesn't it now look like a farm subsidy? Didn't it always? Bio-fuels? Doesn't that look like a subsidy for research programs in the bio-science sector?

I am not arguing that there should not be farm subsidies, or that we should not support basic research in the biosciences. What I am suggesting, however, is that we need to accurately describe the reason for these types of funding and not get distracted or misled by using the label of the cause de jure for programs that have no real effect in the renewable energy sector or which do not lead to sensible and sustainable energy policies.

No technology in the renewable sector should be abandoned, but all of them should be subjected to sensible economic review and assessment of their prospects for true scalability.

Sustainable means these technologies will not evaporate with the end of the current governor's administration in Colorado, and that a hard-nosed economic analysis will be a part of any advocacy of renewable energy and fossil fuel, going forward.

dmissey@denvertechnologytransfer.com

Introduction to Denver Economists

Compared to the financial train-wreck of the 1980’s, Colorado seems to be weathering the recession better than many other states, thanks in part to a more diverse economy.

Is this enough?

Are we being complacent? Economists have a unique perspective regarding critical issues in a changing economy, and Colorado’s economists could be illuminating issues in economic terms, and with access to metric standards, that have become important within the city, the state and the region. What is missing is interaction on both a personal level and a web-based blog level.

Industry participation in economic issues should be encouraged from every sector, including transportation, oil and gas, mining, agriculture, clean tech, renewable energy, social welfare, municipal and state government, banking and finance, healthcare, manufacturing and the retail sector.

All economists should be able to articulate the issues, and describe the potential effects of both maintaining existing policy and/or changing an existing policy – in economic terms.

Topics:

Critical questions remain to be debated. My favored approach would be to have respondents select a dozen or so issues in complete free form, and from those respondents select an agenda for the entire year. Here are a few ideas off of the top of my head:

Consumer Economy - What is the viability of a consumption based economy, and what is the optimal savings rate?

Health Care – A third rail issue – we should touch it.

The Space Program – Go to Mars, revisit the moon, or capture an asteroid?

Energy Policy – What is the role of renewables and how do they fit into the existing energy structure?

Public – Private Partnerships – What is the optimal means of creating effective public-private partnership?

Public Sector Failure – When a failure occurs in the Public sector, what are the best curative actions?

Sustainability – What is sustainability?

Fossil Fuel Recovery and Consumption – too many issues to count.

Renewable Energy – See Fossil Fuels above.

Capital Markets – Does New York’s predominance in the financial sector encourage gaming the system?

Service economy or manufacturing economy – Which has the greater potential for productivity gains?

Innovation – What are the most proven sources of innovation?

The Classic Balloon Debate – A holiday favorite. Nominate three people, living or dead, put them in the balloon, debate and vote on who gets thrown out to save the other two.

Some selected issues are not meant to directly address a public policy, but instead to help inspire a new perspective. Others, especially in energy and health care, are part of a critical, immediate societal debate and need a thorough airing from economists, at least for our own consumption.

Speakers:

Must be members of the DABE.

Audience

Open to all.

Format

Debates should be three way, not bi-polar, with fixed rules regarding opening statements, rebuttals and restatements.

Debates last one hour, with one hour of comentary.

Rules

No direct political references to current, or recent, executives or legislators.

No foul language.

Forum:

We need a serious forum in Denver that will permit an effective debate with audieance participation. Meetings should be once a month, in the evening, and timed to permit everyone to have dinner before or after.

Sponsors:

We need sponsors.

Access to Other DABE members: This email has been sent ‘blind’, out of respect to the privacy of members of the DABE. Should we have open access to each other?

Let me know if you are interested, and what you think might be more desirable in forum or focus.