Playing The Energy Game

Working for Westinghouse is like going to Yale. When you're number two, you have to try harder. Ten years ago one of industrial America's 20 largest corporations, Westinghouse currently places behind heavyweight General Electric in both electrical sales and corporate confidence. Poor management decision-making, lethargic research and development, and a sharp decline in electricity demand over the past decade have saddled the corporation with low profit rates and have forced significant personnel cutbacks. The corporation's heavy investment in nuclear power--it is the foremost nuclear energy generation firm in the world--seems an exceedingly dangerous bet. Rising plant construction costs, along with the March 1979 Three Mile Island debacle, have made dinosaurs of light water reactors. While to many Americans the slogan "No Nukes" signifies the direction to a cleaner and safer life, it is anathema to Westinghouse employees. They must daily defend themselves against environmentalists' charges and justify their livelihood to the increasingly skeptical American public.

Inhabiting the fourteenth floor of Westinghouse headquarters by Pittsburgh's Momanghela River, Market Research and Analysis (MR&A) serves the corporation's Power Systems Company, the branch that manufactures nuclear energy systems and other large scale equipment. MR&A's responsibilities run the gamut from publishing the corporation's major planning document to dealing with all brands of public relations.

Public Relations

At Westinghouse, public relations boils down to essentially one thing: defending the nuclear energy commitment. The group worked with national media and various interest groups to put up a united front against the influential anti-nuclear movement. It publicized pro-nuclear statements from the NAACP and a multitude of labor unions to demonstrate nuclear energy's linkage with employment and working-class aspirations. MR&A's long range energy forecasts emphasized the need for more nuclear-generated electricity to meet energy needs.

An example of MR&A's media relations efforts was "The Energy Game," a motley-colored heuristic board game designed to spell out alternative energy scenarios for the United States. "The Energy Game" postulates a total energy demand figure for the year 2000, projecting current energy consumption trends and the effect of conservation. Each player then deploys existing energy resources and technologies to fulfill this requirement. A red light pops up and alarms sound if he exceeds environmental constraints on coal use or solar research and development limits. The game similarly constrains the extent of possible nuclear energy use, reflecting Westinghouse's sober realization that public apprehension can only stifle its market's growth.

"The Energy Game" debuted on a Pittsburg television talk show last summer. After Al Schmidt, an MR&A nuclear engineer-turned-energy analyst, demonstrated the game's elementary mechanics, the talk show hosts began to deploy energy resources as their common sense or ideological beliefs dictated. The female host unabashedly declared her intent to avoid nukes, playing right into Schmidt's hands. When she reached maximum solar and coal capacity, she had no choice but to play the purple petroleum cards on the board. Schmidt grimly pronounced, "Contratulations, you have just tripled the country's dependence on foreign oil." As he relished the indictment, the other hosts hurriedly switched to remove the petroleum onus.

Microcosm

Although "The Energy Game"'s beguiling simplicity belies a sophisticated research effort, it represents a microcosm of MR&A's forecasting efforts and Westinghouse's public relations front. The corporation lives and dies by kilowatt-hour sales, and shrinking demand announces the twilight of the moribund nuclear industry. Placed on the offensive, the firm's nuclear divisions must convince utilities, the government, and the public, that future energy wants require the construction of more reactors. For MR&A employees, justifying nuclear power is an article of faith; almost every task the group undertakes relates to this objective.

"The Energy Game"'s solar development limits, coal constraints and long term projections for total energy demand represent MR&A's attempt to model the future of America's energy sector. A 26-year-old computer whiz developed an "end use" model to predict total electricity consumption through the year 2000. Roughly speaking, it counts the nation's light bulbs, toasters and all other electricity use, including industrial machinery, to forecast aggregate electricity figures for different geographic regions. This forecasting technique--"an engineering model"--differs significantly from economic models, because it entirely ignores the role prices play in determining the nation's energy mix. The Westinghouse electricity model projects both demographic trends and economic indicators, such as total population, housing stock and employment to predict total electricity use. The model must adjust these input assumptions from the energy forecasts of Data Resources, Inc., Otto Eckstein's Lexington, Mass., econometrics firm. However sophisticated the model or precise its electricity computations, the forecasts will prove no more accurate than the input assumptions someone feeds it. MR&A's forecast last year projected about 104 quadrillion British Thermal Units (BTUs) total energy demand by the end of the century--considerably more than the projected figures of the U.S. Department of Energy. The divergence represents differing perceptions of conservation's impact on future energy use and the U.S. economy's sustained growth rate. The varied assumptions of different forecasting groups speak for a general philosophy in the field that says, "Your guess is as good as mine."

Late last summer, when MR&A met with representatives from Exxon's counterpart group, all the forecasters swapped stories about the energy future. Not surprisingly, the Exxon team perceived abundant demand and supply of petroleum generated through its synthetic fuels program, and less future need for electricity. Exxon's crude oil price forecasts for 1990, already made obsolete by the December 1979 price increases, strained the group's credibility. But the representatives brushed off charges of overly optimistic oil consumption forecasts and continued showing their charts and graphs. No hard feelings, of course: lunch time controversy focused on the dubious end zone call in last year's Steeler-Oiler playoff game.

Future Shock

Perhaps the greatest obstacle to accurate long range forecasting comes from the increasing possibility of future shocks which cannot be surmised from historical trends. Many petroleum analysts in the mid-'70s predicted world crude oil prices would hit a ceiling at $10 per barrel. Obviously, they did not foresee OPEC's tenacity or the Iranian revolution and subsequent supply disruption. The possibility of another significant oil supply shock within the next five years festered in the imagination of MR&A forecasters. The downfall of the present Saudi Arabian government looms on the horizon: "If CIA reports claiming the Soviet Union will run out of domestic oil supplies by 1983 prove accurate, it's not hard to guess where it will find the oil it needs," a Westinghouse executive prognosticated.

When MR&A checked with Department of Energy officials in Washington, it found that no one ever mentioned such a doomsday scenario. Apparently, the Energy Department had not made contingency plans for a total oil cutoff. MR&A would find it difficult to model a catastrophe.

Perhaps the greatest challenge to the economic justifications of the nuclear orthodoxy stems from the possibility of energy conservation. Nationwide debate rages over the feasibility of conservation in the American economy. A much-cited Harvard Business School study suggests the United States can eventually trim energy consumption by as much as 40 per cent. Amory Lovins, a champion of the solar energy movement, emphasizes that cost savings from increasing technological efficiency will vastly outweigh those from such short term measures as turning out lights and insulating homes. But MR&A energy analysts, along with many others, are frankly skeptical of "conservation"--the new catch of the anti-industrial left. One of MR&A's summer projects used an economic model developed at Stanford to determine the consequences of economy-wide energy conservation. By varying an input assumption which gauges the ease of substitution between industrial energy requirements and more efficient capital stock additions, an analyst can indicate the linkages between current production processes and their energy use. A tightly linked structure means energy cutbacks would cause heavy production and employment losses, whereas a more flexible technological framework decreases with little economic effect, because capital labor would be used instead.

The model's complex logic is exhilarating, but a Catch-22 struck hard. The ease of substitution parameter does not represent a behavioral assumption to guide projections; it is not a figure graven in stone, but an empirical result determined from historical data. Projecting the ease of substitution trend into the future is guesswork--nothing more, nothing less. Depending on the figure chosen, the model could predict either economic disaster or conservation harmlessly reducing national energy needs.

Uncertainty

And so goes "The Energy Game". Corporations like Westinghouse and Exxon which serve the nation's energy needs must convince people their products are indispensible. Their forecasts might prove correct--many people see a boon to the nuclear energy market after 1982. But, for now, (the only certain thing anyone can say about the energy future is that it's uncertain.

The author worked last summer as an intern in the Westinghouse Power Systems Company's Market Research and Analysis group.