Clever Geek Handbook
11 February 2026

The New Gold Standard

Recommendation

Even if you’ve never stayed at a luxurious Ritz-Carlton hotel, you are likely to know of the hospitality chain’s sterling reputation. Few companies enjoy such powerful brand recognition; after all, the word “ritzy” has become part of the English vocabulary. Incredibly, no one ever wrote a corporate biography about The Ritz-Carlton, and its secrets of success and service, until Joseph A. Michelli took on this project. He details the five principles Ritz-Carlton employees follow to create a memorable, or “wow,” customer experience. He shows how the company’s leaders teach the “Ladies and Gentlemen” on its staff to live its mission and precepts. Michelli uses quotes and examples to illustrate every point (and is still supporting his position long after the reader’s neck is sore from nodding in agreement). Yes, it really is all that. BooksInShort believes this book offers any businessperson a valuable case study in excellence and service.

Take-Aways

  • The Ritz-Carlton’s founders set high standards.
  • Its employees live these “Gold Standards” through the “Credo,” the “Motto” and the “Three Steps of Service.”
  • The credo outlines the company’s guest-focused mission statement.
  • The motto, intended to engender respect among employees and guests, is, “Ladies and Gentlemen serving Ladies and Gentlemen.”
  • The three service fundamentals are extending a personal greeting to each guest, anticipating guests’ needs and desires, and saying a pleasant farewell by name.
  • Every interaction should give customers a “wow experience.” Staffers share “wow” stories, information and corporate messages at the daily “lineup.”
  • The Ritz-Carlton uses a thorough employee selection procedure to find talented people who take pride in giving service.
  • Every new person hired, regardless of job level, participates in a two-day orientation.
  • The company continually tries to improve its “customer-reaching” processes.
  • The Ritz-Carlton operates two training facilities: the Global Learning Center and the Leadership Center.

Summary

How The Ritz-Carlton Began

Who could have imagined that a poor Swiss herdsman’s son would start a hotel chain that would make his name synonymous with elegance, luxury and extraordinary service? Young César Ritz began by working at premier hotels in France, England and Switzerland, learning the business at every level. After managing London’s Savoy Hotel, he opened The Ritz Paris in 1898. By then, he owned a controlling interest in The Carlton in London and in several posh restaurants.

“Facing struggles, stumbles and transitions, Ritz-Carlton’s leadership has been steadfast in its commitment to service and quality.”

After Ritz died in 1918, his wife Marie allowed developer Albert Keller to franchise the Ritz-Carlton name. In 1927, Keller opened a Ritz-Carlton hotel in Boston, followed by hotels in New York City, Boca Raton, Atlantic City, Pittsburgh and Philadelphia. The bleak economy after the crash of 1929 forced Keller to close all but the Boston hotel. After World War II, the chain began to grow again. Today, Marriott International owns The Ritz-Carlton Hotel Company, which has 69 properties around the world. The profitable hotel chain plans to expand into China, Egypt, Russia, South Korea and other nations, with the goal of having 100 hotels by 2011.

“When it comes to the Gold Standards, Ritz-Carlton leaders and frontline staff alike can appear, from an outsider’s perspective, to be teetering toward the fanatical.”

The five principles at the base of The Ritz-Carlton’s well-defined corporate culture have produced an extraordinary level of staff loyalty, unparalleled service, significant customer engagement and brand recognition so entrenched in Western society that words and phrases such as “ritzy” and “putting on the ritz” are part of the English lexicon. The company’s five guiding precepts are:

Principle One: “Define and Refine”

The Ritz-Carlton’s founders created a set of principles they called the “Gold Standards.” Many credit the hotel chain’s long-standing success to its commitment to keeping these standards alive with a creed, a slogan and a service plan that penetrate every aspect of its business:

  1. “The Credo” – Every staffer carries a “Credo Card” that reads, “The Ritz-Carlton is a place where the genuine care and comfort of our guests is our highest mission. We pledge to provide the finest personal service and facilities for our guests, who will always enjoy a warm, relaxed, yet refined ambience. The Ritz-Carlton experience enlivens the senses, instills well-being, and fulfills even the unexpressed wishes and needs of our guests.”
  2. “The Motto” – The firm’s slogan is, “Ladies and Gentlemen serving Ladies and Gentlemen.” The old-fashion language conveys the idea that excellent service is timeless, and that staff members and guests should treat each other respectfully.
  3. “The Three Steps of Service” – The first-rate service at the heart of The Ritz-Carlton’s culture rests on giving each guest a sincere greeting by name, predicting and meeting every need the guest has, and bidding the guest a “warm goodbye,” also by name.
“No matter what the nature of the business, a company’s leadership is always tasked with making their vision come alive at the front line.”

The Ritz-Carlton repeatedly weaves its “12 service values” into its employees’ everyday experiences. This results-oriented list replaces its former 20 standards of service, which focused more on behavior than on outcomes. Employees follow these service basics:

  1. Foster close relationships with guests so they always stay at Ritz-Carlton hotels.
  2. Fulfill hotel guests’ wishes, both spoken and implied.
  3. Use the power the company provides to create memorable guest experiences.
  4. Become part of the company’s charitable activities, its hospitality and its “mystique.”
  5. Look for ways to make the hotel and its service even better.
  6. Assume immediate personal accountability for fixing guests’ problems.
  7. Work with colleagues as team members to meet each other’s needs and serve guests.
  8. Capitalize on any chance to learn more and develop professionally.
  9. Become involved in planning their job’s scope and responsibilities.
  10. Take pride in how they look, act and speak.
  11. Protect guests’ and other employees’ private information; be aware of their security.
  12. Maintain facilities that are safe, accident-free and sparkling clean.
“Leadership lives in the actions, not the words, of those entrusted to move an organization forward.”

Managers reinforce these values at daily interactive meetings called “lineups.” Employees participate in lineups at the beginning of every shift in every department at every level. At the lineup, staffers discuss these values, and share stories and information.

To remain relevant and up-to-date, the company conducts ongoing research about what consumers want from a high-end hotel. Recent results showed that luxury hotel customers are either “classic status-seekers,” who want the traditional elegance they associate with the Ritz-Carlton brand, or “discerning affluents,” who analyze luxury purchases beyond brand associations. They won’t buy a Mercedes just because of its name. They want to leave an impression, blaze their own trails, lead interesting lives and enjoy exclusive experiences. Ritz-Carlton must win over both types of luxury consumers without compromising its principles.

Principle Two: “Empower through Trust”

Because The Ritz-Carlton depends on its employees, or ladies and gentlemen, to provide exceptional service, it uses an extensive staff-recruitment procedure. Hiring managers seek talented people who feel proud to work in a service industry. Candidates go through several interviews and layers of evaluation in a process the company calls “selection” rather than “hiring.” Employee turnover is around 20%; the industry average is 60%.

“Leaders who focus detailed attention on the wants and needs of their staff ultimately see that same detailed, personalized attention being passed on to customers.”

Every new person hired into any job goes through a two-day orientation about the corporate culture. Managers spend three more days learning Ritz-Carlton’s leadership expectations. After orientation, coaches train new staff members in the central aspects of their jobs. The goal is to certify new employees in their positions’ basic competencies by “Day 21.” That day, new hires have the opportunity to discuss openly the positive and negative aspects of their first three weeks. The company marks every employee’s one-year anniversary with a “Day 365” celebration.

“In essence, much of what happens at Ritz-Carlton is an extension of the way people would treat family members and other loved ones.”

The Ritz-Carlton believes in selecting the right people, and providing the mentoring, training and tools they need to create optimal experiences for guests. To that end, the company trusts employees to use their judgment in spending up to $2000 per guest per day to improve the guest’s visit or to solve any of the guest’s problems.

Making Money and Mystique

Company president Simon Cooper explains, “We make absolutely no bones about our need to be financially sound. We don’t want anybody at Ritz-Carlton to think that ‘profit’ is a bad word.” The company fosters internal transparency regarding the financial aspects of its business. Staffers can view pyramid graphs of its progress on five different success scales. The Ritz-Carlton revises and updates these five factors annually. In 2008, they were:

  1. “The Ritz-Carlton mystique” – Give guests something special to remember. Make the ambience as compelling as possible.
  2. “Employee engagement” – Encourage employees to take initiative and be creative as part of an effort to hire and keep good people, and help them advance.
  3. “Guest engagement” – Create personal ties to each guest.
  4. “Product and service excellence” – Follow the Gold Standards. Set service and location benchmarks and exceed them.
  5. “Financial performance” – Increase earnings and profits.

Principle Three: “...It’s Always about the Customer and the Employees.”

Ritz-Carlton’s executives use a variety of methods to take the pulse of the company’s customers, employees, managers, vendors and stakeholders in a continuing effort to evolve and improve its “customer-reaching” processes. The company won the prestigious Baldrige Award in 1992 and in 1999, the only service industry business to win twice. This achievement is due, in part, to its ongoing quest for improvement and, in part, to its executives’ willingness to invite outside observers to evaluate its systems. Corporate leaders study other businesses for best practices that Ritz-Carlton might borrow. For instance, in 2007 a senior manager observed how Cisco and Corning nurture innovation, and then helped develop the “Ritz-Carlton Four-Step Innovation Process.” The steps are: “Inspire vision, foster environment, stimulate ideas” and “test ideas.”

“People are genuinely wowed when others make a concerted effort to take care of their needs.”

To measure employee engagement, Ritz-Carlton managers collaborated with the Gallup Organization to develop the “Gallup Q12 tool.” The employees rated a series of statements like, “I know what is expected of me at work” and “At work, my opinions seem to count.” The two companies also created a “Customer Engagement Metric” that included such statements as, “Ritz-Carlton is a name I can always trust” and “I feel proud to be a Ritz-Carlton customer.” The survey results allowed the company to build on its successes, and identify gaps and weaknesses.

Principle Four: “Deliver Wow!”

Providing a “wow” experience is each employee’s goal during every interaction with a guest, from making a reservation to saying goodbye. Managers want each guest to “feel a rush,” that is, an emotional connection so strong that staying in the hotel becomes a memorable experience. For example, a traveler who stayed at The Ritz-Carlton in San Francisco for a month while working in the area described his experience this way, “When I entered my room, I found they had stocked everything I would ever need. Since I was staying for a month, they did research and found out my favorite snacks, magazines, movies and music. Everything was there for me. I had a bowl of fruit (a favorite snack of mine) and a box of chocolates with my name spelled out on the pieces. They even created business cards for me using the Ritz-Carlton address, which I needed to pass out during my extended stay.”

“Something as simple as a bottle of water can provide a long-lasting memory...if it’s handed to a thirsty person who isn’t expecting it.”

Sometimes a problem or a mistake can give staff members the best opportunity to make a great impression. With the advent of instant worldwide communication – and Web-spread criticism – immediate problem solving is an essential. Employees learn to take a comprehensive approach to fixing guests’ problems. First, they demonstrate genuine, appropriate concern. Then, they apologize, accept responsibility and promise to address the problem immediately. Employees work together to rectify the situation and keep it from recurring. Their last step is to compensate the guests for their aggravation, loss or frustration in the most suitable way possible.

“No company can be all things to all people, but it is possible for your organization to be all things to your customers.”

Ritz-Carlton’s leaders describe and reinforce its crucial principles by sharing “wow” stories. The manager of internal communication collects these stories each week and publishes them in the internal newsletter, Commitment to Quality. Managers share the stories at the Monday and Friday lineups. Employees whose stories make it into the publication receive a $100 bonus. Here’s one wow story: At Dubai’s Ritz-Carlton, assistant manager Saad Khatib struck up a conversation with a guest. He found out that the guest and his wife could not access the beach to enjoy the sunset because the wife’s wheelchair could not make the sandy descent. The next day, Khatib and the hotel’s carpenter supervisor arranged boards to form a path to the sea. At twilight, the couple dined on “an Arabic carpet on the sand” as they watched the sun go down.

Principle Five: “Leave a Lasting Footprint”

Ritz-Carlton’s corporate umbrella includes two training facilities. Its Global Learning Center provides employees with additional training so they can advance, and its Leadership Center offers executive training to people from other businesses worldwide.

“In the end, all business is personal.”

Social responsibility has been a part of the Ritz-Carlton chain since its inception, as reflected in its mission statement. In 2002, the company launched its “Community Footprints” program to focus on “hunger and poverty relief, the well-being of disadvantaged children and environmental conservation.” The Ritz-Carlton contributes monetarily as well as through conservation and volunteering efforts. In 2007, it donated more than $7 million in funds, products and services, and its employees put in more than 40,000 volunteer hours. As former Ritz-Carlton president Horst Schulze explained, “If you focus narrowly on the bottom line, you leave a legacy only for investors.”

About the Author

Joseph A. Michelli, Ph.D., wrote the bestseller, The Starbucks Experience. He is an international business consultant, radio host and lecturer who appears on CNBC’s On the Money.

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The New Gold Standard

Book The New Gold Standard

5 Leadership Principles for Creating a Legendary Customer Experience Courtesy of the Ritz-Carlton Hotel Company

McGraw-Hill,
 


11 February 2026

When Markets Collide

Recommendation

Mohamed El-Erian is a major name in global money management, and his insights once guided the Pacific Investment Management Company (PIMCO) – one of the world’s largest investment managers – into profitable territory. Given his background at the International Monetary Fund and at Harvard Management Company, you won’t be surprised that his global perspective and practical applications of behavioral psychology are well informed, interesting and helpful – to the right audience. His advice applies mainly to institutional investors seeking a new global vision that will identify the forces affecting today’s markets. El-Erian’s stories about high-level macroeconomic policies will appeal to those big investors and economic decision makers, as well as to individual investors who are searching for new ideas. Though some parts of this analysis have become slightly dated, the overall message remains smart and valid. While never offering investment advice, BooksInShort recommends El-Erian’s valuable text to policy makers and investment professionals.

Take-Aways

  • Major changes in markets initially take the form of “noise” – that is, odd occurrences that shake traditional relationships or ways of doing business.
  • Traders can recognize noise if they’re street smart and understand financial analytics and economics.
  • The growth of emerging markets and novel financial instruments signaled shifts in global market conditions.
  • The US markets’ meltdown, starting in July 2007, surprised regulators and participants.
  • The 2007 credit crisis set the stage for global financial change.
  • To succeed today, investors must monitor events in developing markets.
  • In the future, emerging economies will have to manage larger capital inflows.
  • Investors should make asset allocation decisions using a three-year time frame, but should review their choices annually.
  • Given global economic changes, enhanced risk management will become critical.
  • If policy makers and investors act together, they can deliver improved performance, greater global growth and a more stable investment environment.

Summary

Dealing with Transformations

Investors today have to cope with a constantly changing environment. Economic transformations are unpredictable and difficult to identify because they develop quickly, but investors can suffer financial losses if they fail to recognize when shifts are coming and what they portend.

“The financial market turmoil that started in the summer of 2007 reflects the secular transformation of the global economy.”

Fundamental alterations in the global economy precipitated the 2007 US mortgage market collapse. This far-reaching event involved a complex convergence of novel financial instruments, types of investors and investment entities, as well as shifting demographics. These conditions still prevail, and their myriad repercussions remain hard to spot. However, investors who understand these shifts can hedge against the risks of rapid change and can earn profits.

“It is important to realize that the forces behind the recent financial crises have not gone away.”

Market participants may first detect “noise” – that is, unusual irregularities that shake traditional, long-term connections or ways of doing business. Observers often make the common error of perceiving noise as temporary and, therefore, they mistakenly ignore it, even though noise can indicate impending, fundamental change.

“What started as a problem peculiar to the subprime segment of the US mortgage market has morphed into a series of collapses whose impacts are being felt on both Wall Street and Main Street.”

Traders with instinctive street smarts, a formal grounding in economics and a good understanding of finance analytics are better equipped to recognize when noise is more serious and to determine if it is leading to a major shift.

Starting in 2004, noise went from signaling successive linear discrepancies to indicating simultaneous alterations in worldwide market conditions. Three factors underlined the swings in global marketplace noise:

  1. “Fundamental realignment of global economic power and influence” – Emerging markets grew to displace some Western economies in size and clout.
  2. “Pronounced accumulation of financial wealth” – Former debtor nations became creditors, as developing countries established sovereign wealth funds (SWFs) that could make significant investments globally.
  3. “Proliferation of new financial instruments” – Innovations such as derivatives can hedge risk, but they can also be “weapons of financial mass destruction.”
“By challenging conventional wisdom and historic entitlements, transformations feed a dynamic that is inevitably uneven and, at times, unpredictable.”

Combined, these new forces have altered the global investing landscape in such areas as price creation, economic growth and capital flows. In addition, the markets’ growing interdependence has diminished the benefits of diversification. Investors who understand these realities will perceive potential gains and pitfalls more accurately.

“Ongoing transformations alter in previously unthinkable ways the configurations of risk and return.”

Other indicators of shifting markets include problems with valuations and pricing, as well as the emergence of structured investment vehicles (SIVs) and other mechanisms that aren’t part of most corporate balance sheets. When these products failed in the run-up to the financial crisis, they crippled the American banking system, as well as money market funds and the commercial paper market, and pushed entire countries into crisis.

Entering New Territory

Events that once seemed like aberrations in the financial markets have become commonplace. As early as 2005, economic experts such as Alan Greenspan and Larry Summers said they couldn’t explain how the yield curve was behaving or why global payment imbalances had developed, with capital flowing from poor countries to rich ones. An increase in the number of risky, leveraged products and of investors willing to buy them accompanied these shifts.

“The present turmoil is neither the beginning nor the end of the transformation phase.”

One major variation was developing nations’ growing surpluses. These countries became stronger and they soon turned into US creditors. This historic switch affected foreign exchange rates, company valuations and bond prices. Today, developing nations are providing a stabilizing force in the global economy, as well as new sources of capital. In the financial crisis, the SWFs of developing markets, such as Abu Dhabi, Singapore and China, helped recapitalize huge banks such as Citigroup, UBS and Morgan Stanley.

“What began as noise for many investors and policy makers became a signal of a major redefining of the global financial system.”

While these changes were occurring, the US stock and bond markets began behaving unusually. In 2005, the US federal funds rate climbed 150 basis points. In normal times, this would have produced an increase in long-term rates, but instead long-term rates fell as short-term rates rose, which generated an inverted yield curve. In this scenario, bond investors with a longer time horizon were penalized, not rewarded, for buying longer-dated bonds. This inversion happened at the same time the US stock market was rising, typically a signal of strong economic growth.

Missing the Boat

Many investors and experts turned to the International Monetary Fund (IMF) as the logical institution to act as a main adjudicator. But for a variety of reasons, the IMF has failed to fulfill this role. The IMF may have lacked the expertise to foresee the impact of new products on banks and their balance sheets.

“Indeed, in many ways the subprime debacle (and relate turmoil) constituted the first (but not the last) modern episode of a global securitization crisis.”

In 2007, HSBC took back onto its balance sheet about $45 billion in holdings from two SIVs. This had the effect of cutting its regulatory capital ratio. Soon, Citigroup followed suit, prompting the credit rating agencies to downgrade the banks. Citigroup suffered due to its degraded credit rating, and it had to seek outside capital. By January 2008, an early report found that Merrill Lynch, UBS and Morgan Stanley had joined HSBC, Citigroup and many other financial institutions in tallying up $108 billion in portfolio and securities write-downs.

“Markets collide as new actors, instruments, products and institutions assume greater systemic importance and do so in a manner that is different from that exercised by the previous sets.”

The beginning of the meltdown in US capital markets in July 2007 was a huge surprise to regulators and the markets. Most large investors expected any significant problems to begin in an emerging market nation, not in the United States. But as the crisis unfolded, developing markets fared better than America did, since some purchased debt from developed nations at bargain prices. The 2007 credit crisis set the stage for global financial change.

“In many instances the correct and wise reading of history suggests that it is best to dismiss the notion that ‘things will be different this time around’.”

However, in the course of day-to-day life, most people don’t recognize fundamental shifts, so they remain confused by irrelevant data and distractions in the marketplace. A variety of factors shape investor behavior, including asymmetrical information, information failures, emotional and rational biases, failure to interpret complex signals, and greed. Some investors repeatedly make the same mistakes for reasons rooted in behavioral finance and neuroscience.

Looking Ahead

To succeed in the future, investors must predict events in developing markets as well as developed ones. They also must gauge the impact of new capital flows and new products on market fundamentals, since emerging markets have become major contributors to global economic growth.

“Just a few years ago, developing countries were viewed as the predominant sources of economic disruptions, and for good reasons.”

Investors must analyze whether such markets as China, Russia, Brazil, India, South Africa and Mexico can sustain their positive momentum. As emerging nations continue to see surpluses in their internal reserves and current accounts, they could launch policies to stimulate their internal consumer demand, and that could affect trade patterns.

“Think of the asset allocation question in the following way: How would you best allocate your capital among different asset classes if you knew you were going to be forced to go away for three years and would thus be unable to change the allocations?”

When a country moves from being a debtor to being a creditor, it travels through four phases: First, it doesn’t initially realize the impact of its growing capital reserves, assuming the surplus is temporary. Second, when it does recognize its external account growth, it often issues domestic debt, invests in US Treasuries or outsources the management of its reserves to the Bank for International Settlements, the central bank for central banks. Third, the country starts to buy back its foreign debt and manage its liabilities. At this point, it may form a SWF. Fourth, the nation improves its infrastructure, makes the transition to a consumer-led economy and updates its currency policies.

“Investors tend to underestimate extreme events.”

Managing larger capital inflows, which affect currency values and inflation levels, will be a big challenge for developing economies. However, they can fashion appropriate fiscal, monetary and exchange rate policies to direct the situation effectively. Increases in national wealth will also fuel the growth of SWFs, which some observers have vilified for their supposed intrusions into political, military and commercial ventures. The SWFs’ full disclosures of their governance and other operational structures should reduce these concerns.

Amid these changes, investors could face problems related to mistakes in policy implementation and market breaks. The US Federal Reserve has to cope with rate fluctuations that affect liquidity and with the emergence of inflationary and deflationary forces. The impact of these monetary events depends on a number of domestic and international variables, including shifts in labor and wages in emerging market countries.

Benefiting from Change

To benefit from these global investment fluctuations, investors must focus on proper asset allocation and the right financial vehicles. Investors should make asset allocation decisions using a three-year time frame, but should review their choices annually. Those who seek balanced growth may want a globally diversified – as opposed to US-only – equity portfolio. This equity allocation should be from 30% to 54%, with a maximum exposure to US equities of one-third to one-half of that allocation. For an average long-term investor, the bond allocation should be in the range of 10% to 18%.

In this environment, portfolios should include real assets – such as commodities and real estate – that protect against inflation. Alternative investments, such as hedge funds and private equity funds, have a role but require careful manager selection and often have long holding periods.

A Plan for Policy Makers

These ongoing global economic transformations will demand multilateral policy modifications among all participants. Investors must understand these changes since they will affect the quality of investment information and the accuracy of economic indicators.

To remain the top destination for global inflows, the United States will have to address its current account deficit and exchange rate differentials. To remain attractive to investors, America must cut household debt, and its lenders should enact stricter loan requirements. Looking ahead, the US should improve its debt liability management by maintaining a predictable issuance schedule, promoting liquidity for individual issues and issuing debt along the entire yield curve. Taken together, these steps will enhance credit risk management and pricing, while making markets more liquid.

Managing Risk

Given these global economic variations, enhanced risk management practices are critical. Most individual investors leave risk management to the professionals. Money managers have many more risk strategies at their disposal, including the use of various hedges and so-called “tail insurance,” which attempts to provide “Armageddon protection” against the most extreme market outcomes.

Better risk management also means more diversified portfolios that include various geographies and asset classes. Volatility will increase as investors redirect capital from the US economy to emerging market nations. Global disinflation, as a result of more workers entering a cost-effective global labor force, will accompany this transition.

This worldwide transformation also will help rectify income inequality and poverty, as many more emerging economies develop and use their excess savings to promote growth. To be effective, this shift will require the cooperation of both the private and public sectors in the form of new policies and regulations. If policy makers and investors act together, they can deliver improved performance, greater global growth as well as a more stable investment environment.

About the Author

Mohamed El-Erian, former CEO and co-CIO of PIMCO, is chief economic adviser at Allianz.

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When Markets Collide

Book When Markets Collide

Investment Strategies for the Age of Global Economic Change

McGraw-Hill,
 


11 February 2026

Perfect Power

Recommendation

Just when you thought you already had plenty to worry about, experts Robert Garvin and Kurt Yaeger, and writer Jay Stuller report that the U.S.’s electricity supply system is woefully outdated and in danger of widespread outages. Then, BooksInShort is glad to report, their readable book also presents an apparently reasonable remedy: “microgrids.” These smart, localized electrical networks conserve and store energy, and can redirect it to the parts of the electrical system that need it most. This bright proposal addresses a serious, but under reported problem. The authors, though perhaps more involved than most objective reporters, discuss electricity’s scientific, social, economic and environmental impact. They make their solution more applicable and appealing by identifying companies that are developing microgrid technology. Unlike so many daunting problems, this one seems surmountable, if the U.S. – state by state – can muster the requisite funding and overcome the gooey regulatory status quo.

Take-Aways

  • “Microgrids” are localized electrical networks that rely on “distributed generation” to store, supply and redirect electricity to homes, business and communities.
  • Microgrids use “computerized controllers” that detect surges and store energy in real time.
  • Distributing electricity on a decentralized basis is the key to increased productivity and efficiency.
  • Daily, some 500,000 Americans suffer electrical blackouts that last two hours or longer.
  • Power outages cost American business more than $100 billion annually.
  • The average U.S. household wastes 7% of its home electricity by not turning off appliances and household devices, such as computers.
  • Upgrading power grids worldwide will cost about $6 trillion over the next 25 years.
  • Microgrids intelligently interface with existing utility bulk systems to share or sell power as the need arises.
  • Quality power eliminates the need for surge protectors, transformers and converters.
  • Houses, and commercial and industrial buildings use more than two-thirds of U.S. electricity. More energy-efficient building practices could save much of this power.

Summary

Six Sigma Electricity

The world’s electrical generating system should have a source of constant electricity that meets the stringent demands of Six Sigma service. That would require constant, uninterrupted electrical power that works 99.99% of the time, despite lightning strikes, terrorist attacks, hurricanes and ice storms. This high standard matters because electricity is constantly essential. Worldwide, lack of electricity contributes to poverty. The availability of electricity is directly linked to economic output. It is the constant energy source behind new technologies that are changing the world.

“The technology to achieve electricity service perfection exists.”

Despite undisputed demand, the United States’ electrical system is suffering from outdated equipment, including analog switches, relays and the distribution grid itself. Each day, some 500,000 Americans endure an electrical blackout lasting two hours or more. This loss of power costs U.S. businesses $100 billion annually. However, both state regulators and the monopolistic electrical industry have stymied attempts to make the system more efficient. Electric companies’ revenues depend on how much power they sell, not on its quality, efficiency or reliability. This denigrates the importance of customer satisfaction and may explain why the industry has not become significantly more efficient or reliable since the 1960s.

“Woven together and managed by computerized controllers that – unlike human operators – operate at the speed of light, this emerging web of smart microgrids is like a medieval knight’s chain mail.”

Today, technology offers a better alternative – “microgrids.” These systems enable electric companies to customize their power sources to meet each customer’s demand. Microgrids rely on “distributed generation” to store, supply and redirect electricity as needed to homes, businesses and communities. These smart systems use “computerized controllers” to detect service surges and store energy in real time. Microgrids are cheaper to install than costly, large centralized power facilities with hard-wired distribution tower systems.

The U.S. “electricity infrastructure cannot continue to survive on the life-support level of investment it has endured for the past 30 years.”

Distributing electricity on a decentralized basis, rather than using large centralized plants and long-distance transmission grids, is the path to increased productivity, environmental protection and efficiency. The vision of decentralized distribution is not new. Thomas Edison originally proposed a decentralized model using direct current (DC) in about 1879. However, at the time, technology favored centralized, alternating current (AC), even though Edison went so far as to electrocute an elephant to show that AC was dangerous. “Topsy” died in seconds, but to no avail. In the late 1800s, AC generating stations were more profitable for investors, more cost effective for consumers and more achievable. Today, technology is no longer a limitation; modern investors and consumers would be better served by a decentralized, microgrid-based system.

Today’s U.S. Power Grid

During the “Great Heat Wave” of 2006, large portions of New York needed so much electricity that heavily-used circuits failed. Elsewhere that summer, outages in California and the Midwest affected medical facilities, airports, Internet companies and thousands of other businesses. Afterward, however, an association of electrical grid operators issued a misleading press release saying that they had handled the record demand “without incident.” Perhaps these utility operators could have claimed a partial victory in the 2006 outage if they had compared it to the “Great Northeast Blackout” of August 2003, which plunged 50 million people in four states and two Canadian provinces into darkness. That outage drained $10 billion from the U.S. economy.

“In terms of service quality and choices, what consumers have today is the electrical performance and choice equivalent of the old analog, black rotary-dial telephone.”

In many blackouts, a seemingly minor problem, like a short at a substation, trips circuits and disrupts transmission down an entire line or across a whole network. The current grid, which delivers 40% of the U.S.’s electrical needs, is largely obsolete. Most of its 1950s-vintage relays, power lines and transformers are nearing the end of their expected performance lives. Natural events, like snowstorms, can cause disproportionate damage to the aging system. Meanwhile, cash-strapped state utility boards generally favor piecemeal maintenance over replacing old gear.

“The electricity that powers our lives is actually an invisible process that only exists in the infrastructure that produces, delivers and uses it.”

The entire process of transmitting electricity from the U.S.’s 16,000 power-generating plants wastes money and energy. Some coal-fired electrical plants consume 25 tons of coal a minute, and then squander 60% of the energy produced through wasteful heat loss, emissions or heated water that is released unused. More energy is lost in the transmission process as the copper conduction cables heat up and start to sag, further degrading the power. Electrical transmission systems elsewhere suffer similar problems. For instance, India loses about 26% of its electricity in the process of transmission and distribution.

“The electricity system is at once remarkable and increasingly vulnerable.”

The average U.S. family wastes 7% of its home electricity consumption due to failure to turn off computers, phone chargers and other plugged-in devices. A Carnegie Mellon University study found that U.S. buildings use twice as much energy to heat and cool a square meter of space as European buildings. Most use 1,000 kilowatt hours a year to heat or cool a square meter of space, even though the job could be done with only 100 kilowatt hours using modern technology. Commercial and industrial buildings, and homes, use more than two-thirds of the U.S.’s electricity, mostly for lights, heaters, air conditioners, hot water heaters and entertainment devices.

“The electric utility industry has a very poor track record of proactive infrastructure investment and innovation.”

Modern society’s demand for electricity is not only growing, it is changing technologically. Earlier generations of analog devices could withstand power disruptions, but today’s microprocessors are not as forgiving. Sensitive digital instruments – for instance, life-support machines in hospitals – can crash in the face of power surges, sags and harmonic changes of less than one-sixtieth of a second. In light of such problems, the U.S. military re-examined its energy vulnerability after the September 11, 2001, terrorist attacks. The Defense Department concluded that installing more microgrids on U.S. military bases worldwide should be a top priority.

Power Problems

Electricity is invisible, but its power becomes evident as it is created, transmitted and applied. Electricity is the flow of electrons under pressure (volts), which allows more electricity (watts) to flow through transmission lines. Unlike other forms of power, electricity is hard to store, so it is best used immediately. An electric utility that cannot store power must have the generating capacity to meet peak demand periods, instead of being able to release banked energy as needed. In this regard, the current electrical utility industry is grossly inefficient. Its infrastructure is geared to meeting peak demand periods that span only three hours daily. The grid generally runs at less than its full capacity the rest of the day. This inefficient structure distorts pricing among residential, industrial and commercial consumers, giving retail customers little control over their electricity bills.

“Electricity rates are based first on ensuring that the regulated monopoly utility recovers its costs and makes a profit under all operating conditions.”

One of the factors impeding reform is that 50 separate state agencies – all with different rules and standards – regulate the U.S. electricity supply. The lack of standardized local or regional building codes keeps the U.S. from saving energy on a large scale. Instead, state utility regulators impose restrictive policies on power companies to preserve their status quo as state-regulated monopolies, and regulatory policies tend to discourage innovation and private investment in the grid.

“Once electrified, any appliance, machine or process can become more energy efficient... continuously.”

The general budget-conscious emphasis on constructing low-cost buildings presents another issue, since most of these structures turn out to be energy-inefficient. Energy-efficient building designs could save vast amounts of electricity; better roof and façade design, in particular, could lead to meaningful savings.

Microgrid Solutions

Over the next 25 years, power companies and governments worldwide will spend about $6 trillion to upgrade power grids worldwide. The U.S. alone will need an estimated $2 trillion for replacement equipment and new capacity. Complying with U.S. environmental regulations will cost billions more. Utility companies that cannot promise uninterrupted service in exchange for any rate increase will find it very difficult to raise money in the capital markets. In terms of federal dollars, the U.S. Department of Energy has a $24 billion annual budget, yet it allocates only $125 million for infrastructure improvements. // // Microgrids are an alternative to monopolistic “bulk power grids.” Microgrids interface intelligently with existing utility bulk systems to share or sell power as needed in an efficient, effective process.

“The biggest impediment to the smart grid transformation is neither technical nor economic, but regulatory barriers left over from an earlier era.”

The Galvin Electricity Initiative, headed by [author] Robert Galvin, advocates installing a new microgrid system to move the U.S. away from reliance on centralized utility monopolies. Recognizing the pivotal role of heightened consumer awareness, the Initiative has assembled experts in telecommunications, the environment and public policy, as well as engineers, to develop programs for delivering a “perfect power system.”

“Electricity is a miraculous natural phenomenon.”

The ideal microgrid-based system would be self-repairing, resilient to physical and cyber attacks, and able to deliver reliable, quality electricity at reasonable rates. With quality power, consumers would not need surge protectors, transformers and converters. A smart microgrid could pay for itself in three to five years, and it offers other benefits related to security, convenience and the environment. For now, outdated financial incentives and regulations prevent private companies from installing electrical grids in local communities. The “electrical supply is regulated primarily at the state level,” so state prohibitions against installing private electrical lines over a public street in an area under the aegis of a monopolistic electric utility are a major impediment to microgrid development. Such laws are remnants of the 1900s when states granted local exclusivity to utility companies. Related, outdated local building codes additionally impede competition, keeping consumer costs artificially high. This also has a negative ecological impact.

“Recognition by influential leaders and consumers alike that our electricity supply system is dangerously unreliable, inefficient, and shockingly vulnerable to disruption and attack is the first and most important step in this transformation of electricity policy.”

However, the energy industry can overcome these obstacles. Only 30 years ago, AT&T had a stranglehold on U.S. telecommunications. Consumers had to rent phones from the company in order to connect to its national network. However, courts and regulators eventually broke AT&T’s monopoly. In the process, they created new industries that thrive on competition and innovative technologies. The electrical energy industry is at a similar inflection point today.

“Electricity is, and will continue to be, the ultimate agent for progress.”

Building a smart grid nationwide would create a wide variety of new jobs, ranging from engineers and boilermakers to electricians and electronic technicians. Unlike other types of jobs, these cannot be outsourced overseas. The electrical power industry needs workers in new technological fields that produce energy by processing a wide variety of materials. For instance, a waste treatment plant in Millbrae, California, is converting grease from local restaurants into methane gas that powers its own electricity. Other new energy sources include nanotechnology, cow manure, tidal movements, wind turbines and solar power.

Smart Gear

In 1992, the U.S. Environmental Protection Agency introduced the Energy Star program to combat waste and build consumers’ awareness of energy-efficient appliances. Today’s smart appliance market goes much farther, offering such innovations as telephone and security equipment, which monitors and remotely controls residential heating, cooling and electrical use. These smart systems, which rely on routers plus DSL or cable connections, will give consumers and businesses more control over the cost and environmental impact of their utility choices.

Smart appliances can make home electricity use more economical. These machines can communicate with one another to reduce demand, and can release stored energy at opportune times to provide energy to larger grids and save money. Efficient interconnected grids could also receive and use real-time information about weather, light or moisture. Companies offering such smart control devices for home use include Cisco, Intel, Motorola, Samsung, Panasonic, Mitsubishi and Sony. Estimates predict that this market will be worth $30 billion over the next 10 years. Johnson Controls, Honeywell, Invensys and Siemens also offer smart electrical monitoring systems for commercial buildings.

About the Authors

Robert Galvin heads the Galvin Electricity Initiative. He is the former Chairman and CEO of Motorola, Inc., where he pioneered “Six-Sigma Quality.” Kurt Yaeger is former President and CEO of the Electric Power Research Institute. Jay Stuller, who worked in public affairs and communication for the Chevron Corporation, has written seven books and nearly 1,000 articles.

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Perfect Power

Book Perfect Power

How the MicroGrid Revolution Will Unleash Cleaner, Greener, More Abundant Energy

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