While maintaining its stance as the most sophisticated competitive electricity market in the country, PJM still faces several challenges, all of which are augmented by its expanded footprint. Most...
rates? The PUC decided. Was a new power plant needed? The PUC decided whether it was "used and useful," and what the right fuel should have been. What was the proper budget for construction? The PUC decided what cost level was prudent (remember that the famous business judgment rule that protects directors is couched in terms of what a "prudent" man would do).
There were areas where boards did get involved, but the artificiality imposed by the monopoly position of the utility and the substitution of the government regulator for genuine market forces left the board in the dugout more often than on the field. Until now there really was not much of a role for the board to play. Also, compared to similar-sized companies in other industries, utility directors' fees have been quite modest.
This world order will no longer be acceptable to the institutional shareholders who currently make up over 40 percent of the utility shareholder constituency, or to the courts, as the stakes of many shareholders dwindle.
Boards will need to educate themselves, rapidly, to the new paradigms of competition, and stop regarding the utility as a quasi-public entity that happens to pay dividends. They will also need to press their managements for the kinds of information a prudent man would need to protect and enhance his investment. This will protect the boards, and might even protect the shareholders. Finally, the management of these companies will need to build a new type of partnership with their boards.
The accompanying quiz covers elements that are, or soon will be, critical to the success or failure of electric utilities. Some are utility-specific; some relate to more general business issues that are becoming more important to utilities. The object is twofold. First, to sensitize managements and directors to the level of knowledge and concern for shareholder interests likely to be expected by shareholders, the marketplace, and the judicial system. And second, to alert directors to the kinds of questions and guidance that will test their managements and make the director/ management team function in fact as well as in name.
To make the test objective, there are no "Why" questions. However, "Why?" is a question your shareholders could properly assume that you, as a director, should be thinking about. And one that, sooner rather than later, you should have good answers to. t
J. Michael Parish is an attorney with the Washington, DC, law firm of Reid & Priest, LLP.
Truth ... or Consequences1. How efficient is your utility?
(Compare your company's heat rates for plants with similar fuels to others in your power pool or your state.)2. Does the wholesale market pose a threat?
(How will your prices look to your 10 largest customers after deregulation ... and can you afford not to care?)3. What major costs do you incur?
(How do you expect these components to change over the next five years?)4. What segments of your customer base are most profitable?
(Where do see your future profits: industrial, residential, commercial, government/nonprofit customers, offsystem sales?)5. How much of your business is