June 1 , 2002
The CEO Power Forum: The Best of the Best
business growing in the 15 to 20 percent growth rate category. That is for several reasons. We participate in the competitive generation business but in a very different way than most of our peers. We only build power plants after we have customers. We only build power plants after we have long-term contracts for the output of those plants. Because of the stability and reliability associated with Southern Co.'s name, there are a lot of wholesale customers (co-ops, municipals, and other utilities) that are most interested in having a reliable, dependable source of power to serve their customers. We are seeing a lot of those folks turn to us.
How long are these contracts for?
Anywhere from five years to 15 years, with seven to 10 years being a more typical number. We like that because it gives us certainty in earnings and gives us confidence to build additional plants when you have that kind of earnings stability over a period of time. But the customers like it also because these wholesale customers that we are selling to have retail customers that they are obligated to serve.
How do you manage the commodity risk in your competitive generation business?
In any business that produces a decent return, there are business risks, or we couldn't produce the kinds of returns we are talking about. What we have attempted to do is structure our competitive generation business to have no more risk than a regulated business, and that is hard to do because a regulated business is, comparatively speaking, a low-risk business. The way we have done that is to deal with each of these risk factors separately. Regarding market prices of power, the day-to-day and hour-to-hour changes in market prices for power-we mitigate that by simply having contracts with creditworthy entities that pay us our fixed cost and a return on our plants. So we are not affected. The profitability of these contracts is quite insensitive to short-term market prices for power. Two, a major risk is fuel volatility, especially natural gas price volatility. We do not take fuel price risk in any part of our business. In our competitive generation business that gas price is passed on in an energy charge to whomever is purchasing the power. They take the fuel risk and we are happy to help hedge that risk if they ask us to, but we don't take fuel price risk and we don't take electric power price volatility risk. In addition, if you have a long-term contract there is always the credit quality of the counterparty to be concerned about. In the vast majority of the contracts that we have, the vast majority of the revenues from those contracts are with counterparts that are investor-owned utilities or they are co-ops and municipals that have retail customers that are going to purchase that power. So, the great bulk of our contracts are not third parties playing in the market. It is utilities that have an obligation to serve that will sell that power and will collect that revenue that are