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CFOs speak out: Growth Strategy for the 21st Century

For The 21st Century
Fortnightly Magazine - October 2004

fundamental standpoint.

Pennsylvania and Ohio are a little bit more of a hybrid model right now in theory. Those states have deregulated generation, but competitive generation markets have not really developed in those states to the degree that some of the regulators and companies had hoped. In Ohio, under the original rate plan we put in place several years ago, there were a number of incentives for us to achieve 20 percent shopping levels by customer and by class. We've been able to do that in Ohio, although it has taken some artificial incentives and some governmental aggregation mechanisms to get there. But we have achieved 20 percent shopping across our customer base.

In 2003, the Ohio commission came out and said that because the competitive generation market had not fully developed they were concerned that when rate freezes for the various companies started to drop off-for FirstEnergy, that was at the end of 2005-customers would be exposed to potentially higher prices and price volatility. So they asked the companies to come back and propose a rate freeze to extend the existing rate structure for a period of time.

Approved by the commission earlier this year, [FirstEnergy] rates will be frozen between 2006 through 2008, with some limited exceptions, one of which is our ability to pass through fuel increases to customers under certain circumstances.

What are the three top concerns on your mind in terms of finances?

RM:At the top of my list is operational excellence. You want to avoid mistakes. You want to provide outstanding service to customers. That's how you build credibility with regulators and customers. Being able to take costs and efficiencies out of the business is important-the ability to consistently grow earnings for shareholders that have predictable rates. Long-term consistency of regulations is key for any company that has coal generation like FirstEnergy does.

Where do you draw the line in terms of outsourcing utility functions?

RM:We've looked at the whole range of potential opportunities to save costs, including outsourcing. There are pros and cons. At this point, we have not outsourced a significant part of our business, but we'll continue to track that. Certainly, TXU made a big splash earlier this year when they announced they were going to outsource a large part of their shared service and some of their customer service functions. I think people in the industry will be tracking that very closely. The concern that you always have when you outsource is a loss in control, obviously. You have to have a superior partner, and sometimes the initial promises are not fulfilled. So, it's a very interesting alternative. We are going to continue to track it, but at this point it has not been right for us.

Gerald Luterman , Executive Vice President and Chief Financial Officer, KeySpan Energy

"To remain competitive it will be necessary for us and others in our industry to match or increase the dividend while maintaining the security of our credit rating and maintaining our capital expenditure."

How do you think utilities should deploy their