How can regulated utilities create value? Each of five key options present their own risks. Which way should management go?
Letters to the Editor
Richard Stavros’ September 2006 Frontlines (“The Geopolitics of the Grid ”) was well done. I enjoyed reading it.
Regarding the paragraph raising questions about why there are major disparities in retail electric rates from one region of the country to another, one major contributing reason is archaic and unfair federal subsidies. Congress did not deal with the federal electricity subsidies problem in either the 1992 or the 2005 energy legislation. BPA and related deep federal subsidies explain why the Pacific Northwest has low retail electricity prices. The same goes for much of the TVA service area, Nebraska, and a number of other states that receive, in one form or another, deep and growing federal subsidies.
The Congress, of course, prefers to act like the subsidies don’t matter, or to look the other way, but the United States will never have competitive, fair, wholesale electric markets as long as the Feds continue to deeply subsidize certain utilities and not others.
Also, a significant amount of this low-priced subsidized electricity is provided to middle- and high-income households, while oftentimes the poor inner city metro area residences do not benefit at all because their utility providers are not subsidized.
Ken Glozer, President, OMB Professionals Inc.
I wanted to commend you on your editorial, “ Gravy Train ” (Frontlines, July 2006) . You articulately summarized the emerging tension between utility executive compensation and “return to basics” corporate strategies. To be sure, the immediate future is about slow and steady growth in total shareholder value from regulated utility operations, coupled with occasional forays into mergers and acquisitions (M&A) in efforts to pump up those rates a few hundred basis points. But don’t expect year-over-year executive compensation increases to moderate.
Current compensation trends were established during the “go-go” days of retail electric opportunity and merchant power-plant development. And, although I don’t have much evidence to support this claim, that trend had limited success in attracting the best and the brightest from other industries. Although this may still result in the best and brightest filling the executive ranks of utilities, it may challenge the notion that the compensation levels were necessary to fill those positions.
Another interesting phenomenon is the increasing disparity between executive compensation and the compensation levels for typical workers. Compensation for typical workers (and managers) change at rates of inflation while C-level executives’ salaries are set through compensation committees.
Executive compensation is unlikely to change to reflect the back-to-basics approach utilities are now following. To the contrary, I would anticipate the emergence of even more lavish payouts, particularly if M&A heats up more.
Is this good for the industry? I would argue most certainly not, as it does not necessarily result in attracting the best and brightest from other industries and, in fact, likely will exacerbate efforts to replenish the general workforce. For an industry trying to rediscover the keys to customer satisfaction—usually driven by rates, reliability, and responsiveness (aka, customer service)—this development may prove problematic.
An Anonymous Industry Consultant