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Creating the New Utility CEO

Increasing risks call for a new generation of leaders.

Fortnightly Magazine - October 2008

finding it difficult to meet growth expectations by relying solely on organic growth. Taking on more risk through unregulated ventures enables these companies to generate higher returns than they could if they were totally beholden to regulators. As a result, most utility companies today are positioned somewhere near the middle of the continuum. And for these companies, a broader CEO skill set is needed.

No longer is it enough for boards to choose CEOs who are masters at managing operational risk. Chief executives also must have the financial acumen to manage ongoing investor relations, deal with volatile commodity price risk, articulate a growth strategy that delivers enhanced shareholder value and be credible with Wall Street in articulating the value of the company’s unregulated activities.

Nowhere will financial acumen be needed more than in the financing and construction of new generation. This need will not only relate to financing issues—which will be significant—but also to sophisticated decision-making about fuel choice, risk management and hedging strategies.

In a future environment characterized both by increased M&A activity and by balkanized regulatory jurisdictions, the notion of regulatory complexity won’t soon go away, either. So it is also valuable for CEOs to have some legal experience, or at least understanding, to navigate this complexity.

A recent Spencer Stuart analysis of 25 of the nation’s largest utilities confirmed that organizations are favoring CEOs with legal and financial experience. Eighty percent of sitting CEOs have held a legal or finance role at some point in their career. Only 28 percent have held an engineering role, one of the traditional sources of senior leaders for the industry. This trend likely will continue into the future. The majority of talent for the center of the continuum won’t be bankers, and won’t come from traditional utility roles. Rather, talent will come from somewhere in between, most likely coupling operations experience with financial savvy that includes a deep understanding of market risk and portfolio theory.

For those companies that position themselves to the right on the continuum, the need for financial expertise is even greater. While these companies likely will still prefer candidates with utility industry experience, they’ll also need talent with the financial acumen to successfully articulate their strategy, value proposition and enterprise risk management program to key stakeholders such as investors, regulators and ratings agencies.

Developing Senior Leadership

Those companies to the left on the continuum are grooming senior talent much as they always have: by preparing high-potential executives with functional and operational roles of increasing responsibility. But the majority of utility companies at the center and to the right on the continuum are taking a different approach. Realizing the need for strong financial and legal understanding in the chief executive role, they’re moving executives such as the general counsel or CFO into an operations role (such as the COO or head of a business unit) before their elevation.

During the late 1990s, it seemed as though everyone viewed traditional utility experience as a liability. Following the collapse of Enron and the dramatic shift toward “back to basics” strategies, a large