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CEOs on Change

Utilities adapt to a shifting landscape.

Fortnightly Magazine - June 2009

divesting some utility operations, and reducing and refinancing debt. Additionally the company downsized its workforce, trimming its total O&M costs by one-third. The result, according to Evanson, is a flatter organization with better communication and a tighter focus on the company’s core competencies—most notably its T&D operations and coal-fired power plants in Pennsylvania, Maryland and West Virginia.

As a consequence, the rating agencies restored Allegheny’s ratings to investment grade, allowing the company to access low-cost financing for the $2 billion in transmission projects it’s now developing.

“There’s no doubt the turnaround positioned us to perform well,” Evanson said. “We can earn a return in this economy, which is great considering power prices are down.”

In the future, Allegheny’s primary challenge likely will be GHG regulation. The company relies heavily on coal—95 percent of Allegheny Energy Supply’s 20-plant portfolio is coal-fired—and the company has invested $1 billion in emissions controls across its fleet since 2003. To address that challenge, Allegheny is bringing gas-fired power plants into the mix, and now is considering investments in renewables. “We’re a little late getting into that,” Evanson said. “We’re talking with some groups about joint venturing on some projects. It will take some time.”

Meanwhile, the company is working through policy channels, trying to ensure GHG regulations provide a reasonable transition for coal generators. “Only recently have people focused on CO 2 as a potential pollutant,” Evanson said. “We need time and R&D in the spirit of American innovation to make sure coal continues to be a viable fuel.”

When asked what lessons he’s learned through Allegheny’s turnaround, Evanson emphasized the need for speed. “You have to move as fast as possible, probably faster than you think you can,” he said. “And move as comprehensively as you can. People hate uncertainty, and they don’t like wondering when the other shoe is going to drop. So think comprehensively, and as soon as possible, get in place a team that is geared to the changes and challenges you’ll face.”

Puget Sound Energy: Listen Carefully

In February 2009, a consortium of institutional investors—including three Canadian pension funds and three Macquarie Group investment funds—completed the $7.4 billion acquisition of Puget Energy, parent of Puget Sound Energy (PSE). The transaction happened at a fortuitous time, according to CEO Steve Reynolds.

“We’re excited,” he said. “This is a great pairing of patient capital with a pretty voracious need for capital to invest on behalf of our customers.”

That capital need involves the company’s strategy to reduce its reliance on coal-fired generation and replace it with renewables and efficiency measures. Reynolds said PSE is “significantly ahead” of Washington state’s renewable portfolio standard, which requires utilities to supply 20 percent of their electricity from renewable sources by 2020.

In addition to investing in energy efficiency and smart-grid technology, PSE announced a joint development agreement in 2008 to build nearly 1,200 MW of wind power capacity over five years, along with gas-fired generation to augment and supplement the variable wind. The recent acquisition supports these plans by providing PSE with investment dollars when it needs them,