Fortnightly: How do current emission restrictions limit your options for plant development in California? Will coal ever be an option?
Darbee: The view right now that we have is that we can’t envision doing any coal in California from a philosophical or conceptual standpoint. What has been discussed is the possibility of integrated gasification combined-cycle (IGCC) outside of California so long as it delivers on the same emission standards of natural gas, which is a high, high bar. That is something that has been discussed, for example, with Joe Desmond and the California Energy Commission, as a parameter for the Frontier [transmission] line. If we were to do it a requirement [would be] that any power going into the line coming to California would meet those standards. The approach we have taken thus far is we can’t see coal on the near-term horizon because of the emission standards we’ve identified.
Fortnightly: Of the 2,200 MW of power assets that you hope to build in California, what will be the fuel mix? And if you are using natural gas, how do you hope to manage the price impact?
Darbee: We’ll have the renewables, which we treat as a separate category, but of the 2,200 it will all be natural gas combined-cycle. We have been working with the California Public Utilities Commission (CPUC) on natural-gas contracts and hedges. For example, the spot market is down to 6 or 7 dollars per million BTUs. So, that’s really the vehicle we use. Now, we blend that with our Diablo [nuclear plant] and our hydro, which are under 3 cents a kilowatt hour. And then it is also blended with renewables [that] can be considerably more expensive. So, in answer to the question, there is a cost to clean power, and the CPUC has concluded what we get is worth the cost.
Fortnightly: But if California’s ethos or politics were not bent toward all clean energy, given the economic realities, would that still be the ideal resource portfolio?
Darbee: We are looking at nuclear power outside the state, where we might partner with others, for example, who might have a license on sites that haven’t been built on. That’s a possibility. We will also work with IGCC with others outside the state. But because of the laws on nuclear power specifically stating that we can’t build a new nuclear power plant unless Yucca Mountain is up and running, and the public reaction to coal, we just don’t see at this juncture the opportunity for nuclear and IGCC in the state. We are exploring it outside the state, where the environment may be more conducive.
We want to do that because we believe in fuel diversity, and therefore we’re trying to put bets on these different places. But we have to be very cognizant of the business environment, both legal and political, in California around coal and nuclear. But let me just mention that we have a renewable portfolio standard (RPS) requirement of 20 percent by 2010, and we are moving aggressively to meet those targets.
Fortnightly: In the coming years, do you worry that state mandates, delivering billions in renewables and scrubbers and new power plants through the rate base, might start to increase and the state may again call for competition as a result? Do you worry about going through stranded cost, part 2?
Darbee: Our rates are about 13 cents/kWh and about 9-plus cents is generation. The way generation is being procured to date is through a competitive process. So, competition has been introduced in what is the substantial majority of our rate component; power is procured through competitive bids.
Competition has been introduced. I don’t see what further could be done to bring down the cost of that generation other than, as we look forward, [to build] nuclear and coal [generation]. The question policymakers and the public will have to ask is if nuclear is done out of state and IGCC is done out of state and it meets the requirements that are good for the environment, should we go ahead and do it? I think we should. I think it is the rational thing.
From the CEO standpoint, I think what’s best for our customers is diversity of supply and, on top of that, trying to keep costs as low as possible. So, I am concerned about rates for our customers and for us to do everything we can to exercise pressure to keep them either slow in growth or moving down. In our company, I like to view myself as the strongest consumer advocate voice in the company.
Fortnightly: One of the reasons some states went to electric competition was over a concern that utilities were unable to determine when and where to build, due to lack of price signals. Given California’s re-regulation, and despite its wholesale market, how will you make sure you do not overbuild and have to later raise rates?
Darbee: I might differ with your premise. I don’t think a significant impetus for deregulation was that utilities didn’t know how to build to meet the needs of the public. They did that pretty well, and they did it far better than leaving it to the competitive markets. What drove competition was a belief that competitive generation would provide power at lower cost than the big, stodgy, slow-moving utilities. I think the reality that many people have pointed out is they haven’t seen those benefits. And that’s why they are very disenchanted with the introduction of competitive markets in the electric utility industry.
Fortnightly: The majority of merger announcements to date have been long-distance, non-contiguous mergers. As a vertically integrated utility, do you believe there is a loss of efficiency from these mergers where savings from combined operations cannot be enjoyed as in a contiguous merger?
Darbee: Our studies have shown that if you acquire a company that’s closer as opposed to further, the savings are not necessarily greater. But if you acquire something that is closer as opposed to further, the likelihood of achieving your targets is greater. So, distance does make accomplishment of these goals more difficult. But our strategy, M&A, will not be based on contiguity. Proximity will be helpful based on what I described.
Basically, we are developing a model with what we are doing with PG&E. And the idea would be to duplicate that model. We are transforming PG&E to dramatically improve service, and to reduce expenses and enhance efficiency and improve culture. The idea would be to replicate that process.
Fortnightly: Given the recent trend of outsourcing in the utilities industry, do you have a view of what you believe is the core of the utility and what others can do better than the utility can?
Darbee: I certainly see the core of the business being electric and gas distribution and transmission. Generation is the stabilizer that ensures new power plants are built if the competitive market doesn’t want to build them. By contrast, tree trimming is something we have outsourced for years, and local tree trimming guys can do that very well.
Some utilities have looked at systems and said, should [we] outsource? We have looked at them thus far and concluded no. We hired a very good systems person, Pat Lawicki, our chief information officer. She is making dramatic changes and she seems to be very, very good. So, systems I think, as with telecommunications, is a pretty fundamental part of our business. We’re inclined to keep that in-house unless we find some reason that it won’t work, and that we can’t do it well and do it cost-effectively.
We also have no intention of outsourcing energy risk management. We don’t think that makes sense. Because if you outsource it to an investment bank, for example, experience has shown it is hard to make sure that they are managing things with your best interest in mind, in contrast to their best interests.
We’re building an enterprise wide risk-management process now, and I’m happy with the way it is going. So, the questions we look at are, do we do it, and do we do it well? Call centers have been something some people have been inclined to outsource. For the foreseeable future our conclusion is that is a vital point of connection with our customers. We can make improvements on cost, but that is a proprietary point of connection with our customers and we’re not currently inclined to give that to a third party.
Fortnightly: What is your definition of leadership? What makes you effective as a leader in your company?
Darbee: I have put an immense amount of time in to what good leadership looks like. It resulted from my movement from Wall Street to the CFO of Pac Bell in 1994. When I was on Wall Street, I didn’t have a job that required great leadership because [I was] managing a small group of people. But when I left—and my first role was managing 2,500 people—I realized this was not an area that I had a great track record in. Therefore, in order to address that weakness, I spent a lot of time. In fact, it has been the center of my focus on leadership.
My business focus has been: What does it take to be a great leader, and what is the difference between great and mediocre in life? The conclusion that I came away with is that a visionary, a leader, needs to first be able to dream great dreams, and establish a vision. Our vision has been to become the leading utility in the United States. And the nature of that is aspirational, but achievable. Like John Kennedy, who said we’d put a man on the moon and bring him back before the end of the decade, the people at NASA said, “How the heck are we ever going to do that? We don’t know how to get there.” The nature of a leader is that they set targets that you can’t accomplish by extending a ruler over the past track record in getting there. They set targets that are a quantum leap. They not only set those targets, but they understand how to translate those targets back in to specific things that have to be done to move an organization from point A to point B.
What you need to do is get that vision and translate it into objectives and then into specific goals and metrics. You have to have strategy for getting there. And the strategy has to deal with the culture and very substantial process of re-engineering. The glue that holds this all together is your values. You have to lead from your values. To the extent you do that, and you do it consistently, and you do it with perseverance, and you are also a great communicator who communicates honestly, you can inspire the hearts and minds of people. And you can move 20,000 people.
When I finish after being in a room with people, [they] come up to me and say, “You know what, Mr. Darbee, I believe in you. Keep doing what you’re doing.” That is what fuels me each and every day.