Six executives map out the technology, tools, theories and institutions that could change the face of electricity forever.
Liberty is the most important component of enlightenment. Once a person frees themselves ¼ they will not only be on their way to becoming a free thinker themselves, but they will also spread the word to others about the value of attaining enlightenment."
Though Immanuel Kant was writing in 1784 to define his own age of enlightenment, he just as well may have been describing the early results of electric deregulation and the liberty it is giving energy executives to enlighten the industry with new innovations.
Five years ago, the technologies, companies, markets and institutions being developed by the innovators profiled here did not exist and would not have existed had it not been for their determination and enlightened vision of the future of electric competition.
Many historians believe the ideas of the Enlightenment provoked both the American Revolution and the French Revolution. Will the innovators profiled here be the architects of a revolution yet unseen in the electric industry?
The Fortnightly spoke to some of the most innovative people we have come across in the areas of business, technology and policy. - R.S.
Kinder and Morgan - The New Empire Builders
Two former Enron executives begin building a corporate empire that may soon rival that of their former employer.
The founders of Kinder Morgan may never have built the sixth-largest integrated natural gas company in less than five years if Ken Lay, chairman and chief executive officer at Enron, had decided to retire early.
Richard Kinder, chairman and chief executive officer of Kinder Morgan, was president at Enron less than five short years ago, and stood in line to become the top executive. Kinder had risen through the corporate ranks with Lay and was instrumental in building Enron Capital & Trade, the merchant arm of Enron.
But Lay, who had been friends with Kinder since they attended the University of Missouri together, decided to extend his tenure at Enron. At that point, Kinder decided it was time to leave.
"I wasn't sure what I was going to do. I never knew I was going to be running a pipeline company. At the point I resigned [from Enron], I was just thinking about going skiing," Kinder says.
But William Morgan, vice chairman and president at Kinder Morgan and also a friend from Kinder's University of Missouri days, offered Kinder a chance to preside over a new kind of company.
They would build their company around a rarely used corporate structure called a master limited partnership, usually used for sleepy, low-earning assets, but which Kinder and Morgan have revolutionized to turn a $300 million company into a $10 billion company with the recent merger of KN Energy.
But beyond the MLP, Kinder and Morgan have designed a company that does not reward its executives unless its shareholders are rewarded.
They recall wanting to create a company from scratch that had none of the negative attributes they had known in their decades of working at large corporate institutions, such as internal politics and executives that put their own interests ahead of the company.
To make certain that their interests should not stray from that of the company, both men pay themselves $1 a year and only earn income by building equity in the company and whatever dividends are paid. They say this will make sure their interests are aligned with those of shareholders.
Have Kinder and Morgan set a new standard by which other energy companies may soon measure themselves? - R.S.
How did you meet?
Morgan: We were at the University of Missouri together in the early '60s and ended up in law school together. We were friends then. We have known each other for more than 35 years.
It seems quite remarkable that Richard Kinder, Bill Morgan, Ken Lay, chairman and chief executive officer of Enron, and Jeffrey Skilling, president and chief operating officer at Enron, all knew each other.
Morgan: It is not a coincidence. Ken Lay and I were fraternity brothers. He actually was the one that hired me into Florida Gas about five or six years before Rich. There is a tendency to hire people that you trust and know are good. Ken hired me and then I ended up hiring Rich.
Kinder: Florida Gas got sold to Houston Natural Gas at the end of 1984 and less than a year later, Houston Natural Gas merged with InterNorth to create what is now Enron. Bill ran a number of the pipelines at what became Enron and left to go do private investment in the energy patch in 1986. I stayed on and then in 1990 became president [of Enron] and was president until the end of 1996. I was president for six years.
Basically Ken and I had always signed a co-terminus agreement, as Ken is two years older than I am. I had told him before that it was his company; if he wanted to stay on, it was fine. We were a good team. I think he would say that, too. But at some point I would run my own show. He decided quite rightly that he wanted to stay another five years. I said I am going to leave.
How was the business begun?
Kinder: Enron had made the decision to get rid of its liquids business during 1996. Bill had some investors with him. He had been the winning bidder of what was the general partner of the master limited partnership, which we had formed at Enron in 1992 to put certain pipeline assets with very small limited partnerships.
In early 1997, together as a group, the two of us and a minority partner, First Union Capital Markets out of Charlotte, bought the general partner from Enron.
What is the advantage of a master limited partnership?
Kinder: An MLP takes these sleepy assets and they return a lot of cash. Enron takes out a big chunk of money when they sell the stock and they usually keep maybe 15 percent of the stock. They keep the general partner's right to a certain percentage of the profits. It is based on how much you can raise the distribution.
When we took over from Enron, Enron was getting 2 percent of the profits because they were the lowest sharing bracket of the partnership agreement. We took it to where we now get about 20 or 30 percent of the income, which today amounts to close to $70 million.
At the time, Enron was making its 2 percent of a small number that was $250,000 a year.
What was unique about your partnership?
Kinder: Our concept, which had never been tried before, was that we could increase the distributions over a period of time and get that unit price up and use the equity as currency to make additional acquisitions.
Kinder: We could use MLP currency to buy assets from another corporation that wanted to sell or from individuals that wanted to have a tax-free transaction, but we couldn't buy companies outright. There are certain limitations on the ability of the institutions, mutual funds primarily, to hold MLP units.
So we said, let's go out and create what we call "the second barrel of the shotgun." Let's go out and create C-corp. currency by doing an IPO and then we will have an MLP currency and a C-corp. currency. [C-corporation is the corporate structure that most large companies have. The C-corp. pays taxes on all revenues and any dividends it pays shareholders.]
We can go out and buy a company with C-corp. stock and break it apart in a financial sense and put the assets, most midstream assets, pipelines, plants, terminals - things that fit the MLP tax structure - we can drop those down into our MLP and still keep, in our case, 30 percent of the cash flow.
Why did you acquire KN, which contributed to the doubling of your company from $3 billion to $10 billion?
Kinder: We wanted to stay with our area of expertise. Bill and I brought in several of the managers from Enron and some from other places that had decades of experience between us in the pipeline business.
All those assets qualify for MLP. They tend to have very long-term, stable cash flows with a reasonable amount of growth. They tend to be assets that can be improved if they are managed and costs are reduced.
What is innovative about the structure of your company?
Kinder: The financial structure of having an MLP coupled with a C-corp. We are not unique in that Enron still has two other MLPs. El Paso has an MLP. Duke has an MLP.
However, when we bought what is today Kinder Morgan General Partners from Enron, we were getting 2 percent. We were distributing $1.20 in terms of a year to these unit holders. Today we pay $2.90 two-and-one-half years later. Putting it another way, we have returned 282 percent to our unit holders all in return in that time period. Of all the midstream energy companies the next in terms is Williams over that time period. I think it is about 150 percent. So we have almost doubled the return of any other company.
Do you think it's unique that you don't draw a salary?
Kinder: I haven't done any research, but I don't believe there are any energy companies where the two top managers own 30 percent of the company and are not paying themselves any kind of salary at all. We are going to put ourselves exactly in the same position as the Goldman, Sachs private services client that comes in and buys 5,000 shares. I think that is a powerful message.
You don't want to become, dare I say, Enron?
Kinder: I was there at the creation and I hired Jeff Skilling in August 1990 and started what became Enron Capital & Trade. [Today it] is what I consider the guts of Enron. It is a brilliant operation, but I can tell you we spent hundreds of millions of dollars on systems and in people costs in developing what they have today. It is a brilliant operation, but there are going to be very few winners in that particular field. It requires huge capital in terms of people capital. It is almost like an investment banking company in the energy business. There is a lot of money to be made there, but there is a lot of money to be made by just operating these assets. It is a lot simpler existence and a lot more predictable from where we stand. That is not to disparage Enron at all. It is a great company ¼ but I would put our return against their return any day.
How do power plants fit with your strategy?
Kinder: We are not going to be the major power developer. We will have some power plants in addition to what we have now over the next few years, probably primarily on our own pipelines.
Tell me about the partnership.
Kinder: We are truly partners. I may have the title of CEO, but we think very much alike. We tell all of the people that work in the organization that if you get ahold of one of us, it is just as good as getting hold of two of us.
Where do you see Kinder Morgan in the next 10 years?
Kinder: I see no reason why this can't be a $20 [billion] or $30 billion company in three to five years if the right acquisitions come along, although we are not growing for size sake.
Lynda Clemmons - Wise to the Weather
In creating a billion-dollar derivatives business, she helps other firms manage earnings against Mother Nature's whims.
She claims she has no supernatural powers to control the weather, but to her customers she is seen as wiser than a rain man and more trusted than the local meteorologist.
Lynda Clemmons, one of the youngest executives at Enron ever to hold the title of vice president, has helped create a business that can help a company avoid lower earnings resulting from bad weather.
Her weather derivative business, which was started from scratch just 30 months ago, now claims $1 billion in sales in a $4 billion market, and the market one day may be much larger. In fact, the U.S. Department of Energy places $1 trillion value on the part of the U.S. economy exposed to weather risk.
Weather derivatives are designed to protect against the impact of volatile climate behavior on a firm's sales, also known as volumetric risk. These instruments can be adapted to a host of businesses such as ski resorts and swimwear manufacturers, but have earned a loyal following of electric utilities who recognize that weather is the largest variable affecting power demand.
Clemmons has contributed to changing how energy companies view weather and how they may protect their companies against its negative impacts. - R.S.
What attracts you to weather derivatives?
Weather is so much fun. It is an amazing market. It is the one market that it doesn't matter how big you are, you can't impact it, to the extent of talking about settlement or market size or something like that. It doesn't matter how strong Enron is within the market place, Mother Nature is going to do what she wants to do. It impacts everybody. In my job on a daily basis, I may talk to a bank, an insurance company, a ski resort, a golf company, a construction company and an agricultural entity. So you get to learn about a huge array of businesses [and] just how the weather impacts their businesses.
You sit down and start to think about it. From the local ice cream vendor to the outdoor arena in your hometown, you start to realize what an impact the weather has, and everybody loves to talk about it.
It's a product that takes people from sort of a chuckle initially - "what do you mean you can do something about the weather?" - to "how much does it cost?" in a pretty short timeframe.
How have you been instrumental in winning over the skeptics?
People hear what they want to hear. The skeptics don't want to believe that it can happen because they haven't seen it happen before. When we show them a list of applications or a list of people who are already participating in the market, usually it is sheer momentum of the way the market is moving that will bring them around. If they still believe it is not the product for them, I don't want to push it on them.
Is the pressure to succeed greater now that you have had $1 billion in sales? How do you manage it?
The industry itself is about $4 billion. You always feel pressure, especially if you have had past success. So to the extent that you feel you have to improve, there is certainly more pressure, but to the extent that you have a track record that you can point to, it hopefully opens doors for future business. You know you have done it before; therefore, you have confidence in your team that you can do it again. We tend to manage pressure like that with group outings. There is a lot of camaraderie and joking that goes on [at] the desk that helps relieve the tension of working on a really big transaction.
What has been your biggest success with weather derivatives?
There are different benchmarks of success relative to where you are at any point in time. For us in the weather market, when we did our first transaction, hey, that was terrific. When we did our hundredth transaction, hey, that is also terrific. When we feel we have closed out a year and we made more money than we expected to make or we thought that we could make, that in itself is fantastic. You sort of have to savor all the small victories as you go along, but you can't spend a whole lot of time on them because there is too much work to do.
What is your mandate in your business? How has it changed?
The mandate has been to go out and build a set of profitable businesses that fit within Enron's other businesses. Clearly, weather has an impact on many of Enron's other businesses. The mandate I don't think has changed, except to the extent that now that the business exists, [the mandate is] go out and make it bigger, make it better and more profitable. In order to do that, we certainly focus on building the industry and not just our desk.
What insights have you learned at Enron?
Clearly, three years ago, four years ago, we did not know this market existed. The lesson here is there is always an opportunity. It is just a matter of locating it and being able to recognize that things that have been accepted for ages don't have to stay that way. No one ever believes that they can hedge or do anything about the weather. Now there is a product out there that can help them do that. The fact that I helped bring that product to market and help that industry develop, really, I think, is a testament to Enron giving me the latitude to go out and do that.
Tell me about the Weather Risk Management Association.
The Weather Risk Management Association was launched by myself, and by Jim Gosselin of Castlebridge Partners, Darren Wilcox of Southern Co., Ravi Nathan of Aquila Energy and Jeff Porter of Koch Industries. The idea behind it is to bring together some of the industry players and create a forum where people who are interested in this marketplace can come to seminars sponsored by the WRMA. [Interested parties] can also go to the website put together by the WRMA and get information effectively from the horse's mouth, if you will, as opposed to having to rely on third-party articles or conferences.
What's the future for weather derivatives?
Big - very big. We have already done a number of European deals. I see growth in Asia, Japan, Australia and in the Southern cone. There is just an enormous amount of interest right now.
What has been your sweetest victory?
Certainly, personally, making vice president at age 28 was a big victory. I don't know if I consider it a victory; it certainly goes in the feel-good category. The victory I think is really the business itself and taking it from nothing to now where you can say that there has been $4 billion of risk covered in a market that no one knew existed 30 months ago. That, to me, is phenomenal. While I will not take credit for all that developing, I will take credit for helping to spread the message.
Dennis W. Kelly - Green Market Phenom
From slaking the world's thirst to improving air quality, Kelly counts on slick marketing and an appeal to fun to succeed in a serious business.
What does a veteran of corporate behemoth Coca-Cola bring to a hip upstart green power supplier like GreenMountain.com, with its emphasis on environmental stewardship? In the case of Dennis Kelly, Green Mountain's president and CEO, it's technical and marketing expertise.
Technology is essential to the company's operations, both internally and as a Web business. But innovative marketing has made the company's Green Mountain Energy the most chosen U.S. brand in "cleaner power." In fact, more than 100,000 Pennsylvanians and Californians had switched to the electric supplier as of November.
According to Kelly, fun is an essential ingredient in the promotion of clean power at GreenMountain.com, both in the office and in marketing. The company's 80 employees are encouraged to do their jobs better through individual empowerment and, at times, shooting hoops for prizes. Some of the company's groundbreaking marketing initiatives have included "g*commerce" alliances with other green companies; EcoCredits, a customer rewards program; and a bonus miles program with United Airlines. And what other power marketer is endorsed by a pop star? Kenny Loggins fronts Green Mountain.com.
In addition to winning residential customers and even some commercial businesses, Green Mountain.com points to new renewable power sources as evidence of its environmental impact. Three wind turbines in California and a Pennsylvania windmill farm were built this year as a direct result of customer choice in those states.
Yet Kelly never loses sight of the bottom line. With $1.5 million in revenues to date, this Harvard MBA predicts that good business is what will make clean power permanent and sustainable. - R.R.J.
How did work at Coca-Cola prepare you for leadership at GreenMountain.com?
I was at Coca-Cola for 16 years, mostly in marketing and general management. My last job was as director of marketing for Europe and deputy chief marketing officer. I also ran worldwide marketing research for Coca-Cola.
My favorite jobs were in Coca-Cola general management. I was general manager of the noncarbonated beverages group, which launched PowerAde, Fruitopia and Nestea in the United States. I was also general manager of the unit that made all the orange juice for McDonald's. So those were my favorite jobs.
One of the reasons I was attracted to Green Mountain was the chance to combine my technical background - I'm a trained mechanical engineer in applied thermodynamics - with general management opportunities in Green Mountain, which is essentially a sales-marketing company.
You came on board in February, the month after Green Mountain launched in Pennsylvania. What were your objectives?
My objectives were to help Green Mountain take all its entrepreneurial spirit and put in systems and processes that would allow it to grow rapidly to be a major force in retail marketing in the United States. ¼ It's a never-ending task, but I think we've done a great job of balancing and managing the creativity and innovation, while putting in place the kinds of processes that are required for what we aspire to be, which is a multi-billion-dollar corporation, operating eventually with public shareholders. ¼
One of the things I'm most proud of is the fact that we are rapidly adapting technology to maintain both our creativity and innovation. Just today we launched our next generation of our website, which, by the way, we think will be obsolete within three months and we're already preparing a new website for launch in another three months. We also launched our internal intranet for the company, because it will help us communicate faster and better, and eliminate the use of paper and allow us to maintain a flat organization.
The way we did that today, by the way, is we had every employee in the company spend the entire morning in a series of games that involved the use of the intranet, and gave out prizes. If they answered questions correctly, they had a chance to shoot basketball goals and hockey nets, but it was all towards learning about innovative use of the Internet and intranet.
You mentioned two things: a flat organization and using games to foster innovation.
I've had a long-term belief that the payoff in productivity from technology - one of them has got to be a flat organization empowered to do the best work they can. We hire very bright people and give them a lot of autonomy and responsibility, and we use technology as a way to communicate rapidly. ¼
Here's another thing we strongly believe in: We need to stick to our core competencies, which are marketing, sales and innovative use of information and technology, and then allow other people to be partners in the things that they do well - for example, billing, power supply, those sorts of things.
And the role of games and fun?
We're involved in a very serious business - supplying electricity, especially environmentally friendly electricity to combat a very serious problem - air pollution. The brand that we built, we know from research, has to be approachable, has to be competent, but it also has to have an element of fun. We also know that a fun, learning, growing environment is one that's important to attract people, so we build fun into what we do everyday. So when we have a major initiative, we always want to make sure we have a fun aspect.
We are a rigorously casual company. If you walk into our offices here in Burlington, Vt., you're just as likely to see someone shooting a fuzzy planet, our sort of icon, through a basketball hoop, while somebody on the phone one cubicle away is negotiating a power supply agreement. ¼
How does your managerial style support innovation at the company?
Again, I intend and will keep a flat organization. I'm repeating myself only because it's important. ¼
A practice that I inherited but that I really like is that every Tuesday we have a company-wide meeting we call the "common sense" meeting. Everybody in the company and a lot of our partners are allowed to participate. We set the agenda and it's an open forum for people to talk about what's on their minds, what's going on. ¼ That company-wide meeting is a very important part of our culture.
Do you have any plans to expand your focus beyond residential customers?
Yes, we do. We actually have some commercial and industrial customers. We've announced that Birkenstock in California has signed up with us; we've signed up a hundred Kinko's stores in California. ¼ We are very interested in the commercial and industrial, but building from the [residential] consumer up. ¼
Among its mission goals, Green Mountain aims to engage in policy work on energy issues. Can you describe your activities there?
Yes, we're very active on the local level in the states that we're involved in, as well as on the national level, working with people like NEMA [National Energy Marketers Association] and others, to make sure that we have the ability to really effect our mission. Our mission is to clean the air by changing the way power is made, and we think the right way to do that is by giving consumers choice. Consumer choice, based on sound economics - that's the way to permanently sustain change in the way power's made. ¼
Since many older coal-fired plants are exempt from tough pollution standards, will deregulation mean cleaner or dirtier air for Americans?
I think because of folks like Green Mountain, deregulation can only mean cleaner air. ¼ Customers now will choose, and in choosing will become educated on the fact that a lot of their energy comes from coal plants that were grandfathered in and not subject to the Clean Air Act. ¼ That's our dream, that's our hope and that's what we get up and come to work everyday for.
Is that what drives Green Mountain's staff?
That's exactly right. But we are a for-profit company. We understand very directly that what we do, we have to create shareholder value at the same time, which is why we think our idea is sustainable. If we can be a profitable company doing this, then the change will be permanent and sustainable.
The Green Mountain Solar program markets photovoltaic systems. What about fuel cells?
We have been and continue to be in discussions with a number of people in the fuel cells area. ¼ We've got some good ideas we've learned from solar about how we can use [fuel cells] as distributed generation in a way that actually ties in very nicely with what we're trying to do.
Much of Green Mountain's success seems to be tied to innovative marketing.
Yes, we are approaching the marketing of electricity with the discipline that I learned at Coca-Cola, that all of our professional marketers have. Marketing is a science, and it should be approached and thought of that way. ¼
What's in store for you and Green Mountain in 2000?
For 2000 we have aggressive growth plans. We feel like we've just scratched the surface in the states we're in, which are California and Pennsylvania. We are very anxious to get into New Jersey and move forward in that state. We're working out some details of that right now. We see some other opportunities in the Northeast, which we're finalizing as part of our business planning process at this moment.
As for me personally, I really think the credit goes to the people. My job is to help people do their best work, and the thing I try to do is remove any roadblocks that are in their way. So if there's any credit to be given for innovation, [it should go to] our people, our agencies, and all I do is try to take obstacles out of their way and give them the freedom they need to do their jobs.
Alan Guggenheim - Bringing Technology Home
This entrepreneur and his two partners have the technology to get fuel cells off the drawing board and into your basement.
Northwest Power Systems is a small company now, but driven by the big vision of its president, Alan Guggenheim, it won't be for long.
Guggenheim was thinking big in 1996, when, as the leader of a business operating from a founder's garage, he approached Bonneville Power Administration with an invention and a request for funding. But it was his business experience and vision to communicate the potential of that technology that won NPS its $250,000 grant.
Two years later, NPS delivered a major breakthrough in small-scale distributed generation. The prototype fuel cell delivered to BPA included NPS's revolutionary fuel processor, which reforms methanol into pure hydrogen for use in proton exchange membrane fuel cell systems.
Since then, BPA's public utility customers have demonstrated the 5-kilowatt system throughout the Pacific Northwest. BPA has entered into a second purchase order, this time for 110 units, to be demonstrated by its customers during the next three years.
With hindsight, BPA now sees how serendipitous was Guggenheim's original proposal to work with the power marketer. According to Terry Esvelt, vice president of BPA's energy efficiency group, "It just so happened that this thing that we didn't really know where it was going to go - nobody was talking about fuel cells back in 1996 - in 1999, boy, it's now a hot topic."
Since first approaching BPA in 1996, Northwest Power Systems has grown from the original three founders - scientist David J. Edlund, Ph.D., chemical engineer William A. Pledger, P.E., and Guggenheim, a business entrepreneur - to a staff of 23 operating from facilities in Bend, Ore.
Always thinking big, Guggenheim now has his sights set on being the world leader in small-scale fuel cell components and systems by 2010. - R.R.J.
NPS' founders say they started the company to build something to make the world better for their kids. How are you working toward that?
When we started this company, we wanted to get into fuel cells because it's good for the earth, for the environment and for our kids. Dave Edlund, Bill Pledger and I have two kids each, and our most important concern is leaving something good for these kids to grow into. We needed to make a living of course, but we hoped to do it in a way that was beneficial to our own kids and grandkids down the road.
How has difficulty in producing pure hydrogen hindered fuel cell development?
This is an observation, but previously fuel cell companies in this industry have focused on the development of the membrane electrode assemblies inside a proton exchange membrane's stack of cells. ¼ Their measure of success was generating a continuous electrical current and not on [the issue of] where's the fuel going to come from. ¼
We noticed in 1996 that there were only a handful of companies that were actively thinking about generating hydrogen, and they were focused on a limited number of fuels. ¼ We thought, well gee, we're not going to focus on the stack at all. We're going to assume that the stack will be there and what's missing here is the reformer. We're going to focus on development of not one reformer for one fuel, [but] on an array of fuel processors that will each operate on a different fuel. Because every time we develop a reformer for a new fuel, we basically open up a new market. ¼
This was the innovation that we brought to the marketplace - recognizing the need for a small-scale, three-stage hydrogen generator that would convert conventional fuels like methanol, ethanol, propane, methane, diesel, kerosene and others, into a pure hydrogen feedstream that would not contaminate the fuel cell stack. ¼
How did you get involved with the BPA?
I had dealt with Bonneville Power Administration for many years prior to forming Northwest Power Systems. ¼
We showed them the invention in September of 1996, and asked if they would basically invest $250,000 in the reduction to practice of our invention, the fuel processor. For that amount of money we felt we would be able to deliver a fully integrated, 3- to 5-kilowatt fuel cell system within a couple of years. It would be a slow development process and require some assistance from Bonneville. The BPA decided to make the investment.
In some ways it's kind of amazing because they don't have a huge research and development budget, and they weren't, in effect, investing in research and development here - it was really a demonstration of technology. But they recognized early on that we were doing a lot of development work. And they loaned us analytical in
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