The CEO Power Forum: The Best of the Best

Five electric utility chiefs are showing true leadership for their companies and for an entire industry.
Fortnightly Magazine - May 15 2003

Five electric utility chiefs are showing true leadership for their companies and for an entire industry.

Who are the best-of-the-best chief executive officers (CEOs) in the power industry? Fortnightly magazine wanted to know. After an almost unending parade of accounting scandals, credit downgrades, and overall corporate malfeasance that shook the industry to its foundation, true leadership is needed now more than ever. But just what is true leadership, and how do you measure it? Peter F. Drucker, a famed guru and authority on corporate management, has said that effective leadership is not about making speeches or being liked; leadership is defined by results, not attributes. Certainly, the CEOs profiled in Fortnightly's 2003 CEO Power Forum are leading companies with financial results that should be the envy and example to all of the utility industry.

We asked SNL Financial, the independent energy information and research firm, to analyze the sector and generate a list of profitability metrics for the 10 largest firms by equity market value (see below), which became the basis for our selection of this year's best-of-the-best CEOs. Then, the Fortnightly editors selected from the top companies those CEOs who, to paraphrase another Drucker maxim, did the right things in addition to showing stellar financial results:

  • H. Allen Franklin, Southern Co., for his ability to show how a modern regulated utility is run successfully.
  • John W. Rowe, Exelon, for his ability to show that utilities can succeed in competitive markets.
  • Thos. E. Capps, Dominion, for his high ethics and uncanny exercise of good corporate judgment in avoiding the pitfalls of others.
  • E. Linn Draper Jr., American Electric Power (AEP), for his leadership in restoring the reputation of a great utility name.
  • Eugene R. McGrath, Consolidated Edison Inc., for showing what T&D utilities can accomplish, and showing true heroism on Sept. 11.

It is interesting to note how varied the companies' corporate strategies are-yet all have managed to make the list. Southern Co. (ticker: SO), which is in the number one spot this year, is a 100-percent regulated utility, while Exelon (ticker: EXC), in the number three spot, resides in two competitive markets, Illinois and Pennsylvania. Dominion (ticker: D), in the fourth spot, differentiates itself through its profitable exploration and production business, in addition to being an electric utility. Furthermore, Dominion managed to avoid merchant generation overbuilding and the energy trading scandal, and the company was one of the few that pursued an international strategy and turned a profit.

American Electric Power (ticker: AEP), having done some fine-tuning in response to its previous involvement in energy trading and the merchant sector, is managing to steer to calmer waters, making the ninth spot on the list. Last but not least is Consolidated Edison (ticker: ED), which as one of the largest wires businesses in the country, shows you don't need generation to be among the elite.

So, what is the future of the electric utility industry, and where is it going? In the following pages, five of the industry's top leaders talk about the strategy and future of their companies and the industry. From all of us at the Fortnightly, we hope you enjoy this year's CEO forum.

Chairman, President, and CEO of Southern Co.

"A lot of wholesale customers are most interested in having a reliable, dependable source of power to serve their customers. We are seeing a lot of those folks turn to us."

The Company

Market Cap End of 1Q 2003:
$20.5 billion

P/E Ratio End of 1Q2003:
15.5 times earnings

Revenue 2002:
$10.55 billion

Net Income 2002:
$1.32 billion or $1.86 per share


The Executive

Age: 58

Education: Franklin received a bachelor's degree in electrical engineering from the University of Alabama.

Board Memberships: Franklin is a member of the board of directors of Southern Co. He is a director of SouthTrust Corp. He was elected a senior member of the Institute of Electrical and Electronics Engineers. Franklin serves on the United Way of Metropolitan Atlanta's board of directors. He is a member of the board of directors of the Georgia Chamber of Commerce and the Metro Atlanta Chamber of Commerce. He was appointed by former Georgia Gov. Roy Barnes to the Board of the Georgia Department of Industry, Trade, and Tourism. He served as president of the Atlanta Area Council of the Boy Scouts of America and as chairman of the Centennial Olympic Park Area Inc. He also served on the advisory board for the Atlanta area Salvation Army, the board of directors of Central Atlanta Progress, National Board of the National Wild Turkey Federation, and the board of trustees of the Robert Woodruff Arts Center and Georgia Research Alliance.

Earlier in Career: Prior to his current position, he was president and chief operating officer of Southern Co. From 1994 to 1999, he was president and chief executive officer of Georgia Power Co., Southern Co.'s largest subsidiary. Prior to his position with Georgia Power, he was president and chief executive officer of Southern Company Services Inc.

How do you intend to maintain growth at Southern?

We have exceeded our growth targets for the last couple of years since we spun [off] Mirant. We have been saying that we intended to grow earnings at least 5 percent per year on an earnings-per-share basis. We have been substantially higher than that. We are still planning to produce at least 5 percent earnings growth. One of the significant advantages we have is we are in a region of the country that has had robust population and economic growth in the Southeast, and specifically in the Atlanta area. Even though this part of the country is in a downturn like everywhere else, all of the demographics and all of the data say that the growth is going to come back here. So, even our base business, which is the regulated electric business, is going to have relatively high growth numbers compared to other parts of the country. We are in a competitive generation business that is growing quite rapidly even during the economic downturn, and even with the problems in the IPP business in other quarters, we are still seeing our competitive generation business growing in the 15 to 20 percent growth rate category. That is for several reasons. We participate in the competitive generation business but in a very different way than most of our peers. We only build power plants after we have customers. We only build power plants after we have long-term contracts for the output of those plants. Because of the stability and reliability associated with Southern Co.'s name, there are a lot of wholesale customers (co-ops, municipals, and other utilities) that are most interested in having a reliable, dependable source of power to serve their customers. We are seeing a lot of those folks turn to us.

How long are these contracts for?

Anywhere from five years to 15 years, with seven to 10 years being a more typical number. We like that because it gives us certainty in earnings and gives us confidence to build additional plants when you have that kind of earnings stability over a period of time. But the customers like it also because these wholesale customers that we are selling to have retail customers that they are obligated to serve.

How do you manage the commodity risk in your competitive generation business?

In any business that produces a decent return, there are business risks, or we couldn't produce the kinds of returns we are talking about. What we have attempted to do is structure our competitive generation business to have no more risk than a regulated business, and that is hard to do because a regulated business is, comparatively speaking, a low-risk business. The way we have done that is to deal with each of these risk factors separately. Regarding market prices of power, the day-to-day and hour-to-hour changes in market prices for power-we mitigate that by simply having contracts with creditworthy entities that pay us our fixed cost and a return on our plants. So we are not affected. The profitability of these contracts is quite insensitive to short-term market prices for power. Two, a major risk is fuel volatility, especially natural gas price volatility. We do not take fuel price risk in any part of our business. In our competitive generation business that gas price is passed on in an energy charge to whomever is purchasing the power. They take the fuel risk and we are happy to help hedge that risk if they ask us to, but we don't take fuel price risk and we don't take electric power price volatility risk. In addition, if you have a long-term contract there is always the credit quality of the counterparty to be concerned about. In the vast majority of the contracts that we have, the vast majority of the revenues from those contracts are with counterparts that are investor-owned utilities or they are co-ops and municipals that have retail customers that are going to purchase that power. So, the great bulk of our contracts are not third parties playing in the market. It is utilities that have an obligation to serve that will sell that power and will collect that revenue that are very likely to maintain their credit quality.

In what other ways is your competitive generation business different from other companies in the independent power sector?

Many companies in the IPP sector build plants with the expectation that they can sell the power in the short-term market. We don't do that. Many of the players in the past have taken natural gas price risk and have guaranteed fixed priced contracts. We don't do that. We are not capable of adequately mitigating or hedging that risk. It is not a risk that we would take in the past and not a risk we would take in the future.

What are the macro-effects of an illiquid wholesale market to the industry?

It doesn't have much of an effect on us, to be perfectly honest, or our retail customers or other retail customers in this part of the country. That is one of the reasons that you can see such different views out of utilities and out of state regulators and governors regarding some of the wholesale market development and wholesale market proposals.

Say, for instance, a power plant that you have allocated to serve a particular customer goes down, and supplies are short. How would you be able to satisfy your obligation?

First of all, you plan for those events, and you have enough reserves to cover for those cases. But in addition, for decades we had the opportunity if one company gets into trouble-if it doesn't have enough capacity because of high load or outages-you simply purchase from parties around you, whether it's other utilities or other IPPs. That's nothing new. That was taking place before we had ever heard of an IPP and before we had ever heard of some of the current wholesale market concepts. You can do that with the wholesale market the way it was 30 years ago. You can do it with the wholesale market 20 years ago or 10 years ago.

What is your view on the wholesale market?

Let me clarify. The better the wholesale market works, the more efficient it is and the better for everybody. We fully support efficient wholesale markets, and we fully support transparency in wholesale markets. The point I am making is that as far as consumers are concerned, there is a different order of magnitude of dependence on wholesale markets depending on whether there is retail competition or not. In areas like the Southeast, where utilities still build enough generation to serve their customers, the great majority of cost associated with serving those customers is related to the cost of the plants those utilities build. Companies will feel optimized by buying and selling on the margin at the top of the stack into the wholesale market. The better the wholesale market works the better it is for retail markets, even here in the Southeast. It's just the relative impact is much smaller here than in an area where retail customers depend exclusively on the wholesale market.

Last year in your letter to shareholders you discussed your involvement in the Southeastern RTO. What is your current position on the issue, and how does it relate to your opposition to SMD?

We have made a lot of progress on SeTrans. I really believe it is a model effort to voluntarily put an RTO together that covers a very large region. Scope-wise it would be one of the largest RTOs in the entire country. Participation-wise it is the most diverse in the country. To my knowledge it is the only RTO that includes the co-ops and municipals in it as full participants.

The problem with standard market design is that it is inconsistent with the rules we were operating under to form SeTrans. We had FERC Order 2000, which said RTOs are voluntary and here are the requirements to form an RTO. We set about to voluntarily form an RTO that met all of those standards, and SeTrans does. In the middle of that process, after we had assembled all these players and we had a number of the states showing interest in SeTrans, FERC issues a standard market design proposal where RTOs really are not voluntary and where the rules are changed dramatically. We have a dilemma that we have an RTO that we have spent years working on and have a great deal of investment as far as players being committed to. Then, all of a sudden, we have a proposed rule out of FERC that is inconsistent with that RTO. It's like changing the rules in the middle of a ball game. The result of that has been that we have continued to work on SeTrans under the original rules. FERC has indicated that they see a lot of good elements in SeTrans. My judgment is that they favor us proceeding with SeTrans.

Is there one thing that you would change with SMD?

There are a lot of things. The way transmission is priced. The movement of jurisdiction from the states to FERC. The loss of native load priority and the ability to assure reliability for native load. It is a whole series of important issues where the SMD is dramatically different than Order 2000. That change of direction has clearly put some real question marks in our ability to ultimately implement SeTrans. It has also created major concerns among state policymakers, especially state public service commissioners. FERC has indicated they will reconcile SMD with some of the concerns they have heard from the states. Hopefully, this will remove some of the confusion and help get us back on track.

Is bigger better? What has been the benefit to Southern of its size?

First of all, I would say that bigger is not necessarily better in my judgment. I think that there is a critical size that companies such as ours achieve where you continue to accrue benefits. I think it is helpful if a company is large enough to be able to finance significant projects by itself without bringing in others. I think it's helpful if a company has enough generation to really see the efficiencies of a large fleet of generation. I think it is helpful if a company has an expansive balance sheet that can compete with the balance sheets of competitors.

At the same time, when a company is as large as Southern or as large as any of the top 10 utilities in this country, getting bigger from that is a great benefit. I think it is important to get better. One of the reasons we have not been acquisition-happy is that we have been extremely disciplined on why we would do that. Does it really have earnings per share growth? Is there something important that we can do if we were bigger that we can't do now? The answer is generally no. On paper it always appears better to be bigger. But bigger is always more bureaucratic and bigger is decisions further from customers, and bigger companies tend to be slower. For our judgment, there is no great benefit to be substantially larger. If you are going to get bigger, it should be for reasons other than being larger.

Chairman, President, and CEO of Exelon

"We do believe our industry will have opportunities. Our preference would be an integrated generation, transmission, and distribution company in an area that has made the transition to competition."

The Company

Market Cap End of 1Q 2003:
$16.4 billion

P/E Ratio End of 1Q2003:
10.3 (forward '03)

Revenue 2002:
$15 billion

Net Income 2002:
$1.4 billion


The Executive

Age: 58

Education: University of Wisconsin, followed by the University of Wisconsin Law School.

Board Memberships: UnumProvident Corp. and Fleet Boston Financial. Additionally, he is on the Board of Trustees at The Art Institute of Chicago, The Chicago Council on Foreign Relations, The Chicago Historical Society, The Field Museum, the Wisconsin Alumni Research Foundation, the American Enterprise Institute, and the Illinois chapter of The Nature Conservancy.
Mr. Rowe is past chairman of the Edison Electric Institute, a trustee of Northwestern University and a member of The Economic Club of Chicago, The Chicago Urban League, and The Commercial Club of Chicago, where he serves on the Civic Committee.

Earlier in Career: Prior to the formation of Exelon, Mr. Rowe served as chairman, president, and chief executive officer of Unicom Corp. and Commonwealth Edison. Mr. Rowe was president and chief executive officer of New England Electric System from 1989 to February 1998, and he served as president and chief executive officer of Central Maine Power Co. from 1984 to 1989.

What has contributed to your company's ability to weather the economic downturn?

What has allowed us to weather the storm is that we have focused intensely on improving our operations and cutting costs at the same time. That is most highly represented by our nuclear operation, where we have gone from a 47 percent capacity factor six years ago to averaging 93 percent the last three years, and done it spending less money on many things simply by doing the job right. It is also represented by the money that we have taken out of areas like IT and overall administration since we did the merger between ComEd and PECO.

Are you one company now?

I would not say that everything is done. I would say that two-thirds of the job is done. I think there is more saving to be done out of consolidating our supply chain. I think there are more savings to be made from operating the delivery businesses in PECO and ComEd more jointly. I think there are more savings to be made in IT. As I look over things, I think we have very well consolidated nuclear. I think we are very far in consolidating our fossil operations. We have made big progress in these areas, but we are not done yet.

What is the strategy going forward in terms of growth, and what assets would you think of purchasing to support that growth?

Our strategy is first to learn from both past successes and past failures and try to get the numbers right. We are absolutely committed that we will not grow unless we can do it in an accretive way. We, like other utilities, do not have room for big mistakes that produce losses. Frankly, in our business there is no strategy powerful enough to justify two to three years' dilution. Anything we do, we have to have high confidence that it will be accretive. That said, we do believe our industry will have opportunities. Our preference would be an integrated generation, transmission and distribution company in an area that has made the transition to competition. But like everybody else, we are keenly aware that there are some very depressed generation companies around, and if we thought the prices were low enough so the acquisition could be properly accretive, we would consider that too.

What kind of M&A would you be interested in?

The first criterion is accretion and second criterion is good return on investment, and beyond that, integrated utilities fit our strategy best. The reason we haven't done one is we haven't found somebody that fits our criteria who wants to do a deal with us.

Would you think of selling your transmission assets? Does that make sense to you?

We are ardently in favor of the creation of a super-RTO in the Northeast. We want to belong to PJM because it unites the two halves of our company and gives us maximum flexibility. So, we would love to see PJM and MISO integrated as much as possible. We would certainly consider selling our transmission assets if: a) that helped the Northeast market develop; b) it solved problems for FERC, and; c) the Senate passes the House bill that protects us from adverse tax consequences. So, there are three very important things going on, but I'm not sure that will come to pass.

When do you believe power markets will rebound?

In terms of power markets, we tend to see them recovered just a little already. We don't think you'll see substantial recoveries until the 2006-2007 time period, but we don't think it is as late as 2010. We believe that the economy will begin to improve if not this year, next year or 2005. We believe the current excess capacity will be soaked up partly by improvements in the economy and partly by continued environmental pressure to shut down some of the least efficient of the old units.

Do you believe the growth strategies of yesteryear, such as international and independent generation, will again be available to utilities and supported by investors?

Personally, I believe the right strategy for our company is to focus on the United States, to focus on generation, transmission, distribution and focus on trying to serve customers and make money by integrating those operations more successfully and across broader regions. I think the most important single lesson from California is that total disaggregation is a bad idea for customers and a bad idea for investors. But that doesn't mean that you will not see a resurgence of international expansion. There is nothing inherently wrong with it.

I think you will see a resurgence of the independent generation business, but it will not be as cushy as it was when they got long-term contracts from utilities, nor will it be as aggressively self-confident as it was three years ago when P/Es were astronomical. I think you will see continued evolution in retail competition but slower than we used to think. I think you see a very high recognition today that utilities still have the obligation to keep the lights on and you have to keep some muscle for them to do it.

What will the Exelon of 2050 look like?

It will be very different and it will change beyond my comprehension several times before we get to 2050. My wild speculation is that it would be a company that would be the nation's leader in the next generation of nuclear technology and in biomass and distributed generation, because I concur with the EPRI vision of a system of the future that mixes local generation, peaking, biomass, and baseload power in a very complex interactive system. Maybe by that time it will be farther than the hydrogen economy that the president foresees. My strength as an executive has been that I have never thought my crystal ball was really made of crystal. So, if I can see two to five years ahead, I'm doing pretty well. Seeing 50 years ahead is something I disclaim.

You announced a cost reduction plan aimed at target savings of 5 percent to 10 percent from current capex and non-fuel O&M budgets ($6B combined). How will you reach these savings? How dependent are forward earnings forecasts on your ability to meet these targets?

We have launched The Exelon Way initiative as a long-term, all-encompassing effort to transform how Exelon defines and conducts business. Areas currently under evaluation include restructuring of our business units, realignment and integration of support functions, standardization and simplification of processes, and optimization of investment. Our target is $300 [million] to $600 million in increased cash flow from operations by the end of 2004. Current earnings guidance for Exelon is $4.80 to $5.00 per share in '03 with growth thereafter at about 5 percent per year. The Exelon Way initiative would be largely additive to these expectations.

What about Exelon's efforts to site and build another nuclear plant?

We intend to apply for an early site permit that would "bank" a site at the Clinton Power Station in central Illinois for future construction of a new nuclear unit, should we ever decide to build one.

What was wrong with the pebble bed nuclear design project that you pulled out of?

Nothing wrong with the idea, but the technology is still under development and we are not an R&D firm. If the technology is fully developed and proven, we would certainly consider using it.

Can building new nuclear be made economic in this environment?

With current technology, with current market conditions, no. But as with all things, both the technology and the market will change. We'll have to wait and see.

Some have said that it is patently unfair and uncompetitive for some utilities to be able to compete and take market share from other utilities in competitive states while their vertically integrated utility is being protected from competition by their state PUC. As a utility in a competitive state, what is your stance on the issue?

Regional wholesale competition provides numerous economic and reliability-related benefits to consumers. It is unfortunate that some states and some utilities view an open, competitive wholesale market as a threat. This is evidenced through recent actions by the Commonwealth of Virginia with respect to the expansion of RTOs and recent legislative proposals that call for a "clarification" of jurisdiction that would severely restrict FERC's authority over interstate commerce and overturn 75 years of Supreme Court precedent. Exelon remains committed to public policies that build competitive wholesale and retail markets to meet the needs of our customers.

We have learned a number of key lessons over the past few years: Retail competition works well for large customers; small customers need a reliable regulated service option in addition to a competitive choice; and utilities that provide the regulated service option must be allowed to make their own supply arrangements.

What do you believe is the future of retail? Has it been a success or failure?

In Illinois, open access has been available to all non-residential customers since Dec. 31, 2000. As expected, the largest customers have been among the first to enter the market. Indeed, the large customers participating in open access in ComEd's service territory today represent roughly 30 percent of all ComEd kilowatt-hour sales. Furthermore, market development at the large customer level has been so robust that the Illinois Commerce Commission allowed ComEd to declare the 3 MW and greater customer market "competitive" and abandon tariffed service offerings to these customers.

Competition has been a success in Illinois, at least in ComEd's service area, to date in the large C&I [commercial and industrial] market. As for smaller customers, the jury is still out. Time and market development will tell.

In Pennsylvania, the number of active suppliers operating in PECO's territory fell from 36 in January 2001 to an average of 16 in 2002 and 2003 to date. Choice rules are such that it is relatively easy for suppliers to get into and out of the market. The only constant is that the utility has to offer fixed prices until 2010 in PECO's case. In Pennsylvania, we at PECO are only halfway through a transition period that ends 2010. The post transition market structure is anyone's guess, but it is almost certain to be different than the rules in the transition period.

Defining success is a matter of perspective. In Pennsylvania, provider of last resort rates were set in 1998 for the future 12 years. This has recently turned out to be fantastic for customers because they have been protected from the volatility of the wholesale electricity market. I would say that consumer advocates call this extremely successful: Customers have choices and price protections. However, what is good for the customer is not always good for alternative suppliers. Suppliers at the time probably would say that it has not been successful. If you were to ask them the question in 2001, you would probably have received a different answer. If you ask them in 2004, maybe a different answer yet. Wholesale market prices are like the weather in some places-if you don't like it at the moment, stick around, it's sure to change.

How do you feel about the random assignment of customers?

What we have learned since 1999 in PECO Energy is that if there is to be a random assignment of customers, it is important to develop procedures in cooperation with consumer advocates and regulators so that any process results in the consumer being better off by being randomly selected and assigned. This can mean being guaranteed savings on their generation bill or being sold a generation product with a renewable power component (such as wind or solar) at the same price they were paying for a non-renewable component product.

Chairman, President, and CEO of Dominion

"We have two big finds in the Gulf [of Mexico], Front Runner and Devils Tower. Once they're both running that's going to add 120 billion cubic feet of gas for us. That will throw off a lot of cash."

The Company

Market Cap End of 1Q 2003:
$17.1 billion

P/E Ratio End of 1Q2003:
11.8 (forward '03); 11.5 (trailing '02)

Revenue 2002:
$10.2 billion

Net Income 2002:
$1.362 billion


The Executive

Age: 67

Education: Undergraduate and Law degrees from the University of North Carolina.

Board Memberships: Formerly director of Bassett Furniture Industries Inc. Currently a member of the board of visitors for William & Mary, and the board of trustees of the Virginia Foundation for Independent Colleges.

Earlier in Career: Joined Carolina Power & Light Co. in 1970 as senior counsel, then became vice president and general counsel of Boston Edison Co. in 1974. Partner at Miami law firm of Steel Hector and Davis, where he also served as chairman of the exectuvie committee for the firm. Joined Virginia Power as executive vice president in 1984 and became president of Dominion in 1986. He was elected chief operating officer of the company in 1989 and CEO in 1992.

Equities analysts say that your company's financial profile is strong and keeps getting stronger, but they say potential risks to upward valuations are that roughly 23 percent of earnings per share comes from the natural gas commodity sensitive exploration and production (E&P) business. How would you address these concerns?

We don't want to become an E&P company, but right now we love our E&P. We have 6.1 trillion cubic feet of reserves, and gas prices are high. We think gas probably will trade the next four to five years between $3.50 and $4.50. We make good money on that.

Why do you think analysts are concerned with the E&P business?

I think a lot of the utility analysts do not understand E&P. We are different from the typical E&P company. We hedge and we put together a budget for the next year and a three-year plan, and when we see the gas prices on the forward curve going out higher than we have in our budget and three-year plan, we go out and hedge all we can. A lot of E&P companies do not do that. They go and try to hit home runs when gas prices are high and then swing out when gas prices are low. We try not to do that. We try not to have the big swings in our earnings that a typical E&P company would have.

What is it about Dominion's culture that makes it more conservative than other E&P businesses in risk managing the commodity price swings more tightly?

When E&P is between 22 percent and 23 percent of your earnings … what you want to do is grow earnings 5 to 7 percent each year. If you grow earnings 15 percent this year because gas prices are so high, what do you do next year when they are not so high? That is why we hedge as much as we can. We are partially hedged for 2004 and into 2005.

What are the prospects of siting new nuclear power?

Right now I don't think anyone in this country is going to build another nuclear plant. We certainly are not. There is too much risk. We took a look at it. GE came down and talked to us. We figured that a new nuclear power plant would cost $6 [billion] to $7 billion and take 6 to 7 years, and the bus-bar cost, if everything went right, would be something like $28 per megawatt-hour, and we thought that was too high. It is too much risk. It is like bidding part of your company on one plant. Nobody is going to do that. It is not economical.

Where would nuclear have to be for it to be economical?

It would have to be below $24 per megawatt hour to be economical.

I live in Virginia. I have yet to be contacted by an alternative provider wanting to sell me power. Why is that, and what does that mean for electric competition in Virginia?

Do you know why? It is because we are giving it away. Our rates are low. We have lowered our rates three times since 1992, and they are capped until July 2007. I don't know why people haven't come in. I guess we have a low rate and it is hard to compete with.

Do you think regulators have failed at designing the competitive market in Virginia?

It just takes time to do this. I think there will be more competition coming. The ones that were going to come in, the Enrons of the world, aren't around anymore. They were really aggressive until they went belly up.

Knowing you were one of the few U.S. utilities that profited from an international strategy, making $201 million from the sale of Midlands in the U.K., what international markets would you pursue?

Would I go anywhere offshore other than gas in Canada? No. The risk-adjusted return is just not there. We pulled out of Latin America; we were down there in Belize, Bolivia, Peru, and Argentina. The climate was getting bad and we had a chance to sell. We came out a little ahead, but not nearly as well as we did in the U.K. We did that before this country started deregulation. Once deregulation started coming to the Northeast, it was just a much better risk-adjusted return over here. We got out of Latin America.

What specifically soured you on your Latin American investments? How did the risks in your risk-adjusted return framework change?

I'll give you an example of a company in Brazil. We took a good look at Brazil and there was a hydroelectric plant, a pretty good size one that was over 1,000 megawatts. The problem down there was that if you bought that plant you had to finance it in U.S. dollars because their market was not big enough or sophisticated enough to raise a lot of money in their local currency. So, you had to raise dollars and then get paid in the Real. You have seen what has happened to the Real now. That's a no-no. You don't want to invest in one currency and get paid in another unless you are willing to take a hell of a big currency risk, and we were not willing to do it.

What conditions would you need to begin thinking about an international strategy again?

A frontal lobotomy.

Many utilities have said that they may be interested in acquiring distressed assets. Is Dominion? Why?

Yes. We are acquisitive if it is accretive. We don't buy things for strategic reasons and hope that we will make money on them down the road. We don't believe in buying market share if you are not going to make a profit on it.

Is being a big utility better? Will Dominion get bigger by whole acquisition of companies rather than assets?

We think you are probably better off buying assets such as baseload generating units or pipe. Big is OK. Big is good. But the bigger you are the harder it is to get the five to seven percent growth. But you can do things and take some risks that a smaller company can't do, and you can afford to buy some things that a small company can't do. Being big has some advantages. But it is harder to turn a battleship than it is a PT boat. So, the idea is not to be big for big's sake, the idea is to be profitable. If you can be big and profitable, so much the better, but if it comes down to one or the other, you'd much rather be profitable.

How do you plan to grow in the next few years?

We will produce this year about 470 billion cubic feet equivalent of natural gas. We have two big finds in the Gulf [of Mexico], Front Runner and Devils Tower. One comes on in the beginning of next year and the other one in the second half of next year. Once they're both running that's going to add 120 billion cubic feet of gas for us. That will throw off a lot of cash for us. We will take that cash and buy some generating units, or buy some pipe, or buy some onshore long-life reserves. We will grow it that way. We also have power plants under construction that come on line in 2005 for the co-ops in North Carolina and a big one outside Philadelphia coming on line in 2004, which we have people wanting to buy from.

Chairman, President, and CEO of American Electric Power*

"It is our view that the environmental constraints are going to continue to get more stringent, and we think in some instances they should."

The Company

Market Cap End of 1Q 2003:
$9.026 billion

P/E Ratio End of 1Q2003:

Revenue 2002:
$14.5 billion

Net Income 2002:
Negative ($519 million), including one-time charges and writeoffs. Ongoing earnings (earnings from operations before one-time or unusual items) was $957 million.


The Executive

Age: 61

Education: Bachelor of Arts and a Bachelor of Science in chemical engineering from Rice University in Houston, and a doctorate in nuclear science and engineering from Cornell University in Ithaca, N.Y. He is a registered professional engineer in the state of Texas.

Board Memberships: Elected a member of the National Academy of Engineering. Elected to the Cornell University Council Board in 1998, appointed to the University of Chicago board of governors for Argonne National Laboratory in 1999, and serves on the University of Texas Engineering Foundation Council. Appointed to the board of directors for The Nature Conservancy in September 1999. He serves on the board of The Nature Conservancy's Ohio chapter. He is also a director of the Nuclear Energy Institute (past chairman), the Institute of Nuclear Power Operations (past chairman), the National Coal Council (past chairman), and the Edison Electric Institute (past chairman).

Earlier in Career: He became president of AEP and the Service Corp. in March 1992, following 13 years with Gulf States Utilities Co. in Beaumont, Texas, where he served as chairman, president and chief executive officer. He became chairman, president, and chief executive officer of AEP in May 1993.

What possibilities are there to continue investigations into trading?

I really don't have much to say on that one. The ball is in the court of the various entities that might investigate. They have asked us questions. We have responded to all of the questions. I have no reason to believe that there is anything more, but I also have no way to tell that for sure.

Are there any other risks of liquidity crisis at AEP?

We have done a lot in the way of financing already this year. About two and a half weeks ago, we sold $2 billion worth of bonds for our Ohio and Texas companies. That was followed just a few days later by $1.1 billion worth of equity issuance, and then last week we sold another $500 million worth of bonds for the parent. In addition, we had a bank line that was to have matured in May of this year. We have replaced it with two pieces of a bank line of credit, one of which is a one-year line of credit and the other one is a three-year line of credit. So, we now have lines of credit that amount to $750 million that expire in one year, $1.5 billion that expire in two years, and another $750 million that expires in three years. So, we have lots of credit and about $1.7 billion in cash, and have not had difficulty selling bonds or stock.

What is your debt ratio? Where do you want to be?

We have said that we want to be between 50 and 55 percent. We are at about 54 percent.

What is the company's view on the environment, and what is the company actively doing to reduce emissions?

We are a large emitter of various gases because we are a huge generator of electricity. It is our view that the environmental constraints are going to continue to get more stringent, and we think in some instances they should. We have been big supporters of the president's Clear Skies proposal that would materially reduce the allowed emissions of nitrogen oxide, sulfur oxides and mercury. We have quite low-cost generation. We are generating a kilowatt-hour at a production cost of $14 or $15 per megawatt-hour. Compare that with a modern combined-cycle gas plant and $6 gas; the price of that is well over $35 per megawatt hour. So, we think our coal will continue to be in the money even with additional environmental emission reduction expenditures. The one wildcard issue is CO2. We think that is an issue that we should be addressing. We have been at the forefront of the groups that advocate voluntary programs to either avoid, reduce, or sequester CO2. We have huge projects in South America that sequester CO2 and we've done various things in the United States as well. We think that those things should be done. We are opposed to mandatory reductions because the technology does not yet exist. But we think we ought to have a real focus on the development of technology that would in fact reduce CO2 material in the meantime. We think voluntary programs make a lot of sense.

In looking at the technologies that exist, have you been spending money on that technology?

There really are no technologies that can be applied to large-scale facilities that will remove CO2 from the stack. What we have devoted our attention to at this stage is sequestration in terms of forestry and also a project that is a joint-project with the Department of Energy and Battelle to explore injecting CO2 into deep geologic structures.

Many utilities have pre-empted new environmental legislation and begun installing and implementing new emissions reduction technologies. Is that something you are doing?

We have already committed to spending about $1.5 billion dollars for NOx reduction. We are in the process of installing selective catalytic reduction on a numer of our facilities. That is really to meet current requirements for NOx removal. As the legislation passes to make even more stringent reductions, we will add that sort of technology to even more plants. We also would be in the position to add sulfur dioxide scrubbers to plants if in fact the Clear Skies initiative passes, which we support.

What's your view on clean coal?

I think that clean coal makes huge sense. That presumably involves coal gasification in an integrated combined-cycle plant. The question there is economics. Those plants at the moment cannot compete with other technologies. So, to get them up in running in quantity will require some sort of government initiative, I suspect.

AEP sold its Texas customers to Centrica. What is the company's position on retail markets?

We do business in 11 states. In four of the 11 states there is, at least theoretically, customer choice at the residential level. The four states have quite different characteristics. In three of the four, Virginia, Michigan, and Ohio, our rates are low enough that essentially none of our customers have switched to new suppliers. In Texas the situation was quite different. The way that retail competition was introduced was that all customers of every utility were switched to new suppliers. The particular rules in Texas, we felt, made supplying those retail customers a very risky business. The customers could come and go at will. We were obligated to serve anybody who wanted us to serve them at a fixed price with no control over the price of the fuel for our power plants. So, the customers could pick and choose. They could leave us when our prices were high and come back to us when the competitor's prices were higher, and we then had to procure the fuel to serve them. We thought our best opportunities in Texas were in the wholesale business and the energy delivery business, and we would leave what we consider to be a more risky business to someone that thinks of themselves as a skilled retailer, namely Centrica.

Why aren't RTOs the right idea, if that is your belief?

We don't necessarily believe that there is anything wrong with an RTO. We are in the troubling situation that we were proceeding to join the PJM RTO and expected to do that around the first of March. We encountered significant resistance from some of the state commissions that don't like the FERC standard market design. There is legislation in Virginia; there is considerable pushback from Louisiana about whether or not we ought to be involved in an RTO. What we have said is that you, the FERC, have to work this out with the states. We are not going to be caught in the middle between our retail rate jurisdiction regulators and the federal level. We are happy with the idea of joining an RTO, but we are sure not going to do it if our state regulators say not to. So, FERC is going to have to assert its authority one way or another. We are simply waiting for that to happen.

How would you like to be remembered at AEP?

I would hope that people would say that by the time I leave the company it was a strong company that was noted for providing reliable and affordable service to its customers. That it was an environmentally responsible entity, and that the employees, shareholders and customers found AEP an attractive place to either to work, take electric service, and invest in.

Chairman, President, and CEO of Consolidated Edison Inc.

"About 5,000 megawatts of new electric capacity needs to be built over the next five to seven years to continue to meet [New York City's] load."

The Company

Market Cap End of 1Q 2003:
$8.2 billion

P/E Ratio End of 1Q2003:

Operating Revenue 2002:
$8.5 billion

Net Income 2002:
$646 million


The Executive

Age: 61

Education: Bachelor's degree in mechanical engineering from Manhattan College; MBA from Iona College.

Board Memberships: Amercan Woman's Economic Deveopment Corp., the Atlantic Mutual Insurance Co., Barnard College, the Business Council of New York State, the Fresh Air Fund, the Hudson River Foundation for Science and Environmental Research Inc., Manhattan College, the Partnership for New York City, Schering-Plough Corp., the United Way of New York City, and the Wildlife Conservation Society.

Earlier in Career: Joined Con Edison as an engineer in 1963; held key executive positions in the utility's major operation and customer service areas, and managed fossil-fired and nuclar generating plants; was elected vice president in 1978, executive vice president in 1982, and president and chief operating officer in 1989; became chairman and CEO in September 1990.

What do think has contributed to your company's ability to weather this economic downturn?

We never left the basics. We stuck to our core strategy throughout the restructuring of our industry. We took a look at the restructured industry early on and decided where our expertise lay and recognized that we have been a distributor of electricity for many, many years.

How do you plan to meet demand given the siting challenges in the city?

Siting challenges have always been an issue in the city because of the dense urban environment, and no one is anxious to have a power plant in their back yard. So, we have had to deal with that issue for many, many years. We do that first by working with the communities, making sure we communicate the need for the facilities. In our case, it is primarily substations because we don't build generation in our service territory. So when we do have to site substations, we work with the communities and we make clear what the need is. We have been fairly successful over the years, although not without delays and problems. We have managed to keep ahead of the curve on infrastructure needs for the city so that we didn't constrain economic growth. About 5,000 megawatts of new electric capacity needs to be built over the next five to seven years to continue to meet the city's load. There are several projects under way that will help meet the future load. It's a struggle for power plant developers, but we are optimistic.

There have been a number of proposals to get more transmission into the city. What is the status of efforts to improve transmission infrastructure in New York City?

Basically the peak load in our service territory is around 12,000 megawatts. The import capability into New York City is about 5,000 megawatts. We have some requirements that have been developed over the years. In New York state, we are required to have enough capacity to meet our expected peak load plus an 18 percent reserve margin, and we adhere to that fairly religiously. Then, we have a second requirement that 80 percent of our expected peak for the in-city load must be located within the city. These rules are a result of the two major city-wide blackouts: the Northeast blackout of 1965 and the New York City blackout of 1977. From a reliability point of view, there is concern about relying on transmission from outside the city. You can't afford to lose the city, so we have the rule that 80 percent of our generation must be from an in-city source.

We have one of the most reliable distribution systems in the world, and we need to have a very reliable system because New York is a vertical city. We house people vertically, and we move them underground. If you don't have electricity you don't have water either. Our system is built with a second contingency design. That means we operate our system at all times to compensate for the loss of its two largest components. So, for example, if we had a 1,000 megawatt transmission line feeding into the city and we had 1,000 megawatt power plant in the city meeting the load at any given time, we operate so we could lose both of those components at the same time and still not lose the city. So, when a new transmission line is built into the city, we have to go beyond thinking of just putting in that transmission line. We also have to be prepared that in operating that line, if it is lost at some point, that we can handle the loss. We have to build the infrastructure to survive the loss of a transmission line. We have pretty strict reliability standards in the city that have resulted in our having the most reliable system in the world.

How has the experience of the Sept. 11 terrorist attacks changed your company and the utility business?

Clearly, everyone is much more focused more on security. We survived and responded to the loss of two of our major substations feeding downtown Manhattan because of a couple of things: the redundancy of our system and the training of our team. In effect, we were able to rebuild all of downtown inside of a week and get the world financial markets back up again. So, emergency preparedness, I think, is foremost on everyone's mind in the electric industry: identifying critical facilities, making sure you secure those critical facilities, and making sure you are working with law enforcement.

What is your view of retail competition given your retail energy services division?

We have retail access in our service area and all of our customers have their choice of supplier. Under restructuring in New York, many of the large commercial and industrial customers have chosen to go to energy services companies (ESCOs) for their supply. Our ESCO, Con Edison Solutions, is in that business. Small customers do not have the same motivation as some large customers have to switch suppliers. So, the vast majority of small customers have stayed with us. We go out and secure the supply for them. The switching rate at the residential level is very low. In all, about 153,000 of our 3.1 million customers have chosen an alternate supplier. A large chunk of our load, about 40 percent, goes to large customers. Some of them have gone to ESCOs, but as part of restructuring, we still distribute power for all customers, regardless of who's supplying the electricity.

What is the average growth rate for your utility?

Our present projections are for a load growth of about 1.8 percent per year over the next five years. New York is going through some tough times now, but it looks very promising from our point of view. We have a long-lead-time business, and when we look around New York we see many projects under development. For example, on the west side of Manhattan, we have the Javits Center being rebuilt, the extension of the number 7 subway line, the downtown rebuilding, and there's the potential for the Olympics. Last summer, two-thirds of our networks exceeded their forecasts, and we had new peak loads this winter and new increases in energy usage. So, looking forward, New York looks pretty good in terms of the growth potential for us.

What are the biggest challenges to your company?

I would say continuing investing in the transmission and distribution infrastructure to make sure the infrastructure stays ahead of its needs so that it doesn't constrain economic growth and constrain jobs and taxes.

What kind of skill sets should utility executives of the future have?

A good example is 9/11 because we had very well-trained people to work during an emergency, and under difficult respiratory conditions. We were able to put 2,000 people on the street the next day and start to rebuild lower Manhattan. That took a lot of skill, a lot of commitment and a lot of bravery, frankly, in a lot of cases. Utility people have a service mentality. When we started restructuring in New York 10 or more years ago, a lot of people advised me. They said it was going to be a new world and that I had better make up my mind that half of the people I have wouldn't have the skills to work in this new world. I was told that I would be better off letting them go and going out and hiring people with the right skills. We said no, we don't agree with that. We know who we have. We know their work ethic and we know their loyalty to the company. So, we went and built a learning center. We have a school, a sizeable school. We send hundreds of people a day, even today, through this school. We retrained our people in the new skill sets that would be needed going forward, and it has worked very well through this transition.

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