The New CEO's

Michael G. Morris
Fortnightly Magazine - June 2004


For Public Utilities Fortnightly's 75th Anniversary CEO issue, the magazine looked to the horizon and asked these new captains about the planned course for their companies, and for an entire industry.

In this endeavor, we chose six CEOs believes are the industry's brightest new stars:

Michael G. Morris, CEO, American Electric Power (Ticker:AEP)
Robert B. McGehee, CEO, Progress Energy (Ticker: PGN)
Michael J. Chesser, CEO, Great Plains Energy (Ticker: GXP)
Gary L. Rainwater, CEO, Ameren (Ticker: AEE)
Dennis R. Wraase, CEO, PEPCO (Ticker: POM)
Paul M. Anderson, CEO, Duke Energy (Ticker: DUK)

Although new leaders, these CEOs are industry veterans that cut their teeth within the corporate ranks for decades before rising to the top spots.

While Gary L. Rainwater, CEO of Ameren, has traveled the traditional route, moving through the engineering ranks, many of the new CEOs come from different backgrounds than their predecessors. Michael G. Morris, CEO, American Electric Power (AEP), and Robert B. McGehee, CEO, Progress Energy, are part of a new wave of utility executive that comes with legal backgrounds and diverse energy experience.

McGehee doesn't necessarily believe one discipline should dominate. "I don't know that a [legal background] is necessary. It is something I find valuable. You do look around. [AEP CEO] Mike Morris has a legal background. Certainly, the top people at Dominion, [CEO] Tom Capps and some of the others, have legal backgrounds. So, you are seeing more and more of it. [But] you're still seeing the MBAs. [TXU CEO] John Wilder, [FPL CEO] Lou Hay and [CEO] Wayne Leonard at Entergy have MBA backgrounds."

In fact, Dennis R. Wraase, CEO, PEPCO, comes from the world of finance. Whether utility leaders come from law, engineering, or finance, one thing can be said: Many of the new CEOs have had diverse experiences. Paul M. Anderson, chairman and CEO at Duke Energy, and Michael J. Chesser, chairman and CEO at Great Plains Energy, bring critical outside expertise that address very specific needs of the companies they now lead.

Even as the industry heads into a back-to-basics mode where some utilities dare to be dull, just judging from breadth and knowledge of the new leaders before us, they offer an exciting future for the industry.

We at the , in its 75th year, hope you enjoy this very special CEO forum.

Michael G. Morris

Chairman, President, and Chief Executive Officer, AEP

The Executive

Age: 57
Education: Bachelor of Science and Master of Science, Eastern Michigan University; law degree, cum laude, Detroit College of Law
Board Memberships: U.S. Department of Energy's Electricity Advisory Board; the National Governors Association's Task Force on Electricity Infrastructure; Connecticut Governor's Council on Economic Competitiveness & Technology; Trustee of the Bushnell Overseers and the board of regents of Eastern Michigan University; director of St. Francis Care Inc., Nuclear Electric Insurance Limited, American Gas Association, Spinnaker Exploration, Flint Ink Corp., Webster Financial Corp., and Cincinnati Bell. Past chairman of the board of the Connecticut Business & Industry Association.
Earlier in Career: Chairman, president and CEO of Northeast Utilities System; president and CEO of Consumers Energy; president of CMS Marketing, Services, and Trading; president of Colorado Interstate Gas Co. and executive vice president of marketing, transportation, and gas supply for ANR Pipeline Co.

The Company

Market Cap End of 1Q2004: $13.03 billion
Revenue 2003: $14.5 billion
Net Income 2003: $110 million
Employees: 22,075

What is one of the top issues that you hope to address this year as a new CEO?

Of the operation and maintenance expense at American Electric Power, our O&M account for the year, including both the utilities and the corporate center and non-utility activities, is just south of $4 billion. Because of that there are obviously opportunities to save. So, what I'm asking the team is to be as cost-effective as we can.

We benchmark ourselves against other utilities on O&M per kilowatt delivered and O&M per worker in the field, and we feel comfortable with where we are. What I am not doing, and what I personally don't agree with, is a new CEO coming in and making a bold statement about, "We are going to cut O&M by $400 million or $500 million," or some such number. I think that does two things. One, it probably sets a false goal that may be too deep and may not be deep enough; how would you know the day you walk in the door? But more importantly, it sends a shudder through the organization of, "Oh my gosh, what does that mean? You are going to fire people or lay people off." Everyone spends all their time wondering what does that mean to me, rather than spending all their time making sure the customer is well cared for. I would much rather have my team energized and trying to save money by working hard and working smart than fearful and shuddering over whether they will or won't have a job.

A recent Fitch reports states that Midwest power prices will be depressed for a long time to come because of abundant coal and nuclear resources. Do you agree?

I do in fact believe Fitch is right. I think we are overbuilt in the upper Midwest, and I think demand growth will be about 1 to 2 percent per year. What that will do over time is sop up some of that excess capacity. But to me, we are blessed with cheap coal plants because we are competing against expensive gas plants. The market-clearing price for our off-system sales … has been very handsome. … So, when we look at the overall growth in our typical service territory of 2 to 3 percent per year, we see earnings growth on top of that, not only from the opportunity to sell off-system sales and to haul more energy for other players, but as you know, we are also blessed with an opportunity to spend $3.5 billion dollars to extend the environmental life of our low cost structure. I think that is an enviable position to be in and we intend to pursue that with all vigor.

Oklahoma regulators named AEP as a past offender on voluntary reliability rules. They claim your maintenance was at unacceptable levels. You recently told analysts you would keep O&M flat year-to-year. How will you maintain reliability?

It's clear that you can hold O&M flat and still enhance your reliability by making sure you are spending your money on those priority issues. You are very fair in bringing up the issue not only in Oklahoma, but we have similar issues here in Ohio where we had lost sight of reliability and customer minutes of interruption and those kind of activities. We have entered into an agreement in Ohio with the commission staff to focus our attention, both our capital and O&M spending, on the distribution grid to improve our worst-performing circuits. We are doing some of the same things in West Virginia because as you know, the terrain in West Virginia is a very difficult terrain to maintain lines in. And as you point out, in Oklahoma, I'm happy to tell you [that] just last week we entered into a settlement with the Oklahoma staff. Hopefully the commission will ultimately approve it, to again focus attention at improving that reliability.

The flat O&M year-over-year will have a lot to do with how we maintain the head count inside of the system and how we let attrition push down some of those human resources costs.

I think that is a very doable thing. That goes back to the whole notion of, "I'd rather have my team energized to keep O&M flat than have my team frightened by me trying to take $400 million to $500 million out of the structure."

Why did you choose to sell your assets immediately in Europe? For a while you seemed committed to being there. Why do you feel the industry had has such a rough time with asset investment in other countries?

The biggest issue there is that we all stepped into the international market arena believing that we could transfer out skills sets to those international assets. I think what we really learned, not just AEP, but really this industry, that another country, another government, another form of regulation, another customer cadre, different customer expectations. It is a very different undertaking. I think because of that most of us came home quite honestly with our tail between our legs.

Do you worry about the impact of rising interest rates?

Of course, they are going to go up. I don't think there is any question about that. Most of the debt that we have has terms associated with it that we are not too worried about. But whenever interest rates go up, share prices of stocks in the utilities space go down. I think that tie isn't needed anymore. That really is a historic tie that had so much to do with the building of a $4 billion power plant in the face of borrowing funds at Sopranos kind of interest rates. I worry about those kinds of things, for instance, in the Texas restructuring, to securitize the stranded cost there. The sooner we do that the better it will be for our customers because it is a very low-interest-rate environment. I expect after the election we will probably see something pretty substantial coming out of the Federal Reserve in an uptick basis.

Many utilities such as AEP are participating in state plans to reduce emissions of nitrogen oxide and sulfur oxide. Are you concerned that the federal government would impose tougher restrictions in the future? Are the states not opening a Pandora's box?

People run around and talk in terms of air pollution getting worse and worse and worse. But statistically that is absolutely inaccurate. Every year since the Clean Air Act has been in place the air quality has gotten better. People need to deal with the facts on those issues. That doesn't mean that there isn't room for improvement. There always is. States and the federal government trying to do one-upping of each other, leading ultimately for coal plants to drop off the system. Now, you are demanding 35 trillion feet of gas on a supply base of 22 trillion feet of gas. In that scenario, I think gas goes to $10 or $20 per million BTU and energy goes to $100 or $200 per megawatt hour. You cannot have an economy in this country without coal-fired generation. Period.

Do you believe AEP should join PJM as FERC has ordered?

I believe long term that the whole notion of the transmission grid being in interstate commerce, which it is, and therefore being regulated by the FERC, is exactly the right way to go. If you look at the interstate gas model, I think it plays well on the interstate electric model if folks will allow that to happen. For instance, here in Columbus, Columbia Gas of Ohio is regulated by the PUCO [Public Utilities Commission of Ohio]. They can't charge a distribution rate without the PUCO approving that rate. But the PUCO does not regulate the Columbia Gulf system or the Columbia interstate transmission system. That model is workable on the electric side as well. [PUCO] can regulate Ohio Power's distribution rates. They can regulate Columbia Southern's distribution rates. They don't need necessarily to regulate the interstate aspects of the transmission grid itself. I think RTOs are taking us there.

Having said that, to the latter part of your question, it will not happen quickly if we don't have a dialogue, and if the federal government isn't willing to talk to the states to try to find a meaningful way to get that done. If you take a typical [AEP] bundled kilowatt of 5.5 cents, about 2.5 cents for generation, about 2.5 cents for distribution and a half a penny for transmission. Why don't the states just simply focus on regulating the gen and distribution rate and let the interstate commerce clause do what it was meant to do? Because power generated in Ohio and consumed in West Virginia or generated in Kentucky and consumed in Ohio is interstate commerce. What we are trying to encourage the FERC to do and tried very hard with the ALJ in the current case, was to say, "Folks, let's do this but let's do it with some understanding that the states are giving something up." The human nature of giving something up is to get something logical in return; some kind of a commitment that the states will have a role to play. As far as interstate commerce, I think at the end of the day the FERC wins this case in court, whether it's three years, five years, or seven years from now. A kilowatt-hour generated in Michigan and consumed in Indiana, that's interstate commerce.

Robert B. McGehee

Chairman, President and CEO, Progress Energy

The Executive

Age: 61
Education: United States Naval Academy, Annapolis, Maryland, B.S. Degree; graduated with distinction; 1966-1971 U.S. Navy, graduated Nuclear Power School and Submarine School; 1971-1974 University of Texas Law School, Austin, Texas, J.D. Degree, graduated with honors.
Board Memberships: Nuclear Energy Institute, vice chairman of the board of directors and executive council; vice chairman of the Atomic Energy Committee of the Public Utility, Communications and Transportation Law Section of the American Bar Association; Institute of Nuclear Power Operators, nominated for election to the board of directors in March, 2004; chairman of the board, Wise Carter Child & Caraway, 1974-1997
Earlier in Career: President and chief executive officer of Progress Energy Inc. since March 2004; president and COO of Progress from October 2002 to March 2004; president and CEO of Progress Energy Service Co. LLC from December 2000 to October 2002; executive vice president and general counsel of Carolina Power & Light Co. administrative services and corporate relations group from March 1999 to December 2000; and senior vice president and general counsel of Carolina Power & Light Co. from May 1997 to March 1999. Previously, McGehee was an attorney in private practice specializing in utility matters.

The Company

Market Cap End of 1Q2004: $11.6 billion
Revenue 2003: $8.7 billion
Net Income 2003: $782 million
Employees: 15,300

What are your goals as a CEO? What do you hope to accomplish and how will you measure success?

To start with, we have a very good and very stable management team here. The people that are in place here have been working on the direction of the company and strategy for a number of years together. So our transition, unlike some others, has been very smooth without a significant change in direction. Having said that, … in the financial area … we are still digesting our merger with Florida Progress to some degree. We are trying to improve our balance sheet. We are trying to get our debt to total capitalization down in the 55 percent range. We certainly want to continue to grow our dividend every year. We want to have easy access to the capital markets, which we do … and essentially position ourselves over the next two to three years to take advantage of any opportunities that may arise. I think the combination of an improving economy and wholesale environment over the next few years, as well as our financial situation, will work very well together. How do you measure this? Certainly our earnings in stock price is going to be a major factor.

How have new corporate governance or Sarbanes-Oxley and new accounting changed the way you lead your company?

It hasn't been that different. We put in a corporate governance committee of our board in 1997 and began looking at a lot of things that Sarbanes-Oxley addresses. Certainly, not in as much detail in some of the accounting requirements. … When the act was first passed we looked at it hard, and our initial conclusion was that we're doing most of those things. Certainly, we put in new accounting procedures and our audit committee of the board is much more active. But this is not something that has turned our company upside-down by any means. We've already done a fair number of these processes.

You may not know this, but we are one of the top three companies as rated by Standard & Poor's for disclosure in our financial reports, as far as being open and clear and to the point. We are also the only energy company. I only make that point … to say that this is not new stuff for us.

How do you hope to grow earnings in your business? How would you define your company's strategy? Is M&A part of the plan?

The way I look at our earnings going forward is we are starting with a very strong core business which now contributes a little less than 90 percent of our net income. That's our two regulated electric utilities. And we think in the high growth areas where we are located that we will certainly in the near term be able to grow net income in the Carolinas and Florida by two to three percent. And if the economy takes off, we can do better than that. So, we are starting off with a base that is as strong as any other company in the industry because of our location.

On top of that, we have room to grow our wholesale business. Now, we do have some tolling contracts that are rolling off at the beginning of 2005. But we have very good prospects where we are dropping on the unregulated side-we have 3,100 MW. I think right now it is contracted to about 85 percent. Next year, that will drop off to about 60 percent absent of new contacts. We have some very good prospects on new contracts on that power from those unregulated plants that I think could be in place certainly during the second year.

So, we are banking on that and helping get back to the 80-percent range going out for the remainder of this decade at least. We could likely sign other contracts during that period also. I think as far as the regulated side, we are positioned to get further growth that could get us up to the five to six percent range of total earnings per share growth over the next couple of years.

Where will those contracts come from? Would it be industrials needing more power to meet the growing economy's demands?

Our strategy is that our wholesale business is focused on co-ops and municipalities, and to some degree, other utilities. We have unregulated wholesale contracts with Duke and Florida Power & Light, but our primary focus is co-ops and munis.

Michael J. Chesser

Chairman and Chief Executive Officer, Great Plains Energy

The Executive

Age: 55
Education: Bachelor of Science, Aerospace Engineering, Georgia Tech; Master of Business Administration, Finance, Loyola College, Baltimore; graduate of the Advanced Management Program at Harvard University.
Board Memberships: Trustee of the University of Missouri-Kansas City and the Midwest Research Institute (MRI). Board member of the Heart of America United Way and the Electric Power Research Institute (EPRI), and a member of the Civic Council of Greater Kansas City.
Earlier in Career: Mr. Chesser joined the company in October 2003 as chairman and chief executive officer after a long and distinguished career in the utility industry that began at Baltimore Gas and Electric. He subsequently served as president and chief operating officer at Atlantic Energy Inc. and president and CEO at GPU Energy, an electric utility serving New Jersey and Pennsylvania. Prior to joining Great Plains Energy, he was chairman and CEO of United Water, which owns and operates several regulated water utilities along with its contract operations.

The Company

Market Cap End of 1Q2004: $2.34 billion
Revenue 2003: $2.15 billion
Net Income 2003: $144.9 million
Employees 2003: 2,475

What are some of your goals as a CEO in 2004 and beyond?

We believe the rising price of natural gas is going to make coal more attractive. It is our intent to try to find a way to capitalize on the core competencies and assets that we have. We haven't decided yet to build a new coal plant, but we do have coal sites that are very attractive from a transportation standpoint and coal supply standpoint. [We are also pursuing] a retail customer distributed technology strategy.

What technology strategy do you hope to adopt?

It could range from on-site generation to load control technologies tying into commercial buildings to help them change the temperature in the building that would be coincident with the utility's need for additional peaking requirements. It could [also] be residential load air-conditioner cyclers.

How do you hope to grow earnings in your business?

Great Plains Energy is very fortunate to have engines of organic growth. Not every company has that, but we do. We have a very active wholesale market, we have very low-cost coal, we have the potential to add to assets, and we have one of the real success stories on the non-regulated side [Strategic Energy], with a lot of room left to grow. My primary focus is going to be to maximize steady, low-risk, organic growth. I would say it would be certainly growth, on a risk-adjusted basis, among the best in the industry.

What is the growth now?

EES North America

Over the last couple of years, the growth rate has been five percent, but it has been low-risk growth. I would hope to achieve at least that on a sustainable basis.

Developers say that a coal plant can cost anywhere from $1,200 per kilowatt, or $700 to $800 million, and can take a 7-year time cycle to build. Can Great Plains shoulder the considerable financial burden associated with building another plant?

We have not made a decision to make that kind of commitment. In our planning process we are taking a hard look at that. We probably have to have more upfront agreement with the regulators than we've ever had in the past before embarking on something like that. For example, we would need agreement around prudency and agreement around how increased environmental requirements would impact us. So, I also feel my experience has been that regulators are attracted to the idea of having a physical hedge within their state to meet future energy needs. So, if we decided to build a plant, I am guardedly optimistic that we would be able to work with them to get the assurances that we would need. But that would have to happen.

What is the future of the industry and how will renewables and other technologies play a part?

I do see us moving from a one-way flow-through business to a two-way integrated network where sources of energy and power are going to come both large and small. Customers will be much more integrated. I frankly think that companies that do not move that ahead and capitalize on it stand to be bypassed very much the way IBM was bypassed when the prevailing thought about the personal computer was that it was just going to be for entertainment and education. They went from a mainframe to a distributed utility computer economy. I think we are going to see that same kind of dramatic transition on the power side.

Which do you have your eye on as a disruptive technology?

I think an economical fuel cell or economical way to convert coal or gas to hydrogen could be highly disruptive. One lesson I have through 34 years in the industry: The history of this industry has been driven by low-probability and high-impact events. Who would have expected [Three Mile Island]? Who would have expected the Arab oil embargo? Who would have expected the gas bubble? Who would have expected that deregulation would have stopped halfway through as a result of Enron? Who would have expected a blackout? I think in the future there will be a lot of things that drive our business that are not easily identified today. We make sure we use a very robust scenario planning process with a range of possible alternatives. The onset of disruptive technology is a very important scenario that we are looking at.

Gary L. Rainwater

Chairman, President, and CEO, Ameren Corp.

The Executive

Age: 57
Education: Bachelor Science, electrical engineering, University of Missouri-Columbia, Master of systems management, University of Southern California
Board Memberships: Member of the boards of Edison Electric Institute, the Association of Edison Illuminating Companies, the Missouri Historical Society, the Regional Chamber and Growth Association, the United Way of Greater St. Louis, and the Urban League of Metropolitan St. Louis, US Bank, and a member of Civic Progress.
Earlier in Career: Joined Union Electric Co. in 1979. Elected executive vice president of AmerenCIPS in 1997. Became president and CEO of AmerenCIPS in late 1997. Assumed responsibility for Ameren's non-regulated generating subsidiary in May 2000. Served as president and COO of Ameren Corp. since September 2001. Assumed the position of chairman and CEO Jan. 1, 2004.

The Company

Market Cap End of 2003: $7.5 billion
Revenue 2003: $4.6 billion
Net Income 2003: $524 million
Employees: 7,650

What are the top issues that you hope to resolve at the company in 2004?

The top priority for us this year is to complete the Illinois Power acquisition. I don't know that I would call it an issue so much as an initiative. But [we want] to get that done before the end of the year and then begin to integrate it or bring it into our system, and at the same time complete the integration of Cilco.

How do you hope to grow earnings in your business, and by how much?

Primarily by investing in the basic utility business. With the acquisitions that we have done with Cilco and Illinois Power, we have created a foundation of a substantially larger company than we were before. … We think there are more costs that still can be taken from this business. Earnings growth in the 3- to 5-percent range is what we see long term.

Your request to transfer 550 MW of unregulated generation to the regulated Ameren subsidiary has drawn criticism. How do you respond?

Fist of all, it isn't something that we asked to do. It's something that was requested by the Missouri Public Service Commission as it really gets to the issue of how the state of Missouri wants the state to structure their business. They would prefer that the utilities own their own generation to supply their load. Over the past several years, all of the generation that we had built, we had built only on the unregulated side of our business. So, to have sufficient generation on the regulated side, the Missouri staff, as part of a rate negotiation, asked that we transfer the generation. There was a competitive bidding process done prior to going into the negotiations in that rate case. That was one of the reasons that the Missouri staff asked us to transfer the generation was that it was lower cost than other options. We are currently waiting on FERC approval, which should happen about June.

Still, do you think this process of transferring unregulated generation to regulated generation is anti-competitive?

No, I don't. Thinking of it from a competitive point of view, really, I was indifferent. In fact, the people in the unregulated generation business would prefer to keep the generation that we are transferring in the unregulated business. This wasn't being done because we couldn't sell the power anywhere else. We have been very successful in selling all the power that we can generate. In fact, our unregulated generation business is essentially sold out. And because we are making the transfer now, they have less to sell. So, it wasn't done for competitive reasons at all. It was done because Missouri wanted the regulated utility to own that generation, and we agreed to it as part of a rate settlement.

Why would the state prefer regulated generation to unregulated generation?

The line of thinking is something like this. If a company has managed its generation well and demonstrated that it can manage that, and do it at very low cost, then the utility customers are better served with a regulated supply then with an unregulated supply, where you are exposed to the market price. The thinking 10 years ago might have been that wherever there is competition the market price is always going to be lower than a cost-based price. That isn't true if you have got a cost-based price from a low-cost utility company. … Our rates here in Missouri are among the lowest in the United States, and our generation cost is very low and is likely to be below market price. So, the thinking is that if the generation is rate-based it will ultimately be a better deal for customers then if the utility buys the power at the market price.

What is the value of Ameren joining the Midwest ISO?

Well, we are a Midwest company. When we look at our options for being part of an RTO, we've been part of Mid-American Interconnect forever. It makes sense for us geographically to be part of the Midwest ISO. I don't put any stock at all in rates rising, especially for states like Missouri. The generation that Union Electric, our Missouri utility company, owns is committed first to the Missouri market. If we can sell additional power to other states, any gain that we make there is a short-term gain. That money goes to offset customer costs and goes to make our rates lower in Missouri. The value really doesn't go out of state.

Dennis R. Wraase

President and CEO, PEPCO Holdings Inc.

The Executive

Age: 60
Education: Bachelor of Science, Accounting, University of Maryland; Master of Science, Finance, George Washington University
Board Memberships: Executive board member, National Capital Area Council Boy Scouts of America; director of Southeastern Electric Exchange, Assoication of Edison Illuminating Cos., Washington Performing Arts Society, Maryland Chamber of Commerce, University of Maryland Foundation, the Robert H. Smith School of Business at the University of Maryland - Board of Visitors.
Earlier in Career: Vice president and comptroller, PEPCO, 1985; senior vice president and CFO, PEPCO, 1996; executive vice president and CFO, PEPCO, 1999. He previously served at Exxon Corp.

The Company

Market Cap End of 2003: $3.4 billion
Revenue 2003: $7.3 billion
Net Income 2003: $113.5 million
Employees: 5,719

You were CEO for only 5 months on the job when Hurricane Isabel hit, what did you learn from your trial by fire?

What we learned is that we had perhaps lost touch with the expectations of our customers. And that their expectations from our ability to deliver in that crisis situation probably exceeded our capability. So, we hired an outside consultant, James Lee Witt, to come in and analyze the [company]. What we really learned was that when you have a disaster like Isabel it is not just an electric disaster, it is a community disaster. It is necessary to work much harder with the community, and if you can accomplish that, the overall result will be better for our customers.

What is PEPCO doing to improve its response to emergencies?

What we have done is several things. One, we have enhanced our systems significantly in order to provide a lot better information [and] to be much quicker in responding to our customers. Things like outage maps will be available on the Web site, being able to tell where our crews are working and giving estimated restoration time. We have embarked on a major community program with all the counties and states that we work in order to better coordinate our activities with their activities in case of disaster. … This company benefited greatly from the experience, and will do an entirely different job the next time such a hurricane occurs.

What are the top issues that you hope to resolve at the company in 2004 and beyond?

We have one major overhang, which is somewhat out of our control, that affects sort of our overall success at the moment. That is the Mirant bankruptcy. We have successfully resolved part of that, but there is another aspect related to some purchase power agreements that is working its way through the court system. We are working very diligently to insure that outcome does not adversely affect us.

Do you think it was right for the Mirant contracts to be upheld?

Obviously, our position is well known. We won. We do think it is more appropriate that FERC deal with the subject than the bankruptcy judge. I think it personally has long-term implications for our industry if the outcome is anything other than that. I would say that you would have to be very circumspect about anybody that you entered in to a contract with to provide long-term energy, in that if they could in some way through financial restructuring, isolate that contract to the point that all they had to do is declare bankruptcy and get out of a bad deal. I think that would be very harmful to the wholesale market. From our personal standpoint, Mirant made a transaction with us. It was open. They knew what they were buying. They knew the assumptions they were making. They knew the obligations they were taking on. We don't think it is appropriate that they use bankruptcy to get out of those.

What is the fate of your Internet, cable, and telephony communications division, StarPower? What happened there?

We took a write-down at year-end, and we are in the process of trying to sell our interest in StarPower. It is a 50/50 joint venture with a company called RCN. They have been in the paper a good bit. They are very close to some form of bankruptcy. While the business itself is pretty sound, with good technology, we have about 40,000 customers that have switched from the incumbent cable. We offer telephone, we offer high-speed Internet, and we also offer dial-up. The one big advantage that that business had is that Wall Street threw money at it faster than it knew how to consume, in many respects. [Since] the telecommunications bubble broke down, we have not been able to grow that business because no one wants to put the capital in it. Also, we have made a conscious decision that we want to concentrate ourselves on the energy business.

What is your position on standard market design, RTOs, and regulated and unregulated markets?

As a member of PJM, and having been in PJM for many, many years, we think the way we embarked on this whole thing with PJM is the right thing to do. Many people hold PJM as the poster-child of competitive markets. Once you commit yourself to a competitive market, we want as good a wholesale and robust market with energy flowing in as many directions as you can.

Paul M. Anderson

Chairman and CEO, Duke Energy

The Executive

Age: 58
Education: Master of Business Administration, Stanford University; Bachelor of Science, Mechanical Engineering, University of Washington.
Board Memberships: Temple-Inland Inc., Qantas Airways Limited; global counselor for the conference board; member of the board of governors for the Council for Economic Development of Australia.
Earlier in Career: CEO, BHP Billiton Ltd. and BHP Billiton PLC, July 2001 to July 2002; managing director and CEO of BHP of Billiton, December 1998 to July 2001; president and COO of Duke Energy, 1997-1998; various leadership roles within PanEnergy from 1977 to 1997.

The Company

Market Cap End of 1Q2004: $18.7 billion
Revenue 2003: $22.5 billion
Net Income 2003: (-1.3 billion).*
Employees: 22,200

Many in the investment community have regarded you as the turn-around doctor. What would you regard as Duke's symptoms?

When I first arrived there were pretty obvious external symptoms, such as a falling stock price, the credit rating had been dropped a couple of times, there was negative press [coming from] analysts' reports out there. All the signs of discontent were being displayed by the marketplace, if you will. Then, there was disagreement as to the direction the company was going on some big issues, such as the dividend and where it belonged, and the merchant function, etc.

What do you hope to accomplish as a CEO? What is the cure for Duke?

Well, you have very short-term goals and very long-term goals. My goals for this year really are to build on to the stable platform that was established at the end of 2003. At the end of 2003, we were able to bring closure to a number of issues. It required some write-offs, but we established a direction and financial plan that maintains the dividend [and] puts in place a restructuring of the balance sheet, which will end up paying down over $4 billion worth of debt. Basically, adjusting some of our major portfolios to the market realities out there.

The short-term goal is build on that platform and continue to strengthen the company so it can control its destiny going forward and operate from a position of strength instead of being reactive. In the longer term, the challenge is figuring where the industry is going and Duke's place within the industry. In the case of Duke, we really have four industries and four industry leaders. The power company is one of the strongest electric utilities in that industry, but then we are also one of the strongest natural gas transmission companies out there, we are by far the strongest field services company. Our liquids production is more than twice the size of the second largest company. And we are in the merchant power business. So, we have four industries that we are dealing with.

Why did your company overbuild merchant generation?

Well, it was an industry problem. I believe what we saw was the typical cycle where there was a shortage of capacity and you see rates going up, and industry responds by adding capacity. In the past, there wasn't so much of a merchant generation business out there. Utilities had a safety net, if you will. Utility capacity immediately would go into rate base and become something that is earned on, as opposed to a merchant plant, where if you have excess capacity and it sits idle, it doesn't earn anything. In fact, it costs money as opposed to creating income. So, we had a lot of players that were used to the old mindset where when you add capacity and you overshoot a little bit, that's OK. And they were in a cutthroat market where that wasn't OK.

How would you do it differently? What lesson was learned?

I think this round of overcapacity build will be the lesson. A number of companies have been in terrible financial distress. A couple of companies have even gone bankrupt during this period of overcapacity build. Hopefully, that lesson won't be lost on people. There has never been a situation like this before because the industry has never gone through a capacity overbuild with such a high percent of that capacity, merchant generation, that doesn't have a built in return.

What has been most difficult about the restructuring of Duke?

Probably the most difficult thing has been to rationalize the merchant power portfolio and to figure out physically what we want in terms of power generation. We have decided to not complete the deferred plants in the West. We have three plants there that we have put off any more construction, or at least any more construction bidding our dollars. We have put our Southeast plants up for sale, coming up with what is a reasonable portfolio of those plants and also all of the contracts that go around them.

Why did you choose to sell your assets immediately? Many bankers have held on to assets in the hopes of a price recovery. Why sell now?

Well, we are not selling all of them, obviously. We have made some very conscious decisions as to which assets to hold on to and which ones to put up for sale. We did want to sell some of it. The reason we chose the Southeast is that's where we have our incumbent utility, Duke Power. My feeling is that if you are going to run a merchant power business, it is best not to do it around where you have a regulated utility.

There have been reports that Asia will be the biggest growth market for generation development. But you sold your assets there. Why?

I believe that Asia has a lot of opportunity, but it takes some very special skills to make money in Asia and you have top be in some very special positions. I've done quite a bit of business in Asia over the last five years. I've seen the players that are making money and the players that are losing money. In general, in a place like China, you make money by selling into the economy. For instance, when I was at BHP Billiton, we sold iron ore and coal into the economy, or by transforming resources using Chinese labor and capabilities. But you don't make money by building infrastructure projects. Building a power plant would be a disaster in China. I find it hard to imagine you could make money over there by building a power plant. To do business in Asia requires an organization that can deal in different time zones than North Carolina. So, you are out of sync in time zones, you are out of sync in language, you are out of sync in currencies, and that requires a lot of skills that we really frankly don't have as an organization.

Given your continued commitment to the merchant sector, how will that industry play out?

Well, I'm not sure how the merchant sector will play out. We obviously are in that sector, and so we obviously will be the shapers of that sector. To me, one of the biggest considerations the industry is going to have to come up with is some of the affiliate rules that have been put out over the last few years as to how much sharing of information management you can have between a merchant operation and a regulated operation. And the answer is not very much. So, a lot of the synergies that we anticipated to be there between merchant generation and a straightforward IOU don't exist anymore. The industry and ourselves has to come to grips with how you reconcile those businesses under those rules.

With all the selling and a return back to basics, how do you hope to grow earnings in your business, and by how much?

We will have an organic growth that will be fairly modest. That will be organic growth in all of our businesses. For instance, our mid-stream field service business will probably grow faster than the regulated electric utility. But ultimately, you have to supplement that organic growth with some growth through M&A or some transactions-induced growth.

What is your position on standard market design, RTOs, and regulated and unregulated markets?

In general, I think that the grid is going to ultimately open up in most situations. That's just a market reality. The real question is how it goes opening up and who owns the assets. That's really a state-by-state issue. Some states are more concerned with actually making sure the assets are [managed] by the utility, as opposed to an RTO, and some are more comfortable with the idea of an RTO or some other kind of independent system operator. The real key is that ultimately the grids will open up and power will be wielded around the country reasonably freely.

What is the future of the industry?

If I could just wave a magic wand and make it happen, it would be an integrated industry where you could supply power and gas and other forms of electricity pretty much freely without a lot of prohibitions to how you did business within the various aspects of the industry.

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