The CEO Forum: The Ultimate CEOs: J. Wayne Leonard

Deck: 

CEO, Entergy

Fortnightly Magazine - June 2006

Fortnightly: Why were last year’s hurricanes so destructive to Entergy’s infrastructure?

Leonard: As you know, Hurricane Katrina was one of the biggest natural catastrophes this country has ever seen in terms of dollars. In our case, Katrina was the biggest natural catastrophe. And Rita was the second biggest, coming right behind it. Katrina hit the vulnerable spot in New Orleans, with the flooding. Rita hit the vulnerable spot with the transmission into Southwestern Louisiana and Southeastern Texas, where you are dead-ended into the Gulf and you’re dead-ended into ERCOT because you are not interconnected there. Then you have a lot of swamp and wetlands and other things where you really have difficulty building anything, whether it’s generating plant or transmission. Rita just separated the generation from the load. It then cut diagonally across our territory. So it got almost every one of our jurisdictions. You couldn’t have had a worse scenario than the way those two hurricanes played out.

Fortnightly: How has this experience changed the type of infrastructure choices you will be making?

Leonard: Can a utility build an infrastructure to avoid that kind of catastrophe? I think today, people would say no. That may change over time. The thing people talk about the most is to put it underground, and there are spots where that makes sense. Not big spots, but there are spots.

Our gas system in New Orleans was virtually destroyed. Even today, as we try to pump water out of the system, it keeps going right back in because the soil is still settling. If our electric system would have been underground, we’d still be trying to get the lights back on. There are places most certainly where it is much better to have it above ground.

We have taken this opportunity to get rid of some of the older wooden pole structures and put in place steel or concrete structures depending on the soil. But there is no universal answer as to which type of structure makes the most sense. A lot of it does depend upon the soil conditions that you find.

It is possible to build things in a correct kind of way and maintain them in a correct way [where], even under very adverse circumstances, they can stand up. Nonetheless, even with today’s technology, you are dealing with a hurricane that has the energy capacity of around 10,000 nuclear bombs over its life cycle. Most of that is over water, of course. But when you’re dealing with a force of nature like that, we’re not talking about easy answers in terms of how you decide a system is foolproof.

Fortnightly: I saw that ERCOT for the first time helped serve 119 MW of load in Louisiana after Katrina. Do you think it is about time that Texas became part of the United States, in terms of greater power exports and imports? Could greater transmission ties help in future crises?

Leonard: That is something that we are studying along with the ERCOT RTO and CenterPoint. We have a piece of Texas ourselves that is not in ERCOT, and we are studying connecting that into ERCOT. We are in the process of developing a business separation plan where Entergy Gulf States Texas would be separated into two companies, one in Louisiana and one in Texas. And then we are trying to come to agreement of what the benefits would be of moving our Texas property into ERCOT and creating those ties.

Preliminarily, it looks like it would take a couple of 40-mile AC ties and 90-mile AC lines and a couple of DC lines. The DC lines are important because you have some co-ops that bought generation on the Louisiana side. Once you open up those ties around Texas, the power would flow in ERCOT, and you would be cutting [those co-ops] off. We wouldn’t want to do that, obviously.

It is probably in the $300 [million] to $400 million range to move our Texas customers into ERCOT. That would then allow power from the Southwest Power Pool to flow into ERCOT also. That would alleviate a lot of congestion problems they have around Houston. It would bring more solid fuels in. It would help them with their capacity situation. Inevitably, it would lead to a stronger, more reliable system.

EES North America

For Texas, they would probably want some assurance that it wouldn’t put them under FERC jurisdiction. But that may come some day or it may not. That really doesn’t matter so much as making sure the system is as reliable as possible.

Fortnightly: What percentage of pre-Katrina load are you serving now?

Leonard: It is a very high level across the system because New Orleans was such a small piece of our overall business. We lost 30,000 customers in Entergy Louisiana because St. Bernard was just outside of New Orleans, and was the most heavily damaged community maybe in the world. In the United States, it was the first time a natural catastrophe damaged every single structure above ground. St. Bernard’s was where there were a number of refineries and a lot of people live. They had 10 feet of water.

We lost all of those customers. They are still out in Louisiana. Then in New Orleans, which is a separate jurisdiction, we were at about 190,000 before the storm and we are at about 40 percent of that now. But the load is about 60 percent because some of the bigger customers and businesses have come back. We have lost some 100,000 customers out of 2 million plus.

Fortnightly: Do you think you will get those customers back?

Leonard: Well, there will be a sizeable piece that won’t come back. New Orleans itself, you have to remember, with a city with a population of 600,000 or so in the 1960s, dropped to 400,000 prior to Katrina in terms of population. It had been a long, slow decline. A lot of those people had moved to the North Shore, which is served by CLECO, putting them in to a different territory.

In this particular case, a number of these customers will move to the North Shore and some will go out of state and won’t come back. I don’t expect New Orleans population levels will rise back to the levels that they were before in the next 10 years or so. The Chicago fire of 1871 or the San Francisco earthquake of 1906 are pretty good examples. It takes about 20 years for a city to really recover.

That’s kind of how Chicago and San Francisco evolved in to the cities they are today. It took a while. They made mistakes, they got things right, they got mass transportation, they got building codes right, they found the right places to build. It’s going to take a while to get back to the previous levels, but ultimately an event like this, time and time again, has shown that the city ends up stronger than it was before.

Because you don’t take incremental steps, you really [have to] step back and [evaluate] the fundamental changes that need to take place and say, “Let’s get ’em done.”

That’s New Orleans’ challenge over the next five years, to find those fundamental changes in the educational system, mass transportation, where we build, and how we build, so the city can be bigger than it was before. But that’s not going to happen in the next five years or so. We have challenges for five years, and decisions to make about where and how we build, and that is going to take a while.

Fortnightly: Should a utility have to declare bankruptcy as a result of performing its duties?

Leonard: It’s terrible public policy. You have an obligation to serve and you do that.You are paying, in our case, $1.5 billion dollars upfront, and you are the last to get paid. The utility was the only one prepared, the first to respond and probably the only one that did their job right, and is the last one to get paid.

In most cases, there is no profit at all built into any of that. You have losses because your customers aren’t there and aren’t taking the power. You have fixed costs that are not being covered. All you are doing is trying to get your money back for the actual outlay that you had in the storm; for poles, meters, and transformers and labor and those types of things. So, from a public policy standpoint, all it does is raise the utility’s overall cost of capital, and from an equity standpoint it seems patently unfair to be the last one on the list to get paid when you are the first to respond.

Fortnightly: What do you hope your independent coordinator of transmission (ICT) proposal will accomplish?

Leonard: This still is a major issue. Even though we felt like we were doing the right thing, building the right systems, following all the rules, and [providing] non-discriminatory access, there was always a perception by anybody who does business with an integrated utility that somehow you’re stacking the deck against them. Anytime you make a mistake, whether it is a human error or whatever, they think you did it intentionally. And people make mistakes from time to time. Anytime the transmission isn’t available because of the laws of physics, they think you are making it up. So, you want to remove that stigma that hangs over your head as quickly as you can by getting some kind of independent proposal on the table.

That’s where we came up with the ICT proposal. We brought in the Southwest Power Pool (SPP), which we felt had the expertise to do it, and with which we are obviously interconnected. They are going to do a lot of regional planning with data that they had for their members. They will determine who gets transmission and who doesn’t. They’ll do virtually everything an RTO would do. They don’t have a congestion market, but ICT doesn’t have one either.

We have a weekly procurement process before FERC that will start that process in terms of managing congestion on a weekly basis. We need an hourly congestion market. So, I would hope over the next four years we convince our regulators that this works. It does provide for more transparency. It does provide for more reliability because of regional planning. And it can be done more economically because we will be able to expand the footprint. Maybe Southern Co. or others will do something similar. I hope what happens as far as the end game is we end up with an independent transmission company. I don’t think it will happen in the next four years, or probably while I’m at Entergy, but I hope this is the precursor. I hope we end up with real independent regional transmission companies, maybe just four or five in the country that are the best in the world.

Fortnightly: How do you define leadership?

Leonard: I think the most important thing as a leader of this organization is to create an environment where every employee feels appreciated, every employee feels they have the opportunity to realize their God-given potential, and every employee feels that somewhere in the organization there is somebody that will make sure that the basic principles of justice and compassion are adhered to. I think it is my job as a leader to define the vision for the company, to make sure that it is executed, to make sure that people understand it, to communicate it every day. But more importantly, [it is] to make sure that our values are always lived up to even when [they] conflict necessarily with our vision. That is what people look for at the end of the day. A leader’s role above all else is to make sure the truth is respected.