The CEO Forum: The Ultimate CEOs: Jeff Sterba

Deck: 

Chairman, President, and CEO, PNM Resources

Fortnightly Magazine - June 2006

Fortnightly: What are your views on retail competition as a viable concept and your view of Texas as a viable market for growth?

Sterba: In the face of all of the things that have happened with natural gas, I view retail competition as still being a viable path under the appropriate market structure and the right regulatory discipline. By that, I mean the discipline not to mess with the market. Texas is probably the best model that I know of [that] has a long-term chance of success. Not without pain. Obviously, rates have moved up sharply in Texas, but through those price signals we start to see consumers changing behavior. It is one of the few markets where you have many competitors. There are 55 or so competitors in the marketplace.

As the price-to-beat come off at the end of 2006, the marketplace will demonstrate those customers who have previously not chosen to go to the competitive market are still going to get a fair shake and find a reasonable deal. But also, the market is seeing immediately the affects that natural-gas price movements are having.

Fortnightly: What is your view of recent state movements to extend rate caps or even reverse deregulation where it previously existed? Do you think retail competition is possible in a high-priced commodity environment?

Sterba: I do believe it is possible in a high-priced commodity environment. And I think that’s where commissions and legislators really have to resist the urge to control an outcome. If I think about what we see happening in Maryland, frankly, what was done in the past has created a problem that must be dealt with in the future. And having some form of phase-in to get to full market, given what has happened to market prices, is probably appropriate, as opposed to just dunking people into the market all at once, given the delays that have been brought about by regulatory and legislative action.

I look to California as one of the poorest examples of a market structure, where, in order to make everyone feel as though this was the greatest thing since sliced bread, they forced the 10 percent rate reduction and froze rates. Which does what? It completely masked what’s happening in the marketplace. In order for a market to work, demand has got to be able to respond to price. You don’t have a market. So, these well-intentioned mechanisms that tried to regulate or legislate an outcome [are] by definition inappropriate and wrong headed. Those states that might be about to go back to regulation—well, OK, go back to a form of regulation that’s sensible, that will help ensure capital can be raised, [where] prudency will be evaluated, but [where] if something is approved by a regulator, its costs will be recovered so you hold down the cost of capital. And don’t get into the trap of thinking, “Let’s go to market forces when prices are low, and when prices move up, then let’s bring on the regulatory caps.” That is a disaster waiting to happen.

Fortnightly: Do you think a utility can viably build a nuclear power plant in the 21st century?

Sterba: I have a strong view about nuclear. I think it is an essential component of today’s resource mix as we move into a carbon-constrained world. There are obviously significant challenges associated with building new nuclear generation. The spent-fuel issue is one [where] the federal government has not been able to uphold its end of the bargain. And that issue has to be addressed and resolved, whether it is through temporary storage, or the federal government takes title to the material so they can manage it in this interim period of time, or through some other mechanism.

As one thinks about nuclear, all the work we have done demonstrates that under the broadest range of scenarios it is consistently the lowest-cost resource when we internalize externalities of carbon and the like. The problem is the licensing risk, the ability to get it constructed and have a supportive environment, and know what is going to happen to the spent fuel over time. But because of that higher [risk], I think you have to be of a certain size to look at nuclear and you have to be able to have enough diversity of resources so you are not dependent on a single 1,000-MW nuclear unit coming on to serve your needs for the next five years.

EES North America

One of the things I’ve become interested in is smaller-sized nuclear facilities that have been used, for example, on military installations for a number of years, where you may be talking about a 50-, 100-, 200-MW unit. You may incur some loss of scale, but you also have, in some sense, a more manageable resource. So, for us to do nuclear, it either has to be like Palo Verde as a participant in a multi-owner project, or it would have to be a new-vintage smaller-scale generation resource, which is not what you see most people focused on.

Fortnightly: Given the political stalemate in Nevada, should the industry continue to focus on Yucca Mountain as opposed to another location or other solution? Are there any other viable alternatives here or abroad that have been considered?

Sterba: I don’t think it is an either/or. I think it’s both. Yucca Mountain has got to continue to be pushed to resolve the issues that remain, preferably with a little more sensibility about what the constraints should be. At the same time, I think it is incumbent on the government to evaluate an interim storage option that is probably an above-ground option (dry cask storage). Probably something like they take title to the material, [and] it’s moved in a more concentrated way to a military installation where it can be safeguarded.

There was a proposal for a storage facility up in the Aleutians. The Russians have always had an interest in becoming a storage site for material, and they certainly have facilities, some of which I have visited, that could store this material. The difficulty is that since they can take title to that material, they can use it.

The notion of international storage controlled by some broader body is an appropriate strategy, but it is going to take a long time to develop. I think about how much money has been spent on Yucca. Have there been issues? Have there been things that probably could have been done differently? Yes. But I personally am not aware of anything that makes Yucca unsafe or an unacceptable storage mechanism. The problem is that it is not big enough if we continue on our single use of nuclear fuel.

Fortnightly: What do you believe are the most pressing policy issues?

Sterba: First, we are clearly moving into an era of increasingly expensive energy, and it comes in all forms: the gas people use in their cars, the natural gas by which they heat their houses and offices, and the electricity that powers so much of the economy. All three elements have moved up in price, and I believe, will continue to in varying degrees. We have, as a country, benefited from having very cheap energy for a very long period of time.

So, there is a large economic question: Can we, without disruption to the economy, adjust to energy prices that are increasing at a significantly higher rate than the price of other commodities, even though they have been not increasing and in some instances decreasing for a number of years? Certainly, natural gas prices up until 2003 had declined in real terms. Electricity had declined in real terms and, for many of us, in nominal terms. Our electric rates today are 20 percent below what they were 15 years ago in a nominal sense. That is a whole mindset change the country has to address. Coupled with that, there will be additional environmental pressures and I think carbon is probably the most significant environmental issue this industry and the country will ever have to address. We have got to do it right. These two are interrelated. Dealing with an increasing-cost energy infrastructure [while also having] to deal with carbon will put additional pressure on price, as well as significant pressure on the economy. There are a whole host of things that put pressure on cost, and I think the challenge we are going to face is how we can best manage that.

Fortnightly: As the chair of the Electric Power Research Institute, do you have an opinion of which technologies are the most promising in terms of environmental footprint?

Sterba: On the demand side there are things utilities can do to substantively help customers reduce their energy use [and] consequently reduce the supply-side footprint. We have to develop regulatory systems that will enable that, and do it effectively.

If you think about whether it is a business or home, those major energy-consuming devices like HVAC, process equipment and refrigerators, it is really simple to put a programmable logic control chip (PLC) on the front end. That equipment and that PLC can be IP addressable, and that facilitates an Internet connection. It doesn’t come through the meter.

Too much of our demand-side management stuff has always had a customer interface. Let’s get the customer out of the middle and provide technology with the information about prices so that a piece of equipment with its PLC can determine how [it] should run. For example, the customer [says], “Between these hours when I’m not here, the house can go up to 80 degrees or 85 degrees, but when I get home at this time I want it down to 74 degrees.” You can do that today with a programmable thermostat. The problem is that you are just telling it when to come on as opposed to it being able to figure out, given these prices on an hourly basis, how to use the piece of equipment most economically.

That kind of stuff is not rocket science. It can be done today. It’s an issue of creating the demand pull and the supply push to make it available at a cost-effective price.

Fortnightly: What is your definition of leadership? How do you affect the company?

Sterba: I think it’s three things. First, it’s the ability to identify a future state for a company and an organization with enough specificity that people can relate to it, yet enough flexibility that others are able to create within it.

The second one is [to] communicate. I know of no person that I consider to be a strong leader who isn’t an even better communicator. You have to be able to help people not only understand where a company is going but how you are going to get there. Some of that is values, some of that [involves whether you] are going to be a quality-based company, be an innovation-based company. What are the things you build as elements that help not only make you distinctive but really help provide that competitive advantage for the long term?

The third one is all about execution. Any leader who thinks their job is only about articulating a grand vision is sadly mistaken. Success is 20 percent planning, 60 percent execution, and 20 percent luck. As a leader, you have to be willing to roll up your sleeves and really help understand the changes.

And I propose a fourth [thing], which I struggle with all of the time. To be a leader, it is less important what decisions you make, [and] more important what questions you ask.