Michael T. Burr,
Wayne Leonard Click here to enlarge image
Things were bleak in the Big Easy. Entergy’s customer service ratings were plummeting. Regulators from four states were breathing down the utility’s neck for poor reliability and shoddy customer service. Shareholders were furious because debt service was high, yet the company’s global investments were not paying off. While the company expanded into numerous ventures on four continents, it was stumbling at home.
“We need to get back to basics with our core domestic utility business,” said Robert v.d. Luft, then chairman and acting CEO. “We recognize the deficiencies we’ve had in service quality, and I pledge that enhancing customer service will become a top priority for all Entergy employees.”
That was 1998. Today Entergy is a different company, from the top down.
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Entergy revamped its global and domestic strategy, and changed most of its upper management. J. Wayne Leonard, once a Cinergy senior executive, was named president and chief operating officer in August 1998. He spearheaded an organizational restructuring that broke up Entergy’s centralized management structure and paved the way for the company’s new direction. Leonard was elevated to CEO in November, and now, two years later his efforts are bearing fruit. EL&P selected Entergy as its Utility of the Month for May 2000. Leonard spoke with us in April about how he turned the company around.
EL&P: What key decisions have brought Entergy to its current position in the market?
Leonard: It goes back to two years ago. We were all over the world, in Latin America, Asia, Australia and Eastern Europe. We were paying out about 90 percent of our earnings [in dividends] and we had about 60 percent debt.
At our annual meeting, our two biggest shareholders did not vote for the board of directors. As a result, the board made a huge management turnover.
We stepped back and looked at everything we were doing, and asked ourselves whether everything we owned was worth more to us than it would be to somebody else. Then we sold almost $5 billion worth of stuff to repair the balance sheet.
Now, in terms of financial integrity, we have about 45 percent debt and we’re paying out 50 percent of our earnings. We have $2 billion in cash in the bank, our earnings are 30 percent higher than they were two years ago, and we have less capital invested than we did then. We’re just getting more productivity out of the capital that we have.
Two years ago, we were at rock bottom. Our customer service levels were at the bottom quartile of the industry and we were getting some pretty severe treatment by our regulators. We were penalized in Texas for poor service. Other regulators were lowering our returns because of poor service levels.
We put a tremendous amount of resources and commitment into providing the best service in the country, whatever it takes. In the last year we improved our reliability by 30 percent. Complaints by regulators were down 60 percent. Our call centers used to take a minute and a half to get an agent on the line, and now it’s 10 seconds. That’s the best in the industry. Our safety record improved by 50 percent, and at the rate we’re going we’ll have the best safety record in the industry.
We’ve made a real commitment to serving low-income customers better. In the Mississippi Delta region, 40 percent to 50 percent of the people live below the poverty level.
We’ve aligned ourselves much more with our constituents than we were two years ago. This has had a positive effect in terms of customer loyalty and in terms of political and regulatory environments.
EL&P: How did you do it? What changes did you make that changed the culture?
Leonard: The biggest levers you’ve got to change a company are strategy, structure and culture. If I could pick two, I’d pick strategy and culture. Any structure will work if people have the right mindset and you’ve got the correct strategy.
When I took over I evaluated everybody in senior management on the basis of certain criteria. The most important was integrity. The second most important was motivation. Why are they here, for themselves or others? Then, capacity to learn. Fourth and fifth were knowledge and experience.
I made a commitment to surround myself with top management with the right integrity, motivation and capacity to learn. That made a big change in the culture immediately because it created a lot more trust in the organization.
Then I set about getting rid of rules. I eliminated every rule I could eliminate. I set a goal of having no rules at all, except in safety. The only rule we have is to make every decision, in dealing with the customer, as if you were the customer. Since every one of us is a customer, that should be fairly easy.
We created a new award this year, called “Breaking the Rules.” Any time we catch somebody breaking the rules to serve the customer, we give them an award. We recently gave this award to a group of people in our call centers who did the best job of not letting the rules get in the way of serving the customer. The message we’re sending is that other than in safety, it’s okay to break the rules. You should never rely on a rule as the reason for not doing the right thing.
It’s a long process, and I’ve spent an enormous amount of time with employees. I have a program where I do an employee’s job every month with them. I spend three weeks at the start of every year in employee meetings. Every employee gets the opportunity in February to talk to the CEO. It’s a big group setting, a half-day meeting with hundreds of people in the room. I’ll talk for a couple of hours about what we’re doing as a company, what our goals are, and then we give employees a couple of hours to ask questions. The format is meant to avoid being intimidating. Employees can submit questions on cards if they like.
It’s really helped change the culture to one of openness and honesty-one that’s built around values instead of rules, and a sense that by helping people do their jobs and working with them, you really want to understand what the problems are.
EL&P: What’s Entergy’s overall market strategy today?
Leonard: We sold everything to focus our attention on North America and Western Europe. We got out of the competitive retail energy business, and got out of the distribution business on a worldwide basis, to focus our attention on specific markets where we have or can acquire a strong institutional knowledge.
In the United States, we’re focused on the mid-South and Northeast. We’ve generally defined a market of about 50,000 MW. We want to own 20 percent of that marketplace, with a mix of base-load, mid-merit and peaking projects that will allow us to capture the higher value products and services in that marketplace.
It’s very difficult to earn your cost of capital as a merchant plant developer today. Some people claim they do it, but they are underestimating their cost of capital because they haven’t hedged out the price risk. With the volatility we see, the cost of capital is much higher than many companies are assuming.
How we compete is to go into a marketplace like the Northeast and acquire nuclear power plants, which are the cleanest power available, with no airborne pollutants and the lowest running cost. That’s our base load capacity.
We’re the only one of all our competitors, by the way, who operates boiling water reactors (BWR) and pressurized water reactors (PWR). This gives us an advantage. For example, when we were competing with Dominion for the NYPA Fitzpatrick plant, it was a BWR plant, and Dominion doesn’t operate those.
In addition to our nuclear base load, we have purchased 36 turbines from GE that we will use to develop projects around the nuclear plants. Frequently these plants will be developed at the nuclear plants themselves, because they’ve got everything we need-the site, transmission capacity, water and gas. We will also site peakers at strategic locations because of transmission constraints. We’ve acquired a number of turbines from GE, and have identified about 100 sites with competitive advantages. We’ve narrowed that to about 20 where we have options or where we have acquired the site to build a plant.
This enables us to sell firm power instead of unit power. Firm power has anywhere from 20 percent to 30 percent markup over unit power. Then we can trade around the asset with an excellent trading operation, which is another piece of our strategy.
We’re very focused on the growth piece of our business. In our service territory, we’re focused on providing the best possible customer service. In the growth business, in the upstream and midstream piece, we’re focused on having an integrated power plant operation that is the cleanest in the country. We’re already the second-cleanest power company in the country. We’ve already met the Kyoto protocol.
EL&P: You exited a number of unregulated businesses. What does unregulated business mean for Entergy going forward?
Leonard: We have five regulatory jurisdictions: Arkansas, Mississippi, Louisiana, Texas and the city of New Orleans. Not one single jurisdiction will have gone through deregulation by next year, but half of our earnings will come from unregulated businesses. This is remarkable, given that we haven’t sold any of our regulated stuff at all yet, or lost any customers.
Our growth is coming from power generation, both new development and nuclear.
We’re in the process of creating a joint venture to enhance the value of our nuclear and gas-fired assets. In this venture, we hope to be able to provide many types of products and services that are different from what a utility normally would provide. Examples are price risk management and ancillary services like weather derivative products.
I would never have imagined that I’d say I was a fan of weather derivatives. It is so complicated. The whole world hedges against weather for a reason. In this joint venture we expect to be on the other side, selling weather hedges instead of buying them.
The company we’re looking to do business with has built the premier weather derivatives business in the world. They have 250 million data points on weather and 55,000 thermometers that they manage in real time via computer network around the world. It’s a huge growth business. If you understand the data, the potential customers are almost unlimited.
Chaos theory tries to tell us that the world is not nearly as random as we think it is. Things we attribute to chance are merely an indication of our ignorance. If you can measure the right things in a precise enough manner, you can take much of the randomness out of the universe.
The company we’re working with has done pioneering work to explain much of the unexplainable in weather patterns that we see. An academic that would discover some of these things would publish it immediately. But in business, it’s a huge competitive advantage to be able to explain or predict more of the weather patterns than others can do. That’s a huge growth business for us, with very few competitors and an unlimited marketplace.
We’ve been at this for about a year, and we hope to have our joint venture partnership completed in the next couple of weeks.
EL&P: Are you involved in any telecommunications ventures or market plays in other areas?
Leonard: No, we had all of that but we sold it. We had acquired 60 security companies in a year. We had different telecom businesses going. We sold all of those off to focus. We spent almost a year solid with Andersen Consulting analyzing our business-our own customers, the buying habits of other customers, the product life cycle, the cost of products-and we concluded that most of the value-added products and services that people are building have substantial negative net present value. The incumbency value with utilities is very high.
We’re focused on in-territory retail, and commodity-related services. We have a lot of big chemical companies. We’ll do sophisticated petrochemical swaps for large industrial customers, and power quality services, but we’re not doing a lot of the downstream retail-type businesses that we were doing before.
With business-to-business on the Internet, if you need a service, you can buy it from somebody else a lot cheaper than you can build it yourself. That’s our view.
EL&P: Your divestiture resulted in a company reorganization. What is Entergy’s organizational structure today?
Leonard: Vertical integration will ultimately be a liability in the industry. Everybody believes it’s the key to success, but we believe the opposite. We believe the key to success is integration between companies, not within a company. So we outsource everything for which we don’t have a scale advantage. We just outsourced our information technology, for example, to SAIC. Our contract guarantees we will have top service and cost forever. Our generating plants are in a separate organization. Their key is operational excellence. They sell power to the jurisdictions, who have responsibility for the customers. Price risk management will be done by a joint venture outside of Entergy. And transmission will be spun off to our shareholders in a transco.
All the responsibility for budgets, people and everything else for customer service are now back under our jurisdictional presidents. Before, they were more like PR people. Most people have gone the other way and centralized all that. But you can create a virtual organization to get the economies of scale and centralization but puts the decision making back with the state presidents, who are closest to the customers.
Entergy is focused on providing the best possible customer service, keeping the lights on, and running our power plants in the best possible way. This is not a trivial task, when a big piece of your assets are nuclear, you’re operating both BWR and PWR, and you have the service territory that we have.
We get hurricanes, tornadoes and ice storms. Twenty-five percent of our substation outages are snake related. We have mice eating underground cables in New Orleans, causing explosions. This really is a swamp in many areas, and it’s a real challenge to keep the lights on. When you do the research, that’s what customers want: reliable service, a good price and good customer service.
EL&P: Please describe your personal management philosophy. What factors are most important for you?
Leonard: I grew up in a small town in a lower-middle-class family. I had a paper route for nine years starting in the third grade. I learned a lot of lessons early in life about what it’s like not to have as much as other people, and what it’s like to compete for the things you want. In my case, my management style is built around how I grew up.
Every person has value, regardless of income level, education, whatever. Every person deserves to be treated with respect.
I surround myself with people of the highest integrity. I look for that more than anything. No matter how talented the person is, if I don’t trust them-if they don’t have integrity, or if they’re a bully-I don’t want them around.
I talk a lot about bullies and cowards in the organization. I’ll tolerate a lot of mistakes. People are working hard, learning and making mistakes. We understand and accept that. But what we don’t tolerate is bullies and cowards. These people are willing to out-shout you because they know you won’t shout back. And then there are other people who sit in meetings and don’t say a word, and then the first thing you know they go behind your back to the boss and disagree with you. I’ve made it clear that those things are unacceptable.
We try to create an environment where people understand that regardless of your position you have to be humble enough to listen and self-confident enough to share knowledge with everybody.
When I pick people I try to pick those that are smarter than I am in their business. Why would you want someone working for you, running a business, if you don’t think they’re better at it than you are? A lot of people are not comfortable with that. They want to be the one who knows more than anyone else, and that’s not how you create a great organization.
EL&P: What is your vision for Entergy over the next five years?
Leonard: We expect to add 1,500 MW a year of nuclear capacity and 1,500 MW a year of new projects. We will become premier at price risk management. Our goal is to be the cleanest and safest utility in the country, to provide the best service in the country, and to be the most diverse utility organization in the country.
Diversity is a key to success. Most organizations are not diverse. In the last year we doubled the number of women and minorities in top management from 10 percent to 20 percent. Our management should be as diverse as the people we serve, and we serve one of the most diverse populations in the country.
New Orleans is 60 percent African American. That’s the highest percentage in the country. Our top management does not reflect that, and that’s a problem. The entire city council of New Orleans, with the exception of one person, is black. You can’t provide products and services and be in line with the values of the community if you don’t reflect its culture and understand the ethic backgrounds of the people you’re trying to serve. That’s one thing that over the next five years we expect to change. We’ve made some progress, but we’re still not where we want to be yet.
It’s also an area of the country where you have some extreme beliefs. New Orleans was the last city of the country during reconstruction to be occupied by federal troops. They didn’t leave for 15 years. One reason is that New Orleans is a valuable port. But it was also because the ethnic problems were so severe. When federal troops left, it went back to an almost home-rule situation, as if the Civil War had never happened. Much of that still exists in this area of the South.
We’re fighting a lot of uphill battles. There are still a lot of racial differences in this area, but we can’t be successful if we can’t be part of solving that problem and providing opportunities for everyone.