Michael T. Burr
Consider all major business transformations in the history of Western Civilization, from the rise of feudalism through the coming biotech age. Each shift has been driven by a few individuals with big ideas, people who were not afraid to challenge conventional thinking, people like William the Conquerer, Florence Nightingale and Henry Ford.
On an admittedly smaller scale, the U.S. utility industry`s transformation is being advanced by a relatively small number of key players. These include certain lawmakers, advocates, consultants and vendors who are changing the very nature of the utility business. Also, important leadership is found in energy companies themselves.
EL&P recently sought the input of its editorial advisers to select three such utility company leaders who demonstrate vision for success in the new energy market of the 21st century. After considerable debate, we selected Dennis Bakke of the AES Corporation in Arlington, Va.; Richard Priory of Duke Energy Corp. in Charlotte, N.C.; and Jean-Pierre Hansen of the Tractebel Group in Brussels, Belgium. While these are certainly not the only people who are shining light onto the industry`s future path, they represent three distinct views of how to succeed in this new marketplace. Indeed, their views differ on the very definition of success.
Dennis Bakke, AES
“Unique” is perhaps the best single word to describe the AES Corporation. “Contrarian” and “progressive” are others. But a few words can`t adequately describe this company, where the primary goals are 1) to make the world a better place and, 2) in CEO Dennis Bakke`s words, “to create the most fun place to work that has existed since the beginning of the industrial revolution-a place where people can apply their skills and gifts without getting squelched.”
Many companies include such sentiments in their mission statements, and a few even attempt to uphold them. But very few make them their mantras, their driving principles and fundamental reasons for doing business, with apparently little heed for their effects on overall profitability and growth.
“In other words, we`re doing what we do out of love instead of for the normal purposes people put forth as business,” Bakke said. “I`m not saying we`re a charity and we do things for free. That`s not as sustainable as an economically solid arrangement. But the primary motivating force is to try to serve the world.”
Bakke (along with chairman and co-founder Roger Sant) started AES in 1981, with the idea that the electric utility business was not a natural monopoly, and should be broken up into constituent businesses, operated separately. Their initial target-and the focus of most of AES` investments to date-was generating plants. In the mid-1980s, AES` leaders turned their direction toward the implementation of the company`s mission-in a nutshell, integrity, fairness, fun and social responsibility.
Bakke is loath to say whether the company`s growth happened because of this unusual business approach or in spite of it. The numbers, however, are unambiguous: AES went from $200 million in revenues in 1990 to $3.3 billion in 1999. This growth curve continues apparently unabated. Its assets grew from $2 billion in 1995 to $21 billion in 1999, and revenue growth averaged 68 percent a year. Profits in 1999- after deducting extraordinary items like a major currency devaluation in Brazil–were a respectable 11 percent.
AES now owns interests in 123 plants totaling more than 43,000 MW of capacity in 16 countries, and an additional 6,300 MW in construction. The company distributes electricity in eight countries through 17 distribution businesses, and employs about 54,000 people.
Playing in Peoria
In 1999, a major part of AES` growth involved the $886 million acquisition of CILCORP Inc., the parent company of Central Illinois Light Co. The Peoria-based utility serves about 190,000 electric and 200,000 gas customers in central Illinois. AES acquired 100 percent, leveraging the transaction with $475 million in senior notes and bonds.
Although CILCORP was AES` first acquisition of a U.S. distribution utility, it was not AES` first foray into the retail electricity business. In addition to the company`s distribution holdings in Latin America, India and the former Soviet republics of Kazakhstan and Georgia, the company entered the U.S. retail market last year.
In July 1999, AES acquired New Energy Ventures, a leading energy service company targeting major industrial and commercial customers. AES paid approximately $90 million for all the outstanding shares, which were held by UniSource Energy Inc. (parent of Tucson Electric Co.) and senior management. Then, in August, AES formed Power Direct, a competitive retail energy supplier targeting residential and small to mid-sized commercial energy users-initially in New Jersey and Pennsylvania. The company was formed with people from CILCORP who saw retail energy opportunities in the mass market.
These investments are consistent with Bakke and Sant`s original vision for AES. “For 12 or 14 years, we`ve been looking for a utility to buy, split up and run the pieces as separate businesses-a customer business, a retail business, a delivery business and power plants in separate generation businesses. CILCORP is the first chance we got to do it. It may take a few years to get it into its pieces, but that`s what we`re trying to do.”
AES has no central departments-no human resources, legal or engineering departments-and it tries to eliminate centralization wherever it exists in its acquired companies. Breaking things up in this way is part of the AES fun-centered philosophy that ruthlessly drives decision-making down to the lowest-possible level. The thinking is that the fun part of work involves making important decisions.
“I try to limit myself to one decision a year,” Bakke says in all seriousness. “I`m talking about business decisions like CEOs are supposed to make-allocation of resources or whether we should do a $3 billion deal in Drax, England-I don`t make those decisions, and neither does our board. All ultimate decisions are made by the person closest to the action, no matter what their title or level in the company, and no matter what the size of the decision. The only requirement is that they have to get advice. It works beautifully for us.”
This hands-off strategy might seem risky, but it gives AES a tremendous depth of resources with which to extend its reach and capitalize on new business opportunities. Even so, Bakke is cautious not to prescribe the AES approach for other companies.
“If you define success as growing big and making lots of money, then I have no advice. But if you mean, `how do you make the most fun workplace since the beginning of the industrial revolution,` I have lots of advice. And my one piece of advice that no one has followed is to give up power and let all your people make the decisions. Step into an advisory role. When you do that, the whole world changes.
“I do not believe this is the new panacea for financial success from a Wall Street standpoint,” he said. “You can do what we`re doing and fall flat on your face, business wise. But you`ll probably still have a great place to work.”
Jean-Pierre Hansen, Tractebel Group
Tractebel is not a household name in the United States, … yet.
In Europe, the Tractebel Group is among the largest gas and electric utilities, serving the lion`s share of customers in Belgium and Luxembourg. Globally, the company has established a reputation as a first-class developer of power plants, becoming the world`s fifth-largest IPP. And in the United States, Houston-based American Tractebel is ramping up its power development and trading operations.
Not a company to overlook, especially considering who owns it: Paris-based infrastructure giant, Suez-Lyonnaise des Eaux.
Who is Suez-Lyonnaise des Eaux, you ask? Just a $33 billion, global infrastructure conglomerate, that`s who.
Suez-Lyonnaise is Europe`s fifth-largest private electricity supplier, and provides energy, water, waste and communications services in 120 countries. Further, the Wall Street Journal reported in March that Suez-Lyonnaise plans to merge with $80 billion utility combine, VIAG-itself the result of a pending merger between VEBA AG and VIAG AG, two of Germany`s dominant infrastructure companies. For perspective, the resulting mega-company would be about as large, in revenue terms, as the top 10 U.S. investor-owned utilities combined. It would be bigger than General Electric, Exxon or IBM, and would rank fourth in the Fortune 500 if it were a U.S. company.
As the major energy arm of Suez-Lyonnaise, Tractebel is a force to be reckoned with, especially when it says things like the following in its annual corporate plan: “… in the United States and Canada the Group has opted to speed up the growth of its two main businesses, independent generation and trading, bringing these two activities under the same roof by increasing the degree of business unit integration.”
At the tiller of the Tractebel Group is Jean-Pierre Hansen, CEO and chairman of the management committee. Hansen became CEO of Tractebel`s Belgian utility, Electrabel, in 1991, and was appointed chairman of the Tractebel Group management committee in March 1999.
In a written response to EL&P, Hansen explained Tractebel`s strategy for growth in the years to come. The company has set sights on European expansion outside its Belgian borders, while continuing to grow its global power and gas asset development businesses in the key regions of North America, the southern cone of Latin America, and Europe.
“Our `smart play` approach, already well under way, will be characterized by further marketing development via marketing companies, and the creation of joint ventures,” Hansen said.
The plan aims at fully integrating Tractebel`s generating, transmission and marketing assets for both gas and electricity in all the regions where it participates. Its aspirations depend on achieving a “critical mass in order to gain maximum advantage from economies of scale in generating and marketing.” But this does not translate into a massive acquisition binge. Instead, Tractebel will concentrate on optimizing its existing assets-the “smart play” approach. “This policy should result in Tractebel doubling its European sales in five years while increasing its generating assets and material investment by barely more than half.”
In Latin America, Tractebel is looking to focus its growth. “This is particularly so in Brazil, where we are focusing on Gerasul, expanding its generating and electricity distribution facilities and developing a central role in the electricity and gas system currently under construction between Brazil, Chile, Argentina and Peru,” Hansen said.
In the United States and Canada, Tractebel is accelerating its expansion. Suez-Lyonnaise subsidiary ELYO-which is expected to be integrated into Tractebel soon-recently acquired industrial cogeneration developer Trigen Energy. Further, American Tractebel is expanding its marketing operations and ramping up its merchant plant development program.
Finally, the company is pursuing new development and acquisitions in various other regions. “Tractebel has pinpointed high-growth countries where it intends on stepping up its development, hoping to take advantage of their long-term potential to develop into more integrated systems.”
“We are building a whole new way of creating value,” Hansen said. At the same time, however, the company continues to rely on its long-standing business philosophy, comprised of three tenets: “The desire and ability to anticipate technical and market developments, as illustrated by the way in which our core business has been internationalized since the early 1990s; the ability to develop partnerships and to `work with others` in Belgium and abroad; and the way in which we have developed and maintained a high skills level in all of the technologies used in our business, and in important peripheral areas.”
In addition to making available assets and financial resources, Hansen said the key to the successful implementation of the company`s plan is its ability to “channel the energy of all Group managers. Tractebel has all the advantages it needs to guarantee its own development and, from its strong market position it is able to continuously assess the potential of any new opportunities.”
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The Tractebel Group, part of the European infrastructure conglomerate Suez-Lyonnaise des Eaux, has sights set on expansion on three continents. The new combined cycle plant at Herdersbrug, Belgium, is part of the company`s ambitious plans for European expansion.
Richard Priory, Duke Energy Corp.
EL&P interviewed Richard Priory, Duke`s chairman, president & CEO, in 1998 for the Utility of the Year Award. At that time, Duke had just finished digesting PanEnergy-the gas transportation company it had swallowed in mid-1997. The company was positioned perhaps more effectively than any other company to capitalize on an integrated portfolio of fuel and power assets.
Two years later, Duke is even better situated, having sold off some assets that were, in Priory`s words, “competitively challenged,” and invested in other, more strategic properties. EL&P asked Priory if his vision for the company had changed since 1998.
“Our vision tries always to be responsive to the external environment as that changes,” he said. With deregulation and restructuring accelerating in the United States and abroad, Duke has shifted its game plan slightly. While its original concept focused on convergence of resources, it evolved into an energy value-chain model.
“To play the convergence game, you had to integrate along the energy value chain, at least a certain portion of it, to create value,” Priory said. “And you had to be good at every part of that energy value chain, from gas gathering and processing to selling electricity. All that, to us, became an interconnected value chain.”
The company`s strategy has shifted further since then, to a more complex model that brought together resources in various places into a single system. “We had a lot of opportunity along the energy value chain, but in many ways it started looking more like a network to us,” he said. “We were interconnecting together supplies of energy to customers on the other end. Then we played the intermediary logistics role, creating value for customers by applying advantageous methodologies for delivering the product less expensively than they would have available to them any other way.”
Part of this evolution involved the liquidation of some assets-most notably $2.2 billion worth of Midwestern pipeline properties that came from PanEnergy. “We have to continually be changing our portfolio of assets to accommodate the fast change in the energy market. Basically everything in our portfolio is up for movement under the right circumstances,” Priory said.
The key, he explained, is to remain focused on the company`s overriding goals. “The ability to focus on shareholder value, which is the ultimate outcome of what we`re doing, will lead to dramatically improved quality of decisions. If you always know what you`re working for and why you`re working, you tend to be able to drop back to that during periods of uncertainty.”
Priory was quick to point out, however, that creating shareholder value is only accomplished by creating value for customers. “Of course we have a strong customer focus, and that leads to creation of shareholder value,” he said.
Priory emphasized the importance of keeping information flowing throughout the organization. “That`s especially important these days. We let information flow in all directions-up, down, laterally, everywhere in the company.” Managers at all levels are encouraged to contact other managers at any level to discuss important points.
“It sounds a bit chaotic. But the reality is that information flow is how we make money in this marketplace, being able to rapidly move information internal to the company,” Priory said. “Information is the very life blood of the business.”
This ad hoc information flow, however, does not apply to the decision-making process. “Decision-making always reverts to the hierarchical structure. We move decisions through the chain to make sure we have the best talent and the broadest viewpoint of individuals from senior leadership participating in the process.”
Nevertheless, speed is critical to Duke`s strategy. Executives must have what Priory calls a “bias for action.”
“The environment is moving fast, and if you can`t move faster, you`ll keep falling behind. So you need a bias for action internally, and quality decision making at the same time. That`s a tough combination to balance.”
This combination, however, is necessary for success in the new utility marketplace. “All CEOs in this industry are facing dynamic movement and restructuring. Plus, they have to be very proficient at managing both a free market-driven and a regulatory-driven culture all in one company,” he explained.
Motivating teams to succeed in these disparate worlds is a major challenge for today`s utility CEO, compared to what was required in the pre-deregulation past. Additionally, the ability to be agile in portfolio management is a new requirement. “Fifteen years ago, CEOs never spent any time figuring out which assets might be sold or acquired. They weren`t in the acquiring mode because nobody was selling any plants, and they weren`t in the sales mode because they couldn`t get anything out of the rate base.”
Now, however, today`s valuable asset might become tomorrow`s white elephant, and vice versa. This is due to rapid shifts in market conditions. “Electricity is the most volatile commodity on Earth,” Priory said. “We`re growing into a volatile market, so to capture value, the new utility CEO needs to be agile in the management of his portfolio.”