By Pam Boschee, Managing Editor
There’s no better source for an up-to-the-minute status report on an industry than from the drivers of that industry-CEOs. EL&P shares its exclusive interviews with the leaders of three companies: Dominion, CMS Energy and Southern Co.
The quotation, “A leader is a dealer in hope,” has been attributed to Napoleon I. In the following interviews, the featured CEOs provide a glimpse into their hopes, while delivering the news about doing business today.
EL&P: Wall Street bankers have theorized that Dominion may be a power company with sufficient financial clout to be on the lookout for acquisitions of additional individual assets-or even for takeover of companies like Calpine, Mirant, AES Corp., Reliant Resources, which have seen their shares fall sharply. What are Dominion’s plans for growth in the next year or so? What considerations drive the decisions to acquire assets or take over faltering companies?
Thomas E. Capps, Chairman, President & CEO, Dominion Click here to enlarge image
Capps: We have internal growth-we’re going to bring 1,500 MW of new generation on this year, about the same next year, about the same year after that. We’re bringing about 1,500 on for the next four years. We’ve had two big finds [oil] in the Gulf of Mexico, Devil’s Tower and Front Runner, and they will be coming on toward the end of ’03 and ’04. We’re in the market for assets. We just bought State Line from Mirant, which is in Indiana; we bought the cousin, Kincaid several years ago. As assets like that come on line, we will buy them if we can get them at a reasonable price. As for companies, there are several weellipseI guess the world lust would be appropriate. Sometimes, we’re able to get them to the parking lot in front of the church and occasionally into the vestibule, but we haven’t dragged anybody up the aisle to the alter yet. It takes a willing buyer and a willing seller. We have hopes that sooner or later we’ll be able to pick up some company, but it would have to be accretive. We don’t build size if we don’t build earnings. If it wasn’t immediately accretive, we certainly wouldn’t do it.
EL&P: This is a time of change for some companies that have traditionally been seen as the powerhouses in the independent power production industry. They’re now having difficulties, and it will be interesting to see in the next year or two what shakes out for them.
Capps: We’ve been against a lot of these companies for assets up in the Northeast when companies had to divest themselves of their generation. We bid against them, and they came out-when they came public from the utilities-with probably a 20 to 1 price-earnings ratio. They paid too much for these units, we think, and they got themselves in a lot of debt; now their stock price is way down, and they’re kind of foreclosed from the debt and equity markets. We think they’ll either have to sell themselves or start selling assets. We noticed a while back that people would call us wanting to sell sites, then they’d want to sell sites that had air permits, and then they’d want to sell sites that had turbines to go with them. We’re seeing some generating units come up for sale, but not as many as we think will be coming in the future. We brought out $930M of new equity two weeks ago, so we’ve got our balance sheets in pretty good shape now. We let our debt ratio get a little high after we acquired Consolidated Natural Gas and we told the rating agencies that we’d have it down to 55 percent debt, 45 percent equity by the end of this year and we’re about there now. We did it because we wanted to be in the position to pick up something if we could acquire it at the right price.
EL&P: Dominion has announced its intent to seek license renewal at Millstone in 2004, and NRC is already reviewing license renewal applications for the North Anna and Surry stations in Virginia. Does Dominion have plans to build a new reactor at North Anna since it has requested an early site permit?
Capps: Don’t read too much into that. All we are doing is keeping our options open. We wouldn’t build a new nuclear power plant right now. We took a good look at the numbers and we talked with GE, and the cost of one and the time to build one-you’re talking six or seven years and an awful lot of money. You’re looking at probably a busbar cost on a new big nuke, $27 per MWh. It’s going to have to get south of $25 to make it competitive. If you were a rate-based utility with construction work in progress and a rate base, you could earn on it. Not being a rate-based utility anymore, we don’t have that. We want to keep our options open, but we have no plans to build another nuclear plant.
EL&P: What is your outlook for U.S. nuclear power given the ongoing difficulties and controversy surrounding nuclear waste disposal?
Capps: It’s a political problem; it’s not a physics or a technological problem. Nobody wants the stuff in their back yard. If there’s ever been a place that’s been studied to death by everybody, it’s Yucca Mountain. The people that are really anti-nuke, you will never satisfy. I wouldn’t mind living next door to the thing-it wouldn’t bother me at all. I also wouldn’t mind living next door to a nuclear plant. That doesn’t’ bother me. The people that are anti-nuke, they want you to go back to an agrarian society where everybody had 10 acres and a mule, and that just ain’t going to happen.
EL&P: What do you identify as the most pressing issue facing utilities today?
Capps: Not being facetious, but as far as we’re concerned-the damn weather. We haven’t had any cold winters or hot summers. We like weather only a utility type could love-we like 100 degrees in the summer time and zero in the winter and we’ll take Fahrenheit or Celsius, either one. Sooner or later the Lord’s going to get back to averaging it out. I think that’s a problem for the whole industry. The second thing I worry about is Congress doing something crazy as the result of Enron. Okay, you may want to oversee the accountants-that’s fine-but the market has done a pretty good job with people that play games or are less than transparent with their accounting in their final reports. The market has really tarnished them. When Congress does something, it uses too heavy a hand and they’ll screw it up. I really believe it. I hope Congress will have a lot of hearings, make a lot of statements, a lot of press releases-and not do very much.
EL&P: A J.D Powers & Associates study ranked Southern Co. highest in overall customer satisfaction for electric service to midsize business customers in the southern U.S. This is the third consecutive year that Southern has received this recognition. Last year, Southern ranked highest overall in customer satisfaction for electric service to residential customers in the southern U.S. What is Southern doing that other companies aren’t to maintain these high rankings?
Allen Franklin, Chairman, President & CEO, Southern Co. Click here to enlarge image
Franklin: It’s simply a matter of priority. We place a very high priority-and have for a long time-on customer service and customer satisfaction. Unlike some of our friends in the industry, we see our retail business as our number one business, and we expect it to be our number one business for a long time to come. Even where we’re venturing out beyond the traditional retail business, such as in competitive generation and new products and services, all of those are built on the foundation of our retail business because our retail business is what creates our brand value; it’s what creates the view that the company is interested in customers. Some people would say why is customer service and customer satisfaction so important in a regulated business and in my judgment, it’s just as important in a regulated business as in a competitive business. In a competitive business, if customers are satisfied, they tend to stay with you, they tend to be willing to pay more for the product if they’re happy with the service. In a regulated business, it’s just as important because the proxy for competition in a regulated business is the regulator. To the extent customers are happy with the company, it makes for much more constructive and favorable regulation. Companies that have very poor levels of customer satisfaction tend to have difficulty with their retail regulators; companies that have very high levels of customer satisfaction tend to have a more constructive environment.
EL&P: Accountability to shareholders is taking on heightened importance in many companies, especially post-Enron. Southern Co. has more than 500,000 shareholders, some of whom one might guess may be turning a more critical eye toward their investments overall. What is the most important message you want to convey to them?
Franklin: In today’s environment, we want shareholders to understand that our strategy is not complicated-it’s transparent, it’s easy to understand and it’s a strategy that fits right in the middle of our core competencies. We have a very predictable stream of earnings, both looking back and looking forward. If you look back over the last one year, five years, 10 years, our total shareholder return has outperformed both the S&P 500 Index and the S&P Utility Index over any of those periods. Whereas perhaps in the past flashy and risky strategies and on-the-edge strategies might have been highly valued by investors, I don’t think that’s the case today. I think people are looking for cash earnings, predictability and visibility, and that’s exactly the type of company we are.
EL&P: The SeTrans RTO is proposed by nine utilities in the Southeast, including Southern Co. It is intended to be an independent, incentive-driven, third party organization that will manage, but not own, the transmission facilities. The total transmission investment involved is about $9.3B, of which the largest stakeholders are Southern Co. with almost $4B in transmission assets and Entergy with nearly $3B. What are the challenges in achieving consensus among this group, many of whom own a much smaller piece of the RTO investment?
Franklin: With so many players with different priorities, it’s a great challenge to put together a plan for an RTO that’s acceptable to most or all of those players that’s workable-one that’s not overly complicated and that’s not overly costly. Many of those players have an interest primarily in protecting cost and reliability as far as retail customers are concerned. Some have an interest that’s based primarily from the wholesale side, being sure that generators have affordable and unfettered access to transmission. Trying to formulate a plan that meets all those objectives, when sometimes they’re in conflict, is difficult. The second challenge is balancing the interest of the wholesale generators vs. retail consumers. In that regard, our primary concern is to be sure that there are not costs transferred from the wholesale side of the business to retail. That’s a big issue and it is the primary driver of all the debate as to transmission pricing; it’s really who should bear the cost, the wholesale supplier or the retail consumer, especially when it’s related to expansion of the transmission system. The third challenge is to be able to satisfy the objectives of FERC and at the same time satisfy the concerns of state commissions. FERC’s primary interest and responsibility is related to wholesale markets, but the state public service commissions are primarily interested in the effect on retail consumers. Developing an RTO plan that will satisfy both those interests is very difficult but it’s absolutely critical that before we go forward with a major restructuring of our transmission system and the way our transmission system is controlled, those two-the federal and state regulators-simply have to reach an accord.
EL&P: Do you think utilities consider selling their transmission assets to an independent transmission company a viable alternative?
Franklin: We’ve looked at that. In fact, early on we thought perhaps that was the best approach for us. After looking at the feasibility of selling transmission, especially from the standpoint of tax consequences, it became apparent that economically and financially that was not viable for us. There was such a significant tax hit that we could not make it work. Congress is considering changing those tax laws to make the sale of transmission economically more feasible. If that change in federal law takes place, then you would see substantially more companies interested.
EL&P: What’s your opinion as to the timeframe involved for this tax change?
Franklin: It’s part of the comprehensive energy bill that is working its way through the Senate now and has been in discussion in the House for some years. This tax change is part of that discussion. Whether this tax provision will make the cut remains to be seen, but it could be as early as this year or it could be several years down the road.
EL&P: Congratulations on your recent appointment to the Department of bEnergy’s newly formed Electricity Advisory Board. Secretary of Energy Spencer Abraham established this 39-member group to tap into high-level advice from across all segments of the electricity industry. If asked for your advice about the top priority agenda item, what would it be?
Franklin: From my standpoint and looking at the priority from the Department of Energy’s responsibilities, it would be to preserve and create energy options as opposed to eliminating energy options. A difficulty that the industry is facing that will ultimately be a difficulty for the entire economy is that there are efforts, and have been for years, to eliminate most of the options for increasing energy supply in this country. This includes pressures on building coal-fired units to the difficulty in building nuclear units to what I think will eventually be difficulty in building gas-fired generation because the cost of gas is ultimately going to be substantially higher since we’re relying almost exclusively on gas for all new generation, and the supply and demand equation will result in increasing gas prices. We are routinely making it more difficult to build power plants without any new economical options on the horizon. I think the comprehensive energy strategy articulated by the president places a good deal more emphasis on creating and preserving options, and I would like to see that implemented via federal legislation, which is being discussed. I think it’s difficult because each one of these supply options tends to be discussed and often attacked one by one without looking at the bigger picture and without thinking through what the alternatives are. The truth is that any form of energy supply has some negative effects, some negative environmental effects, whether it’s windmills, gas, coal, or nuclear plants. There’s not a perfect solution, but we can’t one by one eliminate or overly restrict these options.
EL&P: CMS Energy is the parent company of Michigan Electric Transmission Co., the transmission system of your utility subsidiary, Consumers Energy. Michigan Electric Transmission Co. announced an agreement to sell its transmission assets to Trans-Elect in October 2001. When completed, this will be the first outright sale of a U.S.-based transmission system to an independent transmission company. What were the key drivers behind this groundbreaking business decision?
William T. McCormick, Jr., Chairman & CEO, CMS Energy Corp. Click here to enlarge image
McCormick: The reason we decided to sell was FERC’s orders relating to the requirement to either divest or put transmission assets into a regional transmission organization in which the utility contributing the transmission assets would not have significant control. In other words, they could own only a small percentage of the RTO. It became obvious to us that if we wanted to stay in the transmission business, we would have to do so as essentially a passive investor, someone who had a small percentage ownership in a larger transmission organization, but where we didn’t exercise any management control. After some consideration, we decided that it was in our company’s best interest just to go ahead, if we could find a buyer who was willing to pay an attractive price, to go ahead and divest the asset. It really gets down to not wanting to have significant assets that we can’t manage. It’s as simple as that. Why have hundreds of millions of dollars of assets in things that we have no control over, and where others are making the business decisions that will affect the profitability and rate of return on those investments? It was a fundamental decision of let’s cash out of that and re-invest our money in areas where we can exercise management control and therefore affect the rate of return of our investments.
EL&P: Independent power production (IPP) has been subjected to the highly critical eyes of ratings agencies. Debt seems to have become an objectionable four-letter word. Consequently, investment interest has retreated and many power plant projects have been tabled and cancelled until financing becomes more favorable. How has CMS Generation, your independent power production subsidiary, been affected by this? What is your outlook for independent power overall in the next year? In the next five years?
McCormick: Our generation company is a wholly owned subsidiary of CMS Energy, so it does not trade independently on the exchange like some of them do, like AES, Mirant, NRG Energy or Calpine and so forth. The investor reaction to the independent power industry has been somewhat negative in recent months and it’s a reflection of the fact that there is a kind of collective realization that began late last year and has moved into this year that the amount of capacity that has been committed for new plants in the next several years was well beyond the demand needs. Therefore, prices would be very soft in the merchant market. Many of the plants that were being proposed and have been proposed are in fact merchant plants. The amount of megawatts that were committed to as of the end of last year was a very substantial number and was driving up the reserve margins in almost every region of the country to very large levels. This process of committing to these plants started three or four years ago when people realized there were shortages in some areas, and a lot of IPP companies went out and got large orders of turbines and started committing to building a lot of these plants. Consequently there has been a fairly large capacity of new IPP power that has come on in the last year or two and there’s a substantial amount projected to come on this year and next year and the year after. The consequence of all that is that it has driven down the price of merchant power considerably.
For example, in February 2001 [referring to a chart recently prepared], the forward prices for the summer of ’01 were up in the $130-$140 per MWh range. This year in February, the forward prices for merchant power, spot power, for summer of this year were down in the $30-$40 per MWh range. It dropped from $140 to $40. Those are the numbers in our area, ECAR [East Central Area Reliability Council]. That major drop in one year was a reflection of a collective realization of how much capacity was coming on-line and how much surplus there would be to requirements. The surplus was aggravated somewhat by the fact that the economy’s been down, and there has been some weather effect. The weather is not as big a factor in electricity because you can’t store electricity; unlike gas, where if you have warm weather, you put it in storage and then it’s still available for later use. The economy has had some negative effect, but even in a nominally good economy, people are looking at very sizeable growth in reserve margins in most areas of the country and that has given rise to this precipitous drop in the last six to 12 months in electricity prices in the merchant market. Most of the independent power producers have been under a lot of pressure because many of them have large amounts of merchant capacity, which is subject to this volatility in the pricing. Those companies that have the largest amounts of merchant capacity are being affected the most, and those that have more contract capacity, less merchant, are being affected less. As far as our subsidiary is concerned, the vast majority of our electricity in our independent power group is contract capacity. We don’t have a lot of merchant capacity. It has not really had as devastating effect on us as it is having on some of the other companies.
EL&P: CMS Energy owns and operates the United States’ largest active liquefied natural gas (LNG) facility in Lake Charles, La., which is one of four existing LNG import terminals in the U.S. Higher U.S. natural gas prices coupled with high gas demand drive the support for development of new LNG import terminals. What is your outlook for LNG imports? New LNG terminals?
McCormick: There has been a short-term softness in the past number of months of natural gas prices; down in the low $2 range in the spot market.
However, it’s interesting to note that right now, today, and in the last several weeks, spot gas has recovered quite a bit. It’s up around $3.50. There hasn’t been as much volatility in forward gas prices for the next year or two or three, so while spot prices have, in the short term, dropped to low levels, the longer term futures for gas-if you look out one, two, three, four years, have been a little bit more stable. People don’t make LNG decisions based on the spot market today; they look at it based on what the price is likely to be over the next several years.
The current natural gas spot price [referring to The Wall Street Journal commodities listings] is $3.47, it has come up over $1 in the last month. If you were to buy futures in November of this year, it’s $3.71; in January ’03, it’s $4.05; next March, it’s $3.81 and in the next summer it gets down to $3.50 and then it’s back up in December/January to $4. You can see that on a one-year strip basis for next year, January ’03 to December ’03, it averages about $3.70-$3.80 per Mbtu, which is extremely solid in terms of LNG. We’ve always said that north of $3 for LNG, it’s economical to bring it in [import LNG]. The pricing today is more than adequate to ensure healthy LNG economics. As far as what our company’s doing, we’re doing three things right now: we’ve announced an expansion of our Lake Charles facility that will take it from the current steady state level of 600 million [cubic feet] a day up to over a billion [cubic feet] a day-it’s a major expansion we have underway.
The second thing is we announced a number of months ago that we had formed a partnership with Sempra Energy to build a Baja, Calif. West Coast terminal that would import LNG into Baja, Mexico. That gas would then be shipped north to supply some of the industrial uses in northern Mexico and it would be piped into the United States for use in southern California. We believe that will be a very attractive project and we will be doing joint marketing with Sempra. The third thing we’re working on is an offshore Gulf of Mexico terminal, which would be a new terminal. We own Panhandle [Eastern Pipe Line Co.] and Trunkline pipeline systems and we also own two offshore pipeline systems-Sea Robin and Terrebonne.
We have excess capacity in the Sea Robin system that would allow us to build an LNG receiving terminal offshore in the Gulf, 50 miles out, which could unload onto one of our platforms and pipe the gas in our existing pipeline into the shore and then go into the interstate gas pipeline system. We are currently doing studies and work on that particular project. We’ve also had discussions with the Mexican government about the possibility of us participating in an East Coast Mexico terminal. We are fairly active in the LNG area, both from an import facility standpoint as well as a marketing standpoint. Our marketing company happens to be the most significant marketer of LNG import in the U.S. We’re in the business in a big way and we think the economics of natural gas on a go forward basis will continue to be very positive. The demand for gas is going to continue to rise in the U.S. for environmental reasons, industrial uses and for electric generation. The domestic supplies are such that we’re convinced, based on drilling data and other sources, that the domestic, indigenous supplies will not be able to keep up with the growing demand for natural gas in North America. So, there will be increasing need to do some LNG importation.
EL&P: Congratulations on your recent appointment to the Department of Energy’s newly formed Electricity Advisory Board. Secretary of Energy Spencer Abraham established this 39-member group to tap into high-level advice from across all segments of the electricity industry. If asked for your advice about the top priority agenda item, what would it be?
McCormick: I’ve said for some time that I think one of the most important things that we can do is to de-bottleneck the electric transmission systems in the country, if we want to provide more ability to move electricity around and utilize new generation sources more efficiently. The biggest part of the problem is the lack of interstate transmission capacity.
In the natural gas business, FERC has eminent domain authority and has the ability to provide condemnation rights, so that if people object to a pipeline-they don’t want to sell their land or there is other opposition-FERC can cut through all that and eventually make sure the pipeline is built. There is no equivalent authority for interstate electric transmission siting; there is no federal authority that gives anyone any ability to condemn property in order to build electric transmission systems. One of the big difficulties that companies have had in the past decade or two is siting new electric transmission facilities. I made the point numerous times that you can reorganize the authority for transmission all you want, create all the RTOs you want-but if you don’t get more transmission capacity, it isn’t going to matter. Shuffling the boxes around organizationally as to who’s got authority to control the transmission system will not produce any new capacity. In my view, one of the most important things is to get Congress to include in any energy bill that eventually comes out a provision that provides for siting and condemnation authority so that we can put electric transmission on the same footing as gas transmission.
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