Pam Boschee, Managing Editor
When other utilities were venturing into diverse, unregulated businesses, Consolidated Edison Inc. (Con Edison) continued its conservative “wires and pipes” approach to sustaining financial strength. This philosophy has served the company—and its shareholders—well.
EL&P is pleased to present our annual Utility of the Year award to Con Edison.
Kevin Burke, president and chief operating officer of Consolidated Edison Company of New York Inc. Click here to enlarge image
In a year fraught with credit rating fiascoes, Con Edison has sustained superior credit quality while also delivering electricity with award-winning reliability.
As of early November, Con Edison’s corporate credit rating and outlook by Standard & Poor’s (S&P) was A+/Stable/A-1. At the Edison Electric Institute’s Financial Conference in October, Consolidated Edison Inc. reported its holding company held an A bond rating and its regulated businesses held an A+ bond rating. The company has minimal off balance sheet financing and has no ratings triggers. As of Sept. 30, Con Edison’s balance sheet showed long-term debt at 49.3 percent, preferred stock at 1.8 percent and common equity at 48.9 percent.
Regulated businesses account for 98 percent of the company’s earnings contributions. Only two percent is derived from unregulated businesses. This formula seems to have worked for Con Edison. The company has demonstrated 10 consecutive years of return on equity of 12 percent or better and has provided investors with 28 consecutive years of dividend increases. Over the last 10 years, Con Edison’s total return to shareholders averaged 9 percent, compared to 3.8 percent for S&P Electrics.
Con Edison has not sacrificed reliability for shareholder returns. In fact, about $5 billion in capital expenditures are planned over the next five years, much of it for T&D.
PA Consulting Group selected Con Edison as the Northeast region and overall national winner of its 2002 ReliabilityOne Awards in October. Con Edison customers’ outages averaged only 15 minutes per year per customer. Compare this to the average customer of a North American utility who experienced a total of 1.5 sustained outages, lasting around three hours total.
Con Edison plans to invest about $5 billion over the next five years, much of it for T&D. Photo courtesy of Con Edison. Click here to enlarge image
Jeff Lewis, PA Consulting analyst, said the selections from about 100 utilities are based on a proprietary quantitative process, which includes factors such as outage duration and frequency (with and without storms), and reliability measures such as CAIDI, SAIDI and SAIFI.
This was the second year for PA Consulting’s awards. Con Edison was also the Northeast regional winner last year. (This was the first year for the naming of an overall national winner.)
Lewis added, “Con Edison had superior reliability in the country over many, many years.”
Kevin Burke, president and chief operating officer of Consolidated Edison Company of New York Inc., spoke with EL&P about Con Edison’s successful business approach. Here’s his insider’s view of how sticking with the basics can make a company a winner.
EL&P: Overall, utilities and their parent companies have endured a difficult year in terms of their financial ratings. Con Edison has stood above many of its peers and remained a strong performer. What strategies contributed to its sustained strong business profile?
Burke: I think you’re right that we do stand away from a lot of our peers; our stock price is virtually unchanged from the beginning of the year. Even in the long term, when we look back over the S&P 500 over a 10-year period, we’re about the same as what the S&P 500 has done. One of the primary issues [in terms of corporate strategies] is we’ve really never left the basics of the business that we’re in. Sometimes we refer to it as our wires and pipes strategy. We live in a different environment than many other companies, and reliability of service is crucial to our customers. It’s a vertical city—people need electricity to get to work, get into their apartments. They can’t do anything without having electricity and it’s crucial to them. We focus on every day being a world class operation in the regulated T&D businesses. In some other areas, we’ve capitalized on our expertise for additional growth opportunities through selective investment in our unregulated companies—Con Edison Solutions, Con Edison Development, Con Edison Energy, Con Edison Communications—all of which were based upon the strengths of the utility that’s been in the energy business in New York City for about 180 years now. Those companies are continuing to do in the restructured environment what the utility had traditionally performed. We didn’t go far away from our core business or from our core strengths and knowledge.
EL&P: How have Con Edison’s business strategies changed over the course of 2002?
Burke: I was the vice president of corporate planning a couple of years ago when we were looking at restructuring the industry. We picked a path and we have stayed on that path. I think being disciplined, telling people what you’re going to do, doing it, and not going far afield has been one of our strengths. Some other companies have gone far afield from what they knew, and I think that’s how they got into trouble. In this past year, there hasn’t been a change in the strategy—of course, you’re always changing how you’re implementing that strategy and looking for opportunities within the context of the business environment. The business environment has really changed in 2002—the overall economy has softened and the energy industry has changed rather dramatically. But if you take a look at the fundamental business strategy of the company, I’d say it hasn’t changed.
EL&P: Standard & Poor’s recently noted that Con Edison is planning about $5 billion in capital expenditures over the next five years, almost half of which will be spent in 2002-2003. How will this money be invested—special projects, transmission?
Burke: When you think of a transmission system, some people think of long distance transmission lines. Our service territory is relatively small from a geographical point of view, so a lot of this investment is in putting in new substations, shorter transmission lines to those substations, and extensive investment in our distribution system to meet the increased load. A good bit of it is in new substations and enhancing existing substations.
EL&P: What level of demand growth do you forecast for your service territory over the next five years?
Burke: We’re probably looking at 1.3 to 1.5 percent increases in peak load. We’ve also seen that the load factor is improving. If you went back 15 years or so, you’d hit a peak in the commercial areas, and then it would fall off after 6 o’clock at night, for example.
Now, the drop-off in customer demand doesn’t fall off that much because the residential areas pick up into the evening. In some cases, it’s not dropping off until 10 or 11 o’clock at night. We have some distribution networks that peak at night as opposed to what people traditionally think of utilities as peaking in the late afternoon. That’s driven by residential air conditioning load. We see continuing growth in peak demand, but also substantial growth in energy and improvement in load factor.
EL&P: What are Con Edison’s plans to meet this increased demand?
Burke: In addition to an electric system, we also have a gas and steam system. The power plants that we have are the plants that provide steam to the steam system and some of them also generate electricity. Other than that, we have sold all of our plants. As part of restructuring, all our customers have choices as to who their supplier of electricity would be. As we look forward, we’re looking at developing more of a portfolio approach, similar to what we’ve done on the gas system. Using energy supply contracts that have different durations, we’d be able to manage supply and price volatility. As a utility, we are out of the business of building power plants to meet the needs of our customers, and many of the companies that were in that business are now experiencing financial difficulties that preclude them from adding any additional capacity on their systems. Right now, there’s not that much construction going on in the New York City area. There is some, but not a lot. We think next summer the supply will be adequate, but it will be tight. That will probably be the case for the year after too, but we’re working with other participants in the industry and state government to find ways to encourage people to build generation.
EL&P: What are the main existing sources of power going into New York City?
Burke: We have a number of sources in New York City. These were power plants that Con Edison had built over many years and then sold. Most of the power is generated right in New York City, not true in terms of energy, but in terms of capacity. In New York state, there is a capacity market and any utility or energy service company is required to have under contract capacity that equals 118 percent of their customers’ peak demand. That provides the traditional 18 percent reserve. On top of that, they must have those contracts with generators for 80 percent of the peak demand of their customers in New York City, and those power plants have to be located in New York City. For example, if our peak load in the city was going to be 10,000 MW, the utilities and the energy service companies would have to have contracts for 8,000 of those MW in New York City and then a total of 11,800 MW between the city generation and the out of city generation.
EL&P: What is the primary fuel source for the city generation?
Con Edison customers’ outages averaged only 15 minutes per year per customer. Photo courtesy of Con Edison. Click here to enlarge image
Burke: The majority of it is gas-fired. Some of the plants that we had owned were originally coal-burning plants that were then converted to oil and subsequently converted to be able to burn gas. Most of the base load plants can burn oil and gas. Because of that, you can get the economies in the summer, if the price of gas is lower than the price of oil and then in the winter time, can burn oil if the gas isn’t available. If we had a cold winter and the pipeline capacity for natural gas isn’t adequate to meet the heating loads of customers and power plants, then we burn oil. The new plants going up are primarily gas-fired. I think all of the plants that put in applications to New York state in the last few years are gas-fired. That is a concern; we need to be concerned about fuel diversity.
EL&P: Con Edison was recently recognized by PA Consulting Group as the most reliable utility in the U.S. What reliability initiatives contributed to this notable success?
Burke: We have an underground system and we have an overhead system. The underground system is not just taking an overhead system and putting it underground. When we design our network systems, which is generally referred to as our underground system, we have a number of primary distribution feeders which are either 13 kV or 27 kV, that go into the network and then feed network transformers that are connected to a secondary grid. The system is designed in such a way that on a peak day, we can lose two of the feeders going into the network and still meet the customers’ needs. We wind up with a good bit of redundancy, and that provides a lot of the reliability because when you do get a failure in the underground feeder, it’s much more difficult to find than when you have a failure in an overhead feeder. We have systems in place for maintenance and for trying to find the best place to invest money in the underground system. We have fairly sophisticated probalistic models that we use to help us evaluate improvements to the distribution system.
EL&P: What are your thoughts about FERC’s recently proposed Standard Market Design (SMD)?
Burke: In New York, the New York Power Pool (NYPP) was created sometime after the ’65 blackout. The vast majority of the employees at Con Edison have always run the business either with the NYPP or more recently with the New York Independent System Operator (NYISO). With the NYPP and with the NYISO, we’ve been used to having a market where we can buy and sell electricity. We view an SMD as positive. If the market design was similar between New York, PJM, or the New England ISO, we think the market would be more efficient. In some other parts of the country, people haven’t been used to working in that kind of environment. I think they don’t see the benefits of some of the proposals and in having such a large market. There are a couple of things in the SMD NOPR that we weren’t all that happy with. We are looking for a robust wholesale market, and that means a wholesale generation market with an open and transparent transmission market. We’re a little concerned that FERC was saying that the independent transmission companies would have advantages over perhaps some other transmission owner, whether utility or merchant transmission owner. I think over time what we should be trying to achieve is that all owners of transmission systems should have the same rights and responsibilities. No one party should have an advantage over another party. The other thing we’ve had in New York, right from the beginning of the NY-ISO, is a market monitoring organization. This past summer and the summer before, market prices in New York, by and large, were pretty reasonable. We didn’t have some of the problems that California had partially because we did have the reserve margin and also we had fairly strong market monitoring and market mitigation rules.
Consolidated Edison Inc. snapshot
Consolidated Edison Company of New York
- 32,657 miles of overhead distribution lines
- 89,392 miles of underground distribution lines
- 4,241 miles of gas mains
- 87 miles of steam mains
- 3.2 million electric customers
- 1.1 million gas customers
- 1,850 steam customers
Orange and Rockland Utilities
- 5,085 miles of overhead distribution lines
- 2,574 miles of underground distribution lines
- 1,782 miles of gas mains
- 280,000 electric customers
- 120,000 gas customers
- Con Edison Solutions—retail energy and services marketing company
- Con Edison Energy—.supplies wholesale energy and specialized energy supply services to customers in the electric and gas markets in the Northeast and Mid-Atlantic States
- Con Edison Development—.acquires, develops, owns and operates electric generation assets in the Northeast to serve customers of Solutions and Energy.
Con Edison common equity performance
Click here to enlarge image
The following graph is a comparison of equity indices provided by The C Three Group for Con Edison, a composite of energy utilities, and for a selected Con Edison peer group.
For each company, the number of shares that could have been purchased with $100 on Jan. 1, 1998, is calculated. Each stock is adjusted for dividends, stock splits and spin-offs. Dividends are assumed to be reinvested. For example, a “Company X” index value of 150 indicates that $100 of Company X stock purchased in January 1998 would now be worth $150.
To create indices, The C Three Group averaged together each company’s stock value, as calculated by the above method, for the same period. The composite indices include 97 companies that have either a regulated gas or electric component to their businesses. (A complete listing is available at www.cthree.net.) Unlike other indices, these do not weight average based on market capitalization. The C Three Indices are intended to represent true value indices—reflecting what a shareholder would have today if they invested in one of more of these stocks on Jan. 1, 1998.
Note: Peer group includes: CH Energy, DQE, Energy East, Keyspan, Maine Public Service, Northeast Utilities, NSTAR, Public Service Enterprise, and UIL Holdings. Source: The C Three Group