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ELECTRICELECTRICPERSPECTIVESPERSPECTIVESJ U L Y / A U G U S T 2 0 1 2

Leadership Development Rise of the New Entrants

Powering the People Redux

Lighting Changes and Choices

Earning the Right to WinPerformance leaders establish comparativeadvantage by aligning their strategies witha limited set of relevant and differentiated capabilities. But, success requires more than being a fast follower—it demands foresight, discipline, and continuous renewal. Drawing on deep industry and functional understanding, Booz & Company workswith many of the world's leading power and gas companies translating strategy intocapability and performance priorities, designing innovative operating models, and achieving differentiated leadership.

For more information: Jim HendricksonPartnerWashington, [email protected]

Todd [email protected]

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T H E M A G A Z I N E F O R

M A N AG E M E N T I N A M E R I C A’ S

S H A R E H O L D E R - O W N E D

E L E C T R I C C O M P A N I E S

JU LY / AUGUST 2 012 • VOLUME 37 , NUMBER 4

FeaturesELECTRICELECTRICPERSPECTIVESPERSPECTIVES

20 Powering the People 2.0A look back at the event that highlighted electric utility and technology company partnerships and the value of electricity.

B Y TARA T. YOUNG

24 The New and YouAs technological innovation unfolds, electric companies should consider some cautionary tales from other industries and prepare for disruption of business models, revenue streams, and entire customer segments.

B Y J OHN CALDWELL

34 Developing New LeadersWith innovative training programs and extensive outreach initiatives, electric utilities look to build their executive and manage-ment ranks from inside and outside the company.

B Y D ENNIS J. WAMSTED

20

24

34

JULY / AUGUST 2 012 • VOLUME 37 , NUMBER 4

DepartmentsT H E M A G A Z I N E F O R

M A N AG E M E N T I N A M E R I C A’ S

S H A R E H O L D E R - O W N E D

E L E C T R I C C O M P A N I E S

ELECTRICELECTRICPERSPECTIVESPERSPECTIVES

E L E C T R I C P E R S P E C T I V E S

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On the cover: As they navigate a host of challenging and complex issues, electric utilities invest time and resources in a variety of leadership development programs that will prepare and train their high-potential employees for the C-suite. (Photo: Masterfi le)

6 Powering Change

August means action.

8 EE at Work

Smart rates march on.

10 Power Poll

Privacy is paramount.

12 News & Trends

Cooling concerns…around the world in an EV…Edi-son Award

winners…customer satisfaction…wind energy jobs…of-fi ce moves…Energy Forward labels…and more.

42 Energy Effi ciency

A lighting standard time-line for the various types of fl uorescent, incandescent, and high-intensity discharge light-ing components.

45 Regulation

Sharehold-er-owned electric companies fi led 17 rate cases in the fi rst quarter of 2012.

48 Building the Future

Minnesota Power’s Boswell Energy Center Unit 4.

rd time-us ent, d

Quanta Services’ roots in the power industry run deep. For generations, Quanta has been the force behind the development of the power grid. As constraints on the infrastructure increase, so does the demand for transmission and distribution contractors. Reliability is at stake.

Quanta designs, installs, maintains and repairs electric power infrastructure. The branches of our network are far reaching and ready to mobilize. With more than 19,000 employees working in all 50 states and Canada, Quanta’s growth has made the company the foremost utility contractor with the largest non-utility workforce in the country.

The nation’s premier utilities rely on Quanta’s expertise to deliver the manpower, resources and technology necessary to meet growing demand, integrate new generation sources and deliver the power and reliability consumers deserve.

Reliable

www.quantaservices.com 713.629.7600 NYSE-PWR

6 E L E C T R I C P E R S P E C T I V E S

powering change

One of the top legislative issues before the electric power industry is the expiration of federal tax rates for both dividends and capital gains. The facts are stark, and even if you’ve heard them before, they bear repeating: If Congress and the Presi-dent don’t act by December 31, the maximum tax rate on dividends will jump from

15 percent to 39.6 percent; on capital gains, from 15 percent to 20 percent. Add the 3.8-per-cent Medicare tax on investment income—imposed by the 2010 health care legislation and set to begin in 2013 for households earning more than $250,000 ($200,000 single)—and some investors will see a top rate of 43.4 percent for dividends and 23.8 percent for capital gains.

The impacts of such a drastic tax hike bear repeating, as well. Cer-tainly, it will affect the millions of Americans who own dividend-paying stocks, directly or indirectly. This, and the simple fact that capital gains and dividend tax rates would not be the same, will have a ripple effect on America’s economy, depress stock values, reduce investment in dividend-paying companies (like electric utilities), and jeopardize infrastructure projects that create jobs.

We need to bring this issue to the top of the legislative agenda. But at a time when lawmakers are in constant campaign mode and

Congress is more divisive than ever, a decision on whether to extend current dividend tax rates is taking a back seat to election-year politics.

While the House promises to vote on tax measures in late July, before the August congressio-nal recess, the Senate is not likely to address the issue until after the November elections, dur-ing the “lame duck” session. At that point, Congress will have little time to act—and by then, it may be too late to avoid the consequences of delay.

For members of Congress, August is a time to be with their constituents. Which for us means August is a time for action.

Dividends in the DistrictIndeed, our legislators are heading home, and they need to hear from all of us that lower dividend tax rates matter. The Defend My Dividend campaign—powered by Edison Electric Institute, American Gas Association, Nuclear Energy Institute, Alliance for Savings and Invest-ment, and other industries and companies that pay out dividends—is kicking into high gear throughout the month with “Dividends in the District,” an aggressive constituent outreach campaign in lawmakers’ home districts. It’s an effort that all utility employees, retirees, and other stakeholders can support. Participating is easy, and you can get involved by■ scheduling a time to meet with your members of Congress in their local offi ces;■ attending local town hall meetings or community events hosted by your lawmakers—and voicing your support for lower dividend tax rates that are on a par with capital gains rates;■ visiting www.DefendMyDividend.org to send letters to your members of Congress directly; ■ liking Defend My Dividend on Facebook and posting on your legislators’ Facebook walls; and■ helping us spread the word to your friends and colleagues via Facebook, the Defend My Dividend website, and word-of-mouth.

August means action. We may have to wait for the fi nal decision on dividend tax rates, but we are hustling in the meantime. ◆

Brian L. WolffSenior Vice President, External Affairs, Edison Electric Institute

AUGUST MEANS ACTION

Introducing DNV KEMA Energy & Sustainability

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With more than 2300 energy and sustainability experts, DNV KEMA Energy & Sustainability offers comprehensive services to help utility and energy clients transition to a sustainable energy future. From assessing energy sources to understanding the end user, our services in business and technical consulting, grid transformation, renewable energy, carbon reduction, testing, inspection, certification and risk management enable our clients to develop and deliver new energy and energy efficiency to the market and value to their customers. With our independent view, in-depth knowledge, and innovative solutions, we are well positioned to support our clients in ensuring a reliable, efficient and sustainable energy supply.

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ee atwork Where electric ef ciency and ef cient regulation meet.

Smart Rates March OnBy Lisa V. Wood, executive director, Institute for Electric Effi ciency

Electricity customers—and electricity rates—are get-ting smarter, state by state. By mid-2013, Baltimore Gas & Electric (BGE), Delmarva Power, and Pepco residential customers—more than 2 million in Dela-

ware and Maryland—will have smart rates as their default option. As of June 2012, 2.6 million Southern California Edi-son residential customers had the option, as did 1.2 million San Diego Gas & Electric (SDG&E) residential and small com-mercial customers.

If those customers have smart meters, they receive a de-fault smart rate—and the payoff is savings in money and energy for customer and utility alike.

In those states, customers earn a critical peak rebate (CPR, also called a peak time rebate, or PTR) if they cut their de-mand during a peak event, which the utility may call during certain days of the year for a certain pe-riod of the day, when energy use is expected to be extraordinarily high. During all other hours of the year, customers pay the regular residential rate.

These utilities are on track to have the major-ity of their residential customers enrolled in a smart rate program—the fi rst utilities to do so. Right now, a total of more than 3.8 million residential cus-tomers in those states can use the rate, almost 11 per-cent of all customers with smart meters. By mid-2013, the number will be 8.2 million. With positive results from dynamic pric-ing pilots and with more than half of the nation’s households (65 million) projected to have smart meters by mid-decade, more state commissions and utilities are expected to follow.

Rolling It OutIn June, Delmarva Power began moving nearly 7,000

of its standard-offer service customers in Delaware to a CPR default rate. They will earn a credit of $1.25 per kilowatt-hour (KWH) saved during a peak event. The remaining residential customers will move to this rate by June 2013.

In Maryland, Pepco transitioned 5,000 residential custom-ers to a CPR rate for a three-month initial period beginning in July. The next step will be transferring approximately 500,000 more customers by mid-2013.

The Maryland commission approved BGE’s proposal to move all residential customers to a CPR default rate in mid-2013. The most recent data from BGE’s pilots showed that with a CPR of $1.25 per KWH, roughly 10 times the current price of electricity, the utility achieved peak savings of 26-36 percent—and 93 percent of participating customers were satisfi ed.

Pepco and Delmarva Power also will move their smaller commercial customers to default CPR rates, with the initial phase-in occurring mid-2013. Full rollout to all smaller com-mercial customers will be effective mid-2014.

A Peak Day by Any Other NameToday, using a PTR, 2.6 million smart-metered Southern Cali-fornia Edison (SCE) customers can save money by reducing

power consumption when SCE designates a “Save Power Day.” By the end of 2012, 4 million residential customers will be eligible. Every KWH reduction a smart-metered customer makes between 2:00 pm and 6:00 pm will earn that customer a $0.75 credit. SCE’s meters also will con-nect with certain home energy network devices, such as information dis-plays. If a customer has a qualifying, enabling technology paired to the meter, the PTR increases to $1.25/KWH.

SDG&E has added a PTR, too, to both its residential and small business de-fault rate schedules, and 1.2 million smart-me-tered SDG&E customers are now eligible. SDG&E’s approach is similar to SCE’s, but the peak hours are different—11:00 am to 6:00 pm. And instead of a “Save Power Day,” SDG&E calls it “Reduce Your Use Day.” ◆

Dre

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In fi ve states, residential custo-mers can cut usage and automatical-ly take advantage of peak rebates.

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A Peak DToday, usfornia Ed

In fi ve statemers can cly take adv

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Privacy Is ParamountBy Wallace Mealiea, manager of customer research at Edison Electric Institute.

Americans are putting more and more of their lives online. Services like Facebook, YouTube, Pinter-est, and LinkedIn now store billions and billions of pieces of information on millions and millions

of people. Of course, as companies become repositories of personal data, the public has a growing expectation and level of concern about information privacy. Those concerns are heightened every time the media have a story about hacking, phishing, or data breaches.

Not surprisingly, the vast majority (89 percent) of elec-tricity customers believe it is “very” important to keep their personal information private, according to Edison Electric Institute’s fi rst quarter 2012 “Power Poll.” (See Figure 1.) Add in the 10 percent who believe that keeping that information private is “at least somewhat” important, and you have close to unanimity. Customers also are increasingly aware of reports that internet companies are making personal user information available to third-party companies. More than half of respondents (57 percent) say they are familiar with such news stories; and 67 percent said they are very concerned about information sharing among third parties.

As electric utilities begin to link electric technologies with information technologies through the smart grid and smart meters, online billing and notifi cation, and so on, it is instructive to see where utilities fi t regard-ing customer privacy expectations.

Is Electricity Different?While nine-in-ten customers see the privacy of personal information as very important, only 24 percent feel the same way about electricity usage information. (See Figure 2.) An additional 36 percent believe keep-ing that information private is “somewhat” important. Middle-aged customers are most likely to say that the privacy of usage data is important, but even among those respon-dents, the level of intensity is well below that for personal information. A fairly large number of customers (38 percent) say it isn’t too or isn’t at all important to keep electricity usage information private.

Even so, a signifi cant proportion of cus-tomers, 70 percent, are concerned about other companies having access to their home’s electricity usage information. In

fact, when asked, three-in-four customers (76 percent) believe that only they and their elec-tric utility should have access to usage informa-tion from smart meters. A handful of respondents (20 percent) believe the customer, their utility,

and authorized third parties should have access; only 1 per-cent believe the customer, their utility, and any third party should have it.

Smart meters and smart grid technologies are now creat-ing opportunities for customers and electric companies to better understand how people use electricity. To the extent these technologies may create new data privacy concerns, 41 percent of customers say electric utilities do a good job in ensuring the safety and technological security of electric usage information. Still, a large number of customers have

no opinion (38 percent). Fortunately, few cus-tomers (only 9 percent) feel electric utilities do a poor job.

Privacy Protections Will Be ExpectedAlthough customers are somewhat less con-cerned about the privacy of electricity usage information and a good number of them do not have strong opinions about smart meter data security, we can expect that opinions on these issues will harden as smart meter de-ployments increase. As customers, given their strong desire for personal privacy, learn more about smart meters, it stands to reason that they will place an increasingly higher priority on electric usage information privacy. Fortu-nately, many consumers (57 percent) currently believe electric utility companies generally do a good job of keeping information private. The sector ranks below banks (70 percent be-lieving they do a good job on privacy) and healthcare providers (65 percent) but above credit-card companies (54 percent), telephone and wireless companies (47 percent), and on-line service companies (30 percent). The chal-lenge for electric companies will be to educate customers about the benefi ts of smart meters and the smart grid while reassuring them that companies have and will continue to protect their privacy. ◆

This analysis is based on the fi rst quarter 2012 “Power Poll,” Edi-son Electric Institute’s quarterly national survey of residential cus-tomers. This survey, done for EEI by Market Strategies International using a national online panel from Research Now, was conducted March 30 to April 5, 2012, with 1,000 residential customers. For more information, EEI members can visit www.eei.org /powerpoll.

dddddd h i d hi d i h l


power oll Insights about residential customers

F I G U R E 1

PRIVACY OF PERSONAL INFORMATION

How important to you is keeping your personal information private?

F I G U R E 2

PRIVACY OF ELECTRICITY USAGE INFORMATION

How important to you is keeping your electricity usage information private?

Some 10%

Not too 1%

Very 89%

Don’t know 0%

Not at all 9%

Don’t know 2%

Very 24%

Some 36%

Not too29%

Not at all 0%

www.acrtinc.com

We don’t trim trees.We trim liability.

© Copyright ACRT Inc. All Rights Reserved.

Make An Investment In PowerAs the leading independent utility vegetation management organization, ACRT empowers customers to take charge of regulatory compliance challenges, reduce system liability and increase customer satisfaction through customized, comprehensive UVM solutions that ensure uninterrupted power transmission and distribution.


news+trends

Courtesy: Westinghouse

“The technical NODA is an impor-tant step toward addressing these concerns, because it seeks more information on these critical issues, which must be resolved in the fi nal rule,” Kuhn said.

At the same time, EEI believes that EPA’s WTP survey should not be part of the agency’s rulemaking. The survey is intended to estimate the fi nal rule’s economic benefi ts by quantifying the price that people hy-pothetically would assign to having improvements to fi shery resources. Guidelines for WTP studies require that a survey must be well designed, thoroughly peer-reviewed, and subject to reliability testing—but, according to EEI, EPA’s survey falls short of that, with the result that the survey method is too specula-tive. For example, when EPA fi rst proposed the rule, it estimated that costs would outweigh benefi ts 21:1. Then, applying the WTP survey—and without changing any aspects of the proposed rule—EPA increased the rule’s benefi ts estimates by more than 10,000 percent, now indicating that benefi ts outweigh costs, 5:1.

Calling the survey “deeply fl awed,” Kuhn said that its very premise is misleading. “It infers without any solid justifi cation that improvements in fi sh populations and aquatic eco-systems can result from regulating cooling water intake structures.”

Indeed, the Electric Power Re-search Institute reported last year that, despite more than 40 years of study of generation facility impacts on fi sh, “there exists little substantial evidence that reducing impinge-ment and entrainment by regulating cooling water intakes will result in measurable improvements in recre-ational or commercial fi sh popula-tions or ecological services.”

Moreover, EEI contends, “The bot-tom line is that this type of survey is unnecessary—and, in this case, mis-leading—in assessing the expected benefi ts of a national rule governing cooling water intake structures,” Kuhn said. “It sets a bad precedent for federal regulatory policy.”

12 E L E C T R I C P E R S P E C T I V E SE L E C T R I C P E R S P E C T I V E S

Ben

Jac

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Cooling Concerns

The Environmental Protection Agency (EPA) is poised to issue a fi nal cooling water intake structure rule under section 316(b) of the Clean Water Act—a rule that, as proposed, would profoundly affect electric utilities. It would require most existing electric and industrial facili-

ties that use cooling water to undergo extensive changes. EPA estimates that the rule will affect at least 650 power plants across the country.

In June, the agency published two notices of data availability (NODAs) on the proposed rule seeking comments on two sets of issues—technical im-provements to the 2011 proposed rule, and whether and how EPA should in-clude results of a “willingness-to-pay” (WTP) public opinion survey designed to quantify the rule’s benefi ts.

EPA asked for comments on potential technical improvements by July 11 and on the survey results by July 12.

“Electricity providers from across the country are united in their concerns about the proposed rule,” said Tom Kuhn, president of Edison Electric Insti-tute (EEI). “We are calling for more fl exibility with respect to EPA’s proposed ‘impingement’ and ‘entrainment’ requirements, including the use of appro-priate cost-benefi t mechanisms to ensure that any regulatory costs match expected environmental benefi ts.”

Failure to address these shortcomings, according to the institute, would create uncertainty and force many utilities to pursue compliance options that would cost customers far more than comparable alternatives.

J U LY / A U G U S T 2 012 13

THE EDISON AWARD

Southern Company and AES Gener were named the 2012 recipients of the

Edison Award, the electric power industry’s highest honor, at Edison Electric Institute’s (EEI’s) annual con-vention in June.

Southern Company’s primary achievements were the progress it made toward building two new reactors at the site of sub-sidiary Georgia Power’s Plant Vogtle and its success in obtaining the fi rst combined construction and operat-ing license in the United States in more than three decades.

Southern Company began pre-construction activities at Plant Vogtle in summer 2009. The early stages of site excavation and foundation level-ing went smoothly, as did meeting each regulatory milestone. At that

time, Americans viewed nuclear power positively,

but after the Fukushima Daiichi nuclear plant di-

saster in March 2011, the future of the nu-clear industry—as well

as Plant Vogtle—came into question.

Despite the uncertain-ties, Southern Company was determined to con-tinue the Vogtle develop-

ment and so began outreach efforts focused on explaining the safety of the country’s current nuclear fl eet and even safer new reactors.

2011 was the year with the most signifi cant activity for Plant Vogtle. Several million cubic yards of special soils were backfi lled and compacted during this time, and the nuclear

islands for the new units were lined with retaining walls. Southern met many other construction milestones, completing the tasks on schedule and on budget.

AES Gener announced the early completion of, and the start of commercial operations by, the 545-megawatt (MW) Angamos coal-fi red power plant in northern Chile. The plant is on the Pacifi c coast in the Atacama Desert, the driest in the world. But natural gas supplies to the region had declined even as the demand for reliable baseload generation was increasing for lo-cal mining activities. Construction presented many challenges, such as the application of new technologies and an aggressive timeline, but AES

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Gener completed the plant ahead of schedule.

Boosting the plant’s effi ciency and reliability is a 20-MW lithium-ion battery energy storage system. An-gamos is the fi rst hybrid coal plant in the world that uses batteries of this scale. The system eliminates the need for spinning reserves and in-creases the plant’s total output.

Angamos also has modern envi-ronmental controls and emissions-reducing equipment, all of which exceed local standards for noise, air emissions, and discharges into the ocean. Further, the plant is the fi rst of its kind in South America to use a seawater cooling tower—this serves as a model for other seaside plants

Construction at Georgia Power’s Plant Vogtle Unit 3

Battery banks at AES Gener’s Angamos plant

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Courtesy: AES Gener


with limited access to fresh water for cooling.

At the same June meeting, EEI elected as its chairman Lewis Hay III, executive chairman of NextEra Energy. He will be supported by Michael Yackira, presi-dent and CEO of NV Energy, and Theodore Craver, Jr., chairman, president, and CEO of Edison International.

Hay joined the company as chief fi nancial offi cer in August 1999. He stepped down as CEO on July 1 and will serve as executive chairman of NextEra En-ergy through 2013. He serves on the boards of both Capital One and Har-

ris Corporation and also is a director and past chairman of the Institute of Nuclear Power Operations. In addition, he is a member of the Business Board of Advisors at Carnegie Mellon University’s Tepper School of Business and is a member of the Busi-ness Roundtable and the Florida Council

of 100. He received an undergradu-ate degree in electrical engineering from Lehigh University in 1977 and a graduate degree in industrial ad-ministration from Carnegie Mellon University in 1982.

CUSTOMERS’ POSITIVE ENERGY

Utility customers are happy in 2012, according to a pair of surveys from the Ameri-can Customer Satisfaction

Index (ACSI) and Edison Electric Institute (EEI). “For energy utilities, 2012 marks the largest year-on-year customer satisfaction gain in a de-cade,” says Claes Fornell, author of ACSI’s “The Satisfi ed Customer: Winners and Losers in the Battle for Buyer Preference.”

In the survey, Atmos Energy (a multistate natural gas utility in the Southeast) and Sempra Energy had the top shareholder-owned utility spots with an 83, followed by Center-Point Energy at 82. All three achieved a 2-percent boost over the previous year to reach their individual all-time high scores. Electric utilities as a group held steady at 75, while lower prices boosted natural gas util-ities’ performance by 1 percent to 81.

Several other shareholder-owned utilities stood out as customer-pleasers: Southern Company and Ni-Source scored 81 with solid gains of 5 percent and 7 percent, respectively. PPL, NextEra Energy, and Dominion tied at 80. American Electric Power and Ameren both scored 10-percent gains to 79 and 78, respectively, while Pepco Holdings scored a 28-percent boost to 69, a big come-back for the utility.

Fornell attributes the rise in satis-faction to lower bills, brought about by lower natural gas prices and a mild winter.

Perhaps, but there may be more to it than that. In EEI’s most recent “Power Poll,” despite the fi nding that 48 percent of the customers feel the country is on the wrong track on en-ergy issues, 72 percent said they are “totally satisfi ed” with their overall utility experience. This is consistent with previous years, says Wallace Mealiea, manager of customer re-search. “The performance ratings are pretty stable given the diffi cult

WIND’S BRISK BUSINESS SET TO SLOW DOWN

The wind indus-try installed 6,816 mega-watts (M W) in

2011—31 percent more than 2010—for a total

of 46,916 M W in the United States, accord-ing to a recent report from the American Wind Energy Association. This growth means jobs: Three states now have between 6,000 and 7,000 wind jobs, according to AWEA. (See Table 1.) But the industry risks running

into the doldrums. Not only are natural gas prices low, but also, as a Navigant Consulting study for AWEA notes, wind industry jobs will be cut in half without the extension of the production tax credit (PT C).

Much of the recent growth in wind instal-lations is the result of projects being pushed online before the PT C expires on December 31, according to Lola Infante of Edison Elec-tric Institute.

“Small wind projects are being announced [before the expiration date], but there are no more announcements of big wind farms, because they take longer to build,” Infante explains. “We have an average size of projects of 67 M W being an-nounced in 2012,” and

TA B L E 1

TOP 10 STATES FOR OVERALL WIND JOBS

1 Iowa: 6,000-7,000

2 Texas: 6-7 K

3 Illinois: 6-7 K

4 Ohio: 5-6 K

5 Colorado: 4-5 K

6 California: 4-5 K

7 Michigan: 4-5 K

8 Pennsylvania: 3-4 K

9 Florida: 2-3 K

10 Oregon: 2-3 K

these smaller projects can secure nancing and be built before the deadline. On the other hand, in 2012, the average size of wind projects so far being cancelled or postponed is 300 M W.

Lew Hay III

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J U LY / A U G U S T 2 012 15

economy and other variables,” he says. “It’s an indication that utilities are doing a pretty good job of stick-ing to their knitting.”

JUDGE AN APPLIANCE BY ITS LABEL

The basic concept of the Environmental Protec-tion Agency’s ENERGY STAR program is to label energy-

effi cient electronics and appliances so that consumers can use that information as part of their purchase deci-sion. The Northwest Energy Effi ciency Al-liance (NEEA) is taking the concept to another level: Products with the new “Energy Forward” label are the “best” of ENERGY STAR, according to NEEA, a partnership with North-western utilities (including Avista, Idaho Power, NorthWestern Energy, Pacifi Corp, and Puget Sound Energy) and ENERGY STAR.

On the retail fl oor, models with or-ange Energy Forward stickers must be 20 percent more effi cient than the rest of the ENERGY STAR models. “Re-tailers representing 84 percent of TVs sold in the Northwest are partnering with NEEA to promote Energy For-ward TVs in nearly 500 stores,” ac-cording to Becca Yates, the alliance’s marketing and communications manager. Best Buy, Costco, Kmart, Sam’s Club, Sears, Target, Walmart, and several independent retailers participate in the program.

It’s not totally about effi ciency. “The Energy Forward sticker was created to make the connection be-tween energy effi ciency and overall

AROUND THE WORLD IN AN EV

Oh, it’s on. Two Frenchmen, Antonin Guy and Xavier Degon, are circumnavigating the globe in a Citroën C-ZERO electric vehicle this year, crossing 17 countries and making 300 stops (every 60 miles) for recharging. “If we can do a world

tour in a standard electric car, you can use it for your daily rides,” they said in a press release.

The 25,000-kilometer (15,500-mile) trip began on February 11 in Strasbourg, France. The drivers went west, crossed the Atlantic, drove across the United States, crossed the Paci c, drove from Tokyo to the southern tip of Japan, crossed the South China Sea to Singapore, and are now (July 11) in China’s Yunnan Province. (You can nd the real-time map on www.electric-odyssey.com.) All recharg-ing stops, using a standard 220-volt outlet, have been at homes, schools, or businesses—ba-sically anyone who will lend a charge for a euro or two.

But wait a minute. In September 2011, Spanish driver Rafael di Mes-tre announced that he would be the rst to go around the world in an EV—and in, yes, 80 days—starting from Barcelona, once he received his new Tesla Model S. Spurred by the French attempt, di Mestre couldn’t wait, jumped into his Tesla Roadster, and began his trek on May 11 (three months after the French), driving from Barcelona to Strasbourg. He is intent on overtaking Guy and Degon—whose Citroën needs more recharging stops—before they return to Strasbourg from the east. Right now, having crossed the Paci c from Los Angeles, di Mestre and his Roadster are in Beijing. He was held up for nearly three weeks by—curses!—a “toll procedure” in Tianjin. Now, according to di Mestre’s website, www.1e-race.com, to make Barcelona in the 80-day frame, he will have to drive 600 kilometers (about 370 miles) per day.

The industry’s “measures on reasonableness of rates and cost for value have been fairly consistent over the years,” he continued.

Citing utility effi ciency pro-grams and programs that help customers gain control over their payment and usage, Meal-iea says utilities are sending the message that “we understand

the challenges you are facing, and we are doing what we can to help you.

“I think that may be fi ltering through to customers,” he says.

Antonin Guy and Xavier Degon, with the Citroën C-ZERO.

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supe-rior TV perfor-mance,” Yates says. “Industry trends show that the techno-logically

advanced TVs increasingly incor-porate energy effi ciency into their product lines as a way to reduce en-ergy but also enhance performance.” In some LED TVs, for example, a fea-ture turns off LEDs when black ap-pears on the screen, thereby creating a better image and reducing energy use, according to Yates.

Another label service, Top Ten USA, rates and lists online (for free) the top 10 most effi cient devices—Effi ciency All-Stars—in several electronics categories, including refrigerators, freezers, televisions, computers, vehicles, dishwashers, clothes washers, and monitors. Retailers can use the Top Ten label

when marketing the prod-ucts. (See www.toptenusa.org.)

Pacifi c Gas and Elec-tric is on the program’s advisory board. “We and

our cus-tomers recognize the value of having clear and timely infor-mation about the most energy-effi cient

products on the market,” said Duane Larson, the utility’s director of mass market energy solutions and service, in a statement. “TopTen USA pro-vides our customers with greater ac-cess to this information, so that they can save energy and money.”

In the digital universe, fl oating through and being stored in servers, iPads, and more, are 1.8 zettabytes of data (18x10 20 bytes

or 1.8 billion terabytes, if that’s any help). Apple, eBay, and others have server farms that house some of the thousands of petabytes of that data (a petabyte being 1,000 terabytes). And those farms are energy-inten-sive, using high-quality electricity to hold all the data and producing heat, which requires cooling.

Apple’s new 4.8 megawatt (MW)

biogas-fueled fuel cell plant in Maiden, NC, scheduled to go into operation at year-end, will feature 24 fuel cell Bloom Boxes built by Bloom Energy. It will be the larg-est non-utility fuel cell plant in the country.

But not for long. Retailer eBay re-cently announced an expansion of its existing data center facility in South Jordan, UT—to be operational in 2013 and to rely on 30 Bloom Boxes to provide 6 MW of capacity.

The largest fuel-cell farm in the

Facebook users now can sign up for an applica-tion that shares

and compares how much energy they use. OPower’s app is de-signed to motivate users to reduce their energy consumption through a time-tested method—peer pressure. Sixteen electric utilities serving 20 million customers across the nation are participating.

SHARING KILOWATTHOURS ON FACEBOOK

WHERE TO PUT BIG DATA?

Signing up is easy: The user can create a free account at www.social.opower.com. The app automatically uploads energy usage directly from the

user’s utility, if it is participating. The app also provides tips on energy manage-ment, and allows users to share ideas in a com-munity forum.

Bloom Box fuel cells at eBay’s data facility in South Jordan, UT.

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Richard J. Mark was named chair-man, president, and CEO of Ameren Illinois.

Catherine Heigel is now general counsel and corporate secretary at Amer-ican Transmission Company. Succeeding Heigel as president of Duke Energy’s South Carolina region is Clark Gillespy.

Arizona Public Service president and chief operating of cer Don Robinson will hand off operational responsibilities and continue with the company as a senior advisor. APS also promoted Mark Schia-voni to executive vice president of opera-tions and Jeff Guldner to senior vice president of customers and regulation.

DTE Energy named Peter Oleksiak as senior vice president of nance and James Tompkins as vice president, ef-fective September 1. Donna England was appointed chief accounting of cer, Dan Brudzynski will assume the role of vice president and treasurer, and Nick Khouri, the current vice president and treasurer, will succeed Brudzynski as vice president of regulatory affairs.

Thomas V. Shockley was appointed permanent CEO of El Paso Electric after having served as interim CEO since Janu-ary 2012. Hector R. Puente, formerly senior vice president of operations, has been promoted to senior vice president and chief operations of cer.

NV Energy’s chief nancial of cer Dilek Samil was promoted to executive vice president and chief operating of cer. Jonathan Halkyard joined the company as executive vice president and chief nancial of cer—he comes from Caesars Entertainment Corporation where he worked in a similar capacity.

Mark Wilten joined PPL as vice presi-dent of nance and treasurer, succeeding James Abel, who retired April 1. Wilten previously served as treasurer for Nissan North America.

Southern Company named Mark Crosswhite as executive vice president and chief operating of cer, succeeding Anthony Topazi, who retired. Stanley Connally, Jr. replaced Crosswhite as president and CEO of Gulf Power, and John Pemberton succeeded Connally as senior vice president and senior pro-duction of cer of generation at Georgia Power. Leigh Davis Perry replaced Pemberton as senior vice president and general counsel for Southern Company operations and Southern Nuclear. Perry previously served as vice president of charitable giving for Alabama Power.

Other moves? Contact Edgardo Ortiz ([email protected]).

Offi ce MovesExecutive Comings and Goings

world (60 MW) is being built in Seoul, South Korea, by FuelCell Energy, Inc.

Last year, Apple’s worldwide facili-ties consumed 493 million kilowatt-hours (KWH). Still, the company is aiming for a “net-zero energy program” using a tiered approach, according to its “Facilities Report.” It will begin the charge with energy effi ciency; followed by the use of onsite renewable energy genera-tion (where space and operational constraints allow); and, fi nally, part-nerships with several utilities and renewable energy providers for grid-purchased renewable energy.

Apple’s new fuel cell plant will support the iCloud online data storage system and its SIRI voice-recognition software. Duke Energy

Bytes and bytes. The Ap-ple data center in Maiden, NC, will be powered by a 4.8 MW fuel-cell plant.

WHAT GOES AROUND

The rst presidential motorcade in the United States took place on August 22, 1902. Teddy

Roosevelt sat in the front of a Columbia Electric Victoria Pha-eton (the driver sat in the back) and took a ride through Hartford, CT, greeting crowds along the way. Hartford’s Columbia Electric Vehicle Company, which devel-

oped several electric- and gasoline-powered vehicles until 1915, was a spinoff of the Pope Manufacturing Company, famous for its bicycles. In fact, the policemen and Secret Service agents riding alongside the president’s car mounted Columbia Chainless Bicycles, which used a kind of drive shaft to propel them. Today, the electric vehicle sector is growing rapidly. And it might just be coincidence that bicycle compo-nent manufacturers like Shimano and Sturmey-Archer are developing more powerful versions of chainless propulsion.

will pur-chase excess energy from the plant, according

to reports. A 100-acre, 20-megawatt solar facility will support the Maiden data center as well.

Cooling costs can also be cut by building in cooler areas. In 2009, for example, Google purchased a paper mill in Hamina, southern Finland, and turned it into a data center, us-ing seawater from the Baltic Sea for its cooling system. Facebook plans to build three 300,000-square-foot server halls in Lulea, Sweden, about 60 miles from the Arctic Circle. For around eight months of the year, the plant will cool itself with the icy out-side air. Heat from the server racks will warm the plant’s offi ces. Hydro-power from dams on the Lulea River will power the servers over the year and cool them during the summer.

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SUPPLIER DIVERSITY AWARDS

Edison Electric Institute (EEI) honored several compa-nies in May for their work in advancing purchasing

opportunities in the electric power industry for women-, minority-, and disabled-veteran-owned businesses.

Southern Company received the 2012 Supplier Diversity Excellence Award for consistent, organization-wide commitment to encouraging diversity among its suppliers. The company’s efforts to reach a wide va-riety of ethnic groups, women, and veterans, and its work in mentoring and training those suppliers, were particularly signifi cant.

The awards for Innovation in Supplier Diversity went to Pacifi c Gas and Electric and Progress En-

ergy. Both companies created new approaches to diversifying their sup-plier base by involving executives and consultants across business units and by aggressive goal setting.

Joseph Alderete, manager of sup-plier diversity for Southern Califor-

nia Edison, earned the Pacesetter Award for his innovations in seeking out opportunities for diverse busi-ness owners.

The awards were presented dur-ing EEI’s Supplier Diversity Confer-ence. ◆

Awards host Wendy Raquel Robinson (center) with Southern Company representatives (from left to right) Glenda Thomas, Bryan Fletcher, Alice Gordon, and Unzell Kelly.

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On March 22, the Edison Foundation and its Institute for Elec-tric Effi ciency hosted an invitation-only conference, Powering the People 2.0, at the Newseum in Washington, DC. The event brought together nearly 350 power industry leaders, corporate executives, policy makers, regulators, and members of the national media to discuss the electric revolution shaping the 21st century.

JOE RIGBY, Pepco Holdings’ chairman, president, and CEO, kicked off the conference by talking about our energy future and the opportunity that the electric power sector has to lead the second electric revolu-tion and to fundamentally shape and change the 21st century. Tony Earley, chairman, CEO, and president of

PG&E Corporation and then-chairman of the Edison Foundation, followed with opening remarks addressing the challenges facing the electric power industry and describ-ing the industry’s outlook.

“The growth, prosperity, and innovation that electri-fication set in motion have been so extraordinary that the resulting demands on the grid will require us to rethink the system that got us here,” said Earley. “The electrifi ca-tion of the 20th century dra-matically changed the way we live. Now, in the 21st century, we are facing technology, pol-icy, and energy challenges. So today, our industry can’t rest. We have to adapt. We have to develop new solutions. We have to re-envision and rein-

vent what we’ve built over the last century. This is an incred-ibly exciting challenge, and it’s an opportunity for all of us who are in this business.”

One of the major opportunities is in the transportation sector, and Powering the People 2.0 featured an electric transportation experience. Edison Electric Institute (EEI) president Tom Kuhn discussed the importance of electrifying the last major sector of the economy and the challenges and opportunities that face us as we transition to electric vehicles and other forms of electric transportation.

New Technologies and Engaging ConsumersThroughout the day, electric company leaders, energy tech-nology and information technology (IT) company executives, military and government offi cials, policy makers, and con-sumer engagement experts all participated in presentations and dialogues.

“The purpose of Power-ing the People 2.0 was to bring together electric util-ity leaders and technology company partners to talk about innovations and new technologies that are fos-tering change in how we generate, manage, use, and think about electricity,” said Lisa Wood, executive direc-tor of the Edison Founda-tion’s Institute for Electric Efficiency (IEE). “It is very much about what we can do with all of these new tech-nologies, how to motivate people to embrace the fu-

A look back at the event that highlighted electric utility and technology company partnerships and the value of electricity. By Tara T. Young

Tony Earley Lisa Wood

J U LY / A U G U S T 2 012 21

Tara Young is senior communications specialist at Edison Electric Institute.

ture, and how to engage con-sumers in managing energy.”

The New Energy Innovation MarketplacePaul Bonavia, UniSource En-ergy’s chairman, president, and CEO, moderated a panel focused on how advances in new energy technologies are creating distinct roles and op-portunities for policy makers, scientists, entrepreneurs, ven-ture capitalists, and electric utility companies. The discus-sion featured Nick Akins, pres-ident and CEO of American Electric Power; Cheryl Martin, deputy director for commer-cialization of the Advanced Research Projects Agency-Energy (ARPA-E); Paul Leggett, executive director of the global power and utility group for Morgan Stanley; and William Conlon, senior vice president of engineering for AREVA Solar.

“You would be amazed how many ideas come into utility companies because tech fi rms are looking for hosts, and we really have to think about and prioritize the projects that make sense for us,” said AEP’s Akins. “The venture capital side of things provides that window into new technologies and provides it in a way that’s unbiased. If venture capital fi rms see opportunities for investment in companies that have good ideas, ideas that we—electric utilities—can fi lter through them, that helps us make sure that, in the move from bench-top to commercial scale, we’re really using our time and money effi ciently and investing in the right tech-nologies. We know that in the future our customers will want different things. So, for an electric utility, the venture fi rm

relationship can provide a good platform for evaluating tech-nologies on our system.”

The Green Button InitiativeNick Sinai, a senior advisor with the White House Offi ce of Science and Technology Policy, discussed the White House’s “Green Button” initiative, a voluntary industry effort to pro-vide a standard format for en-ergy usage data generated by smart meters and to make that data available to customers on participating utility websites. He pointed to the benefi ts of that availability and the pri-vacy challenges that went along with it.

“Who knows? We might see an ‘Angry Birds’ app for energy,” said Sinai. “But we also know that consumers are going to take advantage of innovative services and appli-cations if they feel confi dent that their data are secure. And privacy has never been more important than today in the age of the internet.”

Our Nation’s Military: Transforming Their Energy FutureU.S. energy policy and energy use are linked strongly to America’s national security, and electric companies and the military are collaborating on several initiatives to secure the nation’s energy future. Amy Harder, energy and environ-ment correspondent for National Journal Daily, moderated a

Nick Akins

Nick Sinai


panel that included Susan Story, president and CEO of South-ern Company Services; Richard Kidd, deputy assistant secre-tary of the Army for energy and sustainability; and Dorothy Robyn, deputy under secretary of defense for installations and environment for the Department of Defense.

“An energy-secure Army installation has three attributes: energy effi cient buildings, onsite power generation or power storage of some sort, and a smart micro-grid to connect the two,” said Kidd. “Over the past years, the Army has taken

signifi cant steps to improve the energy effi ciency on our installations. We’ve insti-tuted a number of policies and have worked through the budget process to triple the amount of appropria-tions that we will apply on our built environment. Ad-ditionally, we are supple-menting these investments through partnerships with energy service companies and our utilities.”

How Do You Motivate People?What truly motivates peo-ple in the workplace? What

strategies can electric company executives use to inspire their employees to do extraordinary things in times of change? Dan Pink, a leader on economic transformation and author of A Whole New Mind (New York: Penguin Group, 2005) and Drive: The Surprising Truth About What Motivates Us, (New York: Riverhead Hardcover, 2009) addressed those questions in a thought-provoking keynote speech.

“Next week, if you have any kind of leadership role, if you want to answer these questions about breaking silos or cross-

Smart TalkFrom an interview with IEE executive director Lisa Wood by Smart Grid News founding editor and chief analyst Jesse Berst at Power-ing the People 2.0.

Berst: It seems like the pace of adoption [of technological innovation] is beginning to increase…. Is that what you’re finding?

Wood: The utility industry has realized that we all need to work together to make this work. And there’s a lot more reaching out across borders to bring technology companies into the utility business. But also

technology companies are realizing that they can’t do this without the industry that already has the customers. It’s a two-way street.

To see the complete video, visit www.edisonfoundation.net/IEE

Dan Pink

Richard Kidd

J U LY / A U G U S T 2 012 23

industry collaborations, have two fewer con-versations about how and two more about why,” said Pink. “And you’ll see an uptick in performance. Here’s the thing: Human be-ings are not automatons. They’re people like you and me, and by their very nature they want to do good work. They want to contri-bute to the world. And if we just get out of their way and give them a reason for doing it, you might be surprised.”

Engaging the New Energy ConsumerNew technologies and products are trans-forming the way consumers use and think about energy. Lisa Hillenbrand, Procter & Gamble’s global marketing director, dis-cussed the challenges and opportunities that face electric companies as they seek to engage customers in the new energy market-place. She focused on the idea of “people power” and related that to P&G’s objective always “to delight the consumer.”

“Innovation does not stop with invention,” said Hillen-brand. “In fact, invention is just the very fi rst step. I know it feels good. You’ve got something. It’s invented. But if people don’t adopt it, it’s not an innovation. Successful innovation needs to delight people. And we need to get to the point with smart grid technologies where more and more people are delighted with the solutions you guys are proposing.”

Peter Delaney, OGE En-ergy’s chairman, president, and CEO, noted that “smart meters have changed the way we interact with our customers and how our customers view and use electricity.” Delaney mod-erated a subsequent discus-sion about ways to engage the new energy consumer with Hillenbrand; Peter Honebein, founder of the Customer Performance Group; Jon Lanning, senior manager of the home man-agement platform for Best Buy; and Judith Schwartz, president of To the Point.

“We’re at the beginning of a sea change in the electric power sector,” said IEE’s Wood in closing the conference. “In-novation and technology powered by electricity are driving that change. From electric transportation to new applica-tions and new technologies for consumers, businesses, and our military, the electric utility industry and its technology partners are fostering change and innovation across all sec-tors of the economy. We really are on the verge of a second electric revolution.” ◆

Watch videos of the panel discussions and the key-note address at www.EdisonFoun-dation.net/IEE, where you can also read col-loquies of the discus-sions. And plan now to attend the next Power-ing the Peo-ple event on March 21, 2013.

Powering the People 2.0 fea-tured two exhibit areas—Electric Avenue and In-novation Alley— where electric companies, en-ergy technology companies, and IT companies demonstrated how their part-nerships and collaborations are leading the way toward smart homes, smart buildings, and grid mod-ernization. The local FOX News affi liate aired live reports from the exhibits.

Lisa Hillenbrand


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J U LY / A U G U S T 2 012 25

Secretary of Energy Steven Chu jokes that if Alexan-der Graham Bell were to encounter a modern cell phone, he would not be able to understand how it works and most likely wouldn’t recognize it as a phone at all—but if Thomas Edison were to visit a modern power plant, he would exclaim, “That looks just like the one I built!”

Of course, this is an exaggeration. But it refl ects a consensus that this industry is due for change and that grid modernization and digitization probably will be at the core of it.

Grid modernization will occur along several different dimen-sions. In part, it will come about by adopting more of the same information and communication technologies that so radically changed the telephone. Remote sensors will detect outages and electronically report their location; advanced metering technolo-gies will allow a two-way fl ow of information in real time between customers and electricity providers; and automated control sys-tems will allow for more effi cient balancing of supply sources and consumer demand. Innovations in electricity storage will also enable a more effi cient matching of supply and demand; and the growth of alternative sources of generation, distributed and renew-able, could bring electricity supply literally to customers’ doorsteps.

But these changes create the potential for an overhaul in the grid operator’s basic market and regulatory structure. Indeed, electricity providers are participating in a revolution involving electric tech-nologies, information technologies, and new ways for the customer to use electricity. At the same time, through various proactive strat-egies, partnerships, and programs, they are preparing for another

As technological innovation unfolds, electric compa-nies should consider some cautionary tales from other industries and prepare for disruption of business mod-els, revenue streams, and entire customer segments.

BY JOHN CALDWELL

J U LY / A U G U S T 2 012 25Master le


lower costs) into the mar-ket. The classic example is Amazon.com, which intro-duced a more convenient and effi cient way for people to buy books—the internet. Amazon did not invent the internet; but Jeff Bezos, Amazon’s founder, recog-nized how it could be used to introduce disintermedi-ation into the book-buying value chain and traditional brick-and-mortar stores. By the same token, Netfl ix used the internet to dis-intermediate the corner video rental store.

At the turn of the century Sears, Roebuck—“the original Amazon,” says Berst—became the fi rst company to create a virtual superstore using a new infrastructure (the expanding rail system) for ordering and fulfillment and for undercutting the generally more expensive mom-and-pop stores.

potential revolution, where established business mod-els of the incumbent—the utility—could be upended, traditional revenue streams threatened, and entire cus-tomer segments put at risk.

Such revolutions have occurred in other indus-tries, with sometimes di-sastrous consequences for incumbents. This can come about when new entrants to the market take advan-tage of technological in-novation to create special advantages, while incum-bents are too slow to capi-talize on, or react to, these changes. Such outcomes are not inevitable, however. Incumbents can take steps with their brand, expertise, and cus-tomer base to expand and prosper.

Finding a Better WayIn a 2010 white paper for Edison Elec-tric Institute, “Managing in an Age of Change: Lessons from Previous In-dustrial Transformations,” Jesse Berst described several industries that un-derwent fundamental change as new entrants challenged existing providers, including transportation (i.e., the rail-roads), telecommunications, and re-tail sales. (See also “The First Push,” by Jesse Berst in the May/June 2010 Elec-tric Perspectives.) The entrants, who in some cases wound up supplanting the incumbents in their respective industries, generally did s o, a c c o rd -ing to Berst, by capitalizing on “disinter-mediation.” The entrant (and not the incumbent, at least not at first) recognized a recent innovation as a way to bring new effi cien-cies (greater speed, more convenience,

Editor’s note. This is the fi rst of two articles. The second, to appear in the September/October 2012 issue, will focus on the unique technological part-nerships, customer programs, and new business models electric companies are embracing to spur innovation and lead—rather than be subsumed by—the revolution in electric and informa-tion technologies.

John Caldwell is director of economics at Edison Elec-tric Institute.

The store’s famous catalog initially was mailed to people in towns with railroad stops.

The railroads themselves found quick competition with the new inter-state highway system started by Presi-dent Eisenhower in the 1950s. By the 1960s and 1970s, commuter rail had al-most disappeared (going from 2,500 in the mid-1950s to fewer than 500 by the late 1960s) and trucking ate into freight profi ts. The highly traditional, highly regulated railroads failed to adapt.

AT&T did not reorient itself to a world in which its long-time cash cow—long-distance telephone service—was evolving into a commodity, created essentially by telecommunications deregulation. In the late 1990s, CEO

Michael Armstrong tried to counter this trend by becoming all things to all people, keeping the old lines of busi-ness while also expanding into cable, wireless, and business services. It was too much to do.

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J U LY / A U G U S T 2 012 27

tries and companies “failed to recog-nize the scope of the change, failed to rethink where value would migrate, and failed to reposition themselves” to better thrive in the new market envi-ronment.

Building an Inferior MousetrapClayton M. Christensen and Michael E. Raynor introduced the term “dis-ruptive innovation” in their book, The Innovator’s Solution (Cambridge: Har-vard Business School Press, 2003). In this and Christensen’s earlier The In-novator’s Dilemma (Cambridge: Har-vard School Business Press, 1997), the authors provide several examples in which technological discoveries or ad-vances completely overturned existing markets. Whereas disintermediation is the application of an existing technol-ogy to improvements in the delivery chain (the process), disruptive inno-vation capitalizes on improvements in the underlying product. (See Table 1.) Some of the conclusions are coun-terintuitive. The authors fi nd, for ex-ample, that the technology adopted by the new competitor historically re-sulted in a product that was usually inferior, at least from the perspective

of the incumbent providers’ existing business model. If it genuinely was prized more highly by any particular class of customers, those customers generally comprised a small or low-margin segment of the business—and the incumbent did not perceive the loss as a signifi cant threat.

For minicomputers in 1981, for ex-ample, the 5.25-inch disk drive was vastly inferior to the 8-inch drive, which was the standard. But makers of the smaller drive marketed it to manu-facturers of the new desktop computer, where the size alone presented a dis-tinct advantage for the more compact machines. Many of the sellers of the 8-inch drive failed to adapt quickly enough by creating their own smaller versions; and by the time the desktops supplanted minicomputers, those sell-ers fell by the wayside.

The fi rst steamships’ more expen-sive design (relative to traditional sail-ing ships) seemed to be justifi ed only for inland water routes, where the en-gines’ greater maneuverability made it a profi table alternative. But after con-quering the inland water route mar-ket, steamships eventually supplanted sailing fl eets for long-distance hauling.

Manufacturers of music compact discs (CDs) abandoned the market for musical singles, concluding that it had become extinct—or at least was no longer profi table. The market was not extinct, however, and after MP3s pro-

TA B L E 1

THE FOUR QUADRANTS OF INNOVATION

Delivery channel Product

Discover or invent more effi cient delivery channel for a product line (“disintermediation”); use as an inroad to an existing competitor’s product line. Examples: Amazon.com and Netfl ix.

Capitalize on process or product development to create a new market within an existing one and ultimately challenge and/or displace incumbent providers. Examples: Google, Honda motorcycles, digital watches, and minimills.

Discover or invent more effi cient delivery channel and apply to one’s own product line. Examples: Dell Computer and bank ATMs.

Capitalize on process or product development to reduce the price and/or enhance the value of one’s own existing product, or introduce a new product through one’s own established marketing channels. Examples: Hewlett-Packard inkjet printers, Miller Lite, and Amazon Kindle.

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One company’s economics. Merchant sail-ing fl eets saw steamships as not economic for an ocean crossing—until they were.


vided a way to meet the demand for singles, providers in the new medium went on to capture a sizable chunk of the CD market share.

Western Union, the dominant pro-vider of long-distance communication services in the 19th century, rejected an offer to buy Alexander Graham Bell’s patent for the telephone (for $100,000). At the time, it was clear that telephones could serve the relatively small market for short-distance electronic messag-ing, but when it came to communi-cations at longer distances, Western Union did not see it as an economic alternative to the company’s existing nationwide network of telegraphs.

The important point is that the deci-sions made by incumbent providers in the face of many innovations were gen-erally (at least from the incumbents’ perspective) the logical and correct ones, based on sound business princi-

ples and analysis. Their business models had not failed them: They

merely were caught in a paradigm that prevented them from seeing the transformational opportunities that the outside entrepreneur saw.

In fact, the incumbents’ actions usually followed what they per-

ceived to be the interests and desires of their existing cus-

tomers. The incumbents were customer-centric and -focused. And, when they began to see some cus-tomer segments (gener-

ally the less profi table) falling away, they focused even more in-

tently on high-margin customers and specifi c strategies for retaining them—often with less-than-successful conse-quences.

The good news for incumbent pro-viders is that not all innovation has to be disruptive. Christensen defi nes “sustaining innovation” as that which “targets demanding, high-end custom-ers with better performance than what was previously available.” This can consist of the usual year-by-year incre-mental improvements in existing prod-ucts and services—“building the better mousetrap”—or truly revolutionary technological breakthroughs. In either case, because incumbents already en-joy a dominant market share of the un-derlying product or service, they have an inherent advantage in marketing improved versions of these against those offered by new entrants. The in-ternet, for example, proved to be a sus-taining innovation for Dell Computer, because Dell’s market model—already disruptive when compared with more established computer manufactur-ers—involved sales via direct contact (usually by phone or computer) with

customers, rather than through in-store retail distribution.

The only limits to sustaining innova-tions are set by the customers them-selves, who might resist changes that they perceive depart too far or too rap-idly from the products and services they know. (Opposition by a small but vocal minority of customers to smart meters is a recent illustration.)

The distinction between disruptive innovations and sustaining ones is not always clear. An innovation that might be disruptive if discovered by a new entrant, could be sustaining if the in-cumbent capitalizes on it fi rst.

Competition and Creative MonopolySo, how can you make sure that your company is on the right side of change and innovation? Of course, it is easier to characterize underly-ing threats than it is to map out solutions. In many cases, consultants fall back on two clichéd recommen-dations: “learn to be more competitive in an increasingly competi-tive environment” and “fi nd ways to provide more choice to cus-tomers.”

Peter Thiel, the founder of PayPal, posits a third route: be a “creative monopoly.” Thiel, concluding that competition’s benefits are overrated, particularly in the business arena, de-clares that being a good mo-nopolist is better than being a good competitor. In an April 23, 2002, New York Times column, David Brooks reports on a lecture by Thiel

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and sums up the philosophy by say-ing “competition has trumped value-creation” and “the competitive arena undermines innovation.”

Sports and war, for example, are competitive enterprises. Brooks writes that if your opponent gets three runs in the top of the inning, your job is to get four in the bottom. But business, politics, intellectual life, and most other realms are not like that. In most realms, if somebody makes three runs against you in one inning, you have the option of picking up your equipment and inventing a different game. You don’t have to compete; you can invent.

Those observations seem to fly in the face of basic economics and are even a little heretical. Competition, after all, is touted as the basis of the free-enterprise system and the engine of capitalism.

But in truly competitive markets, says Thiel, where many suppliers sell an identical product, profit margins are virtually nonexistent, and there are

few, if any, interesting differences in the level of product quality or service among the competing suppliers. Think of the market for commodities or basic raw materials—or even electricity.

By contrast, think of some of the most successful and profi table com-panies that have arisen in recent years: Apple, Amazon, Netflix, Facebook, Google. These companies were suc-cessful not because they rose to the top of a heap of companies selling identi-cal products or services, but because each found a niche—or created a niche where none had existed before. Their success and profi tability derived from their ability to become creative mo-nopolists.

And this was not in the sense that they were companies with a dominant market share, obtained through exer-cising market power over potential ri-

vals. For Thiel, “monopoly” has a more positive connotation. A monopoly is a company with a customer base loyal to its product. The monopoly “owns” its market through some combination of branding, scale/cost advantages, net-work effects, or proprietary technol-ogy. Apple, for example, has all four.

The Fallacy of Choice“Choice,” as part of a recipe for suc-cess, can be overused, too. While it is true that customers love variety and the ability to express themselves through the selection of alternative product offerings, it does not follow that simply providing customers with more choices—including choices of alternative suppliers—creates or en-sures customer satisfaction. The cre-ative monopolist generally succeeds, in fact, by doing the opposite: estab-lishing a relationship with customers in which choice becomes unnecessary or even undesirable. When it comes to colas, for example, a customer prefer-ring Coca-Cola doesn’t want to think about choices among other brands and generally doesn’t have to. For that customer, Coca-Cola has succeeded in becoming a monopolist. And to the extent that any other cola brand (Pepsi, for example) can do the same thing, it also enjoys, among its sphere of com-mitted customers, the benefits of a monopolist. The company can charge more for its product, compared to ge-neric colas; and it can enjoy a fairly predictable earnings stream based on customer loyalty. It is a relationship, built on the customer’s faith that he or she is receiving a premium product or service at a reasonable price, given the qualities that set that product apart in the customer’s mind.

Only when the customer’s faith is shaken does the relationship become threatened. This can happen in many ways. For Coke, it nearly happened in the 1980s, when it tried to replace its long-established formula with a new one, which had been developed based on blind taste tests. Many of Coke’s loyal customers were ready to abandon it—and would have, had Coca-Cola not quickly corrected its misstep by rein-

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In the 1980s, Coca-Cola almost lost its customer base by introducing a new formula, but recouped by “reintroducing” Coke Classic.

Courtesy: Coca-Cola Corp.


troducing the original brand as “Coke Classic.”

America Online, once a dominant provider of email service, lost custom-ers when it was revealed that the com-pany was making it diffi cult for them to leave on their own volition. This policy demonstrated a lack of faith in its own product and a lack of regard for its customer relationships. Many cable

or satellite TV providers, in their zeal to attract new customers with special rate offerings and product giveaways, have alienated some of their existing cus-tomers, who realize that they are pay-ing much more and getting less for the same service. When a creative monop-olist fails in maintaining the faith and loyalty of its customers, it always learns too late that it is far less expensive to

retain a satisfi ed customer than it is to bring on a new one.

According to Thiel, a creative monopolist tells a c o m p e l l i n g story about the future. It fi nds a small target mar-ket, becomes the

best at serving it, takes over immedi-ately adjacent markets, widens its ap-erture, and takes over more and more. Once the operation is quite large, a combination of network effects, tech-nology, scale advantages, and even brand make it difficult for others to follow. Putting together a completely accurate narrative of your company’s future probably isn’t possible, but the more you think about it, the better your narrative and better your chances of building a valuable company.

Thiel says that most successful cre-ative monopolies come into existence on the heels of innovation, disruptive or otherwise. But he warns that it is dangerous to come into an industry undergoing technological change: Come in too early, and other innova-tions will supersede your particular one; come in too late, and there will be nothing new left to offer. However, says Thiel, “if nothing has happened in an industry for a long time, and you come along and dramatically improve something important, chances are that no one will come and do that again, to you.”

Some StrategiesDisintermediation, disruptive innova-tion, sustaining innovation, and cre-

ative monopoly—all describe how firms can capture, create, or retain a market, and thereby achieve great successes.

A common ele-ment of all of these is that the successful entrant or incum-bent establishes a superior relationship with its targeted cus-tomer base, either by

usurping one held by an existing sup-plier through disintermediation or dis-ruptive innovation, by creating a new market niche altogether, or by main-taining one through the monopolist’s assets of branding, control of networks, economies of scale, or sustaining inno-vation, perhaps involving the owner-ship of proprietary technologies.

Thiel: A monopoly “owns” its custom-ers’ loyalty through a combination of branding, scale advantages, net-work effects, or proprietary tech-nology. Apple, for example, has achieved all four.

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Vigilance also can lead a large com-pany to acquire or merge with a prom-ising new interloper. The risk here is that the newer company’s innovative market strategy and novel approach to sales growth could fall victim to the dominant company’s traditional cor-porate strategic focus, causing it to lose the very asset that made it an attractive company to acquire in the fi rst place. Here again, a better strategy might be to give the acquired company free rein as a virtually autonomous subsidiary.

Fleeing the Market

C onsider the rise of steel “minimills,” a classic case of disruptive innovation. The traditional steel-making process involves massive, integrated mills that cost billions of dollars and produce high-quality steel. Minimills, which use electric-arc furnaces

to melt scrap steel, are much smaller in scale, less expensive to build and operate, and can produce steel at about 20 percent less cost than traditional mills. But when they were first introduced, minimills produced steel of low quality, suitable only for concrete reinforcing bars (rebars). Since this product constituted only about 4 percent of the total steel market and—with its low sale price—provided slim sales margins, traditional steelmakers were content to let minimills take over the rebar market, which they did.

With their inherent extreme cost advantage, the first entrants in the market reaped huge profits while still undercutting incumbent steel producers—un-til the market became flooded with minimill competitors. Profit margins evaporated, as did the rewards in serving this market segment. Through further innovation, however, some minimills improved steel quality sufficiently to serve the more lucrative market for angle iron, bars, and rods—though not sufficiently enough to serve the premium markets of structural and sheet steel. Still, profit margins were higher, and the market size was twice that of rebar, though not big enough to concern conventional steelmakers. Again, early entrants reaped profits until a flood of other minimills diluted the market. More innovation followed to tap more profitable steel production; more dilution followed that. A final round of innovation put some minimills in direct competition with conventional producers for sheet steel: their highest-margin and largest market segment.

The real point is that in each of these incursions, the early innovators fled a competitive market and entered one wherein they knew they could eventually drive out the incumbents and reap huge profits—at least for a time.

A second common element is that successful fi rms (even fi rms that are not, in Thiel’s view, “creative monopo-lists”) eschew the traditional notion of competition—where many providers offer a similar product. High margins and high growth come to firms that capture a market (even if only tempo-rarily) rather than contend with many similar competitors within it. (See the sidebar, “Fleeing the Market.”)

In the electricity industry, where technological change already is hap-pening and accelerating, where does that leave the incumbent electricity provider? Some general strategies come to mind.

The boldest one is to take the role of the disintermediator or disruptive innovator, fi nd new market opportuni-ties, and build future business around them. But this is not a game favorable to large companies heavily invested—both monetarily and in terms of regula-tory structure and tradition—in certain established market models. Utility holding companies could resort to diversifi cation: creating autonomous, unregulated subsidiaries and allowing their leaders to be innovative entrepre-neurs who search for established mar-ket channels or product lines to upend. For companies that have experienced Wall Street’s doubt about utility diver-sifi cation and worked diligently in the last several years to divest themselves of “noncore” subsidiaries, that might be an unappealing option.

Even less palatable would be Chris-tensen’s advice that, rather than seek out products or markets with relatively high, fairly reliable earnings streams, new subsidiaries should gamble on markets with low margins that are of little interest to larger market partici-pants, because that is where the beach-heads for successful technological invasions are. A high risk, but for com-panies that want to take the gamble, it could be the single best way to be on the right side of sweeping, market-capturing innovations.

Another way, which has enabled some large companies to survive in the face of disintermediation or disruptive innovation, is to adopt a strategy of vig-

ilance, and when a creative interloper appears on the horizon, imitate the strategies or roll out comparable prod-ucts, as quickly as possible. National Cash Register (NCR), for example, com-pletely missed the advent of the elec-tronic cash register in the 1970s. It saw its sales of electromechanical registers fall to zero. But NCR quickly rolled out its own electronic register and then used the company’s existing market-ing channels to recapture lost market share.

The minimill. High margins and high growth can come to fi rms that capture a market rather than contend with many similar competitors within it.

J U LY / A U G U S T 2 012 33

The secret sauce keeping custom-ers loyal can be, well, a secret sauce—or the accumulation of trust cre-ated by service reliability or product quality, as in the case of Amazon’s popular Kindle e-readers.

opportunities for further growth and expansion. While the other strategies emphasize change and innovation, this one recognizes that there could also be critical elements making up the relationship between the com-pany and its customers—usually in-volving branding—that should not be changed. These comprise the “secret sauce” that motivates customers to stay loyal to their particular provider, often for their entire lifetimes. With such companies as Coca-Cola or KFC, it literally is the unique combination of ingredients that make up its brand. With companies in other industries, it simply may be the accumulation of trust built up in service reliability or product quality. In any case, the ulti-mate key to the creative monopolist’s success is maintaining a base of loyal customers—customers who are satis-fi ed that when it comes to their par-ticular provider, choice is unnecessary, potentially risky, and even undesirable.

Such general strategies present po-tential avenues not just for survival, but for greater growth in the future electricity industry. And right now, the industry is blazing new trails for growth, embracing new, effi cient tech-nologies, new partnerships, new ways to communicate with customers, new business models, and new regula-tory processes that recognize the role of new technologies in a modernized grid and the value of electricity itself. [Such programs, as well as the indus-try’s “Distribution 2020” initiative, are part of an article in the next issue of Electric Perspectives.]

It is arguable that by doing these things, electric companies have broken new ground in the history of industry transformations.

And if, as Dr. Chu suggests, that industry may someday become un-recognizable to Thomas Edison, those who have the foresight to prepare for change now will still be comfortably familiar with it in the future. Change is inevitable, and while continued suc-cess is not guaranteed, with the proper strategic focus and preparation, today’s utilities can have more confi dence that they will succeed ◆

Of course, the practice of sustaining innovation is the best-suited strategy for companies that already have a mar-ket niche, wish to retain it, and want to continue growth within it. Amazon’s Kindle, the Apple iPad, and Verizon FIOS are prominent recent examples of such innovations. What could have been a disruptive innovation had com-panies outside the industry seen the potential (e-readers gutting Amazon’s physical book delivery, flash-storage computer notebooks overcoming Ap-ple’s iPhone, and cable/cell-phone/entertainment packages squash-ing Verizon’s telephone business), can easily be a sustaining one in-stead if existing providers see this potential

first. Many if not all utilities already are invested heavily in sustaining in-novation, in both continuous effi-ciency and process improvements and the grid modernization activities that many companies have initiated recently.

One strategy for electricity provid-ers may be simply to embrace their inner creative monopolist. Indeed, as both regulatory and market mod-els evolve, redefining one’s business from a regulated monopoly to a more creative one may be the key to suc-cess. Utilities already have most cre-ative monopolist characteristics: scale economies, product branding, and at least some control over networks. Perhaps, by expanding on these and even branching into the monopo-list’s fourth asset—proprietary technologies—utilities will find

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J U LY / A U G U S T 2 012 35

DEVELOPING NEW

LEADERS

How many bullets would you need to list the electric utility industry’s challenges? The signifi cant retirement of coal-fi red generation. The rapid build-out of gas-fi red generation. Unprecedented amounts of natural gas on the market. Increasing environmental scrutiny. Tepid

overall electric demand. Changing business models. And all four years after the recession fi rst hit the U.S. economy and in the face of billions of investment dol-lars for needed grid modernization.

The list is longer, of course, and there are no easy solutions.Like all companies, utilities must rely on their employees to respond to such

challenges and successfully navigate an uncertain economic environment—and most of that response comes from the utility’s leaders, from those at the top of the organizational chart down to the fi rst-line supervisors.

How effective have the industry’s leadership development efforts been? There are several terrifi c programs among electric companies, but utility human resources executives, industry consultants, and executive search fi rms suggest that there needs to be increased focus.

With innovative training programs and outreach init-iatives, electric utilities look to build their executive and management ranks from inside and outside the company.

B Y D E N N I S J . WA M S T E D

J U LY / A U G U S T 2 012J U LY / A U G U S T 2 012 35Images.com


Dennis Wamsted is an energy writer in Arlington, VA.

Other industries share this problem. A landmark study, “Go Where There Be Dragons,” by The Conference Board in 2010, found nearly universal rec-ognition among CEOs across the U.S. business landscape that they needed “a stronger, deeper leadership pipeline.” Did they get it? In its 2012 human capi-tal trends report, Deloitte concluded that in the economic crisis and the years since, “many organizations dis-covered they didn’t have the depth of leadership necessary to navigate to-day’s challenging business conditions. Moreover, they lacked the data and in-sights to know which leadership candi-dates were truly worth developing and investing in—particularly when facing sharp budget cuts.”

And, like other industries, the utility industry is dealing with the fact that

the very nature of leadership is chang-ing. But it is also true that the best time to build leadership can be during times of change.

A Leadership Development FocusPaul Benson is a partner at Heidrick & Struggles and leads the executive search and consulting fi rm’s power and utility practice. For him, to the extent that there is a lack of leadership devel-opment in the utility industry, it is due mainly to the historically conservative nature of the utility organization.

Another problem, Benson contin-ued, is that many companies (not just utilities) have hired “by looking in the rear-view mirror.” When the chief fi -nancial offi cer (CFO) left a utility, for example, the company simply might have replaced that person with some-one capable of doing exactly the same tasks. What they needed to do, he said,

particularly in light of changing tech-nologies and shifting attitudes among industry stakeholders, was to look fi ve years out and fi gure out what they ex-pected their CFO to be doing then—and then to hire a person capable of han-dling those duties.

But, particularly in the 21st century, many companies in the utility industry have focused intently on leadership development.

At Dominion, support for leadership development has ebbed and flowed over the years, said Roy Grier, vice president of human resources. Tom Farrell, who took the reins in 2007, has given it strong support. Since then, “we have had a very intentional approach,” said Grier.

Part of this effort, Grier continues, is strong support for job switching among company executives. He has benefi ted from this program himself, having been moved from his previous post as vice president of shared ser-vices to his current human resources position in 2009. “We do a fair amount of that,” he said. “We want our offi cers to be able to do more than one thing. This helps the company groom execu-tives to be better leaders.”

A job switch at the upper levels of Dominion management, announced in February, shows how committed the company is to training, and testing, its leadership team. The switch involved Diane Leopold and Paul Ruppert, who traded jobs April 1, with Leopold taking over as senior vice president at Domin-ion’s transmission unit and Ruppert becoming senior vice president for business development and generation construction.

In announcing the switch, Farrell said, “This rotation is another step to-ward strengthening the depth of un-derstanding and expertise among our senior management team.”

A second component of Dominion’s leadership development efforts, con-tinued Grier, is an internal training program that began three years ago. Dubbed “Developing the Dominion Leader” (DDL), the program is geared to high-potential directors (just below offi cer level). The 18-month-long pro-

Many companies (not just utilities) have hired “by looking in the rear-view mirror.” When the chief

fi nancial offi cer left a utility, for example, the company simply might have replaced that person with someone

capable of doing exactly the same tasks.

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gram gives them access to the compa-ny’s senior leadership team and helps them meet other promising employees in different Dominion units. About 60 employees have taken part in the pro-gram to date.

“The DDL program has been very ef-fective,” said Grier, pointing out that the last four directors promoted to of-fi cer had all been through the training. With the success of the program, he explained, the company had pushed it one step down the corporate ladder and launched a similar program this year for manager-level employees.

The same kind of leadership devel-opment effort has been under way at CenterPoint Energy since 2006, said Dean Woods, the company’s vice presi-dent of human resources. The initia-tive, “Leadership Academy,” takes classes of 36-38 high-potential, mid-career employees from across the com-pany and brings them together for an intensive two-year program that covers fi nancial issues, project management, public speaking, and related topics. The classes, divided into small teams, are expected to tackle a project as-signed to them by senior management during the second year of the program.

Echoing Grier’s enthusiasm, Woods said CenterPoint Energy has been ex-tremely happy with the program’s re-sults. The fi rst class continues to excel, with 80 percent of them being rated “above expectations” in their annual performance reviews, he said. Beyond that, the program is helping these promising employees fi gure out what their future at the company could be like. “It gives them a good vision of what they can accomplish at the com-pany.”

Duke Energy has been actively in-volved in workforce training efforts throughout its history, according to Al-lison Honeycutt, the company’s work-force strategy director. And, beginning about six years ago, the company in-creased its focus on leadership devel-opment.

Similar to Dominion, Duke Energy has stressed rotations as a means of giving high-potential employees expo-sure to more business units. “As future

leaders develop,” Honeycutt said, “we want them to have a broad perspec-tive.” The company also has devised a talent consulting role that helps prom-ising employees fi nd the right devel-opmental opportunities across the company.

Duke Energy also has instituted its “Strategic Leadership Program,” a for-mal training effort for up-and-coming mid-level employees. This is an “MBA-light” initiative, said Honeycutt, but it is one where the participants “are getting their hands dirty on some real problems.” (See the sidebar, “Hey, Hot-shot, Solve This!”)

The View From OutsideGetting hands-on experience is abso-lutely vital for successful leadership

development, said Stuart Pearman, the energy practice leader at ScottMadden. Developing leaders cannot be done through a one-size-fi ts-all approach, he continues, and he downplayed the effectiveness of school-based manage-ment development programs.

“You can’t outsource this effort to a school, call it good, and hope for the best,” said Pearman, who actually moonlights as an adjunct professor at the University of North Carolina’s Kenan-Flagler Business School. “There is a role for outside teaching, but if that is all you are doing, it is probably not enough. You can’t just send folks to a classroom.”

Susan Christensen, a partner who heads up Accenture’s talent and opera-tional performance practice, agreed: A

Hey, Hotshot, Solve This!

T he highlight of the Dominion, Duke Energy, and CenterPoint Energy leadership de-velopment programs is a project during which participants tackle issues confronting their company, looking to devise solutions for real-world problems. The exercise is

beneficial in its own right for the participating employees—even better is a resulting pro-posal that passes senior management muster and is adopted by the company.

PremierNotes, for example, was designed by a participant in Duke Energy’s strategic leadership program (run in conjunction with the University of North Carolina’s Kenan-Fla-gler Business School). Launched in 2011, the initiative is an investment vehicle that func-tions like a money market account. It has become a small but growing alternative funding source for Duke Energy, supplementing the company’s traditional debt capital from banks, brokers, and underwriters.

Investors buy a floating-rate demand note directly from the company that they can add to or redeem at any time either via a check or through a bank transfer. Interest on the invest-ment compounds daily and is paid monthly; there are tiered interest levels depending on the amount invested. The value of the invested principal does not change like equities or exchange-traded bonds.

The investments are not government-guaranteed and do entail risk, since they are unse-cured and backed only by the performance and financial strength of the company. Still, the reception from the investor community has been positive.

CenterPoint Energy also has benefited from a development idea made real—a 2010 initiative from its Leadership Academy that restructured its commercial natural gas trans-portation program to encourage more customers to participate. According to a utility spokeswoman, the program■ increased margins at the company’s natural gas division in Houston;■ improved corporate cash flow because the company’s gas unit no longer has to purchase the gas for transportation-only customers; and■ reduced the gas unit’s exposure to potential bad debt since now the company is only out the transportation fee if a customer doesn’t pay, while the risk for nonpayment has been shifted to the marketing companies.

Perhaps more indicative of the program’s overall success, it has been expanded to other states in the company’s service territory.


two-week management class is not the solution to leadership development. “They go to class, someone sprinkles pixie dust on them, and managers turn into leaders,” she said. The only real way to develop leaders is for senior management to make it an integral part of their day-to-day operations.

National Grid is one company where senior executives are playing a par-ticularly aggressive role in developing leadership talent throughout the fi rm, Christensen said. “They have done a fantastic job of it.” Other companies realize the importance of developing leadership and change management skills in their high-potential employees as well, she continued. “Senior manag-ers increasingly understand that these are key talents that will lead to success in the C-suite.”

Another company that understands the need for leadership development,

according to Pearman, is NextEra En-ergy. “They do a great job of leadership development internally,” he said. The company’s senior-most executives, in-cluding executive chairman Lew Hay, devote time to the training program, which brings in 15-20 executives for in-tensive team-based training and prob-lem solving.

Pearman and Ken Ostrowski, a di-rector with McKinsey & Company, singled out Southern Company. “They do an amazing job of developing gen-eral managers in their company,” Os-trowski said. “They aggressively rotate people to develop well-rounded man-agers and make great leaders.”

Added Pearman, “They get people ready to succeed.”

Unfortunately, Ostrowski said, there still are not enough companies on that side of the ledger. Instead of shifting their managers and challenging their

employees, he continued, “too many companies fall into the trap of saying they don’t have a deep enough bench.” What often happens then is that peo-ple stay in the jobs they are in and don’t get exposure to other opportunities. “This isn’t good for the company or the employee,” said Ostrowski.

Indeed, one of the keys to develop-ing talent, he continued, is to challenge employees—and you can’t challenge them if they stay in one place. Compa-nies have no way of knowing if some-one who has had the same job for 10 or 20 years has any leadership potential at all. That employee may have done his job well during that time, but it says nothing about his ability to lead.

Rotating and challenging employees may be somewhat harder in the short term, Ostrowski acknowledged, but for the long term it is the only real option for developing the next generation of leaders. It also will encourage highly able employees to remain in the in-dustry rather than seeking challenges elsewhere, he said.

Leading vs. Managing The uncertain environment surround-ing the industry today actually forces companies to think more about leader-ship and the need for continual devel-opment, according to Pearman. “In a stable environment you can get by with managing, but in a highly uncertain environment, like today’s, you have to lead, you have to get people aligned. Uncertainty creates a stress case for leadership.”

Also, due to the smarter, modern-ized grid, new customer relationships, and other issues that cut across the organization, the silos in an industry famous for them are breaking down. “Those forces are upping the ante for working across organizational bound-aries—and this is a big change from the past,” Pearman continued.

Ostrowski agreed and said that lead-ership development remains a big challenge for the industry in the future. Still, while he does not have enough data of his own to say there has been an industry-wide push toward lead-ership development in the past 10

Too many companies fall into the trap of saying they don’t have a deep enough bench. What often happens

then is that people stay in the jobs they are in and don’t get exposure to other opportunities.

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years, there certainly has been interest among his firm’s clients. In particu-lar, Ostrowski said, McKinsey has seen signifi cant interest in a hands-on pro-gram it developed called the “Change Leaders Forum,” which is designed to help senior managers get their mes-sage across to managers and offi cers a step or two down the corporate ladder.

The thinking in years past often was that the CEO would take us where we need to go, said Ostrowski. That era is ending—if not already over. (See the sidebar, “Just a Singer in a Rock and Roll Band.”) The goal of McKinsey’s program, continued Ostrowski, is to help senior management make that transition, get the 100 or 200 most se-nior employees all on the same page, and turn them all into leaders instead of followers. “There is a hunger for this type of program,” he said.

To date, the company has run the

Just a Singer in a Rock and Roll Band

“T oday, as new generations begin to make their mark in the workplace, the notion of

what a leader is, and needs to be, is be-ing challenged. Our current leadership model is not sustainable. That means the notion of the leader as the person who knew everything, who made all the deci-sions, who was comfortable with com-mand and control, who trusted an inner circle—and who could pride himself (or delude himself) into thinking he (or, rarely, she) was the smartest and best-informed person in the room [—does not apply anymore.] The CEO as rock star is dead. Leaders will need to be more collaborative and better listeners. Smart leaders won’t do it alone—they will cre-ate great teams where group expertise matters more than individual savvy.”

From “Go Where There Be Dragons,” by Charles Mitchell and David Learmond (New York: The Conference Board, Inc., 2010)

As the senior executives in the baby-boomer generation begin to step down, utility companies may need to

take greater risks in replacing them, either by reaching deeper into the company or turning to the outside for help.

program with fi ve utility clients, and it has been well received in every case. Utility executives understand that “we have to work differently to succeed in the future,” Ostrowski added.

Bringing Outsiders InAt the offi cer level, utilities have hired “outsiders” in the past, often from the fi nancial arena. In the 1990s, during deregulation and diversifi cation, there was talk that perhaps new CEOs might even come from the consumer prod-ucts or related industry. But, particu-larly for the CEO slot, utilities largely have been reluctant to make such a move—not least because there are unique aspects of the industry in terms of regulation, capitalization, engineer-ing, infrastructure, and more, and ex-perience with that structure counts.

But the reluctance may be about to change.

“Necessity forces innovation,” said Ostrowski, and as the senior executives in the baby-boomer generation begin to step down, utility companies may need to take greater risks in replacing them, either by reaching deeper into the company or turning to the outside for help.

There just isn’t enough qualified executive talent in the electric utility industry to go around, said Peter Bo-gin, a partner in the energy practice at SpencerStuart. When the retirements start, the industry can’t limit itself to hiring from within.

“They need to keep an open mind about the industries they will recruit from,” Bogin continued. One area utili-ties could consider is the military, he said. (See the sidebar, “Looking to the Military.”) Senior military leaders un-derstand infrastructure and logistics and have years of honed leadership

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skills—many of the qualities needed in a good CEO.

Other possible recruitment targets include the large engineering, procure-ment, and construction fi rms, as well as other companies involved with large infrastructure projects.

While searching beyond the utility may seem unlikely now, ScottMadden’s Pearman made the point that many would have said Ford’s decision to hire Alan Mulally in 2006 from Boeing made no sense either. He was an air-plane builder, a defense guy, what did he know about cars? But he did know something about market leadership, as Ford successfully rode out the 2008 recession and is now back in the black.

Heidrick & Struggles’ Benson added that the willingness to look outside the industry will grow as a byproduct of changes at the board level, too. As the current generation of directors steps down “there is likely to be new thinking at the top,” he said. “They are going to look at the business differently.”

To make those outside hires work, however, will require additional steps at the utility, Benson continued. You can’t simply hire a CEO from the out-side, show her the corner offi ce, and wish her good luck. Making an outside hire work requires what he called “an onboarding integration plan.” Getting the new executives acclimated and comfortable will solve lots of long-term issues, Benson said. This is particularly important at the C-suite level, because that is where the fi t and culture mat-ters most. Executives at that level don’t tend to leave because they can’t handle the work, he said. They leave because of culture issues; they want the com-pany to turn left, but the culture steers the fi rm to the right.

“It is a fascinating time for the indus-try,” said Accenture’s Christensen. The best time to build leadership is often during periods of extreme change—and the pervasive uncertainty hanging over the industry offers a unique op-portunity. Utilities have a chance to re-brand themselves with employees, the public, and other stakeholders. And that will take leaders throughout the organization. ◆

Looking to the Military

T he first baby-boomers turned 65 in 2011, and they promise to reshape the job market for the next 19 years, as 10,000 boomers reach “official” retirement age every day from now through 2030. The utility industry stands to be hit particularly hard.

A 2011 survey, “Gaps in the Energy Workforce Pipeline,” by the Center for Energy Workforce Development (CEWD, a nonprofit consortium of electric, natural gas, and nuclear utilities and their trade associations, Edison Electric Institute, American Gas Association, Nuclear Energy Institute, and National Rural Electric Cooperative Association) found that more than 60 percent of the utility industry’s workforce would be eligible to retire or could leave for other reasons in the coming decade. Moreover, 36 percent of the jobs deemed “critical” by the industry—more than 73,000 skilled technicians, engineers, plant operators, and more—may need to be replaced by 2015, with an additional 16 percent (33,000) to be replaced by 2020.

The 2008-2009 recession and slow recovery have delayed some retirements, the survey pointed out, but the workforce is not getting any younger—about one-third of the industry’s workforce already is older than 53, and the number of employees with more than 30 years’ service continues to climb. In other words, the industry must plan now to replace those critical employees, because they may leave in the near future.

Where the replacements will come from is uncertain, but, through its Troops to Energy Jobs initiative, the power industry is making a big push to increase hiring from the military. In tandem with six utilities—Southern Company, Dominion, Arizona Public Service Com-pany, Pacific Gas & Electric, American Electric Power, and National Grid—CEWD has put together a pilot program designed to link vets with electric utility jobs. The principal goal is to create a template that utilities can use when looking to the military for new hires and to streamline the process of moving from the military to the private sector.

Making the Natural FitUtilities value employees with military experience because of their strong work ethic and leadership skills. But the hiring effort has been hindered by a variety of other factors, includ-ing a proliferation of veterans’ agencies with different responsibilities and little coordination.

A simple challenge, according to Ann Randazzo, CEWD’s executive director, is that the military and utilities essentially speak different languages—the actual terms for a military skill set may not match the terms for the same skill set in the utility environment. Translation work on both sides will help utilities better understand the skills potential hires have and help military transition officials understand the expertise utilities are looking for.

As part of the pilot, the companies also are trying to identify those utility jobs that are more or less identical to ones in the military, what Randazzo calls “ready-now” jobs. Similarly, the companies are identifying more skilled positions that may require additional schooling and what that schooling would entail. In doing this, Randazzo said, the industry can get vets “into the workforce development pipeline.” They may not be able to land a util-ity job immediately, but with one or two classes, or perhaps an associate’s degree, they can latch on to one.

The pilot looks at identifying needs for vets once they are hired. Teaching vets what is ex-pected in civilian jobs can be crucial for their long-term success in a business environment, Randazzo pointed out.

Tom Farrell, chairman, president, and CEO of Dominion, strongly promoted the Troops to Energy Jobs initiative during his tenure as Edison Electric Institute chairman. “There is a natural fit between the military and the energy industry,” he said when the pilot was launched. “Both cultures are civic-minded and, first and foremost, safety-focused. Military personnel are also well-trained and disciplined—key qualities we look for in this industry.”

As part of its commitment, Dominion has boosted the percentage of its new hires coming from the military, says Roy Grier, the company’s vice president of human resources. In the past, about 11 percent of new hires were vets. This year, it is more than 20 percent. Cur-rently about 10 percent of the company’s overall workforce has prior military experience.

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manufacturers have received a two-year extension to produce such lamps until July 2014.

Standards for fl uorescent lamp bal-lasts, which start and regulate the lamp, also have increased. New effi ciency standards for ballasts serving several types of T12 lamps went into effect in 2005. Under the Energy Policy Act of 2005, additional standards were ap-plied to ballasts serving three other types of T12 lamps in 2009. Under a 2011 DOE rulemaking, all types of fl uo-rescent lamp ballasts—instant-start, programmed-start, rapid-start, and sign (multi-bulb) ballasts—will have to meet even higher standards starting in No-vember 2014.

Utilities may see some impact on their DSM programs. Fluorescent light-ing systems have been a large compo-nent of utility commercial and industrial DSM over the past 25 years, and utilities will have to measure the extent to which the new fl uorescent technology standards will

reduce potential savings and

affect DSM opportunities.For residential customers with older

fi xtures, it will be harder to fi nd replace-ment T12 lamps and ballasts, and they might need to replace the fi xtures. For commercial and industrial customers, the energy savings probably will be much lower on a percentage basis, and the paybacks probably much longer than previous lamp/ballast retrofi ts.

Incandescent LightingSince the Energy Policy Act of 2005, there have been several new DOE regula-tions and federal legislation that have either increased the effi ciency of incan-descent lamps or mandated the use of other, higher-effi ciency technologies.

programs, so it is helpful to see the lighting standard timeline for the vari-ous types of fl uorescent, incandescent, and high-intensity discharge lighting components.

Fluorescent LightingDue to a DOE rulemaking decision in 2009, July 13, 2012, was the last day that companies were allowed to make or import traditional fl uorescent T12 lamps. (T12 signifi es that the diameter of the bulb is 12 eighths of an inch—or 1.5 inches. The wider the diameter, the more energy it takes to start and run the bulb.) Many commercial and industrial users have gone to T8 lamps over the years. Still, some 700 series (that is, fi rst-generation) T8 lamps do not meet the new effi ciency standards. Certain

The Energy Informa-tion Administration estimates that, in

2010, the residential and commercial sectors used about 499 billion kilowatt-hours (KWH) of electricity for lighting. (There are no recent numbers for industrial sector or street lighting.) This was equal to about 18 percent of the total electricity consumed by the sectors and about 13 percent of total U.S. electricity consumption.

The energy effi ciency sections of the Energy Policy Act of 2005 and the Energy Independence and Security Act of 2007, along with several Department of Energy (DOE) energy effi ciency standards rule-makings, have attempted to make a dent in that consumption. For some time, those standards have had an impact on the types of light bulbs and fi xtures available in the United States; and they promise even more changes in the com-ing years.

The benefi ts are indeed signifi cant. The American Council for an Energy Effi cient Economy estimates that the improvement and replacement of several types of lighting components will lead to an annual savings of 50.8 billion KWH in 2025. At the same time, these changes are affecting customers, utilities (to whom many customers turn in energy-related matters), and util-ity demand-side management (DSM)

ENERGY EFFICIENCY

Lighting Effi ciency Changes and ChoicesBy Steve Rosenstock

Steven Rosenstock is senior manager of energy solu-tions for Edison Electric Institute.

ment T12 lamps and ballasts, and they might need to replace the fixtures. Forprograms so it is helpful to see the

the new fl uorescent technology gystandards will

reduce potential savings and

affect DSM opportunities.For residential customers with older

fi xtures, it will be harder to fi nd replace-ment T12 lamps and ballasts, and they

J U LY / A U G U S T 2 012 43

(See the sidebar, “Incandescent and Halogen Lamp Effi ciency Since 2006.”) Several more changes are on the hori-zon.

January 2013January 2013:: 75-watt general service and modi-fi ed spectrum (that is, specially coated) general service incan-descent lamps (GSILs) will not be allowed to be manufactured in or imported into the United States. The maximum wattage allowed for GSILs that produce 1,050-2,489 lumens will be 53 watts.

January 2014: January 2014: 60- and 40-watt GSILs

will not be allowed to be manufactured or imported. The maximum wattage allowed for a 60-watt equivalent lamp (producing 750-1,049 lumens) will be 43 watts; the maximum wattage for a 40-watt equivalent (producing 750-1,049 lumens) will be 29 watts.

July 2014July 2014:: New standards for incan-descent refl ector lamps rated between 40 and 205 watts—for general spec-trum and modifi ed spectrum lamps, lamps that have diameters greater than 2.5 inches or less than and equal to 2.5 inches, and lamps with voltage ratings greater than and equal to 125 volts or less than 125 volts.

DOE is required to start a rulemaking on incandescent lamps to determine whether effi ciency standards should be increased—if DOE decides yes, then it must publish a fi nal rule by January 1, 2017.

Utilities have used incandescent lighting systems, along with fl uores-cent ones, as part of residential DSM programs for many years; and, as with new standards for fl uorescent lighting, utilities will have to gauge the effect on DSM savings. Higher initial prices for

Higher initial prices

for incan-descent

lamps may persuade

customers to use higher-effi ciency

lighting sys-tems.

incandescent lamps may persuade cus-tomers to use higher-effi ciency lighting systems, such as compact fl uorescent lamps, without DSM programs, since incremental initial cost increases will be lower or even eliminated. Utilities also may fi nd that they need to keep educat-ing customers that incandescent light bulbs have not been banned but instead are more effi cient.

Indeed, incandescent lighting technologies are widely available to customers, but it is also true that the initial costs have gone up, and lumen outputs for certain technologies have declined. For example, 100-watt incan-descent lamps typically produced 1,750 lumens, while the typical compliant 72-watt lamps produce 1,490 lumens. A good number of residential custom-ers already use CFLs in high-use fi x-tures—the living-room rather than the basement light, for example. But many CFL and LED lamps cannot be used on dimmer switches, which may lead to customer frustration.

High-Intensity Discharge LightingSince 2008, high-intensity discharge (HID) lamps also have been subject to new standards.

January 2008:January 2008: Mercury vapor lamp ballasts are no longer allowed to be manufactured in or imported into the United States.

CFLs need a little more energy when they are fi rst turned on but use about 75 percent less energy than incandescent bulbs.

LED street lighting benefi ts include 50-80 percent energy savings, even distribution of light, and enhanced visibility.

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January 2009:January 2009: New effi ciency stan-dards go into effect for the pulse-start and probe-start ballasts used in metal halide lamp fi xtures, where the lamps are rated at 150 watts or more and 500 watts or less. Under provisions of the Energy Independence and Security Act of 2007, DOE was to have published a proposed rule by January 1, 2012, on whether to amend these standards. DOE completed its pre-liminary analysis of new standards in April 2011, but as of June 2012 had not pub-lished the rule.

February 2012:February 2012: DOE begins its energy-effi ciency standards rulemaking for HID lamps. Comments on the DOE framework document were due by April 2012.

In terms of HID lighting, utilities that offer outdoor lighting programs to residential customers or municipalities are having to decide on their treatment of “legacy” mercury vapor systems, as replacement ballasts have not been manufactured since 2007. Some com-panies already have programs to replace mercury vapor outdoor lighting fi xtures. Municipal customers with constrained budgets also must make decisions about their own legacies. Still, many municipalities switched to metal-halide or high-pressure sodium lighting many years ago.

For residential customers with mer-cury vapor fi xtures, replacement lamps are still available, but it might be dif-fi cult to purchase replacement ballasts (depending on whether any distributors still stock pre-2008 ballasts). When their ballasts fail, customers will have to invest in new fi xtures.

All changes have benefi ts and challenges—but suffi ce it to say that utilities and their customers have begun to see the world in a whole new light. ◆

Municipal customers with con-strained

budgets also must make decisions

about their own legacies.

January 2006 New federal standards require that the maximum bulb wattage in a tor-chiere fi xture (that fl oorlamp with halogen uplighting) be 190 watts. Until then, typical torchieres were sold with 300- or 500-watt lamps.

January 2007Ceiling-fan light kits with medium-screw base sockets manufactured after January 1 are re-quired to fi t screw-based CFLs that either meet certain ENERGY STAR CFL program requirements or have an energy-effi -ciency (lumens-per-watt) equivalent to comparable ENERGY STAR-qualifi ed

January 2008New effi ciency stan-dards for ellipsoidal, bulged, and bulged parabolic aluminized incandescent refl ector lamps.

January 2009 Ceiling fan light kits, candelabra screw-base, intermediate screw-base, two-pin halogen, and bayonet sockets manufactured after January 1, 2009, are not allowed to operate with lamps that total more than 190 watts; and they must be packaged with lamps that to-gether total 190 watts or less.

January 2012 General service and modifi ed spectrum general service in-candescent lamps—basically, traditional 100-watt light-bulbs—are no longer allowed to be manufac-tured in or imported into the country. The maximum wattage allowed for general service light bulbs that produce 1,490-2,600 lumens became 72 watts.

Incandescent and Halogen Lamp Effi ciency Since 2006

CFLs. Kits with pin-based sockets for fl uorescent lamps now must be packaged with lamps in all sockets, and the lamps must meet the ENERGY STAR program requirements for resi-dential light fi xtures.

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June 2008New effi ciency stan-dards for incandescent refl ector lamps with diameters of more than 2.25 inches and less than 2.75 inches.

at

ng) be then, s werer 500-

January 2006New standards elimi-nate the use of incan-descent light bulbs in both exit signs (in favor of light-emitting diode (LED) or com-pact fl uorescent lamps —CFLs) and traf-fi c signals (in favor of LED lamps).

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J U LY / A U G U S T 2 012 45

Innovative approaches such as interim rate increases, the use of projected costs, and construction work in progress enable utilities to shorten regulatory lag.

Commissions can allow utilities to shorten regulatory lag through the use of innovative approaches such as interim rate increases, adjustment clauses, and other recovery mecha-nisms; the use of projected costs in rate cases; and construction work in progress (CWIP), which allows a utility to partly recover construction fi nanc-

ing costs before a project comes online. These approaches also help smooth the introduction of rate increases rather than allowing rates to jump suddenly after a case. Commissions and state legislatures can support utilities’ fi nancial health and help curb future rate increases by helping utili-ties reduce lag.

REGULATION

Infrastructure InvestmentDrives Recent Rate CasesBy Cass Bielski

Following the trend of rising rate case activity since the early 2000s,

shareholder-owned electric utilities filed 17 rate cases in first quarter 2012. (See Fig-ure 1.) As in previous years, infrastructure investment was once again the main driver.

The average awarded return on equity (ROE) in the fi rst quarter was 10.84 percent, a jump from the level in recent years and the highest awarded ROE for any quarter since 2005. Unfortunately, this is probably not a trend. Virginia utilities settled fi ve rate cases that re-fl ect premiums earned for performance and other factors, skewing the quarter’s average awarded ROE. Without the Vir-ginia cases in the dataset, the average awarded ROE was 10.30 percent, a level much closer to that of recent quarters. Moreover, the average requested ROE was 10.57 percent—the fi rst time in Cass Bielski is manager of rate and regulatory busi-ness at Edison Electric Institute.

almost 12 years that this quarterly indicator was lower than the average awarded ROE.

Regulatory LagRegulatory lag is the time between a rate case fi ling and a decision—an im-portant measure because it is a rough proxy for the time between when the

utility needs funds and when it can re-cover those funds in rates. The average regulatory lag for the quarter was 10.5 months—quite close to the average (10 months) for the past few decades. Regulatory lag did spike and generally become more volatile during the main period of industry restructuring in the late 1990s and early 2000s but other-wise has remained relatively stable.

Filed CasesThe main rate case driver in the fi rst quarter, infrastructure investment, included investment in nuclear genera-tion, environmental-related projects, and the smart grid. There were sec-ondary drivers, too, such as attempts by utilities to implement trackers and recover revenue shortfalls caused by the weak economy.

Union Electric (Ameren Missouri) fi led for a storm restoration tracker.

Kansas City Power & Light is looking for an interim energy charge mechanism that would serve several functions, one of which would be to provide a sharing mechanism for changes in off-system sales margins based on the probabilities of meeting or exceeding certain levels of off-system sales. This is one of several tracking mechanisms the company is seeking. Right now, it is prohibited from seeking a fuel adjust-ment clause before June 15, 2015.

The aver-age awarded

return on equity (ROE) in the fi rst

quarter was 10.84

percent.

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FIGURE 1

NUMBER OF RATE CASES FILED (QUARTERLY)(U.S. shareholder-owned electric utilities)

25

20

15

10

5

0

Cases

Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Source: SNL Financial/Regulatory Research Associates and EEI Rate Department

Under a recently enacted law, Ameren Illi-nois must invest, over a 10-year period, $360 million in transmission, distribution, and smart grid upgrades.

PPL fi led for a competitive enhance-ment rider intended to recover expenses associated with the utility’s customer education program and other initiatives designed to expand retail competition in Pennsylvania. Among the fi lings for recovery based on weak economic conditions, PPL fi led in part to recover shortfalls from lower customer usage in a stagnant economy.

Ameren Illinois fi led its formula rate plan under a recently enacted law that requires utilities to meet various objec-

tives in return for a formula-derived al-lowed ROE. Under the law, Ameren must invest, over a 10-year period, $265 million in electric system upgrades, modernization projects, and training facilities, and $360 million in trans-mission, distribution, and smart grid upgrades. The commission retains au-thority to investigate the prudence and reasonableness of those upgrades. The law also requires formula rate plans that■ refl ect the utility’s capital structure (excluding goodwill—that is, intangible but measurable value);■ apply a set formula for determining allowed ROE based on the previous year’s results (that is, a premium on the 30-year Treasury bond yield of 590 basis points the fi rst year and 580 basis points each succeeding year); and

■ provide for recovery of pension and pension-related costs and certain incen-tive compensation expenses.

Ameren Illinois also must refund to customers amounts above (or collect from them amounts below) a 50 basis-point dead-band around the authorized ROE. The ROE may be reduced if the utility fails to meet certain performance metrics. The utility also must contribute, in conjunction with another Illinois utility, Commonwealth Edi-son, $60 million to-ward low-income and support programs. The commission will terminate the for-mula rate plan if the average annual rate increase between 2012 and 2014 exceeds 2.5 percent. All formula rate plans are to be terminated at year-end 2017 unless legislation extends them.

Florida Power & Light’s fi ling re-quested a 25 basis-point adder if the company maintains the lowest typical residential bill in the state. The com-pany’s fi ling indicated that FP&L intends to spend $9 billion between 2011 and 2013 to strengthen and improve Flor-ida’s electric generation and delivery system.

Decided CasesTen of the 17 decided cases in fi rst quarter 2012 were settlements, which often don’t disclose all the case details. But what is disclosed can be examined.

The quarter’s decided cases refl ect a heavy dose of new generation spend-ing. The settlement approved for FP&L increases base rates related to nuclear plants by $150 million, then freezes most rates through 2016. It also con-tains performance incentives related to the management of nuclear plant main-tenance.

The order in a Virginia Electric & Power (Dominion Virginia Power) case allows the company to implement a rider to recover costs of converting three coal-fi red plants to burn biomass fuels, including a cash return on CWIP.

The quar-ter’s decided cases refl ect

a heavy dose of new generation spending.

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J U LY / A U G U S T 2 012 47

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The 12.4-percent ROE includes a 200 basis-point premium through the fi rst fi ve years of the converted plants’ lives. “We fi nd the proposed biomass conver-sions are likely to be cost-effective on a net present value basis,” the commis-sion said. “The converted facilities will not adversely impact system reliability [and] Dominion’s forecasted fuel prices are reasonable for purposes of this proceeding.… We conclude that the conversions will have a positive impact on economic development within the Commonwealth.”

The Montana commission approved a two-step rate increase for costs as-sociated with a NorthWestern Energy generation plant. The increase refl ects, in part, bonus depreciation—a federal program allowing parties to write off as-sets quickly.

In the fi rst quarter, the Idaho com-mission approved a settlement that found a transmission line completely “used and useful” after previously ruling that part of it was not. The case was on appeal before the Idaho Supreme Court

at the time of the settlement. The order approving the settlement requires Paci-fi Corp to dismiss the case and to delay the recovery of the costs of the incre-mental transmission until the next rate case. “This concession benefi ts cus-tomers because it eliminates uncertainty inherent in litigation and postpones cost recovery,” the commission said.

The North Dakota commission ap-proved a settlement for Northern States Power–Minnesota that authorizes a two-step rate increase and allows the company to implement a decoupling mechanism for retail sales revenue for 2012 only. The order approving the set-tlement requires the company to submit a performance-based ratemaking plan with metrics to measure and evaluate system reliability and with rate-of-return incentives to improve reliability. The settlement also■ allows the company to recover certain operations, maintenance, and capital costs associated with fl ooding in the service territory in 2011;

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DNV KEMA Energy & Sustainability. . . . . . . . 7

Elster . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

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RES Americas . . . . . . . . . . . . . . . . . . . . . . . 17

Sargent & Lundy . . . . . . . . . . . . . . . . . . . . . . 1

Solar Electric Power Association . . . . . . . . . 31

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Wright Tree . . . . . . . . . . . . . . . . . . . . . . . . . 19

■ requires the company to credit to customers $4.7 million associated with a payment it received from the Depart-ment of Energy related to spent fuel removal; and■ requires the company to implement several initiatives aimed at improving reliability, including a three-year pro-gram to replace certain underground cables, and an increase in the size and scope of the company’s vegetation man-agement program. ◆

Converting three coal-fi red plants to burn biomass will provide environmental and cus-tomer benefi ts, according to Dominion.

MINNESOTA POWER’S

Minnesota Power’s Boswell Unit 4—at a capacity of 545 megawatts, Northeastern Minnesota’s largest electric generating unit—will soon undergo a major environmental retrofi t designed to slash

emissions of mercury, particulates, and sulfur dioxide while helping to ensure competitively priced energy for decades to come.

“This capstone event of our six-year environmental con-trol effort will transform Boswell 4, the workhorse of our generation fl eet, so it continues to provide reliable, safe, and affordable electric power to our customers,” said Al Hodnik, chairman, president, and CEO, of ALLETE, the utility’s parent company, during ALLETE’s annual meeting of shareholders in early May.

Minnesota Power serves 144,000 residents, 16 munici-palities, and some of the largest industrial customers in the United States.

The utility, which owns 80 percent of the unit, will pay out $350-400 million over the next several years. WPPI Energy, a regional company serving 51 public power utilities, owns 20 percent and will pay for its share of the costs. Minnesota Power will be fi ling the project plans and permit applications with state and federal regulators this summer.

Meeting State and Federal RequirementsWith requirements for a 90-percent mercury reduction on Boswell Unit 4 by 2018 already in state statute, Minnesota Power has been analyzing a Unit 4 retrofi t as pending En-vironmental Protection Agency (EPA) regulations affecting

coal units nationwide were fi nalized. Technology choices, resource needs, economic projections, customer cost im-pacts, and project execution were key factors in this exten-sive assessment. EPA’s issuance of the Mercury and Air Toxics Standards Rule for mercury reduction in December 2011 was a key factor in the timing of the utility’s decision.

Over the past six years, Minnesota Power has invested ap-proximately $350 million to reduce emissions by about 70 percent overall on its system, with most of this investment applied to Boswell Unit 3, the company’s second-largest gen-erator. The Boswell 4 project will increase overall emissions reduction to around 85 percent. Every phase of Minnesota Power’s ongoing resource planning process has underscored that emission-reduction investments in Boswell 3 and 4 en-hance and sustain these core energy sources as a good value for customers.

The utility wants to “reduce emissions and keep our largest and newest baseload plants operating for many more years,” said Hodnik. “This will allow us to serve the growing energy needs of our customers economically and reliably, while meeting our environmental responsibilities. The Boswell 4 emission-reduction project is another example of our com-mitment to enhance the economy and quality of life in this region.”

In conjunction with reducing emissions and increasing the operational effi ciencies in its coal-fi red fl eet, Minnesota Power also is adding considerable cost-effective renewable energy to its portfolio. The company will meet future energy needs with a more diverse, lower-emitting power supply that lessens coal-fi red generation to about 50 percent of its total resource base.

The transition to signifi cantly reshape Minnesota Power’s fl eet is well underway. ◆

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Boswell Unit 4

Minnesota Power’s Boswell Energy Center in Cohasset, MN.


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