NEWS & TRENDS

INDUSTRY PERFORMERS
Four years ago, no one had heard of Keyspan. Last year, the company was named the electric power industry's top financial performer. In 1998, Keyspan was formed by the union of Brooklyn Union Gas and LILCO. This provided the foundation for growth in the Long Island area and beyond, and savings produced amounted to $100 million in 1999.

As a result of its success, Keyspan Corporation won the Edison Electric Institute's (EEI's) Index award for long-term financial achievement. The award was presented at EEI's Financial Conference in New Orleans last October.

The Index of shareholder-owned electric companies is a peer group that values total return on each electric utility over a five-year period. The Index is regarded as a benchmark for long-term financial performance and is used by over one-third of EEI's member companies in their proxy statements. For the 1996-2000 period, Keyspan Corporation achieved the best performance with a 265 percent return. This result exceeds the S&P 500 return of 114 percent. By comparison, the Index returned a weighted average of 77 percent during the same period.

The industry also had a good year financially in 2000, as detailed in EEI's Financial Review. Total industry revenues reached a historic record of $440 billion, a 40-percent increase from the previous year. Earnings per share—excluding non-recurring items—reached $2.54, an increase of 24 percent over the prior year.

Keyspan implemented a broad range of energy services and showed a 46-percent increase in earnings in 2000. The company's success resulted in an increase in market capitalization of $3.7 billion over the past five years. Keyspan also owns a Canadian pipeline interest and gas and oil exploration operations in the Gulf of Mexico region.

Other top performers for the five-year period include second place, Black Hills Corporation with a return of 240 percent; third place, MDU Resources with a return of 201 percent; fourth place, Exelon Corporation with a return of 196 percent; and fifth place, Cleco Corporation, with a return of 163 percent.

ONE PLUS ONE DOESN'T ALWAYS EQUAL TWO
The past several years have seen unprecedented growth in merger activity among electric utilities. There were 26 announced mergers in 1999 compared with 8 in 1995. (See Figure 1.) At the same time, there has been an increase in cancelled mergers. Through the first six months of 2001, four mergers were withdrawn, and seven are still pending.

Simple mathematical logic isn't always the way it works when companies merge or acquire. In fact, a recent article suggests that when it comes to sustaining revenue growth, companies could actually be better off by staying single. According to the article in the October issue of the McKinsey Quarterly, while cost savings might be a given for companies that merge, it is not enough to fuel the sustained growth of a large company.

Joining forces with another company doesn't necessarily strengthen the original company's position. According to writers Bekier, Bogardus, and Oldham of the McKinsey Group, regarding 160 acquisitions listed by 157 public companies, 12 percent of the companies experienced increased growth in the three years after they acquired or merged. Only seven of these companies provided higher-than-industry-average returns to their shareholders. In one instance, a merged company that looked forward to strong growth rates came in under the expected revenues it would have had if it remained single.

So what should companies do to ensure they grow after they acquire? According to McKinsey, revenues determine the outcome of a merger, not cost savings. Revenue has more of an impact on a company's bottom line than savings, and fluctuations in revenue carry more weight than similar imbalances in projected savings. The research shows that given a 1 percent loss in revenue growth, only a company that achieves savings 25 percent higher than originally planned will sustain growth. And a company that increases targeted revenues by as little as 2 or 3 percent can offset a 50-percent loss in cost savings.

However, merger strategies shouldn't neglect savings altogether. The stock market reacts seriously when companies slip on their projected savings: Studies show that missing an earnings target by 5 percent can push down a company's share price by 15 percent. And up to 40 percent of mergers don't even make the most of the cost savings opportunities they have.

Those companies that make successful mergers have several business strategies in place to ensure their focus is revenue-driven and cost savings-aware. "Merger masters," according to the article, focus on their time-tested customers and revenue and retain their most talented employees—especially those in customer service. Another strategy that makes for a successful post-merger transition is to implement strict cost practices at every level of the company. This practice enables top management to spend valuable time focusing on revenue-generating business. Companies geared for merger success also develop corporate cultures that reward and emphasize performance. These companies are growth-focused and provide incentives, mentors, and opportunities for entrepreneurial types to move ahead.

It's no doubt the number of smaller companies will continue to dwindle as corporations become larger and fewer. But for the M&A trend to continue, corporations that don't have a growth-oriented merger strategy in place should check their math before embarking in this arena.

AMR MAKING INROADS
Automated meter reading (AMR) may still have trouble becoming widely accepted in the marketplace, but a recent Chartwell report published in September 2001 reveals that 70 percent of America's electric utilities use AMR in one capacity or another—be it a system-wide build out or installations for meters that are hard to reach.

Since last year, according to the report, applications of AMR for time-of-use pricing have grown dramatically—more than tripled—and are still growing. AMR was on course to be installed on 12 percent of the nation's meters by the end of 2001. While half those surveyed by Chart-well agreed AMR would one day be in place across the meter population, another half could not predict when that would occur.

Reactions to wholesale pricing and recent energy shortages are driving the growth in energy management through AMR, according to the report. A desire to improve customer service and management also has come to the forefront as a reason for companies to invest in AMR. Up from the previous year, the number of customers who said they used AMR for programs involving load control and customer management services rose by 53 percent.

The significantly increasing numbers serve to show, according to Chartwell, that across the industry, more electric companies than ever are using AMR. And while many companies don't view AMR as more than a solution to a problem, they do generally admit it will provide benefits that will be essential in future energy markets. That's why, according to the report, some of the companies that have developed and adopted an AMR strategy throughout their meter base feel that they are ahead of the game.

EDUCATING FOR ELECTRICITY'S FUTURE
Getting students interested in utility technology and the utility business is vital to the industry's future. Bringing powerplants into the classroom rather than taking a field trip to visit them is the educational strategy of Villanova University professor Ed McAssey. McAssey, a professor of energy technology, uses a micro-electric powerplant (based on the Rankine cycle, the model on which a majority of plants run) in his classroom to teach students how electric power is generated. Students can measure boiler temperature and pressure, steam rate, turbine inlet and exit temperature and pressure, and generator voltage and amperage output on the miniaturized plant. The "Rankine-Cycler," made by Turbine Technologies, is fully functioning with a data acquisition station that lets students collect and analyze lab results. McAssey began using the model in his classroom beginning fall semester 2001.

"We strongly believe in developing educational products that nurture critical thinking skills," says Wolfgang Kutrieb, president of Turbine Technologies. The model plant also has an axial flow steam turbine, a variable load generator, a multi-pass flame through boiler, a feed water pump, and steam condensing tower components.

High school and college students are also getting the inside track on what it takes to succeed in today's energy industry, thanks to many electric utility school-to-career programs and other educational tools. A recent publication by the National Employer Leadership Council (NELC), for example, an initiative by the National Alliance of Business, features several utility company school-to-career programs. NELC is a business membership organization that advocates combining classroom courses with real-life learning to help prepare students for jobs. "The Utilities Industry" booklet is part of the Best Practices in School-to-Careers series, which focuses on employer involvement in the learning process, and provides models of successful school-to-career programs across many industries.

Detroit Edison's Exploring Program, an initiative associated with the Boy Scouts, is one such example. Students in grades 10-12 are assigned individual mentors who meet with them weekly, teach them basic job skills, and provide hands-on experience in computer science, engineering, and business administration fields. By the time the students complete the Exploring Program, they're already creating web pages and giving presentations on subjects related to their field of interest.

Xcel Energy, another company cited in the publication, provides students an initial preview of various careers through a video designed for them, "Let's Get Technical—Careers in Energy." The video spans the scope of utility company operations and job possibilities. Students also can obtain hands-on experience via "job-shadowing"—for example, accompanying information technology employees for a day to witness their day-to-day responsibilities and the skills that are required. Xcel's internship programs offer an even more intense career education opportunity. At the company's Riverside Generating Plant, interns work in diverse fields, including engineering, instrumentation and controls, coal yard and plant safety, and more.

Duke Power contributes to school-to-work education through teacher workshops in South and North Carolina. The workshops are designed to help middle- and high-school teachers understand electrical production and effectively bring electricity and energy issues into their classrooms. The one-week workshop includes presentations and tours of Duke's nuclear and hydro facilities.

One part of the program shows teachers how to assess water quality and its importance to a healthy environment. Science teachers actually build a "kick-net" which they use to collect aquatic invertebrates in streams. Alongside Duke Power scientists, the teachers then study which species and how many they have collected in order to determine how polluted—or how clean—the stream water is. Duke's workshops also provide continuing education credits for the teachers to use towards teacher certification, as well as materials on how to integrate what they learn into their curricula.

ILLUMINATING A NATIONAL MEMORIAL
Seventy-three years ago, builders broke ground for the construction of the Thomas Jefferson Memorial in Washington, DC. Since then, the memorial has attracted more than 2 million visitors a year to its white marble dome to meditate on the words of Jefferson, enjoy the ring of cherry blossoms surrounding the tidal basin each spring, and in the summer, view—from the steps of the monument—the 4th of July fireworks over the Mall.

This year, in partnership with Osram Sylvania and the National Park Foundation, the National Park Service (NPS) unveiled a new lighting system for the memorial. The new system is a tribute to energy-efficient design and technology, and results in 78 percent energy savings over the old system, according to NPS (The old system used incandescent lighting.) Arnold Goldstein of the NPS stated that the project "illustrates the advancements that have been made in architectural lighting. The results of this work allow the NPS to lower energy consumption without sacrificing the necessary light levels and aesthetics."

The technology used to light the memorial involves high-intensity discharge halide lamps and 17,000 light-emitting diodes (LEDs). The LEDs create an even, daylight quality, are individually no larger than a spot on a ladybug, and last up to 100,000 hours each. According to Goldstein, the memorial's original energy requirement was over 125,000 watts, while the new system requires just over 25,000 watts.

The new system also reveals features generally not seen by the public before. The lights illuminate the text frieze on the interior circumference of the memorial's dome, one of the areas previously in the dark. Other areas of the memorial that have clearly improved include the memorial stairs, the pediment, and the bronze statue of Jefferson.

In some areas where frequent changing of lamps is impractical or inconvenient, lamps were installed that can last up to 11 years, or 100,000 hours. Other lighting improvements to the memorial and its grounds include the installation of new lighting poles, lighting controls, and floodlight fixtures.

DOING MORE WITH LESS
According to two recent surveys, electric utilities are working harder to provide more energy these days. Energy companies are also claiming there's not enough energy in their region—and that applies to electricity, natural gas, and fuel oil.

One of the surveys, conducted by Lawler, Matusky, and Skelly Engineers, found that 62 percent of utilities say their workload has increased. And 95 percent of respondents state there is a need for more electricity in their respective regions, in a separate survey by the same firm.

Deregulation is the culprit for increased workloads, according to the survey. Thirty percent of respondents said they've had to cut their staff as a result of deregulation, resulting in fewer people to do the work. Companies are also reporting the need to increase operating efficiency (79 percent) and profitability (71 percent).

But the demand for more energy may also create more work for companies. According to the survey, 79 percent of companies are planning to produce more energy in their area. Over half of them are currently siting a new facility, while nearly another half already have new facilities under construction.

In both surveys, the significance of environmental issues has grown. Fifty percent of those surveyed say that environmental issues are more important now because of deregulation. In particular, air issues are also on the minds of companies when it comes to siting and building new plants. Sixty-eight percent say air emissions are a top concern facing existing plants, while 53 percent say they are a concern for repowering existing facilities. Most survey participants—79 percent—said natural gas is their choice for new generation.

SUPERCONDUCTOR WIRES: THE DSL OF TRANSMISSION
High temperature superconductor (HTS) wires are so efficient they can carry up to 140 times the power of conventional copper wires of the same size. Detroit and New York's Long Island are the sites of two major projects that involve HTS wires. Last fall, downtown Detroit installed HTS cables as part of a substation project that serves 14,000 customers. Long Island is also on schedule to have a half-mile underground cable installed on the Long Island Power Authority grid in the next year.

American Superconductor (AMSC), a major supplier of both HTS wires and affiliated products, manufactures about 500 kilometers of wire a year. Recently, AMSC signed on with General Electric to provide HTS wires for development of commercial superconductor generators, a project worth $26 million. The generators are touted as capable of providing millions in energy savings and reduced environmental emissions. AMSC estimates that HTS generators perform at 99-percent efficiency and outperform standard generators by as much as $4 million per year in reduced losses per generator.

But it's the wires that are at the heart of superconductor generator technology. AMSC produces what it calls BI-2223 high strength wire. By adding a thin layer of stainless steel reinforcement to the wire, it is able to handle much greater tensile stress. Wrapping superconductor wires around the rotor of a generator eliminates losses created by saturation characteristics of iron teeth and armature on conventional machines. HTS generators also are lighter than conventional equivalents—by one-third the volume.

AMSC believes the environmental potential of its HTS wire is one of its biggest advantages—its high capacity and light weight make it ideal for underground wiring solutions, especially in cities and dense metropolitan areas where environmental concerns are heightened. AMSC is currently developing a "second generation" conductor wire that it claims will be five times cheaper to manufacture than the BI-2223 model. That wire is projected to be available on a large scale in 2005.

© 2008 Edison Electric Institute