NEWS & TRENDS

FINANCIAL RETROSPECT
While last year was by all measures a turbulent year for the electric power industry, 2002 is shaping up to be even more eventful. With new Federal Energy Regulatory Commission (FERC) measures, debate on energy legislation, continuing fall-out from Enron, and imminent environmental regulatory decisions, the industry is facing more challenges than ever. Yet, financial performance has remained strong and steady.

In 2001, industry total assets increased to $872 billion from $860 billion, an increase of 1.5 percent. Total revenues rose by 29 percent, or $128 billion. And while the S&P index sank 13 percent last year, the Edison Electric Institute (EEI) Index, a measure of shareholder returns, declined by 8.8 percent. For the period 1997-2001, the EEI Index averaged annual returns of 12.37 points, ahead of the Dow Jones Industrial average at 12.17 points.

Green Mountain Power Corporation showed the strongest performance with a 54.1 percent total return in 2001. Other companies posting top returns last year include Central Vermont Public Service (44.1 percent), Conectiv (26.8 percent), Madison Gas and Electric (23.1 percent), and RGS Energy Group (21.6 percent).

But other financial aspects of the industry reflected the national economic downturn. Returns on equity fell to 7.7 percent, the lowest in more than 15 years. Enron's bankruptcy resulted in widespread downgrading by stock analysts in the last quarter of 2001. Thirty-one downgrades were recorded, while the ratio between downgrades and upgrades reached 2.21, still down from 2.60 in 2000. (See Figure 1.)

"Like stock performance, industries in transition do not move in a straight, upward line," said Thomas Kuhn, EEI president, in an annual address to the New York Society of Security Analysts last February. "Although they have faced 10 years of continuous change, utilities are not retreating. Many companies now are regrouping as they look ahead to the next decade of change," Kuhn said.

A PEEK INSIDE THE BOARDROOM
A survey of board directors conducted in January by the Institute of Internal Auditors (IIA) and the National Association of Corporate Directors (NACD) reveals some surprising (or not so) trends in board governance after the fall of Enron. Survey participants reflected a cross-section of industries, including energy companies. According to the survey, corporate directors are reassessing every issue from risk management to company auditing practices.

Of the 135 board directors participating, approximately half planned to discuss off-balance-sheet transactions at their next audit committee meeting; had already questioned auditors about risks like those uncovered at Enron; and felt that major changes in U.S. accounting standards were necessary. A surprising 21 percent stated they were unsure whether complex financial transactions were taking place at their companies. Thirty-seven percent said their organization had a formal risk management process; another seventeen percent were unsure whether risk management initiatives were in place.

Board members who expressed a need for accounting standards reform raised a number of issues—including treatment of off-balance-sheet transactions and related party transactions; independence issues for external auditors; guidance for external auditors and retainment of records; and clearer rules for disclosures. But twenty-nine percent of board directors felt that there was no need for accounting standards reform.

According to the survey, many directors are feeling pressure to separate auditing and consulting practices with different firms post-Enron. Nearly 20 percent responded they were planning changes related to auditor independence. Another 13 percent said plans were in the works to change the amount of non-audit services provided by their external auditor. Seventy-five percent reported that their boards would review annual communications about external auditor independence.

THE LONE STAR SHINES
So far, deregulation of electricity in Texas is going strong. January 2002 marked the beginning of competitive electricity markets in the state. By early February, five percent of customers had switched to new energy providers, equating approximately 270,000 customers. The remaining 95 percent were paying "a price to beat" set by Texas's Public Utility Commission.

TXU's chairman and CEO Erle Nye said consumers were reaping the benefits of competition by paying lower electric rates statewide. Rates within the company's traditional service territory dropped more than 14 percent. TXU's customers can go online to www.powertochoose.org to compare rates between two competing electricity providers in the same zip code.

A few glitches have occurred on Texas's road to competition, however. Many companies complained that switching customers was taking longer than anticipated. Transmission congestion costs have also risen. As for the effect of Enron in Texas's transition, Tom Noel of the Electric Reliability Council of Texas said its demise was handled smoothly, with a default supplier stepping in to take over Enron's load during a 72-hour period, after which a permanent provider was established.

NORTHWESTERNERS KNOW HYDRO
Pacific Northwest residents expressed strong support for hydroelectric power, the region's dominant electricity source, in a recent Bisconti Research survey commissioned by the National Hydropower Association. Hydropower was the top choice for meeting future electricity needs over wind, solar, natural gas, and three other sources of electricity, and nine out of ten respondents favored its current use. Ninety-six percent overall believe hydropower should play an important role meeting future electricity needs, with 69 percent saying it should play a very important role.

The poll found a greater awareness of advantages and disadvantages of hydroelectric power among Northwest residents than among registered voters nationwide. Eighty-five percent of Northwest residents were able to name at least one advantage of hydropower, compared with 72 percent nationally. Sixty-nine percent could name at least one disadvantage, compared to 47 percent nationally.

Less than one-fifth of the region's registered voters supported removal of dams, a topic of hot debate in the Northwest right now. In a separate question, nearly everyone—94 percent—supported maintaining existing dams. And a majority of respondents—63 percent—supported building more hydroelectric power plants to meet future electricity needs (though only a quarter of respondents strongly agreed with that option).

In the poll, only 39 percent supported the reduction of hydropower generation in order to protect fisheries or their habitat, while 57 percent did not support that option. Similarly, 58 percent favored balancing electricity needs and environmental concerns in hydroelectric licensing, even if it means the loss of some fish or wildlife habitat; 37 percent favored giving the environment greater weight.

The hydro industry and other river stakeholders alike have roundly criticized the current hydro relicensing process that takes 8-10 years and costs tens of millions of dollars. Licensees contend that balance has been upset by a series of court rulings and legislative changes that give natural resource agencies absolute authority to prescribe conditions without fair consideration of all project benefits. They contend that the existing process will result in a significant loss of hydroelectric generation. River activists have said that resource agencies' powers are necessary to establish a protective floor above which balancing must occur. According to the poll, registered voters in the Northwest agreed with the "balance" position by a 21-point margin.

In addition, registered voters seemed to agree with the concept of providing tax credits for all forms of renewable energy, with 88 percent approving and only 9 percent disapproving.

The survey was drawn from a random sample of 600 registered voters in Washington, Oregon, and Idaho, while the national survey drew from a random sample of 1,000 US registered voters.

NO MORE ARSENIC-TREATED WOOD
Facing strong public pressure, the chemical and home-improvement industries voluntarily agreed in early February to phase out the use of arsenic in wood preservatives for residential applications over the next two years. Industry representatives admitted that consumer-led opposition (including lawsuits) forced the industry to announce its decision. The decision only applies to wood used for playgrounds, recreational and picnic facilities, and residences.

Chromated copper arsenate, or CCA, has been used as a wood preservative since 1940. The decision to eliminate residential CCA-treated lumber will cost the $4 billion pressure-treated wood industry millions of dollars to revamp facilities.

Wood utility poles are pressure-treated with CCA and other preservatives to protect them against rot, fungus, and insects, and also to help ensure the structural integrity of the pole. Such treatment can lengthen the service life of the wood by three to ten times. In some cases, alternative materials such as steel, fiberglass, or concrete have been used for poles.

The pressure-treated wood industry's joint decision with the Environmental Protection Agency (EPA) to discontinue the use of arsenic-based preservatives will not directly affect the treatment of utility poles, but there may be indirect effects. "Eighty-five percent or higher of the CCA-treated wood industry's customers are residential," says James Roewer, director of the Utility Solid Waste Activities Group at Edison Electric Institute. "We are concerned that the wood treatment industry may abandon the industrial market. As a result, utilities that rely on these suppliers may eventually face a shortage of CCA-treated poles." Roewer suggested that pole suppliers may opt to dedicate a single facility for CCA treatment of poles, while revamping the rest of their facilities.

Consumer groups have alleged that children exposed to CCA-treated wood have a higher risk of lung, bladder, or skin cancer. However, in reaching the agreement, EPA did not find that there was unreasonable risk to the public. According to Roewer, there is no credible information that wooden utility poles pose any risk to public health.

ATM NETWORKS OPEN UP
Recent developments in the automated teller machine (ATM) industry are presenting new payment collection options for utility companies. ATM network rule changes and industry consolidation are bringing new focus to a method of receiving bill payments that has been used regionally for years, but soon will be available coast-to-coast. This payment method involves a consumer using an ATM card, as opposed to a credit card or checking account, to pay their utility bill over the telephone or via the internet.

While some utilities have accepted bill payments over automated phone systems for years, in most cases, high credit card costs, non-sufficient funds and other returned checks, and credit card and electronic check regulations have made it difficult to offer automated payment capabilities to the consumer. Now, approximately 50 utilities representing 50 million consumers are offering ATM payment.

"Over the last six years we have benefited significantly from the security and efficiency that ATM payments provide. Additionally, our customers find ATM payments easy and convenient to use," said Kathie Stefani, program manager at Pacific Gas and Electric (PG&E).

In 1995, the PULSE ATM network, then located primarily in Texas and surrounding states, began accepting ATM payments over an automated telephone system, followed by the West-coast based Star network in 1996. Companies like TXU, Arizona Public Service, and PG&E were early adopters of the method.

The ATM bill payment offering was limited geographically due to the lack of participation by other networks. However, the recent mergers of Star, MAC, Cash Station, and Honor networks, and the PULSE acquisition of the TYME network, have opened up a good portion of the United States to the system. In addition, the NYCE (primarily in the Northeast) and Accel (upper Northwest) networks have begun to accept ATM payments for utility bills.

Utility companies or consumers can recognize savings in third-party processing charges of between $2 and $4 per transaction for a bill payment of $200. Jerry Portocalis, senior vice president of sales and marketing at BillMatrix Corporation, describes the other benefits: "Using ATM networks, the consumer's bank account is immediately debited for the amount of the bill, and the funds are transmitted to the utility. The consumer's account with the utility is updated in either real-time or by batch file that same day." BillMatrix Corporation provides automated payment solutions for utilities and recurring billers, including ATM payments over the phone and Internet.

As more consumers consider using electronic means of paying their bills, and utility companies search for better ways to obtain their payments, ATM cards are becoming a cost-effective and universal alternative to credit cards and electronic checks.

WINDS AND WAVES
New investments in the renewables industry are occurring in both the wind and wave electricity generation sectors. In Europe, wind power has gained such solid ground that some experts predict within 10 years, 10 percent of the energy will be wind-based. In Denmark, wind turbines already produce 16 percent. (A recent decision to stop government subsidization of the turbines there, however, may slow this progress.)

In North America, wind power is growing faster than any other fuel source. The Administration earmarked $9.5 million in tax incentives for renewable energy projects in its 2002 budget. Such support could boost windpower spending by 50 percent. At the same time, a 1.5-cent per kilowatt-hour (KWH) "production tax credit" expired at the end of 2001, leaving many wind producers concerned about their ability to compete with other sources.

While wind is enjoying a boom age, another, lesser-known renewable energy source is reaching North American shores—wave power, a technology that uses buoys, pumps, and conventional turbines to transform the energy of shifting water into electricity. Wave power is considered more reliable than other renewable forms of energy because wave and tidal movements can be predicted ahead of time.

In Washington State, AquaEnergy Group plans to build a 1-megawatt (MW) demonstration project, the first of its kind in the continental United States. The project will be positioned offshore as opposed to along the shoreline. According to the company, potential energy in offshore waves is three times the amount closer to the shore. The project, if expanded to 100 MW, could generate electricity at 4-5 cents/kWh, a price competitive with hydropower. "We are entering the market with the same cost characteristics that it has taken wind power 25 years to attain," said Alla Weinstein, CEO of AquaEnergy.

On Vancouver Island, British Columbia, BC Hydro has plans to develop 10 MW of wind power and four MW of wave power in near-shore and offshore projects. "We are unsure which of these will most easily be able to move up to a commercial scale. This approach gives us the ability to test the effectiveness of both locations," said spokesperson Brenda Goehring. The company expects the two wavepower projects to be functional by 2004.

WHAT'S NEXT? A BRAIN CHIP, OF COURSE
Scientists at Neural Signals, an Atlanta-based research and development company, are busy developing a technology that might just redefine our concept of the human brain. The scientists are making progress with a device known as the "brain communicator," designed to enable paralyzed patients gain more control over their environments. The brain communicator is the only brain implant approved for use in humans by the Food and Drug Administration.

The device is a hollow, glass cone the size of the tip of a ballpoint pen that is surgically positioned inside a person's brain. It relays electrical signals from brain cells to a transmitter inserted under the scalp, which then amplifies and sends the signals to a computer. The technology enables paralyzed individuals to control a virtual keyboard, which can then link to any number of devices, including a television or speech synthesizer.

So far, only one patient has had significant success using the chip. Paralyzed by a stroke, the patient has been using the device since March 1998 and can type using a virtual keyboard at a rate of three characters per minute. The company will test six new patients this year.

But founder Phillip Kennedy sees a broad range of applications, including a $31-billion global market, for such movement-restoration devices. Besides helping paralyzed individuals, the device may also help people suffering from carpal tunnel syndrome, for instance, by enabling them to control a mouse simply by moving their arms.

CUSTOMER ATTITUDES ON THE UPSWING
Compared to Edison Electric Institute's (EEI's) spring 2001 National Residential Customer Monitor, the survey's fall 2001 results show that all key ratings for energy companies are on the rebound, and are on par with or exceeding the results from fall 2000. (See Figure 2.)

"The impacts of California's energy crisis have leveled off in terms of consumer attitudes," says Wally Mealiea, manager of customer research and advertising at EEI. "But we continue to see influences in stated behavior as a result of the summer 2000 energy problems."

In the survey, consumers responded that they continue to reduce energy use to save money and, in some cases, help conserve. Eighty-two percent of Americans are taking steps to reduce energy use, compared to seventy-nine percent in spring 2001.

After September 11, most Americans no longer view the energy industry as a top concern, instead citing terrorism, national security, and safety. But according to the survey—which was conducted in November last year before Enron filed for bankruptcy—three out of four feel there are still energy-related concerns. Out of these, 51 percent think there are mounting energy problems.

While overall support for deregulation remains strong, rising three percentage points since spring 2001, the downside is that the American public remains unconvinced that deregulation will benefit them or improve the performance of their electric company.

"The perception that prices went up occurred after California's energy crisis," says Mealiea. "Those perceptions are reflected by fewer consumers believing deregulation will have a positive effect on the prices they pay, although in reality, higher prices have affected only certain regions of the country."

Consumer attitudes were positive, however, towards the fairness of electricity rates, rising five percentage points since fall 2000, with the greatest gain in the Midlands region (11 points higher).

"Enron could affect consumer opinions in the spring 2002 survey," admits Mealiea. "But those effects will be felt across all industries and big businesses, and most likely will not be directed solely towards the energy industry."

TREES AND UTILITIES
Although price is often thought to be the major reason why customers may cancel a service, a recent survey by the Handbook of Cost Reduction techniques indicates that 68 percent of customers cancel because of employee attitude. (See Figure 3.) That means that utility representatives (either employees or contractors) in direct contact with customers are the major determinants of customer retention.

Utility companies face a unique situation in the delivery of energy because, although vital to maintaining continuity of service, pruning or removing interfering trees is normally neither requested nor appreciated. In addition, utilities are often represented by contractors and rely on their expertise for both proper tree skills and customer relations.

According to Davey Tree Expert Company president Roger Funk, employee attitude is not something that can be mandated by management. In order for employees to develop the right attitude toward customers, management must develop the right attitude toward employees. Employees will believe management has a particular value when they see it in their behavior; and they will adopt the value themselves only when they perceive it as essential to the attainment of their personal goals and ambitions.

Funk predicts utilities will make more use of tools like focus groups as they concentrate on customer service.

National Grid, the eighth largest electric utility in the United States with roughly 3.3 million customers in the Northeast, recently held a roundtable discussion of more than 130 stakeholders from various backgrounds and interests to determine the most important issues facing the tree trimming programs of the company's distribution system. The group identified communication and public relations as critical to the success of the company's maintenance program in their community.

According to a survey by CN Utility Consulting, only 11 of 50 utility respondents currently schedule customer focus groups to evaluate their programs. That may change in the near future, however, as companies realize the importance of improving their customer service.

GETTING THE WORD OUT
Estimated advertising spending in 2001 by electric and gas utilities totaled about $219 million—a 20-percent increase over 2000 spending, which totaled $182 million. The top five big spenders were Touchstone Energy with $15 million; Exelon Corporation with $12.4 million; Dynegy with $8.3 million; Southern with $8.2 million; and Williams with $8.0 million.

© 2008 Edison Electric Institute