News & Trends

OUTSIDE OR INSIDE?
Should a company’s new CEO come from the outside, with fresh blood and new ideas? Or from inside the company itself, with consistency and intimate corporate background? It’s an age-old question.

According to a recent report by Booz Allen Hamilton, the insider has the advantage. While an outsider (someone hired directly as the CEO from outside the company) tends to produce better shareholder returns than an insider, outsider performance swings more widely.  The report found that insiders tend to be “average” when it comes to performance. (See Table 1.)

Over time, insider CEOs are more likely to succeed than those hired from outside. (The study excluded those who are hired from the outside and groomed over time to become CEO.) Outsiders do perform well early on, and companies that hire them enjoy a nearly 7-percentage point advantage (as measured by adjusted returns) over companies that don’t. But it doesn’t always last: After the honeymoon, outsiders under-perform inside hires by 5.5 percentage points. According to the study, this “second-half slump” confronts nearly all chief executives but is more pronounced for outsiders due to their tendency to shake things up at first but then to have difficulty sustaining growth.

One factor limiting outsiders is a lack of internal support networks. As a result, outsiders tend to have shorter tenures and are more likely to be fired than insiders. Overall, the report characterizes hiring an outsider as a “high-risk gamble” and encourages companies looking to hire from the outside to invest time and effort into helping the new CEO build support internally.

In its other findings, the report, covering 2,500 of the largest publicly traded companies, found industries at greatest risk for high CEO turnover rates to be utilities at 15.8 percent, telecommunications services at 15.6 percent, materials at 13.5 percent, and energy at 12.6 percent. Financial services companies had the lowest risk of turnover. The report attributed utilities’ high overall turnover rate to the merger and acquisition activity in the sector, whereas the industry’s forced turnover rate was low.

EMAIL: THE DNA OF OFFICE CRIMES
The number of companies being asked by regulatory bodies or courts to reveal employee emails is on the upswing. According to the American Management Association (AMA), 14 percent of 1,100 U.S. companies surveyed had been ordered to disclose emails, versus 9 percent two years ago. In June, the National Association of Securities and Dealers announced it would require its members to keep even instant messages communicated between employees and clients, treating them essentially the same as emails and paper communications.

But companies themselves are not necessarily catching on. Only 34 percent of respondents have a written policy for retaining and deleting employee email, a statistic unchanged from two years ago. How expensive can it be not to implement an email policy? In 2002, eight brokerage firms were fined $8 million for not keeping or producing email according to the Securities and Exchange Commission’s guidelines.

More than half the companies surveyed monitor email, and 22 percent had fired an employee for breaking company email policy. But only 19 percent of companies use technology to monitor internal employee email, compared with 90 percent of them monitoring incoming and outgoing email.

“Management’s failure to check internal email is a potentially costly oversight,” said Nancy Flynn, executive director of the ePolicy Institute. “Off-the-cuff, casual email conversations among employees are exactly the type of messages that tend to trigger lawsuits, arm prosecutors with damaging evidence, and provide the media with embarrassing real-life disaster stories.”

Flynn’s book, Email Rules: A Business Guide to Managing Policies, Security, and Legal Issues for Email and Digital Communication(AMACOM Books, 2003) has 37 rules that companies can follow to avoid incurring a multimillion-dollar “e-disaster.” One disaster she recounts is that of a CEO emailing managers about his dissatisfaction with employees’ performance. In the harshest terms, the CEO demanded that his managers not tolerate employees’ leaving after an eight-hour workday. His managers promptly dispatched the email to a Yahoo! site where it was viewed by employees and shareholders. The result of this faux pas was a drop in the company’s stock price from $44 to $34 a share in just three days.

Among the maxims Flynn says companies should follow:

• Strategic email management reduces liabilities.
• Email belongs to the employer, not the employee.
• Management must establish and enforce rules of online etiquette.
• Email retention should be simple for employees.
• E-discovery is inevitable. Be prepared.
  

MOVING MASSES
The utility industry’s “Dividend Tax Fairness” website played an influential role in the debate on the Tax Relief Act of 2003—the site was a conduit for more than 70,000 letters and emails from utility employees, retirees, and shareholders to members of Congress. By all accounts, the response from the website dwarfed the response from all other industry websites.

Now the industry is leading a new initiative to encourage support of the Clear Skies initiative. Among other outreach efforts, this one features a website, www.cleanerair4u.org/eei. People can visit the site to send letters to their representatives in Congress with a few clicks of the mouse.
Using zip-code matching technology, the website can send prewritten (or customized, if the person wants) letters directly to the person’s representatives. Shareholder-owned electric companies also can customize the site with their own logo—essentially privately branding the site—and use a tracking mechanism that enables them to see how many of their stakeholders are participating.

Business, minority, and other groups and coalitions can use the website as well.

The grassroots initiative is reaching out to state and local governments and organizations, such as the U.S. Conference of Mayors and the National Association of Counties, both of which have passed resolutions supporting multi-emissions efforts.

"We were able to be so successful with the dividend tax issue thanks to the hard work and dedication of our members," said Morry Markowitz, senior director of external affairs at Edison Electric Institute. "Technology helps us to do this cost-effectively and quickly—but the industry’s success still depends on the commitment of companies to getting their stakeholders actively engaged in the debate."

LNG EXPECTED TO BOOST GAS SUPPLIES
Increasing demand for natural gas and slowly declining natural gas production are causing analysts including Federal Reserve Bank chairman Alan Greenspan—to look to liquefied natural gas (LNG) imports as the answer to North America’s supply issues. At a hearing before the House Energy and Commerce Committee in June, Green-span stated that “our inability to increase imports [of  LNG] to close a modest gap between North American demand and production…is largely responsible for the marked rise in natural gas prices over the past year.”

en if drilling activity increases, a permanent decline in production is expected to set in later in the decade, according to Cambridge Energy Research Associates (CERA)—and higher prices will be the consequence. The Energy Information Administration forecasts demand for gas to grow nearly 2 percent a year through 2010, while supplies will increase only by 1.3 percent. U.S. gas consumption could hit 30 trillion cubic feet by 2015, a 35-percent increase from 2002, according to RJ Rudden. The LNG industry right now has about 830 billion cubic feet (BCF) of capacity each year, according to CERA.

If all LNG projects currently planned were completed, billions more would be available. (See Table 2.) “LNG could supply as much as 11 percent of the total market demand by 2010,” according to Bob Ineson, a CERA director. It currently provides 1-2 percent.

But billions of dollars in investment are needed to build more liquefaction facilities, tankers, and regasification terminals before LNG can alter the outlook for natural gas supplies. This will take five years at least, according to CERA. The Fed agrees there are hurdles, but indicates they can be overcome: “As the technology of LNG liquefaction and shipping has improved, and as safety considerations have lessened, a major expansion of U.S. [LNG] import capability appears to be underway.”

FPL AND CHUBU ELECTRIC WIN EDISON AWARD
At Edison Electric Institute’s annual convention last June, EEI presented FPL  Group with the electric industry’s highest honor, the Edison Award, in recognition of its success in executing a strategy to become a clean energy provider through the use of clean and renewable fuels.

“FPL Group’s winning strategy clearly demonstrates that environmental excellence and outstanding financial performance can go hand in hand,” said EEI President Thomas R. Kuhn. Of FPL Group’s total capacity—through its shareholder-owned utility, Florida Power & Light Company and its independent power producer subsidiary, FPL Energy—46 percent is powered by natural gas. Nuclear energy comprises another 16 percent. FPL Group is also the world’s leader in wind power, which accounts for 24 percent of its portfolio and 7 percent of total company capacity.

The international Edison Award was presented to Chubu Electric Power Company in recognition of its creation of a “transient stability control system,” an online program to help maintain electric system reliability. Designed expressly to maximize system reliability, the program is able to detect problems and faults in the power grid before they lead to broader network outages; then the system determines and implements any necessary changes in power flows to ensure reliability.

Chubu’s online transient stability control system is the first and, to date, the only such system in the world that is currently online and whose successful operation is clearly measurable. The result is enhanced system reliability and more efficient use of existing transmission system capacity, while also minimizing the likelihood of widespread power interruptions. The system also enhances the efficiency of existing generation reserves by increasing total transfer capability, thereby reducing costs for customers.

At the convention, Allen Franklin, chairman, president, and CEO of Southern Company, was elected EEI’s chairman.

“I look forward to the challenge of helping lead our industry at a very critical time,” Franklin said. “Right now we are looking at comprehensive national energy legislation, a landmark FERC rulemaking on wholesale power markets, and major new environmental regulations, just to name a few. There has never been a greater need for the industry to coalesce under the EEI umbrella on the public policy agenda.”

EEI also elected as first vice chairman Wayne H. Brunetti (chairman, president, and CEO of Xcel Energy) and as second vice chairman Michael G. Morris (chairman, president, and CEO of Northeast Utilities).

EMPLOYEES PULL BACK ON RETIREMENT SAVINGS
Employees reacted to their retirement savings accounts with some disdain in 2002, keeping their contributions low and getting less frequently involved in reallocating their assets.  In its most recent research, Hewitt Associates, a human resources out-sourcing and consulting firm, reveals that a weak economy and stock market volatility continued to challenge employees’ involvement with their 401(k)s.

The study shows declines in participation, transfer activity, equity allocation, and for some employee populations, contribution rates. “It’s likely that employees’ willingness to participate was affected by the prolonged market decline, the weak economy, and the negative perception of 401(k) plans resulting from high-profile bankruptcies,” said Lori Lucas, a defined contribution consultant at Hewitt.

The study showed a 2.8-percent-decline in participation, with average plan participation at 68.2 percent. The decline was most evident among younger and low-tenure employees. The average contribution rate was 7.8 percent of employees’ salaries, consistent with 2001 results. Average total plan balance at year-end was approximately $49,000—a decrease of 2.5 percent. Furthermore, in 2002, only 16.8 percent—or 1 in 6—of active 401(k) participants made any form of trade, another decline from 2001, when approximately 1 in 5 participants made at least one trade.

“People may believe they are being long-term investors by taking such a laissez-faire attitude toward their portfolios,” said Lucas. “What they don’t realize is that by not rebalancing their account at least annually to make sure they are in line with their asset allocation target, they are letting the market decide for them. As a result, they have continued to allow market movements to shift their asset allocation to a more conservative position.”

Consistent with 2001, Hewitt’s research shows that diversification was not a top priority for many participants in 2002. While the average defined contribution plan offered 13 funds, participants held an average of 3.6 funds. The average participant held company stock in 42 percent of their balances. More than one quarter (28 percent) of employees held 50 percent or more of their 401(k) plan balances in company stock.

Other key findings include:

• More than one-quarter (27 percent) of active participants have a total plan balance of less than $5,000.
  
• When lifestyle funds are available in 401(k) plans, more than one-third of participants use them; however, few participants use them in the way they are intended. The average number of funds held by participants with lifestyle funds is 4.8.
  
• The average participant is age 43, has 10 years of tenure, and earns an annual salary of approximately $57,000. In contrast, the average
  employee who does not participate is younger (38), has a lower annual salary ($34,000) and a lower tenure with the company (4.5 years.)

The study was based on examination of the savings and investment behavior of more than 2 million eligible employees and nearly 1.5 million participating employees in 2002. Copies of the complete report, “How Well Are Employees Saving and Investing in 401(k) Plans, 2002 Hewitt Universe Benchmarks,” can be purchased at www.hewitt.com. 

THE VALUE OF VIEWSHED
A new study could change people’s minds about building wind farms in their neighborhoods or backyards, or about buying a piece of property that overlooks one. The study, by the Renewable Energy Policy Project (REPP), analyzed 25,000 property transactions with an eye to determining whether the visibility or presence of wind turbines helped or hindered them when compared with properties in similar communities without a view.

"The first systematic study on the issue of property values and wind power development yields the good news for landowners that wind projects do not harm viewshed property values," said American Wind Energy Association executive director Randall Swisher. The study also found that in some areas, property values actually increased, though REPP admits it could have been for other reasons. (See Table 3.)

TABLE 3 WIND POWER DOES NOT HARM PROPERTY VALUES
Monthly average price change ($)
Project (by county)	Property with windfarm view	Comparable property without view
Riverside, Ca	1719.65	814.17
Madison, NY (Madison)	576.22	245.51
Carson, TX	620.47	296.54
Kewaunee, WI	4,334.48	118.18
Searsburg, VT	536.41	330.81
Madison, NY (Fenner)	368.47	245.51
Somerset, PA	190.07	100.06
Buena Vista, IA	401.86	341.87
Kern, CA	492.38	684.16
Fayette, PA	115.96	479.20
Source: Renewable Energy Policy Project

REPP decided to do the study after numerous claims by opponents to wind power development that wind farms hurt property values. The study concludes that such claims are unsubstantiated and that in many cases the opposite is actually true. The full study can be downloaded at www.repp.org.

REGIONAL FUEL DIVERSITY

The map shows the diverse mixes of fuels used to generate electricity
in different regions of the United States. Several factors influence a utility's
choice of fuel, including price, supply, and potential environmental impacts.
The map os published in Edison Electric Institute's 2003 Financial Review,
which is available to the public and can be downloaded at www.eei.org/financial-review.

 

BITING OFF A BIGGER CHUNK 
Nonutilities are taking up a bigger piece of the industry pie, according to Edison Electric Institute’s (EEI’s) 2003 Statistical Yearbook. The Energy Information Administration also confirmed that independent power producers are increasing their market share and becoming more efficient, according to EIA’s Generation and Consumption of Fuels for Electricity Generation. For example, utility generating capacity decreased in 2002 from 2001—to less than 602,000 megawatts (MW) from approximately 618,000 MW. In contrast, last year, nonutility generating sources (NUGs) increased their capacity to almost 380,000 MW from less than 295,000 MW in 2001. In the past few years, an increasing amount of generating assets have been transferred or acquired by unregulated subsidiaries of electric utility holding companies. During 2001 and 2002, over 55,000 MW of utility generating capacity was sold and reclassified as “nonutility” capacity. In 1991, generation by NUGs comprised less than 9 percent of total U.S. electric generation.

For 2002, their share increased to more than 33 percent.

A non-utility generator is defined as an entity that owns electric generating capacity but is not an electric utility. Historically, a NUG was an industrial or commercial entity that supplied power for its own use by purchasing and installing a generator onsite. Now, NUGs include cogenerators, qualifying facilities, exempt wholesale generators, and other nonutility generators (including independent power producers).

Other findings in the Yearbook:

• In 2001, electric utilities’ total electricity generation was down 12.6 percent from 2000.
  
• The share of total (both utility and nonutility) electricity generated from coal was 50.1 percent in 2002, with nuclear accounting for 20.3 percent and natural gas for 18.1 percent.
  
• Total sales to ultimate customers in 2002 were 3,471,159 GW (preliminary estimate). Total revenues from sales to ultimate customers in 2002 increased 4.8 percent over the previous year to $250.1 billion.

The Statistical Yearbook covers all areas of the electric utility industry, including cooperatively-owned, government-owned, and shareholder-owned utilities. Improvements to this year’s edition include forecast data for total electric industry generating capability, source, and disposition; average revenue per kilowatt-hour; price by service category for 2005 through 2025; and transmission line data for rural electric cooperatives. The yearbook is free to EEI members and can be ordered or downloaded by members and non-members at www.eei.org/products-statyearbook.

M&A , ON A SMALLER SCALE
A changing regulatory landscape, erratic financial markets, and dysfunctional wholesale generation markets are among the top challenges electric utility executives say their companies face, according to a recent Accenture survey. The survey—which interviewed 25 U.S. and 8 European executives, from the chief executive officer to the presidential level—was designed to determine the industry’s outlook for merger and acquisition activity under current market conditions.

Most survey respondents forecast that M&A activity will increase in the next two years and then level out and stabilize within five years. Two-thirds of U.S. executives interviewed felt they would be involved in some merger activity during that timeframe. (See Table 1.) Europeans, on the other hand, are backing out of U.S. markets because of regulatory and market uncertainties, according to the survey.

Utility executives feel that most of the accelerated consolidation will occur on the nonregulated side of the industry, but that the days of large acquisitions are mostly over. Instead, more than half feel their companies would do best to target smaller, more strategic assets, according to the survey. Most executives also favor the vertically integrated model for maximizing returns in the long run, and that in the “ideal,” flexible model, some assets would be regulated and others unregulated. (See Table 2.)

For the mid-term, executives feel that focusing on the generation and

TABLE 2 VERTICAL INTEGRATION IS KEY
Number of respondnets
Importance of V.I.	U.S.	Europe
Extremely important	5	3
Somewhat important	9	4
Not as important	9	—
Not important at all	2	—

distribution segments of the market will bring the highest returns. They think the combinations with the greatest potential are

© 2008 Edison Electric Institute