EELECTRICLECTRIC PERSPECTIVES JANUARY/FEBRUARY 2013

NextEra Energy’s Lew Hay III Meeting the Cyber Challenge The Outlook for 2013 Customer Engagement How resilient is your enterprise?

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©2013 Telogis. All rights reserved. EELECTRICLECTRIC PPERSPECTIVESERSPECTIVES THE MAGAZINE FOR MANAGEMENT IN AMERICA’S SHAREHOLDER-OWNED Features ELECTRIC COMPANIES JANUARY / FEBRUARY 2013 • VOLUME 38, NUMBER 1

22 The Outlook for 2013 The electric utility industry faces another year of complex challenges.

BY DENNIS WAMSTED

22 30 Customer Engagement What will it take to change customers into active energy managers— and keep them as customers at the same time?

AN ELECTRIC PERSPECTIVES PANEL 30

40 Meeting the Cyber Threat Electric utilities have stepped up their game as they face a formidable foe.

40

The electric utility industry is not in the law enforcement or intelligence gathering business, and“ the government has limited experience For more operating the electric grid. PAGE 40 content, visit eei.org/EP ” ■ Read the digital interactive edition ■ Download apps for iPhone/iPad and Android phone/tablet ELECTRIC EELECTRICLECTRIC PERSPECTIVES Jane S. Nunnelee PPERSPECTIVESERSPECTIVES Editor & Publisher, 1981-2001 THE MAGAZINE FOR MANAGEMENT IN AMERICA’S SHAREHOLDER-OWNED STAFF ELECTRIC COMPANIES Eric R. Blume Editor & Publisher [email protected] Bruce Cannon Associate Editor [email protected] William Bickel Art Director/Production Manager [email protected] LaVonne M. Rose Departments Subscription Coordinator JANUARY / FEBRUARY 2013 • VOLUME 38, NUMBER 1 [email protected]

EDITORIAL BOARD Edward Comer 6 20 Vice President, General Counsel, and Corporate Secretary President’s Message Power Poll Richard McMahon Vice President, Finance The power of unity. The pursuit of higher learning. and Energy Supply Jim Owen Executive Director, Member Relations and Meeting Services David Owens 8 21 Executive Vice President, Powering Change The Energy Business Operations Ryan Rudominer The year of electrifi cation. Economist Executive Director, Communications Headwinds for Quin Shea Vice President, Environment power sales. Stephanie Voyda Senior Director, Advocacy 10 and Strategic Communications IEE at Work Brian Wolff Senior Vice President, External Affairs Innovate at the speed of value. 48 CIRCULATION Diversity LaVonne M. Rose 202/508-5584 NiSource’s [email protected] 12 “Building the Subscriptions: $100 per year. News & Trends NextGen: Women Superstorm Sandy in Leadership” ADVERTISING SALES stats…nuclear William Mambert program. Electric Perspectives thumbs up…smart 600 Cameron Street Alexandria, VA 22314 grid uncertainty…California car- 703/751-9864 bon…rising natural gas prices… [email protected] retention strategies for top perform- ers…green is the new purple…offi ce 51 moves…and more. Financial Mailing label corrections: send old label and correct title and address to A seesaw pattern for utility stocks. Subscription Coordinator, Electric Perspectives at EEI. Allow 12 weeks. Postmaster: send address changes 19 to Subscription Coordinator, Electric Perspectives, EEI, 701 Pennsylvania Building 56 Avenue, N.W., Washington, DC 20004-2696. Periodicals postage paid at Washington, DC, the Future Another Perspective and additional mailing office. Brunswick Get integration right. Electric Perspectives (ISSN 0364-474X) is published bimonthly by County Power Edison Electric Institute, Inc. Station. 701 Pennsylvania Avenue, N.W., Washington, DC 20004-2696. www.eei.org The title is a registered trademark of Edison Electric Institute. Statements of fact and opinion are the responsibility of the author(s) alone and do not imply an opinion on the part of EEI, its employees, or members. Each advertiser and advertising agency assumes full liability for all contents of advertisements printed. Copyright © 2013 by Edison Electric Institute, Inc. EEI Publication No. 43-13-01. On the cover: Lew Hay, executive chairman of NextEra Energy and chairman of Edison Electric Institute, highlights the cyber threat and what the shareholder-owned electric utility industry is doing to meet the challenge. (Photo courtesy: NextEra Energy) wwww.eei.orgww.eei.org/eepp Utilities and Wind Power at WINDPOWER 2013 Wind power’s long-term price certainty, reliability, and accessibility confirm that it’s a great deal for your utility and your customers. With proven technology and numerous benefits, wind energy can, and should, be a part of your generation mix. At WINDPOWER 2013 in Chicago, you can meet developers and suppliers that are bringing you this low-cost generating option, and learn more about:

declining costs of wind energy and state-of-the-art wind energy long-term price stability forecasting techniques wind integration and operational challenges transmission infrastructure development integrated resource planning integrating wind project ownership into utility operations and maintenance activities Solutions for Success

Visit our website for more information and to register for this event. www.WINDPOWERexpo.org president’s message THE POWER OF UNITY

ver the years, electric utilities, with their unique territories, geography, fuel portfolios, state regulations, and customers, have achieved remarkable things together. As I look back on 2012, I am proud of the way our companies tackled O challenges and demonstrated the Power by Association that EEI represents. Our work together on Dodd-Frank fi nancial reform measures, for example, resulted in signifi cant improvements in fi nal rules issued by the Commodity Futures Trading Commis- sion—and a reduction of burdens on utilities. In 2013, industry coordination again will be critical as the implementation process begins and advocacy continues on key rules. Last year, industry executives worked with the Departments of Energy and Homeland Se- curity to help clarify the respective responsibilities of the private sector and government regarding cyber risks and activities. Congress and the President surely will focus on cyber security in 2013, and our industry will continue to advocate for policy changes that leverage private sec- tor input and focus government authority on responding to imminent threats. The Environmental Protection Agency will fi nalize key utility regula- tions (including its rule regarding cooling water intake structures) and likely propose new ones. For example, EPA’s anticipated proposal for new source performance standards under the Clean Air Act could serve to regulate greenhouse gas emissions from existing sources. As always, such environmental issues require the industry’s concerted response. As the magazine goes to press, I don’t know whether Congress and the President have avoided the fi scal cliff, nor do I know the fate of dividend tax rates. I do know, however, that our In 2012, our industry responded to industry has been united in making our case: low dividend tax rates that are in line with capital so many challenges with strength. gains tax rates matter. The Defend My Dividend But utilities do that naturally, don’t they? campaign has generated hundreds of thousands of messages to Congress, and the industry’s efforts have been dynamic—CEO and CFO fl y- ins to Washington, grassroots mobilization, media and social media outreach and more. As Congress turns to tax reform in 2013, we will need a similar level of engagement.

What We Do In 2012, our industry responded to so many challenges with strength. But utilities do that naturally, don’t they? In October, when Superstorm Sandy unleashed her fury on North America, our industry’s mutual assistance network brought together local utility crews, out-of-state crews, and contractors to restore power. Utility employees from unaffected areas headed north and east; some loaded up trucks and supplies on military aircraft and fl ew across the country; and all brought heroic work and relief to hard-hit utilities and their customers. The numbers are staggering—about 10 million customers without power at the peak and more than 67,000 utility workers working around the clock to restore service. The coordination of workers on the ground; the unprecedented partnership among utilities, the Administration, and state and local emergency resources; and the dedication of executives with whom the EEI team spoke every day, at all hours, were mighty things to behold. Perhaps it is overly humble to say, “Well, that’s what we do,” but in fact, that is what we do. That is the power of the unity and purpose the industry will continue to bring to the issues of 2013.

Thomas R. Kuhn President, Edison Electric Institute

6 ELECTRIC PERSPECTIVES THANK YOU

To The Hard-Working Men And Women Of the Electric Utility Industry.

The damage done by Superstorm Sandy was unprecedented in its size and scope. Approximately 10 million customers lost power across more than 20 states as a result of the epic storm and Nor’easter Athena that followed closely after.

An army of 67,000 utility workers—from across the country and Canada—worked around the clock to restore electricity as safely and quickly as possible, often under very difficult conditions. www.ibew.org www.eei.org Safety and electric reliability are paramount. And no matter what Mother Nature throws at us, we face the challenge with courage and commitment. © 2012 by the Edison Electric Institute. All rights reserved. powering change THE YEAR OF ELECTRIFICATION

his is the year we harness the energy of people to generate excitement about elec- tricity as a transportation fuel. Transportation is the only industrial sector that has not fully embraced electric- T ity as a fuel—yet. For residential customers, plug-in electric vehicles (PEVs) are the most prominent applications; to commercial and industrial (C&I) customers, electric utili- ties also promote applications that move people and goods, too, via commercial delivery fl eets, buses and baggage carts at airports, forklifts in warehouses and at seaports, mining applications, and so on. It is plain to see that opportunities for electrifi cation are multiplying in the transportation market—with unlimited potential for utilities. Promoting this kind of electrifi cation to the public usually focuses on selling the benefi ts—the effi ciencies, the environmental friendli- ness, or any number of benefi ts of electricity-based transportation. EEI is taking a unique communications approach: using the voice of the customer, both within the PEV enthusiasts’ communities and among C&I customers. This is truly something new— We want to create opportunities for cus- letting our customers tell tomers to speak to other customers and tell their own electrifi cation stories. The aim is to engender broad the electrifi cation story for us. awareness, acceptance, and adoption of electricity as a fuel. This isn’t about promoting electricity, at least not the way we have in the past. This is truly something new—letting our customers tell the electrifi cation story for us.

The Electric Generation One component will be The Electric Generation campaign, an effort that begins with using social media channels—it is an organic, true-voice-of-the-customer approach. We’re actually creating a “live” brand, switching out photos of real enthusiasts in the logo. Out of this will come a steady drumbeat of compelling stories in the media and com- pelling content for distribution. PEV-owning customers will give voice to their excitement about PEVs and rally that group to share stories with others. As we promote electricity for transportation, C&I customers will trade case studies and “how-to” stories about how electricity helps their businesses succeed (through environ- mental benefi ts, economic development, productivity, effi ciencies, etc.). In so doing, they will help dispel myths about converting operations to electricity. We also will produce earned media in business-to-business and regional outlets and create video news seg- ments and public television programming to promote the C&I electrifi cation story. Getting customers to talk to customers could be infi nitely valuable. It will help utilities expand into a new market, get closer to those customers, grow a grassroots network, and foster third-party partnerships. For many companies, this could lead to new market op- portunities and improved operations. Moreover, this model could address other areas of electrifi cation for C&I customers, as new, robust electric technologies come down the pike. We want to advance the growth of this burgeoning customer class. Using customers’ voices to tell their story, showcasing their successes, and creating a movement of enthusi- asts willing to expand the conversation about electrifi cation’s benefi ts will help us achieve that goal. ◆

Brian L. Wolff Senior Vice President, External Affairs, Edison Electric Institute

8 ELECTRIC PERSPECTIVES Transmission lines to tightropes— POWER Engineers’ Peter Catchpole is no stranger to the unusual.

In Peter’s 20 years with POWER, he has blazed trails providing creative engineering solutions on traditional transmission projects while also handling some of the most challenging and interesting assignments in the world. CONTACT PETER Tacoma Narrows crossing (6240 ft) to discuss your everyday or not-so-everyday transmission needs.

Cable design and anchoring » 208-788-0497 for Nick Wallenda’s high-wire walk over Niagara Falls » [email protected] GET THE STORIES Scan the code to get video links and articles that cover Peter’s unusual projects or visit Kildala Pass, British Columbia – transmission line catenary powereng.com/peterpioneer. iee at work Where innovation and efÀ cient technologies meet.

importance of electricity in every aspect of our lives. The Innovate at the average American home now has 25 electronic products, for example, nearly all of which must be plugged in or recharged. Speed of Value “Today, customers expect Pepco to be on the front end of By Lisa V. Wood, executive director of IEE innovation,” said Joseph M. Rigby, chairman, president, and CEO of Pepco Holdings, Inc. “In moments of truth when the any opportunities to drive effi ciency in utility op- real tests—Superstorm Sandy, for example—show up, the erations result in lower prices and better service. smart grid has been delivering.” By having connected me- At the same time, new smart technologies are ter and feeder outage informa- blurring the distinction between customer and tion to restoration efforts, Rigby M estimated that around 5,700 utility operations—and energy effi ciency is becoming more In moments of tightly related to other utility functions. truth when real separate truck trips (rolls) were “Informing the Future” (an event launching the new IEE tests—Super- avoided after Sandy—and the re- on December 4) reminded everyone that the customer is the storm Sandy, for gion’s power was restored a half- most critical stakeholder in our energy future. But electric example—show day earlier than expected. utilities, in collaboration with regulators and technology up, the smart companies, must design, build, and support the innovations grid has been Our Energy Journey that deliver effi ciency benefi ts on both sides of the meter. delivering. “The investment in innovation IEE’s new mission is to advance the adoption of such technol- is the beginning of the journey,” ogy to transform the power grid. said Delaney, “and the next step is to demonstrate the value Historically, most electric utility innovation has been on from those investments to customers.” the supply side and more or less invisible to customers, noted Robert Rowe, president and CEO of NorthWestern Energy, agreed. “Deployment ‘at the speed of value’ will guide technology investments in the 21st-century power grid and the regula- tory approvals actions required to support those investments,” he said. “Technology deployment should be a complement to ongoing investment

Talking innovation, ef- fi ciency, and electricity. Left to right: Peter Del- aney (OGE Energy), Joseph Rigby (Pepco Holdings), Thierry Godart (Siemens), Trevor Lauer (DTE), Lisa Wood (IEE), Robert Rowe (NorthWestern Energy).

Peter B. Delaney, chairman, president, and CEO of OGE Energy in the underlying network. Without continuing to pay at- Corporation. “With today’s smart meter technology, that is tention to the basic physical infrastructure, we won’t get full no longer the case. On the customer side, the ‘smart’ in smart value out of technology investments. As existing network ele- grid refers to smart consumers getting relevant and timely ments reach the end of their useful lives, and as knowledge information with which to make choices. Today, electric utili- develops about technology functionality and about what ties can provide that information reliably and affordably.” customers do want and will use—and what they don’t want and won’t use—the industry is positioned to deliver value to Driving Forces our customers.” And as we innovate at the speed of value Recent storm-related outages and ensuing customer frustra- and deliver it, technology companies, regulators, and policy tions provide a sort of testimonial-in-reverse to the growing makers will be our key collaborators. ◆

10 ELECTRIC PERSPECTIVES The 250 MW Cedar Point Energy Project BetterBuilt WIND | SOLAR | TRANSMISSION

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POWERING CHANGE POWERING SOLUTIONS POWERING TOMORROW news+trends

Clearing the Way for CALIFORNIA CARBON

Sandy Responders new law that implements a carbon capture and n the White House Situation Room on October 30, President Obama par- trade system in California ticipated in a conference call with electric utility executives, focusing on takes effect this January. the mutual assistance network, utility coordination with the Department A The law seeks to reduce carbon di- Iof Energy and the Federal Emergency Management Administration, and oxide levels to 1990 levels by 2020. what executive actions the industry needed to speed power restoration after Utilities and large industrial facilities Superstorm Sandy. John Brennan, assistant to the President for homeland se- must comply curity and counterterrorism, and Alyssa Mastromonaco, deputy chief of staff “A pretty this year; and for operations, listen at right. big deal for in 2015, distrib- utors of natural companies gas and liquid in California fuels (such as and those gasoline and that sell into diesel) are brought into the California the program. market.” By that time, the law will af- fect approximately 85 percent of the state’s economy. “It’s a pretty big deal for compa- nies in California and those that sell into the California market,” said Eric Holdsworth, director of climate pro- grams at Edison Electric Institute. “They all stand to be affected.” Over the past few months, EEII hash been updating its memberss about the llawaw and its ramifi cationcations.ns. Theree is uncer-uncer- tainty ass to howw the

Pete Souza law will affectct electricityity Superstorm Sandy Stats pricing: “At this

time, wee don’t iStockphoto 20+ 945.5 know whwhatat tthehe cost states affected millibars (in Atlantic City, NJ), impact may be on our customers,” (Department of Energy) the lowest barometric pressure said Pacifi c Gas & Electric spokesper- ever measured in the United States son Lynsey Paulo. north of Cape Hatteras, NC Any entity that emits more than

10 million (U.S. Weather Service) (approximately) electricity 25,000 metric tons of carbon diox- customers out at peak ide-equivalent per year must comply $25 billion with the law. Entities obtain allow- in lost business ances be receiving an allotment,

80 (IHS Global Research) purchasing them in an auction, or utility companies affected or through secondary markets, which sending assistance $50+billion includes receiving offset credits from in damage projects designed to remove carbon 67,000 (various sources) from the atmosphere (such as tree- utility workers and contractors planting). The offset project oppor- restoring power Source: EEI (unless otherwise noted) tunities are fueling a new industry in

1212 ELECTRICELECTRICELEC TRIC PERSPECTIVESPEPERSPECTIVESRRSRSPECTCTT IVEIVV S California as companies dedicated to Only 23 percent of the carbon are interested in seeing whether planting trees or capturing methane reductions in California actually are and how the program will work. gases seek their piece of the pie. achieved through the cap-and-trade Tim Profeta, director of the Nicholas There are 95.8 million total al- system, with most reductions com- Institute for Environmental Policy lowances for electrical distribution ing from direct measures in other Solutions at Duke University, worked utilities in 2013, declining each year sectors and such efforts as improved with the California PUC to determine to 83.1 million allowances in 2020. energy effi ciency and a low-carbon the carbon fee and helped the state Theoretically, the decline in the fuel standard. to design an auction system, which supply of allowances will raise their EEI’s Holdsworth said that utilities, is meant to contain price volatility price tag and give companies incen- which have used similar markets to and bolster market confi dence. “It tive to reduce their emissions. reduce sulfur dioxide, for example, will be a test as to whether the Cali- fornia system can be a model,” he said. MOTOR TREND’S FOR SOME, SMART 2013 CAR OF THE YEAR GRID UNCERTAINTY or the À rst time in Motor Trend’s “Car of the Year” 64-year his- survey by the Smart Grid tory, a car with a noncombustion engine took the prize: The Consumer Collaborative Tesla Model S, an electric vehicle that uses an AC-induction À nds that low-income cus- Fengine (the original patent for which was awarded in 1888 to tomers are less favorably the car’s namesake, Nikolai Tesla). A disposed (42 percent) toward the Among other things, Motor Trend noted the Tesla’s Editor-in- smart grid and smart meters than ■ aerodynamic design (and the interior features a 17- chief Edward higher-income customers (54 per- inch touchscreen); Yoh drove the cent). At the same time, 74 percent ■ center of gravity similar to a racecar (thanks to a of low-income customers value the Á oor-mounted battery pack), Tesla S 285 potential beneÀ ts of the smart grid, ■ 3.9-second zero-to-sixty acceleration; and miles from with added reliability at the top of the ■ great fuel economy (between 74.5 and 118.0 miles Las Vegas to list: 28 percent would pay $3-$4 more per gallon equivalent, depending on road conditions, Los Angeles a month for it. speed, and use of the air-conditioning). On average, the survey found that Editor-in-chief Edward Yoh drove the Tesla S 285 on a single low-income consumers tend to be miles from Las Vegas to Los Angeles on a single charge. less familiar with the smart grid than charge. others—about four in ten are aware The Tesla Model S is on the higher end of the dollar of the technology. (See also “Power scale, but competes with the Mercedes-Benz E-Class, BMW 5 Series, Poll,” page 20.) As and Audi A6. The low-end battery pack model is $58,570, and the high- utilities think about end is $106,900 (both before a federal their communica- tax credit of $7,500). tions strategy, they should consider that many low-income utility customers prefer direct mail (46 percent) or a phone call (24 percent).

A large portion (42 percent) doesn’t Fotolia use the internet at all—in the general population, that portion is just 16 per- cent. Moreover, the majority of low- income Spanish-speaking customers report that they get their news and information from Spanish-language television, underscoring the need for utilities to communicate in Spanish to

Courtesy: Motor Trend reach those customers.

JANUARY / FEBRUARY 2013 13 indicate that they are less Engage employees with talent market, according to Don’t inclined to move because, meaningful work (or watch the survey, and Millenni- in the last 12 months, they them walk out the door). als climb the career ladder Go, have changed jobs (9 This is more important than the quickest. Workers in percent), were promoted other retention initiatives. A the energy and resources Please (22 percent), or have plurality (42 percent) of re- industry—and utilities fall spondents who are looking into that category—express for a new job believe their the most satisfaction with Stay current one does not make their jobs, with 78 percent good use of their skills. agreeing that “overall, I am igh unemploy- Focus on “turnover red satisÀ ed at work.” ment persists, zones.” Employees at high but the “resume risk of departure are those The Top Five Htsunami” has with fewer than two years …reasons people become a smaller “resume on the job and those of the want new jobs are riptide,” according to De- so-called millennial genera- primarily nonÀ nancial loitte’s global survey with tion (aged 31 and younger, ■ lack of career progress; Forbes Insights, “Talent aka Generation Y). ■ new opportunities in the market; 2020,” published last year. Leadership matters. ■ dissatisfaction with manager or Sixty-two percent who supervisor; An organization’s plan to stay with their cur- ■ Courtesy: Alliant Energy lack of challenge in the job; and top performers also rent employers report high ■ lack of compensation increases. taken new positions (15 levels of trust in corporate …retention incentives are those with the percent) with their current leadership. (as ranked by employees) most employment employers. Surprisingly, 31 Along with trust in lead- are primarily À nancial opportunities. percent say they are not ership, a company’s ability ■ additional bonuses or fi nancial satisÀ ed with their jobs. to communicate and to incentives; A good 80 percent of em- But an organization’s top execute on its strategy also ■ promotion/job advancement; ployees planned to stay performers also are those can mean the difference ■ additional compensation; with their organizations in with the most employment between a committed em- ■ fl exible work arrangements; and 2012, a signiÀ cant increase opportunities. The survey ployee and one who is on ■ support and recognition from from 2011, when nearly identiÀ ed three basic prac- the job hunt. supervisors or managers. 65 percent were planning tices for retention and talent Generation X employees Source: Deloitte/Forbes Insights “Talent to leave. Forty-six percent management. are the most active in the 2020” survey of employees.

FIGURE 1 NUCLEAR ENERGY CONFIDENCE IN NUCLEAR SAFETY THUMBS UP Somewhat or Somewhat or Statement strongly agree strongly disagree Don’t know n a recent survey for the Nuclear Nuclear powerplants operating in Energy Institute (NEI) by Bisconti the United States are safe and secure. 7676 1919 5 Research, 76 percent of the re- spondents (U.S. adults) agreed As we have learned from experience and I as technology has improved, U.S. nuclear that U.S. nuclear energy facilities are powerplants have been made safer. 7878 1616 6 “safesafe and secure.” Eighty-one pepercentrcr said they favor the re- Nuclear powerplants in this area are nenewalw of operating licenses for built to withstand the most extreme natural events that may occur here. nuclearn facilities that meet 6868 2323 1010 federal safety standards. We should learn the lessons from the “Confi dence in the safe Japanese accident and continue to develop operationo of the plants and advanced nuclear energy plants to meet America’s growing electricity demand. recognitionrer of their benefi ts 8080 1717 4 iiss the linchpin to public sup- Source: Nuclear Energy Institute 123rf port,”port, Ann Bisconti, president of Participants responded to the statements with either strongly agree, somewhat agree, somewhat disagree, strongly disagree or don’t know. Percentages may not add up to 100 due to independent rounding. BiscontiBisconti i Research,R said. (See Figure 1.)

14 ELECTRIC PERSPECTIVES On the Horizon INSIDE SAN ONOFRE, VIRTUALLY

nline visitors to SONGScommunity.com now can take a virtual tour of the San Onofre Nuclear Gen- erating Station, allowing them to explore inside the 2,200-megawatt nuclear power plant located near San JANUARY O Clemente, CA. Benjamin Franklin’s 307th birth- Safety is the main focus day (1706). Franklin’s study of elec- during the online experi- 17 tricity led to ence; and key features, in- his use of a key and cluding containment domes, a kite during a thun- the seawall, and emergency derstorm to prove diesel generators, are ex- that lightning bolts plained through video and actually are powerful audio, in either English or AP Images electrical currents. Spanish. This in turn led to The virtual tour is part of ongoing efforts to inform and educate his invention of the the public on the plant and speciÀ cally on the technical repair, cor- lightning rod in 1749, rective actions, and proposal to safely restart and operate Unit 2. which has saved Currently, both units of the plant are shut down. Unit 2 was many a house from lightning-strike damage. taken out of service January 9, 2012, for a planned outage. Unit 3 was taken safely ofÁ ine January 31, 2012, after station operators detected a leak in a steam generator tube. Southern California Edi- FEBRUARY son (SCE) submitted its response to the Nuclear Regulatory Com- lack History Month began as “Negro mission’s (NRC’s) conÀ rmatory action letter on October 4, 2012, History Week,” created in 1926 by along with its restart plan for Unit 2. The unit will not be restarted B Carter G. Woodson, a noted African until the NRC has approved all plans. AmericanAm historian, scholar, edu- cator,ca and publisher. It became a month-longm celebration in 1976. MORE BUILDING, MORE RATE CASES TheTh month of February was cho- sense to coincide with the birth- hareholder-owned electric utilities fi led eight rate cases in days of Frederick Douglass and third quarter 2012. While the number represents a slowdown Abraham Lincoln. from the pace of recent quarters, the 41 cases fi led through Sthe fi rst three quarters of 2012 put thehe yyear-to-ear-to- date activity slightly ahead of last year’s pace, accordingaccording Thomas Edison’ss to EEI’s “Rate Case Summary” for third quarterer 2012. 166th birthday “The trend largely refl ects a construction cyclele driven (1847). The most 11 by the need to replace aging infrastructure andnd reduce prolifi c inventor in U.S. the environmental impact of power generation,”on,” said history, Edison had Cass Bielski, manager of rate and regulatory bbusinessusiness 1,093 patents in a wide at Edison Electric Institute and the report’s author.uthor. range of fi elds, includ- Infrastructure investment, rising operation ing electric power (with and maintenance expenses, and the desire his linchpin lightbulb), to implement rate mechanisms all fi gured telecommunications, soundund prominently and nearly equally as reasons forr recording, motion pictures, storage batteries, fi lings in the third quarter. and mining and cement technology. “We of- Awarded return on equity (ROE) for the ten miss opportunity because it’s dressed in third quarter averaged 9.78 percent, the low- overalls and looks like work,” he said. est in more than three decades. Falling inter-

est rates account for much of the longer-term Fotolia Greatest impact? In 1877, Edison trend of declining approved ROEs. Attempts by state commissions to devised the word “hello” as a way to indi- moderate rates during times of fi nancial hardship for many custom- cate that one had picked up the telephone ers also have contributed in recent years. receiver and was on the line. Average requested ROE for the third quarter, at 10.68 percent, is V

JANUARY / FEBRUARY 2013 15 very close to the 10.57 percent low, level of recent years. During industry recorded in fi rst quarter 2012. Re- restructuring in the late 1990s and LESS NATURAL GAS quested ROE has followed a declining early 2000s, the volatility of regula- FOR 2013? pattern similar to average awarded tory lag increased and the duration ROE, and for similar reasons. rose to almost 13 months. Outside ccording to the Energy Average regulatory lag for the third of this period, regulatory lag has Information Administra- quarter, at 8.2 months, was some- been fairly consistent at around 10 tion’s (EIA’s) “Short-Term what below the 10-month average months. A Energy Outlook,” domes- tic natural gas production in 2012 will be nearly 4 percent higher than 2011’s record levels, setting new heights for the golden age of natural gas. But, as production levels off, 2013 production will more or less match 2012’s. Rising natural gas prices will “moderate the appetite for the fuel, the report Rising natural said, with gas prices will spot gas moderate the prices rising 26 percent power sector’s in 2013 to appetite for it. $3.49 per MMBTU from $2.77 per MMBTU in 2012. As a result, natural gas-generated electricity in 2013 will slip to 27 percent of total generation, from the current 30 per- cent. Meanwhile, coal-based power will make up some of what it lost in 2012, by upping its share of the pie to 40 percent, slightly higher than 38 percent in 2012. The average cost of delivered coal will go up only 1 percent. A moderating appetite for natural gas is relative, though. EIA still ex- pects the power sector to use about :LWKSURYHQSHUVRQQHODQGDÁHHW ‡2YHUKHDG 8QGHUJURXQG 1.8 billion cubic feet per day in RIVSHFLDOL]HGHTXLSPHQW8WLOLW\ (OHFWULF'LVWULEXWLRQ 2013—high by historical standards. /LQHV&RQVWUXFWLRQ6HUYLFHV,QF ‡6XEVWDWLRQ 7UDQVPLVVLRQ 8/&6 EXLOGVDQGPDLQWDLQVWKH ‡6WUHHW/LJKWLQJ 7UDIÀF LQIUDVWUXFWXUHRIWRPRUURZ 6LJQDO6\VWHPV 8/&6DQ$VSOXQGKFRPSDQ\LVD ‡3URMHFW0DQDJHPHQW 'HVLJQ WUXVWHGSDUWQHUZLWKRYHU\HDUV ‡(PHUJHQF\6WRUP3ODQQLQJ  RIH[SHULHQFHDQGH[SHUWLVH 5HVWRUDWLRQ

:HLQYLWH\RXWROHDUQPRUHE\ FDOOLQJRUYLVLWLQJ ZZZXWLOLFRQOWGFRPXOFV Courtesy: SCE

16 ELECTRIC PERSPECTIVES Green Is the New Purple

lean tech may create a highly partisan Several states with debate in Washington, DC, but in the fast growth in green “ rest of country, it creates jobs,” says a energy jobs were con- Crecent report from DBL Investors, a clean- sidered swing states tech venture capital group. Several predominantly in the 2012 election: Republican-voting or “red” states showed the stron- Colorado, Florida, gest growth in green jobs from 2003 to 2010: Alaska Nevada, New Mexico, (98-percent growth), North Dakota (58-percent), Wyo- Virginia, and North ming (53-percent), New Mexico (50-percent), Nebraska 123rf Carolina. The elec- (49-percent), and North Carolina (49-percent). Hawaii, toral votes of all but North Carolina went to President a “blue” Democratic-leaning state, had 56-percent Obama. But the report concludes that both Republican green jobs’ growth. and Democratic leaders at state and local levels strong- Alaska, at 5.1 percent, has the highest percentage ly back green-jobs growth. Indeed, it’s more a “purple” of total green jobs in the country. issue—important to both political persuasions.

EV CHARGING GOES WIRELESS OfÀ ce Moves Executive Comings and Goings ...... ireless charging equip- ment for electric ve- hicles (EVs) seems to Lana L. Hillebrand has joined American Schwab, was named vice president, chief Electric Power as senior vice president be a promising tech- compliance and risk ofÀ cer, from her previ- W and chief administrative ofÀ cer from Aon ous position as vice president of regulatory nology in search of a market. In the Hewitt, where she most recently served compliance and chief risk ofÀ cer. last 6 to 12 months, however, nearly as south region leader and senior partner. James Rogers announced that he will all the major EV manufacturers have Dennis E. Welch, formerly executive vice retire as chairman, president, and CEO of president and chief administrative ofÀ cer, announced partnerships to develop Duke Energy by the end of 2013. A search was promoted to executive vice president is underway for his successor. Lloyd wireless charging systems, and there and chief external ofÀ cer. Barbara D. Yates, currently executive vice president of are signs that such systems, installed Radous, formerly senior vice president of customer operations, has been named ex- at the factory or added at the dealer- shared services, was named senior vice ecutive vice president of Duke’s regulated president of the repositioning & program ship, could become a market differ- utilities. Heath Shuler, a former member management ofÀ ce. Craig T. Rhoades, of the U.S. House of Representatives, was entiator for EVs. formerly vice president of customer ser- named senior vice president of federal af- According to a vices, marketing, and distribution services, fairs. recent research was promoted to vice president of supply Donald Felsinger retired as chairman chain, procurement & Á eet. Charles E. brief from Pike of Sempra Energy. Debra Reed, the com- Zebula, formerly treasurer and senior vice pany’s president and CEO, has also been Research, a president of investor relations, was named appointed chairman. part of Navi- executive vice president of energy supply. Sherrill Hudson has been named gant’s Energy Julie Sloat, formerly vice president of reg- non-executive chairman of TECO Energy. ulatory case management, was promoted Practice, sales Hudson has served as executive chairman to treasurer and senior vice president. since August 2010. Clinton Childress re- of wireleswirelesss EVV chargingchargin equipment Margaret E. (Lyn) McDermid will retire tired as senior vice president of corporate will grow steadily through the re- as senior vice president and chief informa- services and chief human resources of- mainder of the decade, reaching tion ofÀ cer of Dominion effective February À cer. His duties are now split between Phil 1, 2013. Steven A. Rogers, currently annual sales of 283,000 by 2020. The Barringer, vice president of corporate ser- president of Dominion Resources Services vices and chief human resources ofÀ cer, Courtesy: Plugless Power entire charger market is expected to and chief administrative ofÀ cer, will suc- and Dee Brown, vice president of busi- rise to almost 2.4 million units sold ceed her in those roles. Carter M. Reid, ness strategy, technology and compliance. in 2020. (See “Players in the Charger formerly vice president, general counsel, William D. (Bill) Johnson, formerly of and corporate secretary, was promoted Market,” page 18.) Duke Energy and Progress Energy, has to senior vice president of administrative been named president and CEO of the Ten- Currently, wireless EV charging services and corporate secretary. Mark O. nessee Valley Authority, effective January systems are not on the commercial Webb was promoted to vice president and 1, 2013. Johnson succeeds Tom Kilgore, market, but at least one vendor in- general counsel from his position as dep- who is retiring. uty general counsel of electric regulation, tends to introduce a system in the Other moves? Contact Edgardo Ortiz litigation, and environment. Christine M. ([email protected]). fi rst half of 2013.

JANUARY / FEBRUARY 2013 17 ENVIRONMENT: THE LIST Players GRID DOLLARS

he Environmental Protection in the ccording to the latest “EEI Annual Agency will fi nalize a number of Charger Property & Plant Capital Invest- signifi cant utility regulations in ment Survey,” shareholder-owned T 2013 and propose new ones, as Market A electric utilities and stand-alone well. “This will be a heavy regulatory year,” The currently small transmission companies invested a record predicts Quin Shea, EEI’s vice president of en- market for electric vehi- $30.3 billion in the nation’s transmission and vironment. (See “The Outlook for 2013,” page cle chargers (fewer than distribution infrastructure in 2011. 22.) Here is the list of issues Shea keeps his 200,000 sold in 2012) Transmission capital expendit-ures in- eyes on, looking not only at 2013, but also for has seen a surge of new creased 8.4 percent over 2010 investment the next several years. competitors in the past levels of $10.2 billion, due in large part to 18 months, says Pike replacement and upgrades of existing trans- Research, which ranked Air 14 manufacturers on mission lines, development of new lines to Utility maximum achievable control technology 12 criteria for strategy meet electricity load growth in certain parts standards and execution: vision; Clean Air Interstate and Cross-State Air go-to-market strategy; Pollution rules partners; production strategy and roadmap; Regional haze/visibility technical innovation; Multiple National Ambient Air Quality Standards geographic reach; New Source Review market share; sales and marketing; product per- formance and features; Climate product portfolio and New Source Performance Standards (NSPS) for ecosystem; pricing; and new and modiÀ ed sources staying power. NSPS for existing sources The manufacturers all offer Level 2 units Best available control technology permitting to residential and com- International negotiations mercial customers, with many also offering Level Water 1 equipment and direct- current charging. Clean Water Act, section 316(b), on cooling water intake structures EfÁ uent (wastewater) guidelines limitations Courtesy: SCE Waters of the United States designations of the country, and the interconnection of National Pollutant Discharge Elimination System pesticide permits new sources of generation (including renew- able resources) onto the grid. Waterbody-speciÀ c standards Distribution investment in 2011 amounted to $19.1 billion, an increase of 13.7 percent Land and over the 2010 level of $16.9 billion as utilities TOP 10 ELECTRIC natural resources ramped up development of automated meter VEHICLE CHARGER Transmission siting and permitting VENDORS infrastructure and other smart grid activities Avian protection 1. ChargePoint related to the distribution system. In addi- Endangered species 2. DBT tion, many companies increased distribution investment in 2011 to repair or replace lines Vegetation management 3. Chargemaster damaged from weather events including 4. Schneider Electric Hurricane Irene and the Halloween snow- 5. General Electric Waste and chemical storm. 6. ECOecotality management The industry expects to make more than 7. ClipperCreek Coal ash $94 billion in total capital expenditures in 8. AeroVironment Polychlorinated biphenyls in electrical equip- 2012 (including nearly $14 billion on trans- ment 9. Siemens mission and $20 billion for distribution). To- 10. Efacec Hazardous material transport tal industry capex has doubled over the past ◆ Bigstock Source: Pike Research 10 years.

18 ELECTRIC PERSPECTIVES P building Power Station Brunswick County DOMINION VIRGINIAPOWER’S chairman, president,chairman, and ing energy needs,” said Thomas F. Farrell II,Dominion’s nomic andoperational choicetomeetourcustomers’ grow- September 1,2013. kilowatt-hours wouldbe83cents, ofelectricity effective in themonthlybillforaresidential customerusing1,000 by 2016.According spring toDominion,theinitialincrease 214-acre sitejusteastofLawrenceville andbeginoperations County Power Station. bined cycle, natural gas-fi 5,300 megawatts( of thatstrategy—and ofthecompany’s aspart planstobuild sources, options. andconservation LastNovember, aspart of nuclear, natural gas, coal,hydro, andrenewable energy a strategy thatdependsonabalancedanddiversefuelmix and low-risk manner, Dominion Virginia Power hasforged mission ( years—the utilityaskedthe Virginia State Corporation Com- Artist’s renderingoftheproposedpowerstation. Moreover, thecompanywilluseBrunswick County Power “The Brunswick County“The Power Station isthecleareco- If approved, the$1.3-billionplantwouldbebuiltona JM ing regions. To meetthatgrowth inacost-effective Power’s area service willbeoneofitsfastest-grow- sion organization, projects thatDominion Virginia SSC Interconnection, the13-stateregional transmis- ) toapprove ofa1,358- construction MW ) ofnewgeneration over thenext15 CEO

red power plant,theBrunswick the .

future MW com- operate. Likewise, from 2011to2019,more than19,000 vironmental regulations thatmaketheplantsuneconomicto Station, whichwillberetired by 2015duetonewfederal en- from theChesapeakeEnergy Center andthe Yorktown Power energy needs. energy tomers’ growing to meetourcus- operational choice economic and Station istheclear County Power The Brunswick of coal-fi Station toreplace more than900 with mostofthebenefi benefi ing, wouldmeandirect jobsfor43peopleandeconomic in thecounty. the Commonwealth, withmore than halfofthosejobsbeing approximately wouldsupport struction 380jobsannuallyin inBrunswick County.million ofthatamountoccurring Con- Almost$824million,withabout$451 construction: during provide direct andindirect economicbenefi compared toawater-based coolingtower. power station,hadit beenoperating in2011,wouldhave most shuttingdown by theendof2015. The analysisalsoindicatedthatthestation,onceoperat- A September 2012economicanalysissaidtheproject will Company testimony before the

ad investment and Utility innovation ts statewideofapproximately $51millionannually, red generation willberetired throughout ts occurring inBrunswick County.ts occurring JANUARY JANUARY / 2013 FEBRUARY by more than90percent as reduces waterconsumption an air-cooled condenserthat regulations. It alsowilluse gent newenvironmental signed tocomplywithstrin- natural andisde- gasprices able totakeadvantage oflow million. The stationwillbe penses by anestimated$112 reduced system fuelex- MW ofcoal-fi SCC indicatesthatthe red generation ts tothestate PJM , with MW 19 ◆

Courtesy: Dominion Insights about residential power oll customers

While smart meters occasionally get bad press, the num- The Pursuit of ber of customers who are aware of smart meters at all and who recall issues or complaints about them is low—only 38 Higher Learning percent, which is about 17 percent of all respondents. Among those aware of smart meters and complaints, the most com- By Wallace Mealiea, manager of customer research at monly cited problem is higher bills, followed by inaccurate Edison Electric Institute. meter readings, privacy issues, and health issues. Few cus- tomers raised concerns about security or hacking problems. or customers truly to appreciate and make good use of a smarter electric system, they need to have a Keep It Safe! basic level of knowledge about the new technologies Policymakers, regulators, utilities, and supporting industries Fcoming online, and they need to have confi dence are focusing on the need to ensure that critical computer that these systems are secure. systems and the grid itself are secure from cyber attacks. [See The Edison Electric Institute’s third quarter 2012 “Power “Cyber Security,” by Lew Hay, page 40.] But only one-third of Poll” found that 46 percent of customers say they have heard customers (32 percent) say they have recently heard, read, the term “smart grid.” Awareness has remained basically at or seen anything about the security of computer systems that level for the last three quarters. On the brighter side, that run essential services like electric utilities, banks, and among customers familiar with the smart grid, levels of water systems. Among this small group, half report hearing knowledge have risen. Nearly six in ten customers who are that computer systems are vulnerable. Only a few say they’ve aware of the smart grid say they have some understanding heard that computer systems have been hacked or that hack- of it, with many (53 percent) saying they have a basic idea of ing could bring down critical systems. While general aware- Among cus- ness of cyber threats tomers, the is low, 80 percent of overall level respondents (when of smart asked directly) say they grid knowl- are concerned about edge is up 7 the security of utility percentage computer systems and points from about the threat of cy- a year ago. ber attacks that could have an impact on elec- tric service. As this is- sue evolves, customers’ awareness will likely grow just as awareness of smart technologies has grown. In the fu- ture, the industry must fi nd ways to assure cus- tomers that its critical systems are being se- Courtesy: Siemens cured. what it is and how it would work. Six percent say they have a The public does agree with the industry’s position on how fairly complete understanding. The overall level of smart grid to address this issue. Presented with three options on how to knowledge is up 7 percentage points from a year ago. address cyber attacks, a majority of respondents (53 percent) Results for smart meters are similar. Forty-six percent are favor public-private partnerships as the best way to assure familiar with them, a stable measure during 2012. But, com- the security of utility computer systems. Only 25 percent be- pared to the smart grid, smart meters enjoy a higher level lieve industry should have the responsibility for preventing of understanding: 75 percent of customers who are aware cyber attacks, with 11 percent supporting additional govern- of smart meters say they have some understanding about ment regulation. ◆ them, with 57 percent claiming a basic understanding and 18 This analysis is based on the third quarter 2012 “Power Poll,” Edison Electric Institute’s percent a fairly complete understanding. In 2012, knowledge quarterly national survey of residential customers. This survey, done for EEI by Market of smart meters has consistently tracked higher than knowl- Strategies International using a national online panel from Research Now, was conducted edge of smart grids. The meters have visibility—after all, they October 5-11, 2012, with 1,003 residential customers. For more information, EEI mem- are attached to homes. bers can visit www.eei.org/powerpoll.

20 ELECTRIC PERSPECTIVES the energy economist

extreme weather events, near collapse of Europe’s economy, Headwinds Middle Eastern revolutions, and U.S. fi scal brinkmanship. The ill wind perhaps has heightened already raised fears for Power Sales about the fi scal cliff’s spending cuts and expiring tax breaks. By John Caldwell, director of economics at Edison Electric Institute Not Your Average Sales Recovery 2011’s double-dip in residential electricity sales did not con- tinue into 2012. But sales seem to have fl attened rather than hree-and-a-half years into the recovery from the risen. Moreover, commercial sales are declining slightly. worst recession since the Great Depression, general Industrial sales, rebounding strongly in 2010-11, have grown economic progress has been tangible. But there are more slowly since then and may be T still gaps in industrial production, consumer con- leveling off. Further, the patterns of fidence, the stock The patterns recovery have been markedly dif- market, employ- of recovery ferent from previous downturns, ment, home sales, have been particularly for residential and and home prices. markedly dif- commercial sales, which tended Even gross domes- ferent from in the past to rebound quickly and tic product (GDP) previous strongly. (See Figure 1.) Perhaps the has grown at the downturns. weakness is due to a weak econ- tepid average an- omy, and a fuller recovery would nual rate of about translate into stronger sales growth. But if the recovery fal- 2 percent in the ters, then further dips are likely. last few years. Typi- And if we do fall off the fi scal cliff, then almost certainly the cally, as it comes economy will sag into recession. The Congressional Budget out of recession, Offi ce (CBO) projects an average annualized decline in GDP of the U.S. economy 1.3 percent in the fi rst half of 2013 if we go over. Employment has grown quickly—on average, at about 4.5 percent—to get levels will drop by about 2 million jobs. There is some debate back to where it would have been. about that scenario’s longer-term consequences, but the What accounts for this weak re- bound? The nature of the recession it- FIGURE 1 self, for one. In 2009, the International INDEX OF ELECTRICITY SALES Monetary Fund found that global (Based on rolling 12-month weather-normalized totals) downturns precipitated by a fi nancial Baseline Dotted lines represent averages from prior fi ve recessions crisis tended to be severe and long. ■ Residential 115 Consumers cut back on spending to ■ Commercial repay debts; banks pull back on lend- 110 ■ Industrial ing. And it’s hard to increase exports to countries in the same boat. 105 There’s also the fear factor. People thought we had become immune from 100 major fi nancial crises, theorizes econ- 95 omist Paul Samuelson. Approaching 2007, the new generation had not seen 90 the severe downturns and high infl a- tion of the 1970s and early 1980s, not 85 0 12 24 36 48 to mention the Great Depression. Most Months after total sales peak felt that we had fi nally learned how to manage the economy, so it was okay to spend more, to invest more, to borrow more, and to risk general consensus (and CBO agrees) is that economic growth more. That complacency now shattered, everyone is cau- would resume later in 2013, although at slightly lower rates tious, jittery. Companies, having amassed nearly $2 trillion than current baseline projections. in cash, are reluctant to invest it. Lending and borrowing Some tailwinds support modest optimism: Manufacturing are stagnant, even though the Federal Reserve has kept in- output has grown, the housing market continues to improve, terest rates low and injected more than $2 trillion into the and oil prices seem to have stabilized. But the outlook is the economy. The recovery faltered in a year (2011) with many same one since the recession ended: Barring unpleasant sur- concerning incidents—a tsunami and nuclear accident, prises, expect moderate growth and a very slow recovery. ◆

JANUARY / FEBRUARY 2013 21 THE OUTLOOK FOR 2O13 BY DENNIS WAMSTED THE rian Wolff, senior vice ELECTRIC president at Edison Electric BInstitute, puts it mildly when UTILITY he says, “There is a lot of work INDUSTRY to be done in 2013.” FACES In fact, the electric utility in- ANOTHER dustry has a daunting to-do list YEAR OF in 2013, with comprehensive COMPLEX tax reform, an array of both Ä nal CHALLENGES. and proposed environmental rules, and cyber security con- cerns topping the charts. But other issues, particularly the les- sons learned from 2012’s dev- astating storms, also will play a prominent role in the new year. le m

22 ELECTRIC PERSPECTIVES Master JANUARYJJANUARYA N U A R Y // FEBRUARYF FEBRUARYE B R U A R Y 20132 201301 3 2323 Laying the Foundation Everything starts with tax reform, The industry will be says Wolff. There have been many watching to see how tweaks to the tax code in recent the tax writers pro- years, including the tax cuts enacted pose treating such during President George W. Bush’s key utility items fi rst term in offi ce. But the last com- as excess deferred prehensive reform effort, Wolff said, taxes, normalization, was back when Congress passed the and interest deduc- Tax Reform Act of 1986. This bipar- tions, as well as tisan legislation, perhaps the larg- dividend tax rates est rewrite to the tax code ever, took and parity with capi- three years to muscle through Con- tal gains tax rates. gress, Wolff points out, and it is un- likely that a new effort will be much quicker. “Overall tax reform will come,” Wolff says, “It won’t be completed in 2013, but the foundation will be laid.” Brian McCormack, EEI’s vice presi- dent of political and external affairs, strikes a similar note. Even if the divi- Courtesy: of the Capitol Architect dend issue is resolved in the lame- duck Congress, he says, the new Congress is likely to take up ones, as well. “This will be a heavy regulatory year,” he pre- comprehensive tax reform in 2013. “The stars are beginning dicts, pointing out that, just prior to the presidential election, to align for tax reform,” he says. “There is some momentum.” numerous environmental-related items directly affecting the “Comprehensive” reform means that everything, not just utility industry were at the Offi ce of Management and Bud- the dividend issue that dominated utility discussions in 2012, get, awaiting fi nal review. With the President re-elected, it is will be on the table. For its part, says Wolff, the industry will likely that action on all of those will move forward this year. be watching to see how the tax writers propose treating such Two rulemakings stand alone at the top of Shea’s worry list: key utility items as excess deferred taxes, normalization, and EPA’s pending fi nal rule on power plant cooling water intake interest deductions, as well as dividend tax rates and parity structures, likely to be issued this spring; and the agency’s with capital gains tax rates. A key issue, he adds, is how much anticipated proposal on greenhouse gas emissions standards overall corporate tax rates will be lowered. for existing generators, which he expects to be out by the end A lower overall rate with of the year. fewer deductions could well The cooling water proposal, the so-called section 316(b) be attractive, but the devil rule under the Clean Water Act, has been under development is in the details. The indus- for years. In 2011, EPA published a draft rule, which would try invests on average (since cover 670 power plants that use at least 2 million gallons of 2008) more than $80 billion a water a day for cooling purposes. The industry expected a year on infrastructure and, as fi nal rule last year, but it was delayed by 12 months, following such, strives to keep its cost an agreement between the agency and the environmental of capital as low as possible, groups that had sued EPA to force it to move forward with the says Richard McMahon, EEI’s proposal. The agency now faces a July 27 court deadline to vice president of fi nance and energy supply. “That issue is publish the fi nal rule, though it is likely that EPA will not wait critically important. We need to make sure that the industry that long, according to Shea. is not disadvantaged because of its high capital spending.” If the fi nal rule imposes a requirement for cooling towers at existing generation sources, Shea says, that could end up Environmental Rulebook boosting the number of coal-based retirements by as much While tax reform will take its fi rst steps this year, Quin Shea, as 40 percent from currently announced levels. It simply EEI’s vice president of environment, says that the Environ- would not be economic for utilities to bring many of their mental Protection Agency (EPA) will fi nalize a number of sig- power plants into compliance with the new rule. Coal-based nifi cant utility regulations in 2013 and propose several new generators will not be the only ones affected, Shea adds. The rule also would hit the nation’s natural gas and nuclear Dennis Wamsted is an energy business writer in Arlington, VA. generators.

24 ELECTRIC PERSPECTIVES “The rule,” he continues, “would have a serious impact on impose GHG reductions, which the industry believes cannot the makeup of the U.S. generation base.” be required under the provision. Moreover, via a notice of data availability issued last year, “This could change everything,” Shea says. EPA decided to weigh the idea of including the results of Another troubling issue for the industry is the perception a “willingness-to-pay” public opinion survey designed to that the administration’s pending actions could affect the quantify the rule’s benefi ts. EEI believes that the survey—the compliance strategies and emission reductions emerging results of which are intended to estimate the final rule’s from discussions on the fi nal shape of the rule for mercury economic benefi ts by quantifying the price that people hy- and air toxics standards (MATS), released by EPA at the tail pothetically would assign to having improvements to fi shery end of 2011. This rule will cost the industry a great deal, Shea resources—should not be part of the agency’s rulemaking. points out, but the industry also received important conces- EEI considers the survey method to be too speculative. When sions. “We got a lot of what EPA fi rst proposed the rule, it estimated that costs would out- we needed in that rule,” he weigh benefi ts 21:1. Then, applying the survey—and without says. “It was a win for both changing any aspects of the proposed rule—the agency sides.” increased the rule’s benefi ts estimates by more than 10,000 Also high on the list is a percent, now indicating that benefi ts outweigh costs 5:1. final coal ash rule, under Ed Comer, EEI’s general counsel, added that the money which EPA is considering spent complying with the 316(b) rule—which would be whether to regulate this signifi cant—would be solely for fi sh and wildlife protection. combustion by-product “This is not a public health issue,” he says. Given the indus- as a hazardous waste. It’s a try’s capital requirements and the still-sluggish economic move, says Shea, that would 123rf recovery, Comer asks, would those expenditures be worth- undercut the thriving secondary market for fl y ash, com- while, or would they be better spent on more pressing issues? monly used in cement, asphalt, and a number of other ap- The second looming environmental issue, says Shea, is the plications. likelihood that EPA will move forward with a proposed rule to regulate greenhouse gas emissions from existing sources The Watch List under the rubric of the new source performance standards While cooling water and greenhouse gases get top billing, in the Clean Air Act. The Act allows only limited controls on Shea has a lengthy list of EPA rules and regulations that he is existing facilities, but environmental groups want to use it to watching for the coming year. They include ■ the cross-state air pollution rule, which remains bottled up in court; In 2011, EPA pub- ■ implementation of the regional haze lished a draft rule, rule, a particularly big issue west of which would cover the Mississippi; 670 power plants ■ MATS implementation issues, espe- that use at least 2 cially for a handful of utilities that are million gallons of wa- looking to secure more than four years ter a day for cooling to comply with the regulations; and purposes. The agency ■ other potential new clean water now faces a July 27 rules. court deadline to Looking forward, Shea sees a tran- publish the fi nal rule, sition in EPA’s focus, with clean water though it is likely that rules taking center stage over the next EPA will not wait that 10 years, joining clean air regulations, long. which have been the subject of the main environmental debate during the past 30-plus years. For starters, EPA began working on new effluent guidelines for the industry in 2009, noting at the time that, because of the agency’s numerous new Clean Air Act rules, it expected utility water dis- charges to increase in the years ahead. EPA is under court order to release a draft rule by April and publish a fi nal decision by May 2014.

JANUARY / FEBRUARY 2013 25 The agency also is consid- ering the use of water body- specific regulations. “This would be problematic for the industry,” Shea says, poten- tially forcing large utilities to meet different standards at plants on differing bodies of water.

Cyber Security Concerns “Cyber security will be a huge issue this year,” says Comer. And, for all intents and pur- poses, forever. Congress considered cyber security legislation in 2012, notes Kathy Steckelberg, EEI’s vice president of gov- ernment relations, but the Any new Department Senate was unable to mus- of Homeland Security- ter cloture on its proposal. centric approach that The utility industry would did not account for like Congress to pass cyber the existing FERC and security legislation but had NRC processes could several concerns with the result in confl icting or Senate proposal, Steckelberg duplicative standards.

continues, particularly with AP Images how it might interfere with the existing utility cyber security regulatory regime. Since the right threats. However, as Congress continues to consider passage of the Energy Policy Act of 2005, the North American legislation, we would urge you to retain the existing sector- Electric Reliability Corporation (NERC), with oversight from specifi c processes which rely on the technical expertise of the Federal Energy Regulatory industry experts working in conjunction with federal regula- Commission (FERC), has been tors to ensure that cyber security standards are technically responsible for developing and operationally sound and do not result in unintended cyber security standards; nu- consequences.” clear facilities are regulated by Despite the industry’s differences with the Senate bill, the Nuclear Regulatory Com- Steckelberg continues, EEI hopes Congress will resume work mission. on cyber security this year. “We want them to work on this “Given the resources that legislation proactively,” she says, “not in response to a crisis.” have been dedicated to the And even if the Obama administration does issue a cyber drafting and implementation security executive order, as many anticipate, there are several of these cyber security stan- issues that can be fi xed only through legislation, she says. dards, our members were un- “I really do think Congress will be back at cyber security in derstandably concerned that 2013,” she concludes. any new DHS [Department of The discussion we need to have, adds Comer, is about Courtesy: NRC Homeland Security]-centric what we really mean when we say cyber security standards. approach that did not account for the existing FERC and NRC Standards that identify specifi c equipment or approaches processes could result in conflicting or duplicative stan- will only give a roadmap to the hackers, terrorists, or hostile dards,” industry representatives wrote in a letter last year to nations trying to get into our systems. “As soon as you write Senator John Rockefeller IV (D-WV), chairman of the Senate one rule, they will fi nd a way to work around it,” Comer con- Commerce, Science, and Transportation Committee, which tinues. “Cyber security is an area where you can spend and is one of the committees with jurisdiction over cyber security throw away an endless amount of money.” legislation. “Of course there is a role for DHS; we agree they Wolff echoes this point, saying that “you can never truly should provide the national security context for FERC and be cyber-secure.” NRC to ensure the industry and regulators are focusing on Still, electric utilities make enormous efforts to minimize

26 ELECTRIC PERSPECTIVES munications. A good example of interdependency, and an area of particular concern to EEI executives, is the natural Bigstock gas pipeline infrastructure. If natural gas supplies were to become constrained or there were outages along the pipeline infrastructure due to a cyber attack, there could be implica- tions for both industries. If that were to happen on a particularly cold day, says Jim Fama, vice president of energy delivery, it could cause a region-wide problem. “Our members our working with their counterparts in the gas industry to address these issues, which are largely regional in nature.” “As natural gas is increasingly used as a generation source, this will become an increasingly important issue for our in- dustry,” adds McMahon. John Easton, EEI’s vice president of international pro- grams, points out that utilities in both Eastern and Western Europe are already familiar with such cybersecurity prob- lems. Russia has used natural gas as a political weapon in years past, turning off supplies for policy or economic reasons. As a result, the European Union runs simulations of cyber-attacks to see what the results would be and what response mechanisms would work best.

Taking Stock of Sandy The devastation wrought by Superstorm Sandy was enor- mous, and the human toll—lives, homes, and entire prop- If natural gas sup- erties lost—was heart-wrenching. The industry’s response, plies were to become through its mutual assistance program and close work with constrained or there the Department of Energy and the Federal Energy Manage- were outages along ment Administration, the pipeline infra- was massive and in- structure due to a spiring—more than cyber attack, there 67,000 local, out-of- could be implications state, and contractor for both industries. utility workers helped get the power back on for about 10 million the risks, says Wolff. He cites the industry’s ongoing work customers. with NERC, a threat scenario project, and high-level briefi ngs 2013 will be a time last year for a number of utility CEOs by senior U.S. national to learn from Sandy Courtesy: BGE security personnel. and other storms. But In particular, the role of the EEI Threat Scenario Project, some hard facts are in order, says Wolff. Most of the damage run in conjunction with The Chertoff Group (led by former in New York City and on Long Island was caused by storm DHS chief Michael Chertoff), is to identify major cyber threats surge, apparently the worst seen in 200 years. So in planning and to lower risks. By helping organizations identify risks, the their response, utilities, regulators, and policymakers have to Chertoff Group assists in building a framework and develop- ask the hard questions: How resilient should the system be? ing effective policies to prevent cyber security incidents. EEI What are customers willing to pay for? also works with the Knowledge Consulting Group on the key Options for improving the system and companies’ ability technical elements of response and recovery. One outcome to respond to massive outages all cost money, said Fama. of this work will be the creation of a “Cyber Security Event Utilities can hire more crews, knowing that they likely would Response Plan” template, which will outline the necessary be needed only once or twice a year (hence the reason for actions to facilitate a successful response and restoration in the industry’s mutual assistance program). Or utilities could the event of a cyber incident. move to underground some of their critical systems—at a Notwithstanding its efforts, the electric utility industry much higher cost than maintaining conventional above- recognizes that it is not an island—it depends on and sup- ground wires (particularly in urban areas). Another idea is ports many other infrastructures, from rail to water to com- the possibility of developing regional supply depots holding

JANUARY / FEBRUARY 2013 27 Comer makes a similar point, asking Rooftop solar systems what kinds of ratemaking approaches are are viable for some needed to correctly set prices for the de- customers, especially velopment of distributed generation and with federal, state microgrids, which many stakeholders are and even local sub- studying. And, how do you ensure that the sidies and implicit move to distributed systems and subsidies subsidies in many util- for renewable power are not simply bene- ity distribution rates. fi ting the richer customers on the system at Others are looking at the expense of the rest of your customers? whole-house backup generators that run on A Smarter System natural gas. The continued spread of smart grid tech- nologies should provide utilities with new tools for reliability, outage detection and restoration, and customer engagement in the years ahead, says Lisa Wood, execu- tive director of IEE, an Edison Foundation institute focusing on advancing innova- tive and effi cient technologies to transform the power grid. The upgraded grid, includ- ing about 40 million smart meters today covering about one third of the nation’s 123rf households (and an estimated 65 million spare transformers, extra poles, cable, and the like. Affected by 2015), will give utilities the ability provide additional utilities could use the supplies in the event of a destructive services and to meet the increasingly sophisticated needs of storm or similar damage-causing event. That way, the price their customers, she says. to create those depots could be spread across the system, But positive develop- benefi ting everyone for the least cost. ments will not have to The storms of 2012, in conjunction with recent technologi- wait until 2015. “We will cal developments, are having another impact on the utility begin to see real results industry, says Rick Tempchin, EEI’s executive director of retail and value from the smart energy services. grid this year.” “We could be at a tipping point this year on technology,” In particular, Wood he says. In years past, storm-related outages simply might points to the aggressive have provoked customer complaints; but, in addition to the efforts by Oklahoma Gas fact that customers are oriented heavily to electronics, to- and Electric Company, day’s new technologies are giving consumers other options. which has some 45,000 Courtesy: Landis & Gyr “Technology is forcing a change,” says Tempchin. Rooftop customers enrolled in its smart pricing demand-response solar systems are viable for some customers, especially with program, with dynamic pricing signals. “By all accounts,” she federal, state and even local subsidies and implicit subsi- says, “the program is a huge success.” dies in many utility distribution rates. Others are looking at Delaware regulators have approved a pricing program, whole-house backup generators that run on natural gas. And wherein the customer’s default pricing plan offers peak-time in the not-too-distant future, low-cost storage options may rebates. In other words, customers will be able to learn about change the equation entirely. “Two-way power fl ow, that is the true cost of their power. “It is a huge step forward,” Wood where we are headed,” he says. says, adding that California has similar programs and that As such, Tempchin says, utilities are thinking about how Maryland is moving in the same direction. they can provide value to their customers. What does the Dynamic pricing linked to smart technology is just one utility have to offer? way to unleash the value of the upgraded grid, Wood says. Change will come in other areas, too. Regulators will have Tax reform, environmental challenges, cyber security, the to adapt as well, since the ratemaking process clearly needs push at the state level about storm response, and rates that to change in light of technology. Many of today’s rates, Temp- more closely refl ect the real price of electricity. While the chin points out, were not designed with today’s technology groundwork has been laid for these and other issues, it is a options in mind. “We have to get the rates right,” he says, daunting job list for the new year, and we haven’t mentioned adding that this will be an evolutionary process, not one that workforce issues, electric vehicles, and any number of other occurs overnight. challenges. Plus, who knows what surprises await? ◆

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©2012 Schneider Electric. All Rights Reserved. Schneider Electric is a trademark owned by Schneider Electric Industries SAS or its affiliated companies. All other trademarks are property of their respective owners. • www.schneider-electric.com • Tel: 1 866 537 1091 Custom

What will it take to change custo managers—and keep them a

30 ELECTRIC PERSPECTIVES mer Engagement AN ELECTRIC PERSPECTIVES PANEL

RGUABLY, the electric utility industry’s great- est revolution occurred more than 100 years A ago: central station generation, followed by the relatively concurrent development of the demand meter, the concept of the utility’s natural monopoly, and regulation by state commissions. Those are still the basic building blocks. But today, electric companies are building a smart grid with (among other things) two-way communica- tion, allowing customers to use elec- tricity in new ways and have more control of it. Against the backdrop of a robust central-station generation system, distributed generation (DG) technologies are gaining in effi ciency and use. Moreover, as utilities invest in the larger system and electricity prices therefore rise, the gap between the electric bill and, say, the solar panel investment becomes smaller. Courtesy: Control4 omers into active energy as customers at the same time?

JANUARY / FEBRUARY 2013 31 Indeed, meters and generation are PARTICIPANTS mainly to three drivers. On the regula- the revolutionary drivers again, inviting tory and state legislative sides, we are new competition and forcing changes John Caldwell, seeing a defi nite push toward renew- in regulation. Those and other forces director of economics, ables and decentralized generation. put electric utilities up against several Edison Electric Institute We see it at the Federal Energy Regu- challenges: In addition to new compet- Lisa Wood, latory Commission. We see it in state itors and regulatory hurdles, utilities executive director, IEE renewable portfolio standards and face new technologies (and those yet Andy Zetlan, net metering standards. We see it in to be developed), new business mod- vice president of the Department of Energy. All seem to els, customers who will business development and push a common vision about changing We have seen a become active partici- regulatory, Aclara the way the country produces electric- change in the way pants on the grid, and Eric Blume, ity: We want it cleaner; and we want it the problem of engaging editor and publisher, more decentralized. our customers de- Electric Perspectives customers in general in The second driver is technologi- mand and expect managing energy. cal change, which is occurring on all electricity. Last October, at a breakfast just fronts. Exciting things are happening in electric before the opening of GridWeek storage. The costs of alternative sources such as 2012, three thoughtful experts joined a panel mod- solar panels continue to decline. And shale gas has erated by Electric Perspectives’ Eric Blume to dis- changed the equation, raising the relative value of cuss those challenges. natural gas in the generation portfolio. The third driver is the customer—the most im- Blume: John, the utility industry has faced new portant driver of all. We have seen a change in the technologies and new competition before and re- way our customers demand and expect electricity. mained essentially whole. What makes the changes We’re a different society from 20 years ago. If you occurring today so different? had an average outage then, people might sit out- John Caldwell: We’re at a side and talk to the neighbors while they waited turning point right now, due for the power to come back on. Now, however, we Courtesy: LG

32 ELECTRIC PERSPECTIVES Courtesy: GE depend on highly reliable electricity because of our still have not fi gured out how to engage the major- increased dependence on and use of communica- ity of customers, other than large ones, in manag- tions and computers. Work is more electronic to- ing their energy use. Of course, we’re all trying to do day, completely different from even a decade ago. that, but it’s very diffi cult—especially with smaller We’re a different community in the way we connect customers who generally don’t want to spend a lot with other people. For those reasons, the value of of time thinking about their energy use. reliable electricity has changed. Moreover, there is The other way to develop engagement is to use a real push on the customer side for wanting more technology to go, in a sense, around the customer, control over electricity supply. engaging her with technology at the “set it and Regulation moves at a relatively glacial pace, forget it” level—where energy management is au- but it is pretty consistent. Customer preferences tomated, provides value, and becomes a lifestyle. change at a faster rate and evolve over time. But The technology is available right now to do that. technology can change an industry overnight. That Still, that smaller customer is a tough nut to crack. is the real game-changer for our industry. We need Blume: So, customer engagement. That must be to keep an eye on where the latest and greatest in- near and dear to you, Andy. novations are. Andy Zetlan: We spend a lot of time working on Blume: Lisa, your organization focuses, at least consumer engagement. As Lisa noted, energy man- in part, on the nexus of regulation and technology. Are those relative rates of change a concern? How do you insert the topics of regulation and Lisa Wood: It’s hard to disagree with John about regulation, technology, and customers—though, technology into something that most consumers in fact, we are seeing a lot of regulatory change. say isn’t broken and is a bargain? Smart-grid, storage, and distributed generation technologies are making a huge difference in terms agement is not the number-one issue of the day for of utility strategies going forward. And the cus- smaller consumers. To convince them that engag- tomer challenge is the most diffi cult thing. Tech- ing with their utility is a good idea also is a chal- nology can change an industry overnight, but we lenge. According to research from the Smart Grid Consumer Collaborative, interest or willingness to engage can be remarkably low in some parts of the country. Part of the reason has to do with the com- plexity of energy use: How do you insert the topics of regulation and technology into something that most consumers say isn’t broken and is a bargain? We’re missing a few things. We’re missing the level of simplifi cation in what the user of electricity will experience. The industry does not have a uni- fi ed view of how it will relate to consum- ers. What will we look like in 10 years? We have industry leaders with strong views, but those views vary considerably. We don’t have universities pressing the point and helping us along. The indus- try can see some of this change coming, but the bulk of the university smart-grid programs focus on technology. And by technology, I mean leverag- ing technology, and not necessarily the technologies that we all use today. If you’ve ever used the older school’s smart thermostat, you already know that it is more complex than most people want to deal with—but we’re trying to deliver something even more complex than that. We have a lot of thinking to do. Our industry may be more than 100 years old, but we haven’t fi gured out what we want to be

Courtesy: Control4 when we grow up.

JANUARY / FEBRUARY 2013 33 Chunky Blume: But, complexity or no, consumers tend to adapt to innovations either slowlyy or quickly. Give them an iPad, and they adaptpt veryvery quickly. Give them that chunky portable phphonehone of the 1980s, and it is hard to conceive of easy adaptation. Big commercial customers—big-box—bigg-box Courtesy: Delphi stores, universities, and so on—are engaged:ged: TTheyhey are much more technologically savvy andand havehaave a greater incentive to save energy than ththee averageaveerage residential customer. Big customers couldcould be a group for which utilities will have to fi ght. Thereh rere araree only a few engaged residential customers, ass youyou all point out. Does engagement open them upup to other utility competitors? Are those customerss like the chunky phone users? Caldwell: The biggest game-changing threat can come through the back door, addressing customers that are either low-margin or low users of a service. Further, the technology that comes along doesn’t even have to be superior to what the incumbent industry is providing. Steel mini-mills, for example: Their steel-making process was actually inferior to the larger mills and produced poor-quality steel. But it was good enough for some customers, and mini-mills began to peel away small market seg- ments. As the smaller mills im-

Utilities have to be at proved their technology, they Courtesy: GM / Steve Fecht the forefront of providing continued to make inroads. Many of the new technolo- some customers today would listen. That’s where new ways to give custom- gies appearing on the horizon the real competitive threat is. The challenge for ers what they want and on our industry, such as so- utilities is to be that white knight, not the bad guy are willing to pay for. lar panels and energy storage whom a white knight can upend. Utilities have to devices, may seem ineffi cient be at the forefront of providing new ways to give from a cost perspective. But this will not prevent customers what they want and are willing to pay them from fi nding a niche among some custom- for. ers, and this niche will expand as the technologies Wood: Look at large customers, particularly mili- improve and become more effi cient. tary bases and big-box stores. Walmart, for exam- There’s also the simpler threat of someone offer- ple, wants to be a sustainable and green company. ing a lower price. And there’s the threat of someone The military says it needs energy security. In both fi nding a way to provide customers with what they cases, those enterprises will either do it themselves feel they aren’t getting in their existing service. It or work with a company—a utility or someone is becoming easier to tap into the desires of those else—to make it happen. The utilities definitely who dislike their bill, who want more reliability, want to work with both groups and fi gure out how who want to go it alone, who are environmentally to meet their needs. oriented. Zetlan: The industry’s investments in sustain- Real-time pricing and demand response do of- able technology tend to be narrow. Many of them fer utility options for customers who want to save are specifi c DG technologies, but they also include money. But the average daily cost of electricity is storage technologies and different approaches to low, so customers generally aren’t railing about demand response. What we have yet to do is put cost. They’re railing about reliability. Another com- these diverse technologies into a system we can pany might be able to provide a reliable supply of all use as a matter of course. It has always been electricity (through some combination of storage, reliability-versus-cost, and today that paradigm smart appliances, and self-generation) to ensure hasn’t changed—we’ve just added some additional that the most important appliances stay on dur- variables. Sustainability, for one. And we’ve also ing an outage when all the other lights are off, and added the active and interested consumer to the

34 ELECTRIC PERSPECTIVES Courtesy: Generac

Courtesy: Exergonics mix. Traditional reliability-versus-cost isn’t going We don’t want to end up away, but we are creating a multi-variable problem like the United States Postal to solve. Fotolia Service, the ultimate pro- vider of last resort. Utilities The Grand Scheme of Things don’t have the option of losing money each year Blume: So, how will the utility provide all these op- or of competing with an increasing number of tions and address all the variables? Renewables, cost-effective providers. One, utilities must ensure distributed generation, and demand response that they’re providing reliable service at affordable are all heavily subsidized through things like net rates. But two, as private companies, they must metering, the demand demonstrate that they are response markets, and Today, most DG is net-metered at the retail rate. growing their earnings. tax incentives. That defi - But this is not a long-term solution. DG custom- They must be more than nitely adds more chal- lenges. ers are not necessarily paying the right price Caldwell: The utility for access to the grid or their share of the fi xed just the provider of last re- will have two paths. On costs of maintaining it. sort, the last option. What- one hand, there will be ever innovations are out many added-value potential applications. On the there for providing electricity in new ways or such other hand, the network will have a lot more de- services as energy management, utilities have to centralized generation sources and storage devices provide those services themselves, partnering with (possibly operated by third parties), and someone (or even purchasing) companies that are doing it or will have to man the switches. Further, there will providing a platform that supports those services. be an important role for the provider of last resort. Wood: Utilities are working with tons of technol- The trick for the utility is at once to keep itself in ogy partners. We had a meeting this past June with the driver’s seat and to make the network manage- 22 technology partners—Southern Company was able, not just for the customers but those others working with every single one of them. The indus- who are using the network. try wants to make grid investment happen, fi gure

JANUARY / FEBRUARY 2013 35 out what this new world will look like, get the tech- we need a more sophisticated power grid to accom- nology right, and work with customers accordingly. modate these new resources. What does the utility With DG, the industry is taking small steps—in need to do? How does it invest without creating part because we have to think about where we rate shock? want to go. Even if we don’t know the answer, we at Caldwell: The traditional rate case is based on least should have a plan for pricing DG appropri- providing a reliable electricity supply. But grid in- ately, and knowing what that pricing means to all vestment involves three types of cases. The easy customers that are on the grid. Today, most DG is one is the cost-savings case—easy, that is, if you net-metered at the retail rate, for example. But this can make a case that your customers will benefi t is not a long-term solution. DG customers are not in the long run from a cost perspective. If you can necessarily paying the right price for access to the do that, then you’ve slam-dunked it. The second grid or their share of the fi xed costs of maintain- type of case utilities can make concerns platform ing it. These are the types of issues that we have to benefi ts. Essentially, you sell a vision rather than resolve now so that we have the right mechanisms a business proposition. You are laying a founda- in place once DG starts to grow. People are talking tion to enable grid participants—customers, the about these issues, but we haven’t focused on the utility, third parties—to receive benefi ts 10 or 20 real costs that must be captured and paid for by years from now, because today’s investments in customers. infrastructure will enable future improvements I live in the District of Columbia, where it is that do provide tangible benefi ts. Perhaps you are possible, with federal and DC tax credits, to put talking about electric vehicles or self-generation. In solar on your rooftop for any event, the platform benefi ts case is a little more You are laying a foundation 15 percent of the real cost. qualitative than quantitative. to enable grid participants (That’s based on marketing The hardest sell of all is the societal benefits information from a vendor, case, where you say that a particular investment to receive benefi ts 10 or 20 though I did not verify it.) years from now, because And I think, wow, I’m a tax- today’s investments in infra- payer and I’m paying for this. That’s a lot of subsidi- structure will enable future zation. We need to have a improvements that do pro- plan for moving from sub- vide tangible benefi ts. sidies to markets and com- petition. In some sense, we need a grand scheme for the 21st-century power grid, but that’s hard to do. The industry is regulated in many different ways—by the Federal Energy Regulatory Commission, by state regulators, by the Environmental Protection Agency, and so on. Zetlan: But the fact is that we’re going down the road with these technologies and moving the utility inexorably toward the consumer. When I fi rst came to the industry, it was all about transmission and big generation. Now it is moving to the distribution system—and for my children and grandchildren, it is moving into their homes and businesses. In- dividual technologies on their own don’t mean a lot until they are brought into a system or a vision. We’re just distributing generation now, but when we open our eyes, we’ll realize that we’re distribut- ing our utility. The same problems in running an entire grid exist in running an entire business. In- side that business, the economics are no different from cost-versus-reliability.

Give Me Flexibility Blume: As we see DG growing along with electric

vehicles and demand response, it seems to me that Courtesy: BGE

36 ELECTRIC PERSPECTIVES will create jobs or clean up the environment, for [See “Another Perspective,” page 56.] One utility example. It can be argued in many cases—such executive uses the phrase “innovate at the speed of as job creation—that society as a whole, not just value.” I think that’s a great way to sum it up. the ratepayer, should bear the costs for providing these benefi ts. In essence, the stimulus act of 2008, Don’t Just Build It which provided billions of dollars for smart grid Zetlan: It comes down to engaging consumers. My infrastructure investment, was based on this prem- company, Aclara, provides consumer-engagement ise—that it was helping the economy in general. software. We reach approximately 50 million con- Wood: I agree. As the industry invests in the grid to accommodate distribution complex- No matter what kind of technology we bring forward, ity, the business of going to the state commis- sion with a rate case will likely change. The a majority haven’t engaged properly. And the reality is issues might be more around determining that people have to become interested at some point. the most fl exible ways to move forward, ac- commodating different types of investments over sumers. But when you look at the actual month- the next few decades as the system evolves, and to-month usage among our utilities, we’re talking allowing for innovation. Everyone is aware of the about a single-digit percentage of folks who ac- need for change—regulators, policy makers, util- tively look at their consumption, think about it, ity executives—and conversations are occurring. and try to improve it. No matter what kind of technology we bring forward, a majority haven’t engaged properly. And the reality is that people have to become interested at some point. We spent time talking about this with folks from Google. They originally thought

123rf Courtesy: Siemens Courtesy: AEP Courtesy: AEP

JANUARY / FEBRUARY 2013 37 If anyone underestimates the need for and new ideas—and need to meet those challenges soon. that consumer engagement consumers to have simple systems around Caldwell: Questions about was a Field of Dreams kind of them, then we’ve all missed the boat. customer desires have three thing: People would be natu- interesting dimensions. One rally interested. Our industry has believed that if we is asking in what cases customers are underserved, show them the data, they will come, they will save. because that is the area where direct improve- But it’s not so obvious. We need new techniques ments or investments can really help. Another question is whether they are over- served, because that is where there can be potential cost-cutting on the cus- tomer side. Those are also some of the areas where a new competitor can come in from the disruptive side. The most in- teresting is the third dimension, where there are products or services to pro- vide to customers that they don’t even presently realize that they want or need. Nobody clamored for personal com- When Jupiter’s moon, Callisto, was puters 20 years ago, for example. No- discovered in 1610, it changed the body said that he or she wanted an ATM machine in a bank. Nobody agitated way the world viewed the universe... for smart phones 10 years before they came out. Wayne Gretzky said, “A good hockey player plays where the puck is, but a great hockey player plays where the puck is going to be.” When a busi- ness can project what customers want before they even know what they want, WILL CHANGE THE WAY THE INDUSTRY VIEWS THE GRID can apply technology, and can modify Learn more at DistribuTECH 2013 | Booth 1500 | www.elster.com their business models accordingly, that will be a quantum leap. Zetlan: Simplicity is what customers want. The revelation for an older some- one like me wasn’t that the tablet and the smart phone were so portable. It was that I didn’t have to study to use them. Ever. If anyone underestimates the need for consumers to have simple systems around them, then we’ve all missed the boat. We can talk about all the narrow technologies we have and all the great things they do. But they have to go together, and simply. Wood: We can’t overestimate the im- portance of simple, good design. Apple has changed the world with its designs. We have a lot of technology companies working in this sector, and I’m confi - dent they will fi gure it out. Energy man- agement will be simple and elegant, and while it may not engage people in the same way a phone does, it will do what customers want it to do based on their needs. We’re going there. We just haven’t arrived yet. ◆

38 ELECTRIC PERSPECTIVES In here, meters keep in touch, so your crews don’t have to.

In the network of possibilities, meters report usage in real time. The power grid monitors itself to identify problems before they become outages. And utilities put resources where they’re needed most. As the only communications provider offering complete smart grid solutions, AT&T is a partner you can rely on to manage your data, so you can focus on managing your power grid.

Discover what AT&T Smart Grid Solutions can do for you at att.com/smartergrid

© 2012 AT&T Intellectual Property. All rights reserved. AT&T, the AT&T logo and all other AT&T marks contained herein are trademarks of AT&T Intellectual Property and/or AT&T affiliated companies. All other marks contained herein are the property of their respective owners. THREAT

40 ELECTRICE L E C T R I C PERSPECTIVESP E R S P E C T I V E S BY LEWIS HAY III Electric utilities have stepped up their game as they face a formidable foe.

Fotolia, Bigstock JANUARYJ A N U A R Y //FEBRUARY FEBRUARYF E B R U A R Y 20132 01 3 41 the economy, such as rail, fuel, fi nance, telecommunications, and government. Across the country, millions of Ameri- cans depend on us to provide them electricity that not only is affordable and reliable, but also enables others to deliver products and services that are essential.

Our Industry’s Collaboration The fact that so many Americans de- pend on us is a great challenge but not a new one. It is the challenge we face every second of every day. It is the chal- lenge that some of our companies have met for more than a hundred years. Our xecutives in the elec- industry never stops asking the ques- tric utility industry Some of our tion, “What could go wrong?” We never have many opportuni- stop working to make the grid stronger, ties to deploy new tech- collaboration more reliable, and more resilient in the nologies to benefi t our face of any threat. And our industry has customers. Yet these as an indus- really stepped up our game in recent technologies also can years as we have worked together to represent threats to our try has taken meet the cyber threat. Eindustry. Indeed, one of the greatest Some of our collaboration as an in- threats to the security and reliability the form of dustry has taken the form of an on- of our electric system is the threat of a an ongoing going dialogue with our key federal catastrophic cyber attack. partners. Our discussions with the Cyber attacks are not a new threat dialogue White House and several Cabinet for us, but our exposure to the threat agencies fi rst became institutionalized is growing. Our old mainframes in the with our after 9/11, through the National Infra- 1960s and 1970s had limited connec- structure Advisory Council that reports tivity and therefore contained expo- key federal to the president. The Fukushima disas- sure to these kinds of risks. But those ter in Japan was a more recent catalyst risks multiplied, and the threats be- partners. for deepening our dialogue, and last came more sophisticated and multidi- year several utility and nuclear CEOs, mensional, as our companies deployed along with representatives of industry even more new technologies and be- trade associations such as the Edison came integrated into a networked Electric Institute (EEI), met with En- global economy. ergy Secretary Steven Chu, Homeland Electric utility companies under- Security Secretary Janet Napolitano, stand what’s at stake. Our companies and other key federal leaders to discuss have sensitive information assets, how we could work together more ef- such as intellectual property, trade- fectively. And this past September, as floor data, system-control data, and part of EEI’s CEO meeting in Colorado customer and employee personal in- Springs, utility CEOs received a secu- formation. Our companies also oper- rity briefi ng from U.S. Northern Com- ate extremely sensitive physical assets, mand, the North American Aerospace such as nuclear and fossil power plant Defense Command, and other security control systems, fuel supply delivery and intelligence agencies. systems, substations, and communica- In addition to these high-level dis- tion networks. Our companies are in- cussions, electric utilities also are terdependent with other key sectors of engaged in several public-private partnerships that help us strengthen Lew Hay is executive chairman of NextEra Energy and chairman of Edison Electric our capabilities on the front lines of Institute. the cyber threat. One example is the

42 ELECTRIC PERSPECTIVES The Threat Scenario Project examined a wide range of threats that could have an im- pact on the operations of our companies.

Electricity Subsector Cybersecurity tively. And a partnership among DHS, utilities gathered in St. Louis to share Capability Maturity Model. This ef- the Idaho National Laboratory, and the their experiences and evaluate the va- fort brings together the Department of U.S. Computer Emergency Readiness lidity, applicability, and completeness Energy, the Department of Homeland Team helps our companies test the se- of the mitigation measures they have Security (DHS), public policy experts, curity of new equipment and software, implemented. and the private sector. The model is a as well as provides specialized training benchmarking tool that a utility can to help our employees better protect Our Industry’s Agenda use to measure the overall effective- our industrial control systems. Our industry’s current collaboration on ness of its cyber security program. Last EEI also has provided leadership and cyber security is robust, but it is natural year, 20 utility companies participated support to member utilities through to ask how we can perform even bet- in a pilot to prove this model. the Threat Scenario Project, commis- ter. In Washington, DC, our leaders ask Other public-private partnerships sioned through The Chertoff Group. periodically whether we need new leg- also have proven their worth. The This project examined a wide range of islation, new regulation, or new action electricity sector’s Information Shar- threats that could have an impact on by executive branch officials to help ing and Analysis Center helps us more the operations of our companies, in- us meet the cyber threat. Our industry thoroughly understand the threat en- cluding many cyber threats. From that has an obligation to make clear to our vironment. The Electricity Subsector work, the EEI Resiliency Self-Assess- leaders how they can help strengthen Cybersecurity Risk Management Pro- ment tool was developed, which many cess enables organizations, regardless utilities have used to identify potential 3-D defense. Idaho National Laboratory of size or governance structure, to ap- gaps in their cyber security efforts. Last is testing Sophia, a system to help grid ply risk management processes effec- summer, representatives of nearly 40 operators detect cyber intruders.

JJANUARYA N U A R Y //FEBRUARY FEBRUARYF E B R U A R Y 20132 01 3 43 gain access to the timely, sensitive, and actionable information that could help us further protect the grid. Too many legal roadblocks and liability concerns prevent electric utilities from sharing information with each other and with the government. Washington also must recognize that imminent cyber security attacks on our industry require not only timely information sharing but also close co- ordination to ensure an effective re- sponse. The electric utility industry is not in the law enforcement or intel- ligence gathering business, and the government has limited experience operating the electric grid. Thus we must communicate with each other openly and seamlessly, especially dur- ing a crisis, so that we can all avoid confusion as we communicate with those who depend on us. And any new federal emergency authority over our industry should be vested in a single our partnerships without reworking agency to prevent any possibility of The best those federal policies that have proven overlapping or confl icting federal au- successful. thority over our operations. defense The maxim “if it ain’t broke, don’t Devoting the right resources to ad- fix it” certainly applies to additional dress long-term vulnerabilities, as against cyber regulatory authorities over our indus- opposed to imminent cyber threats, try. Our companies are already subject requires a different approach to our threats is a to mandatory and enforceable cyber partnership with Washington. The security standards under the jurisdic- proven principles of risk management well-trained tion of the Federal Energy Regulatory are appropriate to guide how our com- Commission, while the Atomic Energy panies respond to long-term vulnera- employee. Act and Nuclear Regulatory Commis- bilities, and federal regulations should sion have created a similar regime for encourage us to use them. Sound risk nuclear power plants. Where we can management means prioritizing the improve regulatory oversight under the right assets and devoting the most re- current model, we should certainly do sources to protecting them. Sound risk it. But we urge leaders in Congress to management also means proactively leverage existing regulatory processes managing new risks, especially as the for making any necessary changes and smart grid develops. Our industry must leave the actual standards-drafting continue to work closely with suppli- and enforcement mechanisms to the ers, manufacturers, and government sector-specifi c framework that already agencies to ensure that the new tech- is serving our country well. nologies running the grid are secure, Washington should instead focus reliable, and aligned with the very lat- on how to further facilitate the pub- est cyber security standards. lic-private partnerships that we have Washington also can help our in- built over the past few years. One step dustry ensure that our product is not forward would be to improve the fl ow only reliable in a world of many cy- of information to electric utilities that ber threats, but affordable as well. Our could help us meet the cyber threat. industry supports mechanisms to re- Too few of our employees have the na- cover costs associated with meeting tional security clearances necessary to cyber threats that are similar to those

44 ELECTRIC PERSPECTIVES Effective leadership at the CEO level begins with an effective strategy for our cyber secu- rity and information assurance activities.

in place related to extreme weather in the event of a cyber attack. There- As leaders, we must also recognize events such as hurricanes. We also sup- fore, it is absolutely critical for each of that cyber security is as much about port liability protections so that cyber us to take appropriate action so that our people, policies, and processes security initiatives have safe harbor our companies can meet the threat. as it is about technical solutions. So from frivolous lawsuits and that in- So, in addition to participating in the we must make sure that there is close formation voluntarily shared with the various public-private collaboration collaboration among those respon- government is exempt from public dis- efforts underway, and in addition to sible for physical and cyber security closure and not available for offi cials working with our leaders to ensure that activities and that they have author- to regulate other activities. These two any new federal policies will build on ity to take necessary action to protect reforms would help keep our costs low what’s working, each of us must make or recover critical network operations. and allow us to continue investing in cyber security a priority throughout We also must remember that the best new technologies that deliver benefi ts our organizations. defense against cyber threats is a well- to our customers. Effective leadership at the CEO level trained employee—so we must ensure begins with an effective strategy for that we have the programs in place to Every CEO’s Responsibility our cyber security and information help every employee and contractor in Regardless of developments in Wash- assurance activities. A sound strat- every department become an effective ington, every CEO in our industry must egy identifi es our most critical assets, partner in our defense. understand that he or she will be held assesses vulnerabilities within our Testing our defenses is one of the accountable for the reliability of the organizations, and determines the best ways to improve them, so CEOs electric system, even (or especially) consequences should these assets be should establish programs to test the compromised. A sound strategy helps vulnerabilities of our systems, net- Collaboration among those responsible drive our budget allocation processes, works, and applications. These can for physical and cyber security activities as well as our risk management pro- include “Blue Team” cooperative test- is key. So is authority to act. cesses. ing and “Red Team” adversarial simu-

JJANUARYA N U A R Y //FEBRUARY FEBRUARYF E B R U A R Y 20132 01 3 45 lations, as well as table-top exercises from which it is constructed. So we And we must also prepare for the specifi cally focused on cyber scenarios. must perform comprehensive initial worst, by planning ahead to recover We also should focus on our supply evaluations of our suppliers and then quickly from a damaging cyber attack chains. We wisely treat the vast ma- review them periodically for security or other unanticipated event. No elec- jority of contractors, service provid- risks. Every CEO also should have the tric system is impervious to attack, just ers, and business partners as trusted visibility across the entire supply chain as no system can weather the most agents. But the security of an enter- to have confidence that all acquired violent of storms. Therefore, every util- prise is only as good as the elements components remain in trusted hands. ity should have a plan to meet basic operational needs following a success- ful cyber attack and to begin restora- tion safely and as quickly as possible. Concrete Every utility also should have a “post- Solutions breach” communication plan that will from the We must StressCrete prepare for Group the worst, With more than 50 years of experience by planning in the industry, the StressCrete Group is North America's oldest and most ahead to re- reliable manufacturer of spun concrete poles. Concrete poles are ideal for utility and transmission distribution cover quickly lines, offering the following benefits: from a dam- ■ Lifetime Warranty ■ Zero Maintenance aging cyber ■ Easy Installation through Direct Embedment attack. ■ Quick Lead Times ■ Three manufacturing facilities include potential draft messages for across North America employees, customers, and all exter- ■ Engineered to specifications nal stakeholders. Such a plan will help ■ Available in all heights up to 110 feet leaders think through the challenge of ■ Environmentally Friendly how to remain a trusted voice with all To request more information these constituencies, even when infor- please phone toll free: mation is changing rapidly or hard to West & Midwest US: come by at all. 1-800-837-1024 As leaders of America’s electric utili- South & Southeast US: ties, we take cyber threats seriously, 1-800-435-6563 but we also can take heart. Unlike Northeast US & Canada: 1-800-268-7809 many other industries and agencies or visit that could be targeted for attack, our www.StressCreteGroup.com industry is already focused unceas- ingly on potential disruptions to our systems. We have experience recover- ing from those disruptions when they do occur. And we have a long history of assisting one another when the need arises. That spirit of cooperation should make us confi dent that we can meet not only the cyber threats we see

Northport, Alabama • Jefferson, Ohio • Atchison, Kansas • Burlington, Ontario today, but also those that we will meet in the years to come. ◆

46 ELECTRIC PERSPECTIVES How are you playing your cards?

Betting to Win in Generation For more information: The energy markets have raised the stakes again. Abundant gas and changing Tom Flaherty politics are shifting relative economics. Senior Partner Dallas Value will prove increasingly more elusive. 214-746-6553 Uncomfortable choices will have to be [email protected] made in what is the riskiest part of the business. The window for decisions— Todd Jirovec and action—is shrinking. Partner Dallas Drawing on a deep understanding of 214-746-6525 industry fundamentals, Booz & Company [email protected] assists the senior management teams of the world's leading power and gas companies with strategic decision-making, operating model innovation, capabilities differentiation, and performance enhancement. DIVERSITY NiSource: Women in the Leadership Pipeline By Mike Banas

n her 32-year career at NiSource Inc.’s Northern Indiana Public Service ICompany (NIPSCO), Saundra Taylor has stepped into historically male leadership positions. Fifteen years ago, she was the first woman at the company to supervise in a power plant. Then in early 2011 she became the company’s first female director of construction; and in June of last year she assumed the role of director of electric operations. “Some people said to me, ‘People are probably waiting to see you fail,’ but I didn’t let that get in my way or intimi- than 170 women employees convened. date me,” she said. The summit provided attendees with As a whole, the utility industry con- leadership development and network- tinues to make progress at diversifying ing opportunities uniquely designed its workforce and increasing the number for women leaders. Summit speakers of women in leadership positions. As a included senior-level executives from part of its efforts, NiSource created the NiSource and its board of directors.

“Building the NextGen: Women in Lead- Courtesy: Inc. NiSource “Leadership development is key to ership” program, which is part of the Carrie Hightman, EVP and chief legal offi cer NiSource’s success,” said NiSource company’s inclusion and diversity ef- at NiSource, speaks to attendees about president and CEO Bob Skaggs. “We forts and specifi cally designed to build “Leading on Purpose” during the 2012 must be focused and deliberate and a sustainable pipeline of women leaders NiSource Women in Leadership Summit. provide ongoing opportunities for at the company. experienced-based development and The program, an idea sparked by with Violet Sistovaris, senior vice presi- formal training.” a conversation in a parking lot with dent and chief information offi cer. Attendees and speakers discussed NiSource’s two most senior female “Having a program like this is not topics facing today’s women leaders, executives almost two years ago, only the right thing to do, but it’s the such as cross-gender communications, provides opportunities for women to smart thing to do,” said Sistovaris. building a personal brand, and over- come together to share ideas, discuss “Research shows that having a diverse coming adversity. challenges and opportunities, and build workforce enhances a company’s ability Teresa Taylor, a member of Ni- leadership skills. to meet its business goals. We believe Source’s board of directors, spoke about “We want to enable all of our women that we cannot achieve our goals with- leadership’s intangibles, which she de- to succeed in any way they want to suc- out an engaged and supported group of scribed as executive maturity, integrity, ceed,” noted Carrie Hightman, executive diverse employees.” and social judgment. vice president and chief legal offi cer. The program has evolved over the “Leaders who show executive matu- Hightman co-founded NiSource’s past two years to include three major rity practice deliberate emotions,” Taylor Building the NextGen program in 2011 components: company-wide and re- said. “They are calm and cool under

Mike Banas is a communications manager at gional summits; a mentoring program; pressure, while wisely using emotions NiSource, Inc. and a women’s affi nity group. to drive results.” In addition to the various internal Inspiration and Insight NiSource presenters and panelists at the NiSource held its second Women in Leadership Summit in Chicago on November 13-14, 2012, where more

48 ELECTRIC PERSPECTIVES Laurel Bellows (r) moderates a discussion with (l to r) Violet Sistovaris, SVP and CIO at NiSource, Maria Wynne, CEO of Girl Scouts of Greater Chicago and NW Indiana, and Joe Hamrock, EVP and group CEO at NiSource.

Development Through Mentorship Part of Building the NextGen is a pilot mentoring program, launched earlier last year. The program matched 16 women employees with male and female senior leaders from across the com- pany, with the aim of fostering profes- sional development specifi cally aligned with NiSource’s business goals. “There was tre- mendous interest The mentor- in the inaugural program,” Hight- ing program’s man said. “But we framework intentionally had to will serve as start small so we can

Courtesy: Inc. NiSource a model for build a sustainable, other formal long-term program.” Good Advice for Building a The mentoring and informal program is designed mentoring Women-in-Leadership Program to enhance Ni- programs Source’s leadership throughout the ■ Align the program and content with your business goals. pipeline by helping ■ Find a champion at the senior level within the organization to sponsor the effort. to attract, grow, company. ■ Get input and participation from all levels of the company (to ensure that the develop, and retain program is relevant and sustainable). talented, high-potential women. The 12-month mentoring program included ■ Build tangible and achievable program goals. a kickoff event, ongoing training, meet- ■ Celebrate and promote successes, even small ones. ings, guidance, and support. ■ Keep the content interesting, fun, and fresh. “Throughout my career, I have had ■ Build a culture of inclusion and diversity—start by educating employees about both formal and informal mentors who what it means to the company and what it means to each individual. have helped accelerate my professional development and expand my network,” said Sistovaris. “At every stage of my summit, external speakers included Ana “The speakers delivered powerful, career, I also have been a mentor to Dutra, CEO of Leadership & Talent Con- inspirational, and insightful messages,” others. As NiSource embraces mentor- sulting at Korn/Ferry; Stedman Graham, said Panpilas Fischer, tax manager at ing, the benefi ts to our organization CEO of S. Graham & Associates; Risa NiSource. “It made me realize that from will quickly become evident. Mentoring Mish, faculty director of the Accelerated the very top, the company is committed will further build our bench strength, MBA Program at Cornell University; and to cultivating opportunities for women.” create a development culture, increase Maria Wynne, CEO of Girl Scouts of A series of regional meetings will cross-organizational communication, Greater Chicago and Northwest Indiana. follow a parallel format to the recently and foster employee engagement and Graham, an executive, educator, completed summit but reach deeper retention.” and speaker with two New York Times into NiSource’s organizational ranks. Preliminary reports from mentors bestsellers, told the audience, “To be In the past year, more than 500 women and mentees have been positive, and a successful leader, you have to defi ne attended the summit or regional meet- the mentoring program’s framework will yourself and have a vision of where ings. serve as a model for other formal and you’re going. The way you see yourself informal mentoring programs through- defi nes how the world sees you. It’s not out the company. about your circumstances; it’s about your possibilities.”

JANUARY / FEBRUARY 2013 49 Broadening Understanding DAWN comprises more than 500 “DAWN is more than just about de- and Awareness male and female employees from across velopment. It’s also about creating a The third component of the program the company. In addition to collabora- resource network for each other and the includes a women’s affi nity group, De- tion and information-sharing through company,” said Dee Cota, manager of veloping and Advancing Women at Ni- the company’s intranet, the affi nity major accounts at NIPSCO and DAWN’s Source, or DAWN. The group’s mission group holds quarterly virtual meetings president. “Members also participate in is to embrace inclusion and diversity by and supplemental local onsite events community service efforts that impact communicating and exchanging infor- designed to develop and advance NiSource’s customers and communi- mation that helps women both profes- women at the company. ties. Plus, members—both men and sionally and personally. women—serve as a collaborative voice around shared issues and concerns while helping broaden the company’s understanding and awareness of inclu- sion and diversity.” DAWN has managed several events and programs: ■ topical discussions with successful women leaders at the company and var- ious other for-profi t and not-for-profi t organizations; ■ donation collection for the Dress For Success organization, which provides professional attire to disadvantaged women to help them fi nd jobs and re- main employed; ■ a workshop with external experts providing tips for leveraging mentors throughout a career and how leveraging these personal advocates can have a positive impact; and ■ training on various issues specifi cally related to women’s safety at work and home. “DAWN offers an invaluable opportu- nity to hear from dynamic speakers on relevant topics, to network with women leaders, and to help the community. As a member, it’s wonderful to see the enthusiasm and excitement across the company for our elevated focus on building great leaders,” said Lauren May, a NiSource communications man- ager. “At NiSource, we started with the broader need to concentrate on em- ployee development as a whole,” said Hightman. “Building the NextGen is an opportunity to focus on one diverse group—women—and their unique needs.” ◆

50 ELECTRIC PERSPECTIVES FINANCIAL A Seesaw Pattern for Utility Stocks By Mark Agnew

he Edison Electric Institute S&P 500, and nearly 20 ppercentercent Index trailed the major market for the Nasdaq Composite.te. OnlOnlyy T averages for the third quarter during 2012’s second quarter,uarter, when of 2012, returning negative 0.4 percent the broad averages posteded losses of 2 compared to the Dow Jones Industrial percent to 5 percent, did the EEI InIndexdex Average’s 2.9-percent and the more than outperform with a 6.6- 6-percent return produced by both the percent gain. S&P 500 and Nasdaq Composite Index. The seesaw pattern seeneeen

All ten major market sectors were stron- through the fi rst three iStockphoto ger than the EEI Index, with nine of the quarters of 2012 typifi es thethhe ten producing gains that ranged from performance trend since the dedepthspths ooff inging ssizeableizeable anandd wwide-rangingide-ranging cacapitalpital 4 percent to 10 percent. Only the Dow the 2008-2009 fi nancial crisis. When investment programs that include dis- Jones Utilities sector, which returned markets fall on fears of slowing growth, tribution network upgrades, smart grid 0.3 percent, performed in- utility stocks tend to investments, a signifi cant boost in the line with the EEI Index. Such Broad global outperform due to their pace of transmission investment, ris- results on the broad market stable business models, ing emissions-related capex driven by are not surprising in a quar- macroeconom- the strength of their steady the need to comply with Environmental ter in which investors’ risk ic forces have dividends, generally strong Protection Agency regulations, and tolerance was boosted by re- been the prin- balance sheets, and the generation investments in select power newed commitments by cen- ciple driver of prospect of mid-single- markets. EEI’s latest capital spending tral banks to spur economic utility stock re- digit earnings growth (with research (completed in August 2012) growth, including September dividend-growth potential) shows that the industry plans to invest announcements by the U.S. turns in recent for a number of utilities. approximately $257 billion during the Federal Reserve of a third years, relative (See Table 1.) When cen- three-year period 2012-2014, averaging round of quantitative easing to other mar- tral banks announce plans about $86 billion per year. This repre- and by the European Central ket sectors. to support markets with sents a slight quickening of the $75 to Bank that it stands willing additional liquidity pro- $79 billion pace of 2009 through 2011, to purchase the government grams and when fears of which refl ected some delays in projects bonds of financially stressed Eurozone recession fade, the industries and com- arising from caution during and after nations. U.S. equity markets also were panies whose profi ts are more cyclically the 2008-2009 fi nancial crisis. Credit spurred higher by indications of contin- geared to economic strength will be the analysts are generally positive on the ued growth in the domestic economy, better stock market performers. industry’s ability to fi nance an aggres- which seemed, during the second quar- sive pace of investment, noting that ter, to be on the verge of descending Steady Industry Fundamentals while it is now cash fl ow negative on back into recession. Indeed, broad global macroeconomic an annual operating basis, its balance Year-to-date through September forces have been the principle driver sheets are generally strong and utilities 30, the trend is pretty much the same. of utility stock returns in recent years, have access to a diverse range of fund- While the EEI Index produced a positive relative to other market sectors. Inves- ing sources. The industry weathered 4.7-percent return for the period, the tors now take mostly as a given the the storm of the 2008-2009 fi nancial strong broad market gains in the fi rst industry’s reasonably strong business crisis by postponing optional capex quarter and third quarter supported fundamentals. Utilities are undertak- projects and fi nding cost savings where much stronger returns by the major possible without jeopardizing service averages—10.0 percent for the Dow quality. Today’s economic backdrop is Jones Industrials, 16.4 percent for the much improved from that period, and with interest rates at multi-decade lows Mark Agnew is director of fi nancial analysis at Edison Electric Institute. and investors of all types hungry for yield, the capital markets are wide open

JANUARY / FEBRUARY 2013 51 for most economic sectors, including Natural Gas Prices downward grind from utilities. The execution risk inherent in Little Changed $16 per MMBTU in 2006 managing large, complex construction Natural gas spot prices and $12 per MMBTU in projects in a way that addresses the were little changed dur- 2008 was evident in the interests of both shareholders and regu- ing the third quarter, futures curve, which in lators seems far more pronounced than hovering just under September shifted up fi nancing risk. $3 per million British 10 percent for 2013 de- Bigstock thermal units (MMBTU). livery dates and nearly However, potential indication they have 8 percent for 2014. Analysts, however, hit a solid bottom after a 5-year-long appeared to fi nd little conviction that the move was more than temporary— possibly refl ecting Federal Reserve monetary policy more than natural gas market fundamentals—pointing to the vast quantities of shale gas now acces- sible through horizontal drilling and hydraulic fracturing, and the belief that natural gas storage levels would remain high regardless of the severity of the upcoming winter. After years of down- ward revisions to price forecasts, few appear ready to make a bullish call.

Low Interest Rates Grind On The 10-year Treasury yield drifted around the 1.5-percent to 1.8-percent range during much of the third quarter, after falling from a 2012 high of about 2.4 percent in late March. Historically low interest rates have unquestionably offered an important source of support for utility shares in recent years by re- ducing the signifi cant interest expense component of utilities’ cost structure and elevating the value of the dividend stream for investors. At the end of the third quarter the industry’s dividend yield was 4.1 percent, the highest of all S&P 500 sectors.

Mixed Valuation Signals The broad market’s gains during the third quarter along with the EEI Index’s fl at performance removed some of the richness to utility share valuations that several analysts noted at the end of the second quarter. Indeed, the magnitude of underperformance for the fi rst nine months of 2012 is similar to that which occurred during the same period of 2009, after markets bottomed and then recovered from the losses produced by

52 ELECTRIC PERSPECTIVES TABLE 1 Energy (25.0 percent in the fi rst quarter) EEI INDEX TOP TEN PERFORMERS had the largest percentage increases. (For the 9-month period ending NV Energy increased its quarterly September 30, 2012.) dividend from $0.13 to $0.17. The com- Return Company Category (%) pany expects the increase to result in a dividend payout ratio of approximately Sempra Energy MR 20.6 50 percent in 2012 and said it will target NextEra Energy, Inc. MR 18.7 a range of 55 to 65 percent in the future. PNM Resources, Inc. R 17.9 With the latest increase, NV Energy has more than doubled its dividend since UNS Energy R 17.2 MGE Energy, Inc. MR 16.1 CH Energy Group, Inc. R 14.5 DTE Energy Company R 13.6 NV Energy, Inc. R 13.2 Pinnacle West Capital Corporation R 13.0 Edison International R 12.8

Note: Return fi gures include capital gains and dividends. R = regulated, MR = mostly regulated, D = diversifi ed. Source: EEI Finance Department AP Imageso the fi nancial crisis. As the market recov- in the third quarter. Although Dividend Tax ery continued in 2010, with 14-percent only three companies raised Four-per- Rates Set to Rise in to 17-percent gains, the staid utility their dividend during the cent dividend Early January sector’s 7-percent return could not keep third quarter (typically a yields give The 15-percent tax rate on pace. Yet when 2011 produced worries quiet period for dividend utility shares dividends and capital gains of economic slowdown, the worsening changes), the total of 31 considerable for individuals is set to of the European debt crisis, and the companies in 2012 that ei- expire at the end of 2012 summer’s woefully memorable defi cit ther increased or reinstated price support unless Congress and Presi- gridlock and S&P downgrade of U.S. their dividend exceeds the relative to the dent Obama take action. Treasury debt in August—along with 23 to 26 seen during the lower yields The 15-percent dividend sharply falling interest rates—the EEI same nine-month period available tax rate remains vital for the Index powered forward with a 20-per- from 2005 through 2011. from bonds. industry’s ability to attract cent return against single-digit gains For full-year 2011, the 32 investment capital. EEI and across the broader markets. companies (58 percent of the industry will continue With the industry business models the industry) that raised or reinstated to encourage Congress and President now set on regulated or mostly regu- their dividend were similar to the 34 Obama to extend the current 15-percent lated structures, and with slow growth in 2010 and 31 in 2009 and below the rates until comprehensive tax reform in earnings and dividends as the main 37 and 43 in 2008 and 2007, but well is enacted. When the magazine went to appeal for investors, such periodic above the 27 companies (42 percent of press in late December, negotiations on reversals of fortune, driven by changing the industry) that did so in 2003. The resolving this and other fi scal cliff tax economic prospects and investor senti- 15-percent dividend tax rate enacted in issues were continuing. ments, seem likely to continue. Interest 2003 has supported the high number rates are now at multi-decade lows and of increases in recent years. As of Sep- IDACORP Announces while analysts still cite utility price/ tember 30, 2012, all 51 publicly traded Second Increase in 2012 earnings ratios as above average, 4-per- companies in the EEI Index were paying The industry’s average dividend in- cent dividend yields give utility shares a common stock dividend. crease during the fi rst nine months of considerable price support relative to 2012 was 7.3 percent, with a range of the lower yields available from bonds. 0.8 percent to 30.8 percent and a median increase of 4.1 percent. NV En- Widespread Dividend ergy (30.8 percent in the second quar- Increases Continue ter), IDACORP (aggregate 26.7 percent in The shareholder-owned electric utility the fi rst and third quarters), and Sempra industry added to its eight-year-long trend of widespread dividend increases

JANUARY / FEBRUARY 2013 53 reinstating it in July 2007 at $0.08 per second consecutive large increase by TABLE 2 share. IDACORP announced its second the parent company of San Diego Gas SECTOR COMPARISON, increase of the year on September 12, & Electric. This follows a 23.1-percent DIVIDEND PAYOUT RATIO raising its quarterly dividend from $0.33 increase last year, the industry’s third- (For the 12-month period ending to $0.38, or 15.2 percent. This followed largest jump in 2011. June 30, 2012.) Payout ratio the company’s 10.0-percent increase Sector (%) in the fi rst quarter from $0.30 to $0.33, Payout Ratio and Dividend Yield resulting in the overall 26.7-percent in- The industry’s dividend payout ratio was EEI Index companies 59.0 crease. Sempra Energy raised its quar- 59.0 percent for the 12 months ending Utilities 62.5 terly dividend from $0.48 to $0.60, the Consumer staples 47.1 Materials 35.2 Industrials 32.2 Health care 28.3 Consumer discretionary 27.1 Energy 24.1 Financials 23.7 Technology 23.5

EEI Index companies payout ratio based on common dividends paid and income before nonrecurring and extraordinary items for trailing 12-month period ending 6/30/12. S&P sector payout ratios based on estimated 2012 dividends and earnings per share as of 9/30/12. Source: AltaVista Research, SNL Financial, and EEI Finance Department

June 30, 2012, surpassing all other U.S. business sectors. (The industry’s payout ratio was 67.2 percent when measured as an un-weighted average of individual company ratios; 59.0 percent represents an aggregated fi gure. (See Table 2.) While the industry’s net income has fl uctuated from year-to-year, its payout ratio has remained relatively consistent :KHQLWFRPHVWR\RXUFXVWRPHUVZH´KDQGOHWKHPZLWKFDUHµ:H after eliminating non-recurring and NQRZWKDWZH·UHDKLJKO\YLVLEOHFRPSRQHQWLQWKHGHOLYHU\RIVDIH extraordinary items from earnings. From UHOLDEOHDQGDIIRUGDEOHHQHUJ\ 2000 through 2011, the annual payout )URPWKHZRUNSODQQHURQWKHJURXQGWRWKHDUERULVWXSLQWKHEXFNHW ratio ranged from 62.0 percent to 69.6 percent, peaking in 2009 due to the $VSOXQGKSURYLGHVWKHWUDLQLQJDQGHTXLSPHQWWRKHOSRXUFUHZV weak economy and the weather’s nega- SUHVHQWDSRVLWLYHSXEOLFLPDJH2XUSHRSOHH[SODLQWKHZRUN²KRZLW tive impact on earnings. LVGRQHDQGZK\LWLVQHFHVVDU\²VR\RXUFXVWRPHUXQGHUVWDQGVWKH The industry’s average dividend yield SURFHVV:HNQRZWKDWRXUFUHZV·SURIHVVLRQDOLVPVDIHW\DQGHIÀFLHQF\ was 4.1 percent on September 30, 2012, UHÁHFW\RXUFRPPLWPHQWWRFXVWRPHUVDWLVIDFWLRQ leading all other U.S. business sectors. The yield has been relatively unchanged $V\RXUSDUWQHULQYHJHWDWLRQ in 2012: at 4.1 percent on June 30, 4.2 PDQDJHPHQW$VSOXQGKRIIHUVD percent on March 31, and 4.1 percent at EHWWHUZD\IRUFXVWRPHUFDUH year-end 2011, although down slightly $%HWWHU:D\² 75((RU from 4.5 percent at year-end 2010 and 6DIHW\‡(IÀFLHQF\‡,QQRYDWLRQ ZZZDVSOXQGKFRP 2009 and 4.9 percent at year-end 2008.

54 ELECTRIC PERSPECTIVES $79.3 billion in 2014. These fi gures are based on a review of the latest capex projections for our entire universe of companies. Although there is a visible spike in 2012, the average projected spending for 2012-2014 is in line with industry averages over the past several years. The increase in 2012 is due to accelerations of various projects, a higher volume of near-term renewable projects (primarily solar and wind), and an expanded range of projects related to environmental compliance.

Fotolia Aggregate pre-dividend free cash fl ow remained in positive territory dur- Business Category Share Repurchases ing 2011, at $5.1 billion, following Comparisons Remain Low After 2007 Spike a positive $3.5 billion in 2010. This The mostly regulated group’s 4.3-per- Ten of the industry’s publicly traded metric was a negative $21.5 billion in cent yield on September 30, 2012, companies repurchased an aggregate 2008 and a negative $13.0 billion in led the regulated group’s 4.1-per- $190 million of common shares during 2007 (the industry’s fi rst defi cit year cent yield and diversifi ed the fi rst six months of 2012 since 2001). group’s 3.9-percent yield. In The indus- as an alternate way of re- Total aggregate industry-wide cash comparison, the regulated try’s dividend turning value to sharehold- dividends paid to common shareholders group yielded 4.3 percent at ers. This compares to 12 rose by $661 million, or 6.9 percent, in September 30, 2011, with payout ratio companies and $912 mil- the fi rst half of 2012 when compared to 4.4 percent for the mostly was 59.0 per- lion in the year-ago period. the year-ago period. On a calendar year regulated group and 3.7 per- cent for the 12 On a calendar-year basis, basis, dividends rose by $1.4 billion, cent for the diversifi ed group. months end- 15 companies repurchased or 7.7 percent, to $19.3 billion in 2011 The EEI Index, a market-cap ing June 30, $1.8 billion during 2011, from $18.0 billion in 2010. From 2003 weighted measure of total compared to 13 companies through 2011, total industry-wide an- shareholder return, gained 2012. and $2.7 billion in 2010, 11 nual cash dividends rose 57 percent, to 12.6 percent for the year companies and $908 mil- $19.3 billion from $12.3 billion. ◆ ended September 30, 2012, resulting lion in 2009, and a total of $2.4 billion in the lower yields for the two larger in 2008—all levels that were far below groups. The slightly higher result for the the $11.9 billion of 2007. The industry’s INDEX TO ADVERTISERS diversifi ed group is partly due to the re- common share repurchases exceeded Asplundh...... 54 moval of Constellation, whose dividend $6.0 billion in 2004, 2005, and 2006, yield was 2.5 percent, due to the March after rising from only $120 million in AT&T...... 39 2012 closure of its merger with Exelon. 2003. American Wind Energy Association ...... 5 The mostly regulated group’s divi- Booz & Company...... Cover 2, 47 dend payout ratio was 69.3 percent for Free Cash Flow Edison Electric Institute/ the 12 months ended June 30, 2012, Defi cit Continues in 2012 International Brotherhood of compared to 63.6 percent for the regu- The industry’s aggregate free cash fl ow Electrical Workers ...... 7 lated group and 61.3 percent for the remained in a defi cit during the fi rst six Elster...... 38 diversifi ed group. The regulated group months of 2012, at negative $14.8 bil- MDU Resources...... 52 typically produces the highest annual lion compared to negative $6.9 billion Michels Corporation ...... 50 payout ratio, having done so in 2010, in the comparable 2011 period. Cal- 2011, and each year from 2003-2008 endar year free cash fl ow was negative Pace Global...... Cover 3 (it was exceeded by the mostly regu- $14.2 billion in 2011, nearly unchanged Power Engineers ...... 9 lated group in 2009). from negative $14.4 billion in 2010, Quanta Services...... Cover 4 marking the seventh consecutive year of RES Americas ...... 11 negative results. Sargent & Lundy ...... 1 EEI’s latest projections (as of August 2012) for industry capex are $94.4 bil- Telogis...... 2 lion in 2012, $83.5 billion in 2013, and Schneider Electric ...... 29 The StressCrete Group...... 46 Utility Line Construction Services ...... 16

JANUARY / FEBRUARY 2013 55 anotherperspective

consumer-focused energy issues through discourse and de- Get Integration Right bate, with the goal of fi nding consensus when possible, and, at a minimum, achieving a clearer understanding of—and By Elizabeth Stipnieks, director, regulatory relations, and appreciation for—each other’s positions and concerns. Becky Harsh, director, retail energy policy, at Edison Electric November’s conference, “Our Distributed Future,” ex- Institute. plored the latest DER technologies and policies; and panels made up of state commissioners, consumer advocates, and n the grid, electric utilities are replacing analogue electric industry leaders discussed DER’s benefi ts and chal- electro-mechanical technologies with an ad- lenges, as well as relevant public policy initiatives and regu- vanced digital information and telecommunica- latory actions. O tions network. In so doing, they are creating an Electric utilities had several concerns. For example, some electric superhighway for the 21st century—one that’s more DER incentives, such as net meter- reliable, secure, and capable of meeting the rapidly changing ing (whereby the customer can put energy needs of its customers. (See “Customer Engagement,” The growth excess self-generated power onto page 30.) of DER affects the system and be compensated), To a great extent, the efforts to transform the country’s both utility have the potential to shift costs electric distribution system have sparked the rise of distrib- and customer, from self-generating customers to uted energy resources (DER), which can include rooftop solar and it raises non-self-generating ones. That’s panels, microturbines providing auxiliary power, energy stor- questions because the utility must purchase age systems, and about how excess power from the self-gener- even microgrids. As states should ator at the full retail price, which the industry moves regulate, includes the fi xed costs of the dis- away from a system as well as tribution network. Customers with- in which electric- encourage, out DER might then have to pick ity fl ows one way— DER’s use. up those costs, thereby subsidizing from the utility to customers with DER. the customer—to a Also, the utility must be able to recover the costs associ- grid that can handle ated with supporting DER. By the same token, if self-generat- both power and in- ing customers no longer contribute their share of fi xed costs formation flowing or pay for the costs they impose on the system, remaining Courtesy: Capstone Turbine Corp. Courtesy: Capstone Turbine back and forth from customers could be exposed to higher rates. In addition, customer to the utility, as well as variable fl ows, it also is utilities continue to make signifi cant investments in their creating more options for customers to generate their own distribution systems and backup power sources to accom- electricity. modate the growth of DER on their systems. Those costs also The growth of DER affects both utility and customer, and it must be recovered. raises questions about how states should regulate, as well as Moreover, rates that fail to recover the appropriate share encourage, DER’s use. In addition, the growth of DER presents of integration or backup service costs from DER customers reliability challenges. Because the grid is designed around a may encourage DER applications that are not economically central-station paradigm, DER must interact with the system effi cient, which raises the total cost for all customers. in a way that maintains system reliability. Utilities therefore Some areas may limit or prevent electric utility partici- are critical partners in the development and safe integration pation in DER markets on the ground that participation of DER: They know where, when, and how they can deploy would not allow the DER market to develop in the most cost- and dispatch these resources optimally, so the system as a effective and effi cient manner. But active participation in whole can benefi t. DER markets will give utilities another avenue for providing a The related policy considerations can be complex. Last reliable and affordable electricity supply; and, as competitive November, more than 200 state commissioners, consumer providers, they also will promote effi ciency and innovation advocates, and electric industry leaders met in Baltimore in market development. under the auspices of the Critical Consumer Issues Forum (CCIF) to begin unwinding those issues. A Solid Foundation The electric utility industry supports its customers’ desire Concerns with Cost Shifting, Need for Cost Recovery to adopt DER—at the same time, the transformation of the In many ways, DER is the prototypical issue for which CCIF nation’s electric distribution system must be accomplished was created in 2010. At the time, the National Association of correctly. The November CCIF forum provided a solid founda- Regulatory Utility Commissioners (NARUC), the National As- tion for achieving this goal. In spring 2013, CCIF is scheduling sociation of State Utility Consumer Advocates (NASUCA), and more discussion on this topic via a series of similar summits. Edison Electric Institute established the group to address For more information, please visit www.CCIForum.com. ◆

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