| BUSINESSWEEK ONLINE : DECEMBER 13, 1999 ISSUE | ||||||||
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| THE CORPORATION
Not Acting at All Like a Utility Power giant AES is surging ahead in a deregulated market Christine Bailey spent about $200 a month to light and power her six-bedroom, 86-year-old colonial-style house in Westfield, N.J. It seemed like a lot, so when New Jersey recently deregulated its power industry, she went hunting for a deal on the Internet. It didn't take too many clicks of the mouse to find the Web site for Power Direct, an independent newcomer. There, Bailey perused such options as a 10% guaranteed savings through 2001, electronic bill payment--and, for slightly higher payments, an environmentally friendly plan in which Power Direct helps cut power-plant emissions. But the clincher came when Bailey compared Power Direct's prices with those of her local utility, Public Service Electric & Gas Co. (PEG), and came away with a $50 cut in her monthly bill. Her house has been humming with Power Direct electricity since Nov. 15. ''I did it for pure economics,'' Bailey says. It figures that if any independent power company was going to chase low-margin, residential customers such as Bailey, it would be AES Corp., the parent of Power Direct and an industry maverick. Energy deregulation is coming in fits and starts to the U.S., and early industry efforts to tap small consumers fell flat. Most competition today focuses on serving energy-sucking giants such as Ford Motor Co. (F), which can afford its own power station. Since summer, though, AES (AES) has used a low-cost strategy to buck that conventional wisdom. BE NIMBLE. Unlike most other companies in the industry, AES believes deregulation offers a big opportunity to sell to individuals and small businesses. The effort is in the early stages. Nearly all of the company's $3 billion in revenue still comes from power generation--about 55% of it outside the U.S. And so far, AES has spent less to capture small and midsize accounts in New Jersey and Pennsylvania than it has sometimes paid for a single power plant. But if AES can perfect a model, it could grab share quickly as deregulation spreads. Only about 9% of the $218 billion U.S. market is currently freed up. Whether Power Direct pans out or not, it demonstrates the nimbleness of one of Corporate America's most decentralized managements. CEO Dennis W. Bakke and Chairman Roger W. Sant created a company 18 years ago whose hierarchy is nearly flat. The 40,000 employees are organized in regional groups, which have responsibility for their own planning, budgeting, and financing. Each team's leader has final say on investment in the region. There's no overall strategic plan and no oversight on spending. ''We have no sign-offs at all. None whatsoever. Zero,'' Bakke says. Even the board of directors is more adviser than decision-maker. ''If [employees] have to get our approval, they're not making decisions. We're making decisions,'' Bakke reasons. BREATHTAKING. This setup generates some very un-utility-like growth. AES should rake in net income of $377 million this year, up 21% from 1998, on 25% higher sales, according to a report from Donaldson, Lufkin & Jenrette Inc. Even that's down from its recent pace. Driven by a breathtaking string of power-plant acquisitions in developing countries, AES posted average annual earnings gains of 54% over the past three years. Its debt-to-capital ratio of 72% is in line with the industry. Meanwhile, shareholders have been rewarded with a more than 400% increase in the stock price, to about 58, since Jan. 1, 1996. That's about four times the gains generated by Enron Corp. (ENE), another aggressive power producer. In March, AES was the only such company to make the Business Week 50 list of top corporate performers. The shares would be worth more, some investors suspect, if Wall Street were more comfortable with the company's philosophy. Bakke and Sant, who headed up conservation programs for the old Federal Energy Administration back in the 1970s, wrote into their company's charter that it would put social responsibility ahead of profitability. AES contributes about 5% of its earnings to nonprofit causes, through ''social responsibility'' funds and matching employee donations. The company hasn't always lived up to its mission: It was fined in 1992 after Oklahoma workers falsified emissions reports, but executives cut their own bonuses afterward. After leaving the government, Sant and Bakke built cheap-power plants and sold the electricity to lumbering utilities, which had to buy it under a 1978 federal law designed to increase generation. But the real growth was overseas. By the '90s, AES was buying assets in Argentina, India, Pakistan, and a dozen other countries as governments rushed to auction off electric plants. Those acquisitions--financed with debt tied to each plant's cash flow--fueled the phenomenal growth. AES is often the only independent supplier in regions that are just beginning to power up heavy industry. And company executives have cultivated ties with local leaders, giving AES an edge when power needs grow. The stock price swooned last year, as investors worried about the company's exposure to volatile economies in Asia and Latin America. But it bounced back as AES diversified, capitalizing on Europe's belated move to deregulate. On Nov. 30, AES closed on its $3 billion purchase of Britain's massive Drax coal-fired plant, which will boost the company's energy output by 11%, to 42,000 megawatts. If its consumer business in the U.S. takes off, AES should spread its risk further. In July, it paid $90 million for NewEnergy Inc. in Los Angeles, an aggressive retailer of electricity to businesses. And in October, AES completed its $886 million purchase of Cilcorp Inc., a Peoria utility. With the most ambitious energy retailers--Enron, Pacific Gas & Electric (PCG), and Duke Energy (DUK)--concentrating on big industrials, NewEnergy is focusing on midsize customers in the West and Northeast. Its clients include MCI WorldCom (WCOM) and Macy's (FD). The idea to go after even smaller accounts bubbled up from within Cilcorp, which had tried and abandoned a retail project three years ago. After regulators in Pennsylvania and New Jersey improved competitive conditions, Cilcorp Senior Vice-President William M. Shay and AES Executive Vice-President Thomas A. Tribone proposed jumping back in. Their plan: buy power in bulk from local utilities and independent producers and sell it, over the utility's own lines, to homeowners and small businesses. In typical AES fashion, a memo describing the idea was distributed to other employees, sparking four months of debate. ''It was very controversial,'' Bakke says. Still, Shay and Tribone decided to go for it. There are plenty of reasons to be skeptical. AES has to negotiate for enough cheap power that its customers don't suffer brownouts during peak usage. Meanwhile, local utilities have economies of scale and established customer relationships. Also, consumers have shown little interest in shopping around for such a plain-vanilla commodity as energy. Enron found that out three years ago when it tried creating a residential electricity business. It was launched with a $30 million national marketing campaign that included Super Bowl ads. But the efforts were greeted with a collective yawn, and Enron pulled the plug last year. Power Direct, with only 3,500 subscribers so far, is cutting its risk by concentrating for now on a single region and running a bare-bones marketing effort that relies on the Internet and direct mail. So far, AES has spent less than $2 million. Shay, who is now Power Direct's president, hopes to pay less than $100 to attract each new customer, compared with a $300 industry average. Enron ''went way overboard'' on advertising, he says. ''There wasn't a market to support that kind of cost.'' Bakke is frank in hedging his own expectations. He acknowledges that AES is moving from its specialty, power generation, into what is basically a marketing business. ''Do we know what we're doing? Are we really good at it? I have no idea,'' he says. But at this company, a strategy like that is too important for the CEO to take on alone. By Lorraine Woellert in Arlington, Va. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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