You’ve probably just been named to head an acquired portfolio of generation
assets. Or maybe you’re one of the visionaries who “led” your company
through the regulatory hurdles of forming an unregulated generation company
affiliate. Either way, your formula for future success has evolved – you’re
now a part of industry in general. Your chairman and shareholders expect
you to be profitable and produce value – now. Sure, they realize you still
have to maintain a reliable generation system and that you have an obligation
to serve, potentially as the provider of last resort. However, that’s
your worry, not theirs. They are focused on profitability and cash flow,
as they should be, given the level of capital invested in your company.

Weren’t you the one that pushed for competition? Weren’t you the one
that said, “Our world is changing, and we need to be ahead of the curve
and the rest of the industry?” Weren’t you the insightful, outspoken advocate
of the benefits of competition among your management team? Yes, you were
and now, as your reward, you’re the person in charge in this new environment.
What will you do? How do you make your new company successful?

This white paper is going to give you some guidance on how to energize
(excuse the pun) your company’s performance. The changes that need to
be made are dramatic, difficult, and most importantly, involve you. You’ll
have to work hard, and you may not have all the answers. That’s okay –
your people expect this to be a learning process. Your shareholders, on
the other hand, don’t expect it to be a long process.

Transcending “Old School”

Your employees are ready and willing for you to lead them. Many of these
people have been waiting their entire careers for an opportunity to prove
that they can compete and that their facilities can be successful in an
open market. However, one problem may exist – you aren’t sure of their
abilities in such an environment. You might lament, “Where can I get the
right kind of employees for a competitive marketplace?” Your current employees
were just recently regulated generation employees (never mind that both
you and I came from the utility industry as well). Some may suggest that
they’re “old school.” In other words, they don’t know the first thing
about competition. They’re accustomed to a cost-plus perspective. They
don’t know how to be efficient because they’ve never had to be.

Well, you’re partially right. You do need some new team members. But
it’s not new employees that you need – it’s “new” management. You’re the
problem. Yes, you’re the biggest single hurdle to your new company’s success.
Quit scoffing, I’m dead serious. You have to change. Most of what you
believe, particularly as it relates to managing your new company, needs
to be thrown out the window. The insight and acumen you acquired working
your way up the corporate ladder in a regulated utility doesn’t work very
well in a competitive company. Trust me.

Rules for Success

Instead, there are some new basic rules for success. These are fundamentals,
for lack of a better term, that many regulated utility managers have forgotten
over the years.

Rule #1: Trust Your Employees

They know what they’re doing. Give them latitude. Allow them to have
more decision-making authority than you feel comfortable giving. Toss
aside the old utility perspective that senior management can trust its
employees only after they have proved they can be trusted. This naïve
and negative way of thinking may have caused more harm to your company
than any other innate characteristic of management. You’ve probably always
wondered why your employees didn’t have a lot of trust in management.
Well, it’s because management never trusted its employees. If you want
to forever correct this situation, you and your managers must change.
Sever all of your managers that you don’t trust first. Until your employees
really believe that you trust them to do the right things, they won’t
contribute to the company’s performance improvements. It’s a domino effect
– one executive demonstrating mistrust will affect the image of all managers
including you personally.

Rule #2: Care for Your Employees

Your primary responsibility as the leader of your company is to take
care of your employees. Your employees need to be well-trained, well-compensated,
and treated with respect. Encourage your employees to have a healthy balance
between professional and personal responsibilities. If you are the 80-hours-a-week,
work-until-midnight type of manager (and many of us have been given all
the new demands of deregulation), stop now. Common sense tells you that
your effectiveness is directly related to your personal well-being, and
no one can be at his or her best when they’re burning the candle at both
ends. Your employees will emulate senior management’s practices; therefore,
if you work 80-hour weeks, so will they. Burn-out, poor employee morale,
and high turnover will be the result. Lead by example and show your employees
that spending time with family and friends is at least as important as
working hard.

Train your employees, encourage them to attend post-graduate education
programs – and pay for it. The value created by having smarter employees
more than offsets the cost of funding additional education. Seeking knowledge
is a trait that you must foster with your people. Elevating the company’s
intellectual capital will, in turn, bolster its overall performance. Each
of us knows we have only a few truly good ideas a year and, if your company
is going to succeed in a new marketplace, you need to increase the number
of employees generating good ideas. Quality, post-graduate education will
lead to good ideas from your employees.

Compensate your employees with motivation in mind. This doesn’t mean
you have to be top tier from a total compensation perspective. It does
mean, however, that you have to essentially make compensation a non-issue.
Provide fair base salaries and larger incentive opportunities than you
were accustomed to in the regulated utility industry. Cash is king, and
your short-term incentive programs should be laden with cash rewards.
Give your employees the opportunity to win large bonuses, and they will
produce big results to earn them. Also, don’t falsely assume that your
employees don’t care about the long-term performance of the company. The
fact is they probably have a greater vested interest in it than you do.
They’re neither as mobile, nor as sought-after by competitors, as you
are. Given this fact, allow your employees access to wealth creation tied
to the company’s success by more broadly providing stock options. And
don’t stop the small recognition programs that your company may have had
in place, either. You know the kind that I mean – an employee reaches
an important goal, gets his or her picture in the company newsletter,
and receives a company logo paperweight or pin. Eliminating these programs
and gestures sends the wrong message that small contributions don’t matter.
On the contrary, in our business, as in any commodity-driven marketplace,
routinely being able to hit singles produces a lot more runs than the
occasional home run (unless you’re Mark McGwire, of course). Therefore,
recognition for small successes becomes even more important as the company
moves toward its new structure.

Treat your employees with respect and value their time as if it were
your own. Your employees are the company “doers.” Every time you inadvertently
miss a meeting, postpone a discussion, or don’t have time to review a
document, your company is losing valuable “doing” time. Remember, because
we’re encouraging our employees to have a healthy balance between work
and family, lost productivity is worth even more in a competitive environment.

Likewise, don’t dominate interactions with employees. They know your
way of thinking and beliefs. It’s been splashed all over the company through
newsletters, press releases, and other company materials. Instead, listen
to your employees. Focus on their ideas and feedback. Set a goal for yourself
of trying to leave each employee meeting with a new piece of information
– how the company performs, what your employees think about a situation,
or how you might improve your own performance. If you pay attention to
what your employees are saying, there will be at least one new performance
improvement opportunity embedded in their comments. Most employees are
quite adept at identifying areas where senior management needs to improve
and at conveying their opinions in a politically correct manner. All we
have to do is listen and the message will be there.

Rule #3: Focus On Results

Utilities are well-known for their ability to over-analyze, study, and
research an issue. The running joke in the industry is that this tendency
produces the “paralysis by analysis” mentality. It doesn’t matter if this
perception is factually based or relates to your old way of doing business
(of course, your former company didn’t have this reputation – it was the
“other guy”). You and your company have to move quickly. You can’t be
fascinated with the “process of the process.” Believe it or not, this
quarter’s results are less than 90 days away, and your chairman and shareholders
are expecting you to perform again, remember?

A big part of your focus on results will be access to financial information
when you need it, and that means as close to real-time as possible. If
your generation portfolio is going to be selling predominantly into merchant
markets, I can’t foresee any way that you could effectively monitor your
performance without daily gross margin reports. Daily reports? Absolutely.
You have to know from day-to-day how much production you had, at what
price you sold it, and how you stand relative to that month’s approved
plan. I realize that this is foreign to a traditional utility’s accounting
and reporting group whose typical close is measured in weeks versus days,
let alone hours. Additionally, you need to monitor your Operations & Maintenance
and General & Administrative expenses on a real-time basis. The nimblest
competitors in this new generation marketplace live and breathe their
margin and cost information, and use it to their advantage. You’re producing
and selling a commodity in a competitive market that oftentimes is not
as efficient as it should be – knowing your margin and cost positions
can guide your asset managers in determining how best to position your
assets, both from a capacity and energy perspective.

Another important element for a successful future is transforming the
pace at which business is conducted. You need to establish a sense of
urgency. How do you accomplish this? Demonstrate your willingness to make
a decision in a situation when you have only 60 percent of the required
information. I know that this is the antithesis of every experience in
a career characterized by public utility commissions (PUC) habitually
re-evaluating major company decisions. Surprise – the PUCs are also changing.
They realize that an “after-the-fact” approach will jeopardize their very
existence. They know that companies need to be more responsive and free
to act competitively. The PUCs recognize which way the winds of deregulation
are blowing just like you do. Remember, it’s this same PUC and commission
staff that had the foresight to approve your spinning off the utility’s
generation assets into an unregulated affiliate or allow the sale of these
assets to an independent third party, like your company, in the first

When you adopt this “60 percent and go” policy, you need to be prepared
for what will inevitably happen. Your company will make mistakes. In fact,
your company will make a lot of mistakes. Your response to a mistake determines
whether or not you will succeed in this new competitive environment. When
mistakes are made, admit them – and then fix them. Acknowledge your own
mistakes and your employees will acknowledge theirs as well. This will
promote trust and encourage your employees to take risks. And don’t be
afraid to talk about mistakes. In the past, too many companies considered
sweeping mistakes under a rug to be a solution. Grab that rug, pick it
up, and shake it out. Give your employees an opportunity to discuss lingering
mistakes for learning and healing purposes, then move on. Both you and
your employees will find that this is a great way to refresh your collective
enthusiasm about the company and its strategies.

Going forward, prepare a lessons-learned summary so you don’t make the
same mistakes twice. Ensure that everyone has access to this summary and
encourage employees to update it. Be prepared to deal with some delicate
issues because mistake recognition/resolution must involve everyone –
even you – or your employees will doubt the commitment to risk taking
and quick decision-making. Hire good people, and don’t be afraid to admit
that you can make mistakes in hiring. Moreover, don’t fall into the old
trap of keeping bad hires to avoid recognizing your own mistakes. As one
of my long-time officers has always said, “When a poor quality person
shows up for work, it’s like two good employees calling in sick.”

Rule #4 – Invest Wisely

Economically justify every capital investment. You and your company probably
aren’t operating under a protective regulatory umbrella anymore. Investments
will not be guaranteed a return from captive customers. In fact, if you
make a bad investment decision today, and it affects your customers tomorrow,
they have a choice – they can choose your competitor’s energy and capacity.
Always question, challenge, and understand every detail about your investments.
You need to lead the way by following a stringent economic approval process.
If an investment doesn’t meet your pre-established economic hurdles, it
doesn’t get funded. End of discussion.

This industry is top-heavy with capital and contrary to longstanding,
utility industry belief, capital does have a cost. Tomorrow’s generation
winners will be the participants who produce energy at the lowest possible
cost, which generally translates into the smallest amount of invested
capital, today. In an industry where competition is replacing monopolistic
regulation, irrational pricing behaviors can emerge. This means that some
of your competitors, in the short term, will sell their capacity and energy
for less than their invested cost in order to maintain minimum levels
of cash flow, even if it adversely impacts their financial ratios. You
and your company, however, can’t get caught in a situation where you suffer
losses because your capital costs have escalated. It’s easier to cut period
costs than to reduce invested capital in an effort to remain financially
viable, ignoring the obvious fact that capital cost reductions are a more
arduous and lengthy process.

The best advice is to adopt a “capital is scarce” attitude. Be a champion
of rigorous economics on your plant investments, particularly on your
aging facilities. Instill an intolerance for faulty analysis and poor
economics when it comes to capital decisions. Standardize your investment
decision methodologies. Ensure your management team understands why the
methodologies are important and what the necessary investment hurdles
are before a capital project goes forward.

Rule #5 – Watch Your Costs

Be a miser when it comes to General & Administrative expenses. It never
ceases to amaze me how often executives forget that for every dollar of
expense they incur, it’s one less dollar of earnings realized. The days
of the cost-plus regulatory compact are long gone. We’re all accustomed
to the PUC ensuring prudent spending of the ratepayers’ money. That’s
not good enough in a competitive environment. You need to raise the bar
even higher. Your employees and, most importantly, you should spend the
company’s money as if it were your own.

Sure, opportunities for meetings, conferences, and seminars in popular
vacation spots will land on your desk. Think instead about ways to save
the money it would cost to attend. Contact the organization to learn if
it will post findings or minutes of the gathering on its website. Better
yet, maybe the organization will conduct a webcast of the event. If you’re
told “no,” suggest it to the organization’s public affairs or communications

A lot of these organizations and their events can affect your company’s
competitive edge by taking away your best people at the wrong time. It’s
safe to say that you have a fair number of people assigned to various
committees and strategic studies undertaken by groups using your sponsorship
money, right? Evaluate the value proposition that these committees and
studies offer your company. Think about ending your company’s membership
if the cost/benefit ratio is negative.

Guide your employees by your own actions. Involvement in these groups
should be driven by clear indications of value that the company receives
in exchange for its investment of time and/or money. As a leader, you
must have the courage to cut ties to those organizations or initiatives
that don’t measure up.

In Conclusion

I know what you’re thinking – you could add another five rules to my
list. They could be just as valid as what I outlined. Hopefully, you have
recognized the over-riding theme. It’s a common-sense, pragmatic style
to leadership and management that we were all taught by our parents. It’s
uncanny how the best leaders and their companies follow these simple rules
of life:

  • Be trustworthy, respectful, and caring
  • Be results-focused and purposeful
  • Be frugal

Try these out. See how well your employees respond to the “new” you.
They’re waiting for you to lead them, so lead.