Rick Priory addresses the Business Today Forum in New York City

Business Today Forum
Rick Priory
Chairman, President and CEO
Duke Energy

New York, NY

Thank you. It is a pleasure to be in the company of so many bright young business minds.

I must confess to some generational envy: You are entering the world of business at a time of unprecedented change and opportunity. The economy is strong, the job market even stronger. Your academic preparations, from the most prestigious institutions in the world, make you great new leadership prospects for companies like mine that are constantly seeking smart, talented, high-energy men and women.

And I selfishly - but sincerely—hope that a number of you will consider coming to work at Duke Energy. Our recruiting folks are here, so I’ll try not to be too heavy-handed talking about my business. And I’m not going to talk to you about the workings of the business world. Your professors have done an excellent job of that. I’ll focus instead on world business - the global exchange of knowledge, innovation, experience and productivity that is touching every organization.

I must admit that the conference’s theme, “Out With the Old, In With the New: Is This the Future of Business?” did give me pause.

I am CEO of a 100-year-old company, after all. We’re a blue chip - not a dot-com—whose product and service line - energy - doesn’t exactly bear a New Economy label. And we’re big:

• We’re one of the largest energy companies in the world and a Fortune 100 company.
• We manage a dynamic portfolio of natural gas and electric supply, delivery and trading businesses.
• We are the number 2 gas trader in the U.S., the number 3 power trader and the leading producer of natural gas liquids.

We also deliver the earnings and growth fundamentals that our investors expect - not just lofty forecasts.

• In 1999, we generated revenues of $22 billion—and are on-track to deliver $40 billion this year.
• We are growing earnings per share—today—at the high end of eight to 10 percent a year.
• In the past 12 months, our stock price has gone from the low $40’s to the high $80’s.

The point I want to make here is that we shouldn’t view today’s marketplace as a standoff between old and new economies. That’s unproductive and unrealistic. All companies must harness the power of the Internet to connect with and serve customers in new ways and use the World Wide Web to reduce costs, bolster margins and create new revenue streams.

Our company is extremely bullish on Internet applications and business opportunities. Not a small part of that is enlightened self interest: As new economy technology companies continue to grow, we grow right along with them, because we’re powering the new economy. It’s hard to quantify the increase in power demand attributable to the Internet, but it is substantial and growing.

And, as the euphoric vapor surrounding the dot-coms clears, I predict they will be held to the same measures and valuation principles as other businesses. We’ll see a shift from the paradigm of valuing stocks on “potential” or “concept” to one based on earnings, cash flow and performance. A renewed mood of realistic valuation sobriety will set in, and investors will seek neither old or new economy companies - but “real economy” companies with the growing and staying power to prevail.

The Internet is one market force that is shaping our world and all of its businesses. Let’s move now to two others that are closely tied - market liberalization and globalization.

You don’t have to go far to find examples of the impact of open markets. Deregulation of the U.S. electric industry is a timely case in point: It wasn’t that long ago that my company was a regulated electric utility serving customers in the Piedmont Carolinas. Our rates were low, our service was good.

But passage of the 1992 Energy Policy Act signaled a whole new era in America’s last remaining and most complex “monopoly” business.

Today, 23 states have enacted electric restructuring legislation. Legislation is pending in two states and under active study in 16, including Duke Energy’s home states of North and South Carolina.

Our deregulating environment was and is propelled by the promise of cost savings, efficiencies, greater customer choice and improved service. The industries that deregulated before us - trucking, airlines and telecommunications—have proven that the competition of free markets spurs innovation, gives customers greater options and choice, increases the level of basic service and speeds new products to market.

You might ask - and I’d expect nothing less of this audience! - “So what went wrong in California this past summer, when electric consumers faced extraordinarily high power bills and the very real threat of power interruptions?”

I would respond that it is important not to confuse market readiness with market reaction to competition. In the case of California, power demand dramatically outstripped supply. While the demand for electricity had risen dramatically over the past decade, the state has build no new meaningful capacity in that timeframe.
Remember those supply and demand curves from freshman economics and what happens when supply is short? Well, that principle actually works in the free market!

In addition, the market rules developed in California quite frankly limit the participant’s ability to manage price volatility. That’s what happens when you’re first out of the chute, as California was with electric restructuring. You move quickly and don’t have the benefit of transition or lessons learned. The rest of us do have the advantage of California’s experience, and we are structuring the new rules of the road with the care and deliberation our consumers deserve.

Putting the free market genie back in the bottle isn’t the answer. And price caps, proposed by some states, are not the answer to high power prices and market volatility.

In fact, price caps reverse much of the progress toward building an efficient free market. They send artificial signals through the marketplace and are a throwback to the age of strict regulation.

Again, think back to Econ 101: when prices are high, new entrants flood the market, balancing supply and demand, reversing the price trend; however, artificial price caps would stifle that.

The real answer lies in creating a market that facilitates the construction of new supply, and provides equal access and opportunity for all who choose to participate.

A year ago, the Midwest faced a situation similar to that of California. But the market responded the way it should when demand was high and supply low: Duke Energy built two 500-megawatt plants. Other companies did as well, and the result of that market responsiveness has been more moderate power pricing in the region this summer.

Open, competitive markets work - at home and abroad.

Which brings me to an anniversary nine days from now that will likely go unobserved - but one that does warrant reflection.

On November 29, 1999, the World Trade Organization opened its Seattle Ministerial meeting. The content of the meeting is less memorable than the controversy that surrounded it.

You’ll recall the televised images: human chains of protestors - some 30,000 strong. National Guard and Special Forces troops facing off with free-trade opponents. Tear gas-shrouded riots. An unexpected spotlight shed on what had been a rather obscure organization.

The debate was hard to get a handle on—thousands of protesters and almost as many interests: environmentalists, trade unions, farmers, human-rights activists. All demonstratively passionate about their causes. What the protesters seemed to have in common was a view of free markets and globalization as negative forces.

As a business person who believes in the constructive power of open markets, I disagree.

We must remember, and we must reassure, that liberalizing markets and globalization are not new phenomena. They have done tremendous good—and hold much greater promise—for our world. A world which, despite the wealth and comfort we enjoy in our small corner, is hungry for access to ideas, investment, infrastructure and global exchange.

Let’s put a face on that hunger. Last year, October 12 to be precise, the earth welcomed its 6 billionth baby. While the United Nations didn’t supply the child’s name, gender or nationality, we can make some educated guesses.

Let’s assume the child is a girl, since female births are outpacing male. Let’s also assume that she was born in Asia or Africa, because population growth is rising rapidly in less developed countries. Today, she may or may not have electricity in her home. One-third of the world’s population does not. And chances are, if her home and town lack electricity, she may also be missing the benefits of education, health care - even the basics of adequate food and shelter.

In my mind, that 13-month-old child is the compelling symbol for the profound good that business can do as it bridges the divides that continue to distance us.

Despite the rhetoric surrounding the Seattle meeting, globalization and market liberalization are not political agendas. Neither are they the target of Western conglomerates seeking new profit sources. They can’t be halted or hastened by policy, manipulated by business or shut down by protesters. They are true economic forces whose winds bring positive change to the lives they touch.

Our world has reached a point in time when the borders must come down. We are more connected than ever before, and business must be willing to share in both the abundance and the problem-solving.

Research and history confirm that open doors invite good. Consider a recent World Trade Organization study, conducted by Dan Ben-David of Tel Aviv University and Alan Winters of Sussex University, that points to the need for and value derived from trade liberalization:

• Extreme poverty remains an overwhelming problem in our world. 1.2 billion people survive on less than a dollar a day. An additional 1.6 billion, more than a quarter of the world’s population, make do with one to two dollars a day
• To alleviate poverty, developing economies need to grow faster. Trade can play an important role in reducing poverty, the study contends, because it boosts economic growth and the poor tend to benefit from that faster growth.
• The study finds that, in general, living standards in most developing countries are not catching up with those in developed countries. But some developing countries are catching up. What distinguishes them is their openness to trade. And the more open they are, the faster they are growing. China, for example, has made tremendous strides against poverty over the past 10 years. And South Korea, once extremely poor, is today as rich as Portugal.
• The study concludes that “trade liberalization is generally a strongly positive contributor to poverty alleviation - it allows people to exploit their productive potential, assists economic growth, curtails arbitrary policy interventions and helps to insulate against shocks.”
• These findings are confirmed by a new World Bank study which, using data from 80 countries over four decades, confirms that market openness boosts economic growth and that the incomes of the poor rise one-for-one with overall growth.

The record is clear: open markets are not just good for business. In fact, those who have most to gain from market freedom are those who begin with the least.

By the time that six billionth child turns 21, energy consumption in the developing world - Asia, Africa, the Middle East and Central and South America - is expected to more than double. We have much work to do to ensure that the prospects facing her as she embarks on her adult life are as promising as those facing each of you today.

Duke Energy is doing its part.

In Latin America, we’re working in El Salvador, Belize, Ecuador, Peru, Bolivia, Brazil and Argentina to integrate energy markets and open up countless opportunities for customers, employees and investors.

In Asia Pacific, we’re meeting the demands of a newly competitive wholesale energy market. Just three months ago, we completed the 495-mile Eastern Gas Pipeline in Australia, bringing competition to that country’s natural gas market for the first time. (And we’re especially proud of the fact that we supplied the gas for the Olympic Games in Sydney, and the international beacon of competition - the Olympic flame!)

And in Europe, we are building upon a strong trading and marketing platform to serve the changing needs of energy customers throughout Europe.

Here’s a fundamental principle of our international strategy that might surprise the Seattle protesters: Wherever we work - in the jungles of Peru, the outback of Australia or the bustle of London, we take a very local view. We don’t presume to fill our international offices with expatriates and impose our corporate will on a region.

We rely heavily on local talent and know firsthand that the best results come from working with the energy professionals who live in the regions where we build our businesses and who understand the area’s culture, people and needs. By combining the skills we’ve honed over nearly 100 years with the best local minds and insights, we’re able to create energy services tailored for each unique market we enter.

And we respect and protect the human and natural communities that surround our projects. In Peru for example, near our Aguaytia project, we’re working closely with the government, local communities and non-governmental organizations to minimize, monitor and mitigate environmental impacts.

In addition, we’re providing children in the Andes and the central jungles of Peru with school supplies. Our employees work with Peru’s Ministry of Health to help vaccinate children against yellow fever.

These are small, in-country examples of how we approach our work around the globe. The point I want to emphasize here is that just as we’re exporting our business and power expertise to parts around the world, we’re taking our environmental and community principles with us as well.

With very rare exception, I’ve seen the same level of commitment from businesses that begins to explore global markets. All of us who bring energy, telecommunications, steel, paper, transport and goods and services to international locales must do so in a manner that reflects the highest regard for the environment and the health and safety of our employees, neighbors and customers.

That’s a basic business tenet. And as our world grows ever smaller, we know that a violation of that tenet anywhere in the world affects our operations and performance everywhere in the world.

Globalization and market liberalization are strong and compelling forces whose current cannot be denied, despite the din of Seattle. Open markets bring choice, efficiency, opportunity to the world and to our backyard.

We are entering an era in which the demand for a better standard of living - common comforts such as refrigeration, medical service or the Internet - are becoming a huge global driving force in political, social and technological “mega trends.” And energy is essential to meet that demand.

I’ll give you an example. I recently returned from visiting some of our facilities in Peru, a country where the average person uses only 5 percent as much electricity as we do in the United States.

I was riding along in a remote village - really not much more than a collection of huts. There was electricity in this area, although not much was being used. One hut appeared to be the local watering hole. It didn’t have a door to the business - there was only a curtain that blew in the breeze. As I went by I saw the curtain flap open - and inside everyone was gathered around a TV set watching the American show, “Frasier” - and in living color!

Now to our point of view, “Frasier” is just another sitcom - an OK way to spend 30 minutes. But consider that sitcom’s impact on people without the standard of living and technological advantages we enjoy.

Now it becomes a force to fire up the demand for all that energy can deliver. Our high-tech world is no longer some faraway myth to these areas of the globe - it’s staring them in the face every day through the advances of television and other global communications technology.

We cannot close the door to the sixth billionth child I mentioned, or to the billions who will follow her. What we can do - what we must do - is continue exporting innovation, efficiency, breakthrough ideas and technology that improves the livelihood of our neighbors.

I am still puzzled by the resistance we saw to open, global markets a year ago, and I’ll share with you the words of Kofi Annan, Secretary General of the United Nations: “Whatever cause you champion, the cure does not lie in protesting against globalization itself. I believe the poor are poor not because of too much globalization, but because of too little.”

I believe we are just beginning to tap the potential of our world’s markets. Globalization, open markets and technology allow us to build bridges where borders used to stand. They allow us to address the concerns of hunger, disease, ignorance and poverty in ways we never dreamed possible. Our economy today is flourishing. Opportunities abound - for businesses to do well - and to do good.

Maybe “Out with the Old, In with the New,” means that the future of business lies with the bright young minds of people like you - carrying some old ideas like free markets and globalization to new markets around the globe. Working for businesses that have managed to merge the strengths of Old and New Economy to create real value.

I wish you great success as you enter the world of business. I hope that you will use your intelligence and spirit to open the door a little wider, letting the winds of change and choice blow freely.