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The Power That Lies Within Us

The Newcomen Society of the United States
Ruth G. Shaw
President & CEO
Duke Power

Good evening. And thank you, Ken (G. Kennedy Thompson, chairman, Wachovia Corporation), for that warm and generous introduction.

Special thanks to each of you for joining us as we celebrate an honor that Duke Power gratefully shares with our customers, our community partners, and our teammates.

We particularly treasure this Newcomen Society Award since two legendary leaders of our company stepped forward to receive this same recognition: Carl Horn, Jr. in 1973 and Bill Lee in 1986. A nod from Newcomen says a lot. Three nods say a whole lot. Tonight’s award affirms consistent, lasting contributions, and in today’s peripatetic business world, staying power is at a premium!

This month, Duke Power celebrates its 101st anniversary. The company began with one cotton mill customer, served by Catawba Hydro Station and 18 miles of transmission line. Catawba Hydro is now retired. In its stead, we operate three nuclear stations, eight coal-fired stations, 31 hydroelectric stations, and numerous combustion turbine units, with system capacity of about 19,900 megawatts. Those original 18 miles of line have been replaced with 13,000 miles of transmission line and 94,000 miles of distribution line. And instead of Roscoe Cannon, the sole operator at Catawba Hydro, nearly 10,000 Duke Power employees serve more than 2.2 million customers across 22,000 square miles of the Carolinas.

Newcomen’s purpose can be summed up in a single phrase: “As we look backward let us look forward.”

You will all be relieved to know that I do not intend to recount our 101 year history tonight. That history is well-documented. But I will hit some highlights, offer some lessons learned, and take a look ahead.

To share Duke Power’s history is to experience through a single company the dramatic changes of the last century. It is also to experience the consistency of our corporate values and the value we offer customers. Our roots go deep and strong into the granite and clay of the Carolinas, and these roots “nourish our future” just as they nourished our past.

Ralph Waldo Emerson captured the sentiment best: “What lies behind us and what lies before us are tiny matters compared to what lies within us.” As we look behind us and before us, we will be reminded of what lies within us.

What Lies Behind Us

Three Carolinians constructed Duke Power around a “grand design.” James Buchanan Duke, Dr. W. Gill Wylie, and William States Lee combined financial clout, engineering prowess, and innovation. They envisioned a series of interconnected power plants, joined by high-voltage transmission lines to serve an entire region, with the plants powered by the “white coal” of hydroelectric power.

With abundant, inexpensive electricity, access to Carolina cotton, and good people hungry for work, the stage was set for the transformation of the languishing agrarian economy—and one of the most spectacular industry raids in history. Most of New England’s flourishing cotton textile industry soon saw the competitive advantages of the Carolinas, and migrated there to create a potent cluster of mills, gins, equipment manufacturers, and associated businesses.

The “grand design” went beyond a new, integrated electric power system. And it went way beyond economic transformation. Buck Duke and his partners wanted to “give back” to the region that nurtured their business. That “giving back” took many forms. Most noteworthy? An abiding commitment to environmental stewardship, and corporate philanthropy.

In 1923, Duke Power established a full-time environmental department—one of the first in the country. What began as an effort to control mosquitoes and curb a malaria outbreak has grown into a lasting commitment to accept special responsibility for our environment.

Philanthropy, too, had a grand scale. In 1924, Mr. Duke established the Duke Endowment, funded with $40 million of his power company and tobacco stocks. That passion to improve the social welfare, as well as the economic well-being, of the region, persists in Duke Power and Duke Energy today, just as it continues in the Duke Endowment.

The story of Duke Power’s early years is a tale of financial strength, brilliant engineering, and bold dreams. Those themes resonate today. And so do the deepest values of our founders: A profound connection to our land, our neighbors, our economy. A deep appreciation for the transforming capacity of electricity. And the business imperative to do good as we do well.

Boom Times

Let’s fast forward past the initial construction of coal-fired steam plants in the 1920’s and 30’s—though those plants should be honored, since many of them still serve our customers well today. We made it through the Great Depression, and developed credit policies that helped many of our customers make it through, too.

Then, following World War II, Duke Power sales surged, driven by a booming economy and an insatiable appetite for electric conveniences. In the ‘50’s and ’60’s, customers installed window air conditioners, gathered around new T.V. sets, warmed themselves by forced air heaters, and added all sorts of electric appliances and gadgets.

It was a good time—a very good time!—to be in the electric utility business. The construction cost per kilowatt of each new plant was less than the one before—a trend of declining costs that lasted until 1968. So the more customers and capacity we added, the lower the unit cost. We provided lower prices to our customers—and higher earnings and dividends to our investors. Our financial strength fueled investment in the power company—and in a few other ventures. (It might surprise some of you to know that the 1973 Newcomen Society meeting was held at Carowinds, where Duke was a major stockholder. Sometimes an abundance of cash creates its own issues!)

Economic growth in the Piedmont Carolinas far outpaced the national average, and Duke Power set about to add new generation—and maintain and upgrade existing plants.

We launched a massive construction program, building on our core strengths of in-house design and construction management. In 1965, we announced the Keowee-Toxaway Project, which involved two company “firsts": a nuclear plant and a pumped-storage hydro plant. We completed Oconee Nuclear Station’s three units in seven years—at a cost less than half the industry average. The Project earned Duke Power its first of three Edison Awards, our industry’s highest honor.

Our successful entry into nuclear paved the way for the McGuire and Catawba Nuclear Stations. It earned us a leadership position in the field, and Bill Lee, the grandson of William States Lee, became nuclear power’s greatest champion, organizing both the Institute of Nuclear Power Operators and the World Association of Nuclear Operations, connecting nuclear plants in a global network of high standards, rigorous peer review, and shared best practices.

Some lessons from this chapter of history?

  • Building the right things right delivers lasting value. The vision to enter the nuclear arena early, the engineering expertise that keeps our fossil plants among the most efficient in the nation, and the dedication of our in-house engineers and construction team has helped keep rates for Duke Power’s customers 20% below the national average for many decades.
  • The tremendous advantages of nuclear power come with tremendous responsibilities, and the commercial nuclear industry is truly only as strong as our weakest link.
  • Enjoy the boom times—and know they will not last.

Battening Down the Hatches

Carl Horn’s 1973 Newcomen address hinted at problems ahead. The company had under design or construction new generating capacity that would increase its existing 7.5 million kilowatts by 150%. The big bet was on nuclear power, with Oconee nearing completion, McGuire under construction, and an application for the Catawba plant already filed. Significant investments in pollution controls added costs but did not increase revenues. Horn cautioned that electric costs would rise as we built the plants needed to keep the lights on.

No one in the audience could have foreseen what lay ahead. Double-digit inflation, economic recession, the Arab oil embargo, soaring coal prices, limited coal supply.

Borrowing costs rose dramatically. Fuel prices shot out of control. Earnings fell. The debt rating dropped to single A. Duke’s common stock was selling well below book value. Along with much of the rest of the electric utility industry, Duke Power struggled.

The tough, tenacious leaders of the day followed some time-honored rules to right the ship: Rule number one: When you’re in a hole, stop digging! And rule number two: Never run out of cash!

We revised our construction schedule, and ultimately cancelled the Cherokee and Perkins nuclear projects. We slashed operating costs. To raise emergency cash, we sold and leased back all of our combustion turbines, our two office buildings in downtown Charlotte, our computers, part of the Catawba Nuclear Station and two million pounds of nuclear fuel.

In 1982, with our capital requirements greatly reduced, we began to see the financial daylight. By 1983, Duke Power had regained its double-A rating. We had battened down the hatches and withstood the storm. And once again, we stood on solid financial footing.

The Prospect of Competition

When Bill Lee addressed the Newcomen Society in 1986, he saw electric utility deregulation ahead. He predicted transmission lines would become common carriers. He predicted increasing competition from small generators and other energy sources. He was dead-on in predicting a regulatory climate unlike any the industry had known.

The passage of the Energy Policy Act of 1992 opened the door to wholesale competition for electric power supply.

And while electric deregulation didn’t play out the way anyone envisioned, its very prospect sharpened our game. Duke Power prepared for competition. With adequate baseload generation for a decade or more, we focused on efficiencies, cost reduction, increased sales, and expanding non-utility income.

We launched an engineering services business and a joint-venture to design and build power plants. We began to extend our reach beyond the Carolinas.

In the electric utility, we became even more attentive to our customers. Our goal? To become their “Company of Choice.” We built a state-of-the-art 24/7 customer service center that continues to be an industry model today. We tailored programs for our industrial and commercial customers. Increasingly, large customers were interested in suppliers who could help with all of their energy needs. And they had seen the benefits which followed deregulation of the natural gas industry.

Facing the brave new world of competition and convergence, Duke Power Chairman and CEO Bill Grigg led the company to a major milestone. In 1996, Duke Power announced its merger with PanEnergy, a leading natural gas transmission company that saw the world the way we did. The new company, named Duke Energy and headquartered in Charlotte, was widely hailed by industry watchers. In 1997, a Fortune magazine article proclaimed that the electric utility industry was “undergoing perhaps the most exciting, scary, total, overwhelming transformation of any industry in the world.” The article went on to state that “no company was coping better with the hurly-burly of change than Duke Power.” With industry-leading customer satisfaction scores and competitive rates, Duke Power was ready for change, and ready to meet the competition.

On June 18, 1997, the DPC symbol on the New York Stock Exchange was retired, and DUK became the ticker symbol of Duke Energy, headed by former Duke Power President Rick Priory. Bill Coley led Duke Power, the largest business unit of the exciting new venture.

After a slow first year or two, the new company gained momentum. We offered the advantage of comprehensive, integrated energy services: We made energy. We moved energy. We managed energy. And we marketed energy. We seemed to have a winning formula for an international energy company, combining expertise in gas transmission and electric power around the world. We took on debt to fuel growth in merchant energy in the U.S. and around the world.

And then, with stunning speed, the freight train hurtling toward electric disaggregation, retail competition and energy convergence derailed. The California energy crisis, the fall of Enron and energy trading, the Northeast blackout—they made everyone re-examine the prudence of a restructured retail marketplace. Consumers, utilities, regulators—all were skeptical about competitive electric markets. In a matter of months, Duke Energy downshifted from unthrottled acceleration to full brake mode.

Many of our assumptions about the future had turned out to be wrong—and we had not seen the warning signs in time. The entire Duke Energy enterprise—including Duke Power—was affected. We faced a ‘70s era flashback: our stock price plummeted, our credit rating fell, and a general skittishness set in. In an unsettled, post 9-11 world, it was time to get back to basics.

In late 2003, Paul Anderson became Chairman and CEO of Duke Energy. He quickly demonstrated his deep understanding of hard lessons Duke Power’s leaders had learned at least once before. He trimmed the sails, reduced debt, sold non-core assets, focused on the electric and gas businesses. He maintained the dividend and restored waning investor confidence.

And he supported a Duke Power Company that was very much returning to its roots.

As a new president of Duke Power in 2003, I listened hard to those who had gone before me—many who had lived through the tough days of the 1970s. And while the world was different, much of what had worked so well before was needed now: Strong and sustained operational performance. Excellent customer service. Innovation. Stewardship. Community service. Integrity.

We emerged from an uncertain period with renewed clarity—and renewed purpose. Duke Power is one company, a leading electric utility in our second century of powering growth and quality of life for our customers and communities in the Carolinas. We create superior value for our customers, employees and Duke Energy investors through the generation, delivery, sale and service of electric power

What Lies Ahead

What lies ahead of Duke Power will surely be defined by what lies within.

We are driven by our desire to make this region a strong place to work and live. Just as our founders brought electric power to aid a struggling reconstruction-era economy, today’s Duke Power acts as a catalyst to recruit new business, to encourage expansion, and to build the competitive capabilities of our region and its people.

Today, Duke Power is at the table on virtually any economic development issue—and we are there with resources to make a difference. We’ve been there with BMW, Dell, Merck Corporation, Steralite and others large and small. We are there with our schools, our community colleges, and our universities. And make no mistake: we’ll be there long-term.

We’re working hard to help business and people who are already here to be more competitive. Duke Power directs 50 percent of its profits from short-term, interruptible wholesale sales to promote economic development in our service area. These dollars are reducing rates or funding programs to make industrial customers more competitive...to fund new education and training programs... and to provide assistance with power bills for low-income customers as we go through economic transition.

Just one example: a $250,000 Duke Power North Carolina Community College Grant enabled Central Piedmont Community College to pursue additional funding for an interactive training curriculum on manufacturing systems. The result? Matching state and federal dollars have grown CPCC’s funding to $1 million—and the Charlotte campus will be home to a new high-tech training facility for displaced manufacturing workers. We’re planting seeds like that across our service area—putting our dollars to work so our neighbors can go to work.

This sharing arrangement brings out our best—and helps bring out the best in our region.

Responsibility to our environment lies deep within us, too. Duke Power worked closely with Governor Easley, legislative leaders and environmental groups to craft North Carolina’s Clean Air Plan in 2002 —a plan that meets or exceeds important air emissions targets and maintains rate stability for our customers. A five-year rate freeze, coupled with aggressive cost management, will enable Duke Power to invest $1.5 billion in environmental upgrades without increasing rates. This work has been lauded as a national model—and recognized by the U.S. Environmental Protection Agency.

Surely the architects of our nuclear program would be gratified to see the resurgence of nuclear power. Public opinion is at an all-time high. People recognize that safe and environmentally sound nuclear generation must be a part of a national energy strategy.

Bill Lee would wiggle those great bushy eyebrows with glee to see Duke Power again has nuclear on the table as a favored option as we plan to meet the power demands of our customers—anticipating new baseload generation for the first time in more than two decades. He’d delight that the operating licenses for our three existing nuclear stations have been extended for 20 years, allowing the plants to operate into the 2030s and 2040s. He’d be dismayed that Yucca Mountain has yet to take its first shipment of spent nuclear fuel—and as determined as I am to move beyond that hurdle and secure the nuclear option for future generations.

A long line of outstanding engineers over the past century would want to roll up their sleeves and lend a hand with the great engineering and environmental work underway at our fossil-fired stations to reduce NOX and SO2 emissions below federal standards. They would be awed by the advanced coal technologies that will be used in new and existing plants to serve customers well into the 21st century.

I wish our early power delivery folks could see a Duke Power van moving down the street, remotely reading hundreds of electric meters as it goes. The sophistication of our grid operations would amaze them—and they would not be able to fathom the potential of broadband signals over power lines.

We stand at a strategic inflection point. What we do right, right now—or fail to do—will have implications for years to come.

The U.S. Department of Energy tells us that world energy demand will double by the year 2025. Duke Power adds approximately 40,000 to 60,000 net new customers each year, and we’re planning now to meet their energy needs with new generation. We will focus on new coal technologies, on next generation nuclear, on alternative energy sources, and on conservation and efficiency to assure a reliable, affordable power supply for our customers.

We’ll be active in shaping policy that encourages electric and natural gas infrastructure development...enforceable reliability standards... emissions reductions. Our country is long past due for a national energy policy, as we face formidable issues of energy security and reliability.

Other issues call for action now. We have already stepped out on global climate change, and support federal action to reduce the carbon intensity of our economy. We believe that a mandatory, economy-wide federal policy—such as a carbon tax—is the best approach to address the issue. And we are ready to engage the debate that will lead to sound, sustainable public policy.

We intend to weigh in on issues of global and national importance. But we remember the essential matters of daily life.

Safety. Our work can be dangerous, and we are fully committed to sending every one home, every day, safe and sound. Zero illnesses. Zero injuries. That is the only acceptable vision, and it is ours. It is how we work. It is how we live.

Citizenship and Service. The men and women who served in our first century would be right at home with thousands of Duke Power employees and retirees who volunteer across the Carolinas. They tutor in schools...build Habitat homes...deliver meals to the homebound and hungry...collect supplies for our military overseas. They make a difference.

I believe those who came before us would think their company is in good hands—the hands of employees who get up every day to bring power and possibility to the Carolinas. Those are the deserving hands honored by this Newcomen Award. And they are the hands that will build our future.

Thank you.