Electricity Spurs the Carolinas' Economy

Remarks to the Charlotte Economics Club
Bill Coley
President
Duke Power

Charlotte, N.C.

I’m very honored to be with you here this afternoon — because in my heart — I’ve always wanted to be an economist. The reason being is that an economist never seems to be wrong.

You know what I’m talking about. You can watch six different economists one day on CNBC... giving six different versions of where the economy is going and what the markets will do. A year later, those same six economists will be back on CNBC and every one of them will be reminding you how right they were the last time they were on.

That’s the kind of job I want — even when I’m wrong, I’m right.

As you know, economists rely on data to clarify their views of the economy — whether it is the Producer Price Index, the bond market, employment numbers, or the Conference Board survey.

I rely on my own numbers, and today I’d like to roll out of few numbers for you concerning electric power usage here in the Carolinas. In my business, these are the numbers I depend on most — and I think they have given a clear picture in the past of the economy here in the Carolinas ... and should continue to be a good barometer in the future.

The Duke Power service territory mirrors the economy we all follow so closely. If you took I-85 from Durham to the Georgia state line you would be bisecting our territory — a territory that has 2 million customers and covers 20,000 square miles.

When I look at our numbers — it’s mostly good news, but not all good news. We live in a very vibrant area of the country here in the Charlotte region — and our numbers bear that out. But not every industry has benefited equally.

But before I get to that — I’d like to quickly share some interesting numbers about electric rates over the past 30 years. I think, without a doubt, the toughest times for my industry were during the 1970s and part of the 1980s. We had runaway inflation, an energy crisis and interest rates at 20 percent. Between 1970 and 1986, electric rates went up more than 480 percent. I worked at Duke Power during those years and I remember struggling to meet payroll and appealing to the regulatory commissions to raise rates year after year. I thought it would never end, and I’m just glad I wasn’t president of Duke Power during those years.

However, as you know, our economy got better. Utilities got smarter. Companies began preparing for deregulation in this industry — for the day when customers can chose their own power company. And I believe that threat of competition has been good.

So from 1986 until today, electric rates have actually gone down 4 percent. Customers are using more electricity but they are paying less per kilowatt-hour for that electricity. I wish I could say that about a lot of products. The bottom line is that electricity has had a great story to tell these past 15 years.

Working in conjunction with the great story of electricity prices has been the great story of the economy of the Piedmont Carolinas. I’d like to spend some time today expanding on that — using the electric sales at Duke Power as my basis. Hopefully, giving you some indication of where this economy may be headed in the future.

I’ll start with the one figure nearest to our own pocket book and that’s residential sales — the Duke Power bill we pay each month. Unfortunately, sales to households in the Carolinas doesn’t tell us much about the economy ... as much as it tells us how hot/cold it’s been. Each month you can compare this month’s bill to your bill from last year and get a good indication of whether it was hotter or colder than last year.

However, if you look at Duke Power’s residential sales over the past few years, some interesting statistics pop out. One is that over the past five years, Duke Power has been adding about 40,000 new residential customers each year. In 1990, we had about 1.4 million residential customers. Today, that number is around 1.7 million.

I’d like to think people are moving here because of the attractive electric rates, but I’m sure it has more to do with the good economic climate and the attractive job market. Nevertheless, people are moving to this area faster than any time in Duke Power’s history.

In fact, the Gross Product of the Duke Power service area is more than $170 billion.

If this area were a country, we would be among the Top 30 economies in the world. As the head of a power company, I can’t think of a better place to be.

That opinion gets a boost when I look at our commercial electric sales — which includes everything from office buildings to the local McDonald’s. It makes sense to believe that with the number of people moving to this area — commercial sales would see healthy growth.

And that’s what’s happening. Over the past 20 years, commercial electric sales have grown at around 5 percent a year. Since 1990, overall commercial sales have jumped more than 40 percent. Unlike residential sales that are largely weather sensitive, commercial sales give a good indication of economic strength — and the outlook continues to be strong.

If you look at Duke Power’s retail sales, you’d see that about 30 percent is residential; 30 percent commercial ... But still the biggest sector for Duke Power is our industrial sector — at about 40 percent of all retail sales. Duke Power got its start at the turn of the last century — and the founders of the company found that attractive electric rates and the nice climate here in the Carolinas attracted the manufacturing and textile mills from up North. Throughout the first half of this century, those manufacturing jobs migrated South — and those moves still have a big impact of our economy today.

Manufacturing is still a big component of this area. Nationwide, manufacturing accounts for about 16 percent of all jobs. Here ... that number rises to 26 percent of all jobs.

But it’s no secret that global competition has cut into the manufacturing sector in the U.S. — and especially here in the Carolinas. Manufacturing jobs have actually dropped almost 10 percent since 1988. The Duke Power area has averaged losing about 6,000 manufacturing jobs a year over the past 10 years.

However, despite job losses in the manufacturing sector — the Carolinas has had a boom in the non-manufacturing sector. Whereas, we were losing 6,000 manufacturing jobs a year for the past decade — we have gained more than 50,000 non-manufacturing jobs a year during the same period. Non- manufacturing jobs have been growing at about 3 percent a year over the past decade. This growth boom has overwhelmed the story about lost manufacturing jobs.

We see it in our overall industrial sales, too. Despite losses in some sectors, we have seen overall industrial sales rise by 1.5 percent a year for the past decade. It hasn’t been a straight line — we have had declining years during that time. But when a rebound comes to this area, the Carolinas appears to bounce back and soar even higher.

Of course, one major part of manufacturing jobs and our industrial sales is the textile sector. As I said earlier, Duke Power has its roots almost 100 years when the textile mills of the North began locating in the South. Textile sales have been the largest sector for Duke Power ever since.

In the past, textile sales accounted for more than 50 percent of our entire industrial sales. However, for the past decade, textile sales have been basically flat — while other industrial sales have grown at almost 2 percent a year.

I will say that it is not that our textile mills are working less — in fact, they are doing more and producing more. However, the number of textile plants has begun to shrink. Today, we have more than 1,200 textile customers. But over the past four years, we have lost about 40 textile customers a year. These are companies or mills that were in business — but shut down. You hear about it on the news — I see the impact from it every month.

What we’re seeing at Duke Power is a leveling off of this trend ... but we are not looking for great rebound in the future. The recent normalization of trade relations with China is likely to change textile companies again in the future.

The flip side to that news is that other industries are growing and flourishing in the Carolinas — more than making up for the downtrend in textiles. Chemicals, Paper and the Transportation industry have all made great strides in the Carolinas recently. I believe this is healthy for the region — bringing and growing new industries that can give this region the broad spectrum of industrial sectors.

With all this good news, you might be wondering if Duke Power has any challenges going forward. The answer is absolutely “yes.”

Whether you know a little, or a lot, about electric restructuring in the Carolinas ... the basic headline is that sometime in the future you will have a choice of electrical suppliers. This has already happened in about half of the states around the nation — mainly states that had high electric rates already. In the Carolinas, where electric rates are about 15-20 percent below the national average — the move has been slower.

What we’re seeing around the nation is some downward pressure on electric rates — typical is a company saving about 5 percent. That may not sound like much, but you have to remember electric rates nationwide have been flat the past 15 years.

That may also be a reason why we’re not seeing a wave of customers changing electric companies. In California, where 10 million customers were given the chance to switch, only 2 percent did.

But the momentum to give customers the right to choose is there. Customer choice is coming to the Carolinas. When I became President of Duke Power in 1997 I said that “We have to serve our customers like they already have a choice of supplier ... because one day they will. Maybe not today ... maybe not next month ... but someday in the future.”

Will this mean that some customers leave Duke Power — absolutely! Part of the mission of deregulating the electric industry will be to spur on a competitive market for customers to have a selection.

However, that doesn’t mean that Duke Power cannot be a winner in this new environment. In fact, I believe any new competitive environment for electricity will have winners and losers. I personally like the 100 years of solid history Duke Power has — and the brand equity we have in the two states.

Will electric rates go up or down? I wish I could say with certainty one way or another. However, I do know that a competitive environment should produce the best electric prices for customers possible. Duke Energy is competing in new competitive electric markets all over the world and succeeding. I have no doubt we will do the same here.

Well, it doesn’t take an economist to look at the numbers I’ve rolled out today and say that the Piedmont Carolinas is a vibrant region of the country.

As you go back to your offices this afternoon, I think it’s worth repeating why we at Duke Power are so excited about the economy in which we serve and the future for Duke Power.

1. We are pleased by the increase in our residential base in the Carolina. People who will merge into the workforce of this region and be consumers for our local businesses.
2. We are encouraged by the commercial development in the region — development that is spurring on increased electric sales.
3. And, while not every industry is enjoying the positive aspects of our economy, the Carolinas has been able to attract new and different industries to the region — building a diverse base of businesses for us.
4. And also, the movement to deregulate the electric industry in the Carolinas should provide choice to consumers — and spur electric companies to be more efficient and more creative.

I look forward to these next few years in this region. I believe the momentum that our local economy has generated should continue. And I believe there is one other thing that should continue, too. That’s the ability of Duke Power to fuel the engine that makes our economy go — from your air conditioner at home, to the auto manufacturing plant that generates jobs in this region.

But let’s not forget that as this nation transforms to an e-commerce and e- business economy, the Big E that I care about — Electricity — will continue to be the starting point for businesses in this region. I expect Duke Power to be powering the people of the Piedmont Carolinas for a long time to come.

That’s one prediction this economist will be happy to stand behind.

Thank you.