Remarks to the Economic Club of New York

Economic Club of New York
Rick Priory
Chairman, President and CEO
Duke Energy

Thank you, Dick (Grasso, chairman of the New York Stock Exchange). Good evening.

When I told my wife I was speaking to the Economic Club this evening, she was quick to acknowledge the appropriateness—since she considers me a walking economic indicator: my hairline’s had a recession, my waistline is inflating, and every time I look at my company’s share price these days, I experience a deep depression!

Despite all that, I’m delighted to be here, and to share the program with my good friend Jeff Immelt. In today’s business environment, it’s often best for CEOs of public companies to travel in pairs!

The ties that connect our two companies precede both Jeff and myself. Thomas Edison’s first successful test of the light bulb occurred in 1879 in his New Jersey laboratory. From that spark of ingenuity grew the company we now know as GE.

A few years later, a couple of entrepreneurs began the work of turning Mr. Edison’s idea into power for the textile communities of North and South Carolina.

That pair, Dr. Gill Wylie and Buck Duke, were able to see the promise of Edison’s light bulb—and how it could change the future. The vision of those individuals grew into Duke Energy.

Electricity captured the imagination of many others across the country. New industries were born. Existing businesses realized new levels of productivity. Schools, hospitals and homes benefited as well. Life was made easier, fuller—and, most would agree—better.

A century later, Jeff and I stand at the helm of the companies that grew from the ingenuity of those early business pioneers. And while the corporate helm isn’t a particularly comfortable place to stand today—it remains, in my opinion, honorable and privileged duty.

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Business has been harshly judged in recent days. You know something’s amiss when there are more CEOs appearing on “America’s Most Wanted” than on “Wall Street Week"!

And we have brought much of that upon ourselves.

What saddens me most—what angers and alarms me—about the almost daily news of wrongdoing—is the resulting breach of trust in the institution of business—and in the marketplace that business supports and stimulates.

I want to be very clear on that tonight: As business is being harshly judged, so too is the very foundation of capitalism. And therein lies my gravest concern: that in our quest to root out the problems that confront us today—we risk crippling a key construct of progress and prosperity.

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It’s not enough for Jeff or me or any CEO to stand up here and make a corporate pledge to clean living. We’ve got to make an affirmative case for the system—the market system—that delivers not just shiny new products and profits, but opportunity and advancement for millions of people.

American capitalism has done tremendous good for our nation and the world. The gains of science and technology are advanced by a system that rewards innovation. And our system ensures that good ideas go far—that wealth, health and education are dispersed widely.

We know that the capitalist model is often envied and emulated across the globe. Our greatest export isn’t energy, pharmaceuticals, reality T.V. or Taco Bells. It is the notion—the ideal—that a community of minds, competitively challenged and fairly rewarded, can make our lives easier, fuller—and better.

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Wiser men than I will assess the morality and market faults that brought us to this turbulent time. I am not a theologian, economist, pundit or politician. I am an engineer. Engineers design, we build, we fix—and to the consternation of our wives and husbands—we re-design, we rebuild, we take things apart so we can fix them again! And that is the perspective I speak from tonight: capitalism must be rebuilt and restored to its civic roots.

So where do we start? From an engineering perspective, we begin with the groundwork—the foundation. In my mind, there are two foundational pillars upon which commerce, capitalism and a working society are built. Those two pillars—trust and market stability—stand together—connected and inter-dependent.

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Trust is a fundamental principle of capitalism: Investors trust business to be faithful stewards of their dollars. They entrust us to deliver a fair return, operate prudently and behave ethically. In his second inaugural address, following the excesses of the 1920s and the Depression of the 1930s, a famous New Yorker named Franklin Roosevelt said: “We have always known that heedless self-interest was bad morals; we now know that it is bad economics.” That observation rings as true today as it did 65 years ago.

The self-interest of certain companies and individuals has dealt a harsh blow to the reputation of business, and to a marketplace in which more Americans than ever are active, investing participants.

Investors, analysts, and business alike must all take a longer view of value and face the reality that stratospheric short-term results are not sustainable and they’re not healthy. We should have learned that lesson from history, but the dot-com bust confirmed the weakness of our collective memories; if we ignore it again, shame on us.

If we are to re-earn investor confidence and restore rationality and legitimacy to the marketplace, we need to renew our commitment to accountability, discipline, candor and leadership. Those principles support and sustain trust—the very framework of our marketplace.

First, accountability. Business must set about the work—and many have—of cleaning up our own corporate backyards. That work requires brutal, self-critical honesty. If there are stink weeds in the garden, we can’t pretend they smell like gardenias! We’ve got to prune out excesses, deception and any practice that threatens the moral roots of the organization.

The Sarbanes-Oxley Act, new rules set forth by the New York Stock Exchange, NASDAQ and the Securities and Exchange Commission provide a good framework for the steps that business must take—and I commend the intent behind those initiatives.

But trust in business can’t be rebuilt from Washington. Trust in business can only be rebuilt by business—in our executive offices, on our trading floors and in our plants and factories.

None of us wants to take heat for problems outside our own organization. But in today’s environment, public opinion is painted with a broad, sweeping brush—and a palette that consists of a bucket of tar and feathers! When one company stands charged, we are all considered guilty until proven otherwise.

The nuclear industry learned that lesson 20 years ago in response to the accident at Three Mile Island. It was dramatically clear to us then—and today—that our industry is only as strong as its weakest link. It didn’t matter that Duke Power’s plants had operated without incident. Every nuclear operator suffered from the crisis—and every one of us was responsible for moving the industry beyond the accident.

From accountability came disciplined action—and let me stress the self-discipline that we saw play out. The nuclear industry didn’t wait for government to set standards. The industry needed to step forward to promote the highest levels of safety, reliability and excellence. And we did, creating the Institute of Nuclear Power Operations, or “INPO,” which every nuclear utility in the US. voluntarily joined.

INPO established benchmarks of excellence in operations, and members of the Institute audited one another’s plants against those rigorous standards. Our audits were thorough, candid, tough and constructive.

Today, our plants are safer, our personnel are better trained and the exchange of experience among the industry is much more productive.

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Here’s another very recent example of business leaders coalescing to speed solutions to the marketplace.

In May, Duke Energy became a founding member of the Committee of Chief Risk Officers, an active coalition of nearly 30 companies engaged in the physical and financial trading of energy. The creation of the committee reflects the rapid growth of the merchant energy business, and the need for commonly understood and accepted risk management procedures.

The committee is hard at work in four key areas: best practices; governance and control; external communications; and valuation standards.

Those of you in the financial profession may recognize the model of the organization: In 1978, a group called the “Group of 30” was formed to develop standards and address issues related to financial derivatives. At that time, the derivatives industry was at about the same stage of development that energy trading is today—relatively immature, evolving and not widely understood.

Today, the Committee of Chief Risk Officers’ focus on best practices will go a long way in helping others understand and evaluate merchant energy activities and the companies engaged in those activities.

Will the committee exert the level of leadership, discipline and peer pressure that INPO achieved for the nuclear industry? Time will tell—but a team of concerned, highly competent business people are committed to the task—so I hold great hope.

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We are all frustrated by the apparent lack of corporate and personal accountability we’ve been hearing about. We need to withhold judgment until due process runs its course—but we shouldn’t hold off on renewing the responsibilities that accompany—and define—leadership.

Here’s a story outside the bounds of energy or business—but it drives home the need for active and vigilant leadership:

When the Titanic sank in 1912, there was a lesser known cruise ship, the Californian, just 20 miles away. The ship’s proximity meant that it could have saved the 1,500 lives that were lost—and changed the course of history.

Unfortunately, the Californian did not respond to the Titanic’s distress signals—because the radio dispatcher was not on duty at the time. You know the moral of the story: We can’t afford to be asleep at the switch. We must be responsive, vigilant, and alert—to the state of our own ship, the course of others, and the sea changes around us.

Being at the helm means being accountable for your actions and the actions of your corporation. As leaders, we are responsible for setting ethical standards and fostering a corporate culture in which integrity is valued and expected in every instance. My business card says I’m Duke’s CEO—that means that I am Duke Energy’s Chief Executive Officer—and its Chief Ethics Officer.

Accountability. Discipline. Candor. Leadership. In my opinion, those are the basic building blocks of trust.

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As I said at the onset, corporate values are a foundational pillar of capitalism. But there is a second pillar that has been equally shaken this year, and deserves our attention: market stability.

To preserve the many benefits of capitalism, we need to ensure that our markets are structured to work fairly on behalf of all participants—and we need to give them the latitude to work.

Some have seized the ethical implosion of a handful of business people as reason to radically regulate, to tighten the reins, and impose hastily constructed controls. And while I won’t argue that change isn’t needed, I will caution against counterproductive measures and the unintended consequences they often produce.

Competitive markets too often take the heat for problems well outside their scope. In my industry, to look at recent history alone, first it was the California power crisis—even though the real culprit there was not a competitive market but rather an extreme supply and demand imbalance and a so-called “reform” regime that kept the market from working.

No matter; California was erroneously construed as proof that we needed to abandon deregulation and return to a more tightly-regulated energy industry. Temporary price caps were put in place, which interfered with proper market signals.

Price caps—in energy or any other commodity business—are not a wise or desirable long-term solution. They actually reverse much of the progress toward building an efficient free market.

When price signals were allowed to work in California, the market responded. Higher prices for electricity dampened demand and encouraged development of new power plants. Folks adjusted the thermostat. Market response was significant enough to move the needle on demand downward—by more than 10 percent.

The state still needs longer-term solutions that will correct the supply and demand imbalance and restore market stability, but I submit that the market, despite political tampering, prevailed in California. It sent the right signals; and those signals were eventually heeded.

Price caps are one example of the ill effects of market intervention. Let me mention another issue that deeply concerns me and threatens the foundation of our market today.

There is an effort afoot in California to overturn long-term energy contracts. Energy companies negotiated with buyers to provide power at a fixed cost. We should all be gravely concerned about the principle at play here. It is an issue bigger than my industry and any single state. In fact, it gets to the very heart of our market system: the sanctity of contracts must be protected.

When contracts that are entered into in good faith are broken, or even threatened—the fracture to our economic system goes deep—and can spread far.

The refrain gets familiar here: a breach of trust and market failure.

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Let’s move from the California crisis to the fall of Enron: At its peak, Enron handled one in four wholesale transactions for electricity or natural gas. So when the crash came, grave concerns were expressed as to whether the overall economy—let alone the energy industry—would weather such a hit to a key market player.

But the market turned out to be wiser than those who would rush in to save it.

When the EnronOnline trading exchange shut down, other trading companies quickly stepped in, ensuring uninterrupted trading and power supply. Trades continued. Customers were served. Infrastructures and systems remained intact. The marketplace corrected itself. That is not to say that more corrections aren’t needed. They are—and they are happening.

The lesson is that free markets—the cornerstone of capitalism—are powerfully self-correcting—sometimes brutally so. But they exert a Darwinian force that ensures strength and resilience. Heavy-handed government intervention doesn’t restore order—it distorts and impairs market activity.

The micro-management that some now demand is just the opposite of what we need. Whenever we completely shield market players from the consequences of risk, we destroy the fundamental governors of the market itself, those governors being caution, transparency, the law of supply and demand, and the balance of risk and reward.

Let me be very clear: I am not opposed to a thoughtful and constructive regulatory framework. But I believe that the healthy approach to today’s review of business is scrutiny of logic, not skepticism; reform based on reason, not reflex; and business change guided by value, not the vagaries of an overwrought marketplace.

Just two weeks ago, we saw a very positive change in accounting rules that, in my opinion, is an important signpost in the effort to restore investor trust in the energy trading industry.

The Emerging Issues Task Force of the Financial Accounting Standards Board rescinded rule 98-10—that made mark-to-market accounting the default treatment for energy contracts. The rule was neither practical nor wise—and its application has confounded me for years.

It was a rule that seemed to encourage the quest toward “instant profits.” It may have appealed to the accounting theorists, but its practical application fell short of inspiring confidence in this emerging industry.

With the rescinding of 98-10, mark-to-market accounting will be far more narrowly applied and will enable us to return to a solid, traditional and more acceptable approach in which profits are recorded as contracts settle—and not before.

I’m not often excited in a positive way about accounting rules—but this one makes a whole lot of sense!

Prudent regulatory oversight is a critical component of the market system, and we can all point to good examples of positive participation. But business cannot and should not abdicate responsibility for ethical conduct—and government should not try to legislate morality.

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We all share in the accountability of what’s gone wrong—and in the stewardship going forward.

As business leaders, we can’t afford to focus our energies solely on the defense of a single company or a troubled sector—there are legions of lawyers applied to those efforts!

It is the workers, investors and pensioners of our country who need our best defense—and our best defense is an able and united defense of a capitalist system that creates jobs, prosperity, innovation and equity.

So my caution tonight is this: in our zeal to right the wrongs of the past year, we must do no harm to our future.

The twin pillars—trust and market stability—are strongest when they work together. A crisis in corporate values shakes market stability, just as the lack of market stability creates pressures to compromise corporate values.

The good news is that shoring up the strength of either pillar has the effect of strengthening the entire structure. And strengthening both in systemic ways will go far to restore trust in business—and confidence in a market system that works better than any other—because it works so well for so many.

Capitalism, free and open markets, the spirit of initiative—however you care to characterize the economic force and creative surge of our great country—business at its best has done tremendous good for our world. And it has capacity to do far greater good—if we are diligent in protecting its principles and its promise.

Thank you.