Duke Holds the Cards in High-Powered Game
CHARLOTTE, N.C.
In a rare appearance before North Carolina utility regulators in 1923, James B. “Buck” Duke, tobacco and textile baron and president of Southern Power Co., put his cards on the table.
Duke would agree to build a badly needed generating plant--a $10-million investment on top of the $60 million of his personal fortune that he already had poured into the utility--provided he got the unpopular rate increase he had been demanding for three years.
“Otherwise,” the tycoon declared, “I am through.”
Seventy-eight years after Buck Duke won his rate hike, his creation, now known as Duke Energy Corp., finds itself at a different card table but playing a similar hand: The Charlotte-based company has $1.6 billion of new generating capacity in the pipeline for power-starved California, but it wants a few things in return.
Duke Energy is one of the most prominent of the out-of-state “merchant generators” accused of manipulating California’s deregulated electricity market for their own profit. They have been called snakes, pirates and price fixers and have been accused of reaping as much as $6 billion in overcharges for electricity sold at wholesale to the state or its regulated utilities.
Duke in particular got unwanted attention this month when it was revealed that it had held secret talks with Gov. Gray Davis aimed at settling lawsuits and investigations arising from the alleged overcharges.
After Duke memorandums outlining a proposed settlement were leaked to a PBS “Frontline” producer and disclosed in the New York Times, Davis quickly disavowed any intention to head off the lawsuits or cut a special deal with Duke.
Duke offered to pay a “fair and equitable” refund of its alleged overcharges and committed itself to supplying additional power to California in the future.
But in exchange, Duke sought “an appropriate discount for being the first to settle,” prompt resolution of the lawsuits and investigations and a “lowering of rhetoric” being leveled against Duke and other generators.
And perhaps most significant for Duke’s long-term goals, the company proposed that Davis “will continue to indicate that the California crisis is an aberration due to flawed legislation of Governor [Pete] Wilson, not a necessary consequence of deregulation, and will not advocate scrapping deregulation in wholesale power markets.”
Though critics derided the proposal as a “wish list,” Duke said it was a bona-fide effort to get past the finger pointing and back to business.
“We offered real solutions,” said James Donnell, president of Duke Energy North America, which runs the company’s merchant generation operations.
The company hasn’t delivered any blunt ultimatums like Buck Duke’s, but spokeswoman Cathy S. Roche did say that, at some point, the political and legal wrangling would “cause us to take a hard look at any investment in new generation” in California.
If Duke Energy had a corporate motto, it might be “Get on with it.”
Like its namesake--whose 1923 encounter with regulators is described in a new book by historian Robert F. Durden--the company is restless, forward-looking, driven to control its own destiny. Duke has bulled ahead with whatever it thought would best advance its fortunes and those of its home turf, the Piedmont region of North and South Carolina.
A few times, such obstinacy led to head-on collisions with public opinion. The darkest hour may have been during the mid-1970s struggle by a Duke subsidiary to keep the United Mine Workers out of its coal mines in Harlan County in Kentucky.
An ugly 13-month strike, marked by violent picket-line clashes and the fatal shooting of a miner, was settled by a federal mediator in 1974, but the experience was so shattering that Duke sold off the coal-mining unit, Durden said.
The plus side of Duke’s hardheaded self-reliance has been a steady long-term view and a knack for wringing the maximum from its assets, be they natural gas reserves, nuclear plants, real estate, water or people. These attributes set Duke apart from most utilities and helped make it a darling of Wall Street.
Buck Duke, the son of a Durham tobacco farmer, was an entrepreneurial genius. With a prescient investment in cigarette-rolling machines, he turned the family business into the country’s biggest cigarette manufacturer. His factories were so productive that Duke had to create more demand, which he did through a costly but hugely successful advertising campaign.
A monopolist by temperament, Duke rolled his competitors into a gigantic trust, the American Tobacco Co., which named him president in 1890 at age 33. The trust so dominated the industry that it was broken up by the U.S. Supreme Court in 1911. By then, Buck Duke had shifted his focus to textile mills and the power needed to run them.
As with cigarettes, Duke had to creatively spur demand for electricity. His own textile business, blossoming through cheap power, became the best advertisement for the profit potential of electrification.
Even on his deathbed in 1925, Duke was thinking ahead. Mindful of the drought that had parched the Carolinas and shrunk his hydroelectric reservoirs, Duke gave the order to build the South’s first large-scale coal-fired power plant.
With $100 million in power company stock and other securities, Duke created the Duke Endowment, which underwrote the growth of Duke University into one of the country’s elite schools. Not incidentally, by tucking a controlling stake in the utility under the endowment’s control, Duke also secured his company’s independence for years to come.
“Unlike a great many utilities, Duke Power never got mixed up in holding companies, because Buck Duke didn’t want to be beholden to some investment bankers up in Chicago or New York,” said Durden, anemeritus professor at Duke.
As Buck Duke intended, cheap electric power lured the textile industry south from New England and put Charlotte on the economic map.
Duke Power became a leader in coal-burning technology and later in nuclear generation, meanwhile diversifying far beyond its regulated-utility business and its core, the Piedmont service area.
With 22,000 employees in 50 countries and revenue of $49 billion last year, Duke is one of the world’s 10 largest energy companies.
It has channeled much of its growth into high-profit-margin businesses outside the regulated-utility arena, including merchant energy, engineering and construction, gas and electricity trading, international power generation and real estate development.
Thanks to a blockbuster 1997 merger with PanEnergy of Houston, Duke is the country’s largest producer of natural gas liquids and second-largest natural gas marketer.
The diversification, plus management’s aggressive new goal of annual profit growth of 10% to 15%, enables Duke to trade at a significantly higher price-to-earnings multiple than such utility competitors as Southern Co., Reliant Energy Inc. and American Electric Power Inc.
But merchant, or wholesale, power--the business that put Duke in the political and legal cross hairs in California--has been the rocket fuel for profit recently.
In the first quarter of 2001, Duke’s wholesale business notched earnings before interest and taxes of $348 million--up a stunning 314% from $84 million in the first quarter of 2000. Merchant power represented 27% of Duke’s first-quarter EBIT, up from just 10% a year earlier. The profit explosion made merchant power the second-biggest profit contributor among Duke’s lines of business, trailing only its Carolinas utility (36%).
Duke’s stock, meanwhile, has soared 54% in the last year, while the Standard & Poor’s 500 stock index has fallen 10%.
“The company seems to be aggressive and confident in itself,” Barry Abramson, utility analyst at UBS Warburg, said last week. “It prides itself on developing talent in-house.”
Abramson and other analysts also noted Duke’s emphasis on “leveraging” all its assets. The natural gas that will fire many of its future generating plants also gives Duke the expertise for lucrative trading operations. Its plant-building know-how led to an international engineering, construction and consulting business. Land originally banked for future hydroelectric projects became the seed of a growing real estate development operation.
In California, Duke bought three plants from PG&E; Corp.’s Pacific Gas & Electric Co. in 1998 under the state’s deregulation plan, which aimed to promote competition by compelling the big investor-owned utilities to sell their fossil-fuel power plants. Two of the plants, Morro Bay on the Central Coast and Moss Landing on Monterey Bay, are undergoing major expansions, which were approved despite opposition from environmentalists.
Duke is considered one of the most efficient plant operators but has been criticized for its environmental record. It is the subject of a lawsuit by the Environmental Protection Agency for alleged violations of the Clean Air Act.
The U.S. Public Interest Research Group last year named Duke as one of its “dirty dozen” energy holding companies for certain coal plant emissions, but PIRG staff attorney Rebecca Stanfield acknowledged that Duke ranks as more environmentally friendly than such competitors as Southern, American Electric and Dominion Resources Inc.
Like most of California’s independent power generators, Duke Energy has a presence in Sacramento, having retained one of the top lobbying firms, Heim, Noack, Kelly & Spahnn. Last year, Duke spent $126,000 on lobbying in the state, up from $51,500 in 1999.
The company also spent $77,000 on campaigns in California in 2000, giving $10,000 to Davis in August and $25,000 to Sen. Steve Peace (D-El Cajon). Spending reports have not been filed for 2001.
Peace, who carried the landmark 1996 legislation that helped implement the state’s deregulation plan, criticized Duke after the disclosure of its settlement talks with Davis.
Peace castigated Duke for trying to imply that there was something unique--and flawed--about California’s deregulation. Duke and other merchant generators hope to rescue deregulation nationally--and secure future profits--by “creating the fiction that the California product was unique,” he said.
Indeed, Duke has told Wall Street that it is counting on wholesale power, along with international energy, to provide annual profit growth of 30% to 40% for the foreseeable future--about three times the growth it expects for the company as a whole.
If it can’t find those profits in California, the company says, it will look elsewhere.
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Times staff writer Dan Morain in Sacramento and researcher Nona Yates in Los Angeles contributed to this report.
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High Voltage
Duke Energy shares soared in 2000 as rocketing prices for electricity and natural gas drove the company’s sales and earnings sharply higher.
Friday: $46.04, up 71 cents
Duke Energy shares, quarterly closes and latest
Source: Bloomberg News
Profit Picture
Duke Energy’s diversification from its regulated-utility base in the Carolinas has helped make it a winner with Wall Street. Here are the sources of its first-quarter operating earnings before interest and taxes, broken out by business segment:
2000
Merchant power generation: 10%
Int’l. energy/other: 12%
Carolinas electric generation: 58%
Natural gas transmission: 20%
2001
Int’l. energy/other: 23%
Carolinas electric generation: 36%
Merchant power generation: 27%
Natural gas transmission: 14%
Source: UBS Warburg
Los Angeles Times
