A Publication of WTVP

Robert O. Viets was born at Girard, Kansas, in 1943. He graduated from Washburn University in 1965 with a degree in economics and received his law degree from Washington University School of Law in 1969. He is a certified public accountant.

After working several years in St. Louis with Arthur Anderson & Co., a national accounting firm, Mr. Viets joined Central Illinois Light Company (CILCO) in Peoria, to manage the company’s regulatory and financial activities. CILCO is a regulated electric and natural gas utility serving customers throughout central Illinois. In 1985, Viets led the formation of CILCORP, Inc., a non-regulated holding company which became the parent company of CILCO. The corporate restructuring was designed to prepare the company for competition in the retail electric and natural gas energy markets. Since 1988, Viets has served as President and CEO of CILCORP Inc. He is also CEO of the company’s major subsidiaries – CILCO; QST Enterprises Inc., which provides energy-related services and products throughout the U.S.; and Environmental Science and Engineering, Inc., a national environmental consulting and analytical services firm.

In May, 1996, CILCORP and CILCO established the first pilot program in the U.S. to let local residential, commercial and industrial consumers of electricity choose their suppliers. The pilot program is designed to advance the pace of deregulation for all U.S. consumers of electricity and natural gas.

My Viets is a director of First of America Bank-Illinois, N.A., RLI Corp., Lincoln Office Supply Co., Inc., and Health Advance Institute-Medical Research Centers and Methodist Health Services Corporation. He serves as chairman of the board of trustees of Bradley University.

CILCORP and its subsidiary, CILCO, have really led the nation in efforts to deregulate the electricity and natural gas industry. How did this come about? Why did CILCO decide to be a leader in pushing for competition in the industry?

The decision to be a leader resulted from our strategic plan. In preparing that strategic plan, we determined that competition in the retail energy markets was inevitable. A major portion of the natural gas industry is already subject to competition. The electric utility industry is the only major industry in the United States that has not yet experienced competition in the retail markets.

In determining how CILCO would fit into a competitive market, we observed that we have relatively low costs compared to our neighboring utilities. We also observed that most participants in the industry are taking a defensive position – they are comfortable with regulated markets. It works to our strategic advantage to make competition come to the retail electricity market sooner rather than later. Rather than take a defensive position, we decided to champion the cause of customer choice.

Regulated utilities are almost guaranteed to make a profit. Wouldn’t it have been more comfortable to sit back and continue to operate in a regulated environment?

For the interim period, it would be easier to sit back. However, in the long run, as the markets change under pressures for competition, it is better for us to be proactive, to try to take the impact the direction of the industry and the way in which the competitive markets are structured. Being on the front end of the movement, we can position ourselves to be a stronger player in the electricity and natural gas industry.

There are approximately 140 investor-owned electricity and combination (electricity and natural gas) companies in the United States. The largest of those companies serve only three percent of the market, so we have a very fragmented market. Unless CILCORP has something unique to offer, we will not be in a position to control our destiny in a consolidating market.

So part of the reason for your decision was to be in control of your destiny, and to avoid being swallowed up by a larger utility?

That’s right.

In fact, the past couple of years in the utility industry have been characterized by mergers and acquisitions. Rumors have circulated about a buyout of CILCO by some larger utility. It would seem that in a deregulated and competitive environment, CILCO would still be a target for takeover, given its limited resources compared to larger companies. Should that be a concern for Central Illinois residents and businesses that have enjoyed CILCO’s service and pricing for so many years?

I do believe that consolidation will occur within the industry. There is no assurance in a free market, where we have a fiduciary responsibility to protect and enhance the interests of our shareholders, that we can continue to operate as a stand-alone company. We are more likely to affect those decisions in a way that favorably impacts our employees and Peoria if we are a leader in the restructuring of the industry.

Are you saying that you are more likely to be an acquiring company than an acquired company?

I cannot speculate on any transaction that might occur sometime in the future. If we weren’t intently committed on carrying out our own strategy, then our customer base would conveniently fit into somebody else’s strategy. On the other hand, if we are developing the right systems, we have a better opportunity to drive key decisions.

You have a pilot program in place to deregulate on the retail level in both electricity and natural gas. What fundamental differences exist between the electric utility and the natural gas utility business that will impact how and when they are deregulated?

Deregulation in the natural gas industry actually started with the Natural Gas Policy Act in 1978. That law established rate caps as a starting point and allowed natural gas prices at the wellhead to rise to those capped rates. There was a phase-in period of about seven years before natural gas purchased at the wellhead was completely deregulated. In the process, though, the natural gas industry was restructured. In the mid-1980s, as a result of that restructuring, the major industrial and commercial customers were given the choice of suppliers.

It makes just as much sense in the natural gas industry as in the electric industry to open up retail competition to residential customers. So in addition to our electricity pilot programs, CILCO has recently given choice to 10,000 natural gas residential customers. Proportionately, the economic benefits on the natural gas system are not as great as they are for retail choice in the electricity system.

In summary, deregulation of natural gas started much earlier, was phased in over a lengthy period of time, and is still not totally available for retail residential customers.

The deregulation process for electricity began in 1992 with the passage of the Energy Policy Act. That act provided that transmission lines must be made available by the owners to transmit energy from suppliers to purchasers in wholesale markets. A wholesale purchaser is someone who is buying electricity for resale. By providing that transmission lines could not be used by their owners as barriers to prevent willing buyers and sellers in the wholesale market from transaction business, Congress introduced the prospect that retail competition would follow.

Most of the decisions about retail choice in the electricity market are likely to be made at the state level. So the states now are addressing that issue.

When we talk about deregulation in the electricity industry, what exactly are we referring to? What elements of electrical service will see competition?

There are three functioning segments to the electricity industry: the production system; the wires system, consisting of high-voltage transmission and lower voltage distribution wires; and the marketing system. Because of aesthetic and safety concerns, the “wires” will continue to be regulated. There is no good reason to duplicate those facilities in competitive markets, and they will continue to be regulated.

The production end (customers should have the opportunity to buy from the most efficient producer) and the marketing end will be subject to competition. Marketers, or aggregators, will work with the customers – particularly with the small customers – in order to make the benefits of competition available. It’s not practical for a residential customer to deal directly with a large producer or generator of electricity. In order to make that practical, the residential customer will work through marketers who will deal on behalf of groups of residential customers in order to provide the lowest cost source of electric power.

Is it accurate to compare this to what has happened in the telephone industry where long distance marketers effectively buy long distance service in bulk from an AT&T, for instance, and then resell it to consumers?

The contractual relationship may be somewhat different, but there will be aggregators who will act on behalf of the residential customers to package the best product.

How has CILCORP restructured to prepare for utility deregulation? Explain how your QST subsidiary operates.

We have organized the company along two lines: CILCO will continue to provide energy services through a regulated rate-base operation, and QST Enterprises Inc. will provide energy-related services to a much broader unregulated market. The gas and electricity transmission and distribution lines will continue to be regulated and owned by CILCO. The power production operation of CILCO will likely begin operating on an unregulated basis at some point in the future.

In addition to marketing gas and electricity under QST Enterprises, we have set up a telecommunications function. We also have our engineering and environmental services operating under QST. So we will be able to deliver a full package of products to commercial, industrial and residential customers.

CILCO wants total deregulation in the utility industry by 1998. Commonwealth Edison, Illinois Power, CIPS and other have formed an association (The Illinois Coalition for Responsibility Electricity Choice) that seeks to slow the process down until at least 2010. Why do they want to delay regulation?

I’ll have to let them speak to what drives their corporate strategies, but some may have determined that they are not yet ready to engage in competitive markets. That may be because of high costs, or because they lack some competencies that are going to be required in order to compete.

CILCO has not opted, through the years, to get into nuclear power. We know that nuclear energy operations have added significant costs to companies like Commonwealth Edison. Is that part of the reason they are resisting a quicker move into competition? Do they feel they must continue to be protected in a regulated environment in order to recover these “stranded” costs?

I’m sure that’s a part of the consideration of some companies not wanting to advance to competition as quickly as we are advocating. They have some high fixed costs associated with generating plants that have not yet been recouped from customers. They would like to recoup those costs before seeing competition in the electricity market.

CILCO has not opted to get into nuclear plants. People should understand that we had the opportunity in the past. Neighboring utilities offered us the “opportunity” to invest in some of the nuclear plants that have been built in the Midwest. We made a conscious decision many years ago not to participate in those construction programs.

As a result, we are in a good position to advocate competition in the electricity market. We made, consciously, the right decisions about how to position ourselves for competition.

One of the arguments that Commonwealth Edison and its coalition is using to delay competition is that the industry cannot handle such a radical change so quickly and there needs to be a more gradual transition. Is that a valid argument?

Most of the arguments we have heard relate to technological requirements. We believe those arguments are unfounded. Electricity systems will operate the same after deregulation occurs as they do now. Electricity flows by the laws of nature. Those laws are not going to change; electricity will continue to flow according to the laws of natures after deregulation occurs.

Deregulation in the electricity industry has a lot more to do with cash settlements between buyers and sellers of electricity at the end of each billing period. Competition merely answers the question about which producers of electricity are willing to absorb margins or to invest in more efficient delivery systems in order to gain access to customers.

I believe reliability will be better under a competitive system than it is now. Reliability under a competitive system as envisioned under federal and state laws is likely to be increased both because of the way load balancing will occur and also because of the focus that regulated electricity companies will have on maintaining the distribution and transmission systems.

CILCO says it has worked openly and publicly to draft its deregulation plan, while the opposition has worked behind closed doors, only recently making its plan public. Why?

Throughout last summer, the high-cost utilities negotiated with a few major industrial customers to delay the benefits of competition to smaller commercial and residential customers in order to allow a greater recovery of the fixed costs of some of their high-cost generating plants. In return for that, the high-cost utilities were willing to buy the support of the major (and potentially more politically powerful_ industrial customers by giving them ways to benefit from competition earlier than smaller customers, including the residential customers. By all appearances, that was the deal that was struck.

The negotiations were conducted under confidentiality agreements. We were not invited to join in the negotiations. Residential customers clearly weren’t invited to be a part of the negotiations because the deal was contrary to their interest. So there were few parties at the table when that plan was developed.

As we go into the legislative session, we believe the deal will fall under its own weight. While large industrial customers have a legitimate interest to protect, residential customers vote. We believe the political weight will come down on the side of the plan that is more open and that makes the benefits of choice available to all customers. We are very confident about the position we are in.

So are you saying, in a nutshell, that the high-cost utilities want to be able to charge high rates to small customers while cutting deals with large customers in order to recoup their costs, whereas CILCO wants to open competition across the board and give everyone the same chance at lower costs simultaneously?

That’s right. If you look at the proposal that has been advanced by the high-cost utilities, the industrial customers would get choice in 2000 and residential customers would get choice in 2005. In both cases, those are merely start dates, however, because each customer class would continue to pay a competitive transition charge for an additional five years beyond the respective start date. The transition charge would bring prices to something well above what a competitive market would support.

Many of the large industrial customers have already received the benefits of price reductions through various special rate programs and contracts that the high-cost utilities have started. But for those price breaks, the larger customer may have opted to use alternative supplies provided by independent power producers or self-generation projects.

CILCO has put together a Consumer Choice Partnership, as association that supports your position for early competition. This Partnership includes some impressive national companies like Ford Motor Company, Mobil Oil Company, CITGO Petroleum Corp., in addition to Caterpillar Inc., and other local companies. How did these larger national companies become a part of this?

Nationally, there is strong support for consumer choice, both from small and large consumers of electricity. It was not difficult for us to identify the companies that would become advocates for our proposal to make choice available to all customers in 1998. Many additional companies have joined since we announced the initial list.

For us to build the partnership, it was just a matter of calling the advocates of customer choice to let them know that the issue is ride in Illinois. Illinois now has the opportunity to improve its economic standing by moving to customer choice early.

Exactly what does the state of Illinois stand to gain economically if is becomes a leader in electrical energy competition?

Illinois has more to gain as a state than the surrounding states. Illinois is literally an island of high electricity cost. Ninety percent of the electricity users in Illinois pay prices which are more than fifty percent above the Midwest regional average.

If Illinois adopts a program that reduces the price of electricity to the regional average, we know that the savings will amount to $2.7 billion dollars annually. That’s roughly what the state of Illinois pays for secondary education out of the General Revenue Fund each year. Residential customers, on average, will see a reduction in their electricity costs in the range of $300-500 annually. That is a significant amount of money with a significant benefit to customers.

The economic development potential would be tremendous. Today, is a company has a choice of where to locate a facility, there is a strong incentive to place the facility in a neighboring state where electricity rates are substantially lower.

If Illinois opens up its electricity markets, that disparity will disappear. Illinois, rather than being viewed as a state of high cost energy, will be viewed as an area of low cost energy. The economic outlook of this state would change significantly. The change could create an economic boom.

Given that, one would think that you would go to Springfield in the next legislative session and that your plan would cruise through the General Assembly. However, it is understood that Commonwealth Edison and its associates have much more political clout throughout the state than does CILCO. What has to happen for you to win this battle?

We have to inform customers. Residential customers vote. The other side can spend all the funds they want on lobbying activities, but if the residential customers understand the issue, we will win.

How do you plan to get the message our statewide given that CILCO is basically a Central Illinois utility?

That’s one of the reasons for putting together the Consumer Choice Partnership. The partnership includes the Citizens For A Sound Economy which is a very influential Washington-cased “think tank” which advocates free markets. They have 9,000 active members throughout the state of Illinois. We also have the National Association of Neighborhoods which represents many of the low income neighborhoods in metropolitan areas nationally, including some cities in Illinois. Many of the major industrial customers in the state are backing our proposal. We have significantly more associations supporting our viewpoint. These include the Illinois Education Association, the Illinois Petroleum Marketers Association, the Illinois Automobile Dealers Association, the Illinois Convenience Stores Association, the Illinois Restaurant Association, and the International Mass Retailers Association.

Briefly tell us about the other areas CILCORP has ventured into through QST, including telecommunications. How was ESE been impacted by reorganization within CILCORP?

QST will be packaging products that can be marketed in conjunction with our energy products. These include electricity and natural gas supplied in unregulated markets; construction and operation services for generation facilities, communication services, initially through the fiber optic loop we have recently built in Peoria; and environmental and engineering services. ESE has been downsized to march a smaller market for environmental services, and ESE capabilities are being integrated into the QST product package.

Through all of the changes at CILCORP and CILCO, what message would you like to give the central Illinois business community?

The changes you see happening at CILCORP and CILCO are driven by the commitment we have to succeed in competitive energy markets. Historically, the management of our company has made good, long-term decisions that allow us to play a key role in determining how competitive energy markets will work at the retail level. Competitive success begins by listening to customers. All of our activities – from designing products to leading the customer choice legislative initiative – are driven by what customers want. IBI