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Electric and Gas Utilities

Electric and gas utilities are increasingly adapting their governance structures, engagement and disclosure practices, and operational goals in response to growing sustainability-related expectations that are linked directly to energy market transformations. But, much more work lies ahead. Many companies continue to fall well short of leading practice.
Electric and Gas Utility Companies

AES*
AGL Resources**
Alliant Energy
Ameren
American Electric Power*
Calpine*
CenterPoint Energy
CMS Energy
Consolidated Edison Dominion Resources
DTE Energy
Duke Energy
Edison International*
Entergy*
Exelon
FirstEnergy
Integrys Energy
MDU Resources
NextEra Energy*
Nisource
Northeast Utilities
NRG Energy*
OGE Energy
ONEOK
Pepco Holdings
PG&E
Pinnacle West*
PPL*
PSEG
SCANA
Sempra
Southern*
TECO Energy
Wisconsin Energy
Xcel Energy
*Electric power only
**Gas only

Key Findings

  • With 42 percent of companies in Tier 1 or 2, the Electric and Gas Utility sector demonstrates relative leadership for overall Governance performance. While sustainability is increasingly becoming rooted in boardrooms, more consistent and comprehensive integration into operational policy and practice is required.
  • There is a growing realization among companies in this sector that external stakeholders play an important role in helping to achieve sustainability objectives, as evidenced by increasing outreach to investors. Only two of 35 companies fail to disclose direct engagement with investors, compared to 18 of 35 in 2012.
  • The Electric and Gas Utility sector has shown significant improvement in disclosing key sustainability issues as specific financial risk factors. More than half of sector companies (54 percent) now meet Tier 1 or tier 2 expectations for disclosure in general.
  • Progress remains elusive among Electric and Gas Utility companies on the key issues of GHG emissions reductions and water management strategies.
  • Most electric and gas utilities can do more to advance their own sustainability goals by pushing a broader set of sustainability principles through their supply chain.
  • Employee engagement through sustainability-related training and support is growing, but more is needed.

 

Introduction

A thread of transformation is running through the Electric and Gas Utility1 sector.

Among companies in the electricity business, attention is increasingly focusing on the concept of “utility 2.0,” capturing the idea that a set of overlapping forces are leading to fundamental changes in traditional business models. Technological innovation, climate change and other environmental concerns, declining demand, and reliability requirements are beginning to define a shift away from simply selling electrons as a commodity and toward a more service-oriented model that gives companies as well as customers greater, and more efficient, control over their use of grid-connected electric power resources. Ninety percent of senior executives from North American power and utility companies who responded to the 2013 PwC Global Power and Utilities Survey2 expect that there will be a complete transformation of, or at least important changes to, the power utility business model.

Companies in gas-related businesses are experiencing their own transformation, driven largely by the enhanced ability to produce gas economically from shale gas resources and the resultant increase in supplies. Natural gas is increasingly the non-renewable fuel of choice for electric power generation, which in turn increases the attention paid to the environmental risks of developing shale gas resources.

In changing times, the Electric and Gas Utility sector must also contend with emerging operational challenges, including the need to implement more sophisticated cyber security measures while enhancing the physical security of critical infrastructure in light of potential vulnerabilities. Simultaneously, the sector faces “legacy” challenges, from ensuring the integrity of surface impoundments that store years of accumulated ash produced by coal-fired electric power plants, to ensuring the integrity of large networks of natural gas distribution pipelines, to maintaining the safety and security of nuclear power plants. And all of these challenges require attention at a time when these companies face a wave of near-term personnel loss – more than 50 percent of the workforce could retire over the next decade, by many estimates – and will need to recruit and train a new, skilled workforce.

The ability to address old and new challenges – to manage risk as well as seize opportunity – all while advancing toward a more sustainable environment and economy, is at the heart of the Ceres Roadmap for Sustainability expectations. Ceres’ analysis of the Electric and Gas Utility sector’s performance relative to the Roadmap expectations analyzes data for 35 companies, the majority of which (22 companies) provide both electric power- and gas-related services.

As summarized below, the most recent data indicate that electric and gas utilities are increasingly adapting their governance structures, engagement and disclosure practices, and operational goals in response to growing sustainability-related expectations that are linked directly to energy market transformations. But, much more work lies ahead. Many companies continue to fall well short of leading practice.

Governance Section Icon

 

Governance for Sustainability

 

  • Sustainability is becoming rooted in Electric and Gas Utility boardrooms, but still requires more consistent and comprehensive integration into operational policy and practice.
  • With 42 percent of companies in Tier 1 or 2, the Electric and Gas Utility sector demonstrates relative leadership for overall Governance performance.

 

Successful integration of sustainability into corporate strategy development and business unit operations requires that a company’s Board of Directors and senior leadership take the matter seriously. For this reason, the Roadmap begins with the expectation that a committee of the Board will have, within its charter, specific responsibility for overseeing sustainability-related performance. The Electric and Gas Utility sector performs quite well against this expectation, and has made significant progress in recent years. Eighty-three percent of the companies evaluated (29 of 35 companies) are in Tiers 1 and 2, having adopted a governance structure that provides oversight of relevant social and/or environmental issues, compared to just 51 percent in 2012. We also see progress in the movement of companies out of Tier 4 (i.e., no disclosure of Board responsibility). Only 14 percent (5 companies) remain at this level compared to nearly 50 percent in 2012.

Exelon’s Corporate Governance Committee charter states that it is the Committee’s responsibility to “[o]versee the Company’s strategies and efforts to protect and improve the quality of the environment, including, but not limited to, the Company’s climate change and sustainability policies and programs . . ..”

The relative strength of this sector’s performance with respect to governance structure may be attributable to the increasing regulatory focus on the electric power sector as a significant source of GHG emissions, and the central role that climate change plays when considering sustainability objectives. It is not surprising, therefore, to see utility company Boards responding affirmatively to the expectation that they are aware of and actively considering its impact on their business.

And yet, strong performance at the Board expectation level is not yet consistently translating into robust accountability at the management level. While 26 percent (9 companies) are in Tier 1 by virtue of having C-level participation on an executive committee with sustainability responsibilities, 54 percent (19 companies) do not disclose any management oversight of sustainability issues and remain in Tier 4. Performance relative to this expectation has in fact declined overall compared to 2012, when 57 percent of companies could report some form of accountability system compared to 43 percent that could (or did) not.

Stakeholder Engagement Section Icon

 

Stakeholder Engagement

 

  • There is a growing realization among companies in this sector that external stakeholders play an important role in helping to achieve sustainability objectives, as evidenced by increasing outreach to investors.
  • Only two of 35 companies fail to disclose direct engagement with investors, compared to 18 of 35 in 2012.

 

The Electric and Gas Utility sector’s performance with respect to two stakeholder engagement expectations showed modest improvement since 2012, though performance is still lacking. Twenty-six percent (9 companies) are Tier 1 or 2 performers, characterized by clear explanations of who the company’s stakeholders are and how the company engages with them, compared to 14 percent in 2012.

Sempra Energy, for example, not only solicited input from stakeholders during its materiality assessment process, but also made regular engagement possible through an online survey instrument that invites continuous stakeholder comment on the issues that concern them the most.

Similarly, 26 percent use a variety of platforms to engage with stakeholders on an annual basis (placing them in Tier 1 or 2) compared to only six percent in 2012. However, 51 percent (18 companies) provide no evidence of stakeholder engagement on sustainability issues, the same rate of (non-) performance observed in 2012.

There was more significant improvement in utility companies’ performance relative to the third stakeholder engagement expectation, investor engagement, reflecting the sector’s response to growing demand from the financial community for clear communication of material sustainability risks and opportunities. Forty-six percent (16 companies) meet Tier 1 or 2 expectations for investor engagement by referring to sustainability risks and opportunities in at least two modes of investor communications and, in some cases, specifically addressing these issues in shareholder engagements. In 2012, by comparison, only 11 percent met Tier 1 or 2 investor engagement expectations.

Disclosure Section Icon

 

Disclosure

 

  • The Electric and Gas Utility sector has shown significant improvement in disclosing key sustainability issues as specific financial risk factors.
  • More than half of sector companies (54 percent) now meet Tier 1 or Tier 2 expectations for disclosure in general.

 

Consistent with the observed change in this sector’s level of overall engagement with the financial community, 49 percent (17 of 35 companies) now meet Tier 1 expectations by disclosing in financial filings at least two material sustainability issues that are not compliance-driven, compared to 26 percent in 2012. Eighty-nine percent (31 companies) meet the Tier 2 expectations by disclosing at least one such issue, compared to 63 percent in 2012. Only nine percent (3 companies) do not make any disclosures beyond compliance with applicable laws and regulations. Several examples highlight this trend toward greater disclosure:

In their 2013 10-K reports to the Securities and Exchange Commission, both AEP and Xcel Energy include as an explicit risk factor the physical and financial risks associated with climate change; AEP also specifically addresses the material issue of an aging workforce and the need to find appropriately skilled replacements.

TECO Energy, with a significant presence in Florida, notes in its 10-K the possibility that warmer temperatures could increase the frequency, severity, or duration of hurricanes, the impact this could have on energy sales and the effects extreme weather could have on its physical assets.

Performance Section Icon

 

Performance: Operations

 

  • Progress remains elusive among Electric and Gas Utility companies on the key issues of GHG emissions reductions and water management strategies.


As in 2012, consideration of the electric and gas utilities’ operational performance focuses on GHG emissions and water management. Unfortunately, performance on both issues is lacking.

An indicator of company performance relative to the Roadmap’s GHG emissions expectation is the existence of emission reduction programs and targets. Fifty-seven percent of the companies in this sector (20 companies) have a program in place to reduce their GHG emissions, but only 31 percent (11 companies) set and disclose quantitative, time-bound targets. Two additional companies have established a target, but do not specify a date by which they plan or expect to reach the target. This profile is essentially unchanged from 2012.

An important indicator of commitment to GHG reductions is the carbon intensity of a company’s generation of electricity. This year, 80 percent of the utilities (25 companies) have a highly carbon-intensive energy mix, down from 93 percent in 2012. But, the transition on a large scale to predominantly lower carbon energy sources continues to be constrained where the traditional utility business model favors centralized, fossil fuel-based generation at the hub of large distribution and transmission networks. Not surprisingly, among the companies that perform best relative to the carbon intensity indicator (PG&E, Exelon, Entergy) remain those with significant nuclear or hydroelectric power generation capacity.

The evaluation for a company’s water management practices has changed since 2012 and now requires that companies scoring in Tier 1 or 2 incorporate supply chain impacts into their water-related management strategies and business risk assessments. This change likely explains the apparent step back in sector performance. No companies currently perform in Tier 1 and only 14 percent (5 companies) in Tier 2 compared to 26 percent (all in Tier 2) in 2012. Nevertheless, this result is somewhat surprising given the importance of water availability to this sector and the growing attention paid to water scarcity throughout the United States. There is some evidence that the tide may be turning, however. Although 40 percent (14 companies) have not completed any assessment of their exposure to water risks, 20 percent (7 companies) have done so in accordance with “best practice” by using generally accepted tools, such as those developed by the World Resources Institute (Aqueduct) or the World Business Council for Sustainable Development (the Global Water Tool). In 2012, only one company reached this level of performance.

Performance Section Icon

 

Performance: Supply Chain

 

  • Most electric and gas utilities can do more to advance their own sustainability goals by pushing a broader set of sustainability principles through their supply chain.


With a supply chain that is dominated (in terms of total spending) by fuel procurement, it can be easy to overlook the fact that the Electric and Gas Utility sector procures a wide range of goods and services. To meet sustainability expectations, electric and gas utilities must be attentive to all parts of their supply chains.

As with other expectations, evidence of progress within the sector is overshadowed by the small number of companies that are performing at leadership levels. For example, the scope of a company’s supply chain standards is an indicator of performance relative to the Roadmap’s Policies and Codes expectation. Eighty percent in this sector (28 companies) have some social standards in place for their supply chains (typically addressing health and safety, non-discrimination, and prevention of child and forced labor), an improvement over 2012 when less than 50 percent addressed social standards in any form. However, only 14 percent (5 companies) have standards that address a majority of the core conventions established by the International Labor Organization (ILO). Only one company, Duke Energy, currently has a supplier code of conduct that addresses eight of the nine core conventions of the ILO, and is the only Tier 1 performer on the Policies and Codes expectation.

Similarly, the sector as a whole is not meeting expectations with respect to supplier engagement; 63 percent (22 companies) still do not appear to have any sustainable supply chain management system (Tier 4), though this is a slight improvement over 2012 when 72 percent of companies were in Tier 4.

Performance Section Icon

 

Performance: Employees

 

  • Employee engagement through sustainability-related training and support is growing, but more is needed.


As noted above, an aging workforce remains a key issue for this sector, so one might expect that sustainability-focused employee engagement would be a priority as a means to retain existing employees and attract new ones. Incorporating sustainability into company training and support programs is one way to address this issue. The trend in sector performance with respect to the Roadmap’s training and support expectation suggests a growing awareness of this path to ensuring the availability of a skilled workforce, but as with other expectations substantial room for improvement remains. In this case, the number of companies that perform at a Tier 3 level or better by providing employees with at least basic sustainability information increased to 46 percent (16 of 35 companies) from 22 percent in 2012. Among these companies, nine meet Tier 2 expectations by offering some employees specific activities for engagement on sustainability issues, and two, including PG&E, systematically embed sustainability into company-wide training and education initiatives.

In addition to extensive technical training focused on safety (by mid-2013 all of the company’s leaders were to have completed a safety leadership workshop), PG&E has recently required all employees to take a training course on the company’s environmental policy.

 

Explore the interactive data to see how the Utility sector performed across all Ceres Roadmap expectations in the Gaining Ground report.


In the video above, Bill Brady, director of Environmental Strategies at Exelon talks about how the energy company is embedding sustainability practices throughout their operations.


 

1. We use the term “utility” only for convenience, as it remains a generic way to describe a diverse sector that comprises companies operating a variety of energy-related businesses, including but not limited to independent power producers, diversified holding companies that might include a regulated utility component, electric and gas distribution companies, and energy services companies that operate in wholesale as well as retail markets.

2. PwC, “Energy Transformation: The Impact on the Power Sector Business Model,” 13th PwC Annual Global Power & Utilities Survey, October 2013, http://www.pwc.com/gx/en/utilities/global-power-and-utilities-survey/assets/pwc-global-survey-new.pdf.