His hands still blackened from coal he has just unloaded from a barge, Jeff Hatch picks up the phone and calls his favorite broker. “What kind of rate can you give me for $10 million at 30 days?” he asks the agent, who handles Treasury bills. “Only 6.09? But I just got a 6.13 quote from Chase.”In another room, Joe Oddo is working on J.P. Morgan & Co. “6.15 at 30 days?” confirms Oddo,a maintenance technician at AES Corp.’s power plant here. “I’ll get right back to you.”Members of an ad hoc team that manage a $33 million plant investment fund, Messrs. Oddo andHatch quickly confer with their associates, then close the deal. “It’s like playing Monopoly,” Mr.Oddo says as he heads off to fix a leaky valve in the boiler room, “Only the money’s real.”14
AES Corp has emerged as the leading private power company in the world since its establishment in 1981 with a capital of $60,000.
The company operates two primary types of businesses: Generation business, where it owns and/or operates power plants to generate and sell power to wholesale customers, such as utilities and other intermediaries; and Utilities business, where the company owns and/or operates utilities to distribute, transmit and sell electricity to end-user customers in the residential, commercial, industrial and governmental sectors in a defined service area.
How did a small US power producer, virtually unheard of outside industry circles just a few years ago, rise so quickly to this pre-eminent global status? The short answer: largely as a result of a spate of acquisitions and successful bids in emerging markets, and particularly in Latin America's rapidly privatizing power sector. The company's phenomenal growth is due to having been in the right place at the right time - namely, Latin America during the unprecedented deregulation and opening to foreign investment that has occurred since 1990.
It was the world’s first forestry project funded explicitly to offset greenhouse gas emissions
Knowledge management is not really about managing knowledge, but rather managing and creating a corporate culture that facilitates and encourages the sharing, appropriate utilization, and creation of knowledge that enables a corporate strategic competitive advantage.http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/1190120402.html
AES has attempted to create an operating environment that results in safe, clean and reliable electricity generation, distribution and supply. Because of this emphasis, the Company prefers to operate all facilities and businesses which it develops or acquires; however, there can be no assurance that the Company will have operating control of all of its facilities.
These values reflect the personal beliefs of the two founders DennisBakke and Roger Sant.Bakke came from a Christian background and Sant was active in the environmental movement. both men viewed AES as an opportunity for them to pursue their values andeffect a fundamental change in business practices.
The development of the $404 million Warrior Run power plant in Cumberland,Maryland was undertaken by an AES team of ten people who handled all the worknecessary leading up to the plant’s groundbreaking in October 1995. They secured 36different permit approvals involving about 24 regulatory agencies and arrangedfinancing that involved tax-exempt bonds and ten lenders. Within the industry, such aproject would typically involve well over a hundred employees.
The project subsidiaries are responsible for all major facility-specific business functions,including financing and capital expenditures. Every AES person has been encouraged to participate in strategic planning and new plant design for the Company. The Company has generally organized itself into multi-skilled teams to develop projects, rather than forming “staff” groups (such as a human resources department or an engineering staff) to carry out specialized functions.They are fluid; many people are members of more than one team at one time. A team is somewhat autonomous; all decisions about a project are made within that team, with final say granted to that team. Decisions are made not from the top-down, but from the bottom-up. Furthermore, responsibility is pushed to the lowest level possible, encouraging everyone to be part of a decision. As a result, each team member views the project in terms of a whole. Colleagues and team members must trust each other to follow through to the best of their ability.3 levels of management
AES refers to its organizational structure as a “honeycomb.” The idea is that each plant comprises a number of small, flexible, self-managed teams who are able to operate cooperatively and efficiently without any centralized direction. At the basis of this structure is the belief that organizations do not need to be managed. Thinking, motivated people can manage themselves and undertake the communication and mutual adjustment needed to coordinate complex tasks. Their job is to get advice from me and fromanybody else they think it’s necessary to get advice from. And then they make the decision.
In terms of performance, one of the most important advantages of the AES system is that it permits speed in decision making, preparing bids, and completing projects. AES abounds with afolk history of teams and individuals given huge responsibilities or thrust into unique andunexpected situations. Paul Burdick, a mechanical engineer, had only been at AES briefly when he was askedto purchase $1 billion in coal. “I’d never negotiated anything before, save for a usedcar,” he said. Burdick spent three weeks asking questions of people both within andoutside of the company on how to accomplish the task. At AES, he says, “You’regiven a lot of leeway and a lot of rope. You can use it to climb or you can hangyourself.”21
International expansion involved participating in theauctioning of state-owned electricity companies by governments, and bidding for long-termpower supply contracts from governments which were opening the generating end of theirelectricity industries to competition. Overseas expansion was primarily through the acquisition of existing power-generating facilities rather than building new plants. A similar transition was occurring in the US. Changes in utility regulations at the state level resulted in some utilities selling off their generating facilities – AES was among the most prominent bidders for these facilities.
Overseas expansion was primarily through the acquisition of existing power-generating facilities rather than building new plants. A similar transition was occurring in the US. Changes in utility regulations at the state level resulted in some utilities selling off their generating facilities – AES was among the most prominent bidders for these facilities.
It is now one of the largest and most important foreign players in Latin American power. Thanks to its aggressive growth in Latin America since then, nearly 40% of AES's cash flow today comes from Latin American projects it either owns or operates outright or in consortium with international and domestic partners
AES is determined to stick to its strategy of being the first into a country in order to get the best opportunities.A power generator here, an electricity distributor there may seem like piece work to some. But there is method to AES's apparent madness of a decentralized approach to growth. Their strategy is that they’ll take all these pieces together and in 10 years put together a regional energy company.The company operated without rules, regulations, or even a well-defined hierarchy. They don't have procedures, just using common sense. Setting itself apart from the stodgy world of regulated electric utilities--or any conventional company--AES trusted people to do good and encouraged them to step a little bit outside the norm.
Beyond budgeting transformation network
Inf: no central staff, organizaional charts, corporate strategy. Management, policies, non-recourse debt require the loans to be repaidsolely from the project’s revenues and provide that the repayment of the loans (and interest thereon) is secured solely by the capital stock, physical assets, contracts and cash flow of that project subsidiary or affiliate. Vote on their budgetHuman resource management: employees, hourly wages, recruiting process is done at the plant level, absense of functional specialists, full access to the company’s operating and financial informationTechnology: not focused on the highest efficiencies, but on doing the right thing. Their choice is between more expensive technology that would enable the plant to meet more demanding U.S. environmental standards or less costly technology that would meet local environmental standards and free up funds for contributions to other needs of communities surrounding the projected plant.Procurement – decentralized according to the company’s strategy
Energy generation, requiring both a fuel source (e.g., coal, nuclear, natural gas, Wind nergy) and a power plant to convert that fuel source into electricity. Generation business is largely tied to securing new power purchase agreements (PPA’s), expanding capacity in existing facilities and building new power plants.Electricity transmission involves both transforming generated electricity into electricity that can be transmitted over power lines and matching end user requirements (demand) with energy availability (supply). After transmission, electricity must be distributed to individual end users via a vast network of power lines and substations. Electric utilities often own miles of power and transmission lines. Lastly, there is delivery, where electricity is transformed again and delivered directly to an end user. Delivery also involves metering and billing. Relevant competitive factors for the power distribution businesses include financial resources, governmental assistance, regulatory restrictions and access to non-recourse financing. In certain locations, distribution businesses face increased competition as a result of changes in laws and regulations which allow wholesale and retail services to be provided on a competitive basis.
long-term contracts with one or a limited number of customers for the majority of relevant plant’s output. The remaining terms of the power sales contracts range from 1 to 25 years. AES hedges the exposure with forward fixed price power sales. If the counterparties breach, they may not be able to enter in contracts of similar favorable terms. Rely on single supplier or several few for provision and transportation of fuel, if suppliers fail, need to buy fuel at market prices exposing to market volatility. To limit the exposure to fluctuations in fuel prices, the company signed long-term contracts for fuel with a limited number of suppliers.Utilities face relatively little direct competition due to significant barriers to entry which are present in these markets. Competition is in efforts to acquire existing businesses and develop new onesThe company is developing an alternative energy business as these alternatives to the traditional fossil fuels are economically competitiveElectricity is a natural monopoly--there is typically only one power line connected to a house. Power production is facing strong and growing competition, highly efficient gas-power plants are causing pressure on the prices. Demand for electricity is driven by industrial and commercial activity and by population growth. The profitability of individual companies depends on the efficiency of their operations. Large companies have economies of scale in purchasing power; small companies can compete effectively by specializing in geographic regions.
The fall of Enron, which had controlled one-quarter of the gas and oil commodities in the United States and ranked as Europe's largest trader of gas and oil, threw the energy industry into chaos.
Obligations for Public ServicesDollarized public services’ tariffs are converted into pesos at a 1 to 1 rate and cannot be increased by suppliers (notwithstanding existing concession agreements which may provide to the contrary). Under the Law, the National Executive Branch is authorized to renegotiate concession agreements in order to “compensate” the companies for the losses caused by the devaluation.Price Controls The Federal Executive Branch is authorized to regulate prices for “critical goods and services” to protect the rights of users and consumers from possible negative changes in the market from monopolistic practices.
Trust reached an all-time low
In the expectation that AES would be unable to access the capital markets in 2002 for additional parent capital, it would be forced to rely on its internally generated cash flows to fund operations and capital expenditures.
• 29 countries• Serving 100 million people• 132 power plants• 14 electric utilities• $16 billion in annual revenues• A global workforce of 25,000
Generation - power plants to generate and sell power to wholesale customers, such as utilities and other intermediariesUtilities business - utilities to distribute, transmitand sell electricity to end-user customers in theresidential, commercial, industrial andgovernmental sectors
Fuel source for power generation in 2008 Diesel 1% Oil Biomass 3% 1%Renewables Coal 21% 41% Gas 33%
Operations by region in 2008 Asia andMiddle East 13% North America 34% LatinAmerica 26% Europe, Afric a 27%
Profits are not any corporation’smain goal. Profits are to acorporation much like breathing isto life. Breathing is not the goal, butwithout breath, life ends.Similarly, without turning a profit, acorporation too, will cease to exist...At AES we strive not to make profitsthe ultimate driver of thecorporation. My desire is that the Dennis W. Bakke, CEOprinciples to which we strive wouldtake preeminence.
Within organizations, people can andshould be trusted to exerciseresponsibility, and at the same time shouldbe held accountable.The way to motivate people is to ignite adesire of people to make a contribution tosociety.For an organization to be effective and toharness human effort and ingenuity, theorganization must be committed to awider social purpose.
rapid growth in electricity demand in many emerging markets inadequate generating capacity the trend towards privatization 70 percent of AES’s opportunities lay outside the US
acquisition of existing power-generating facilities Changes in utility regulations - utilities selling off their generating facilities AES was among the most prominent bidders for these facilities
9 Million customers• TA from $1.44 billion in 1991 to$8 billion today• 40% of AESs cash flow todaycomes from Latin Americanprojects• Original investment $50 million $5.16 billion to date
• #1•Put the pieces together•No rules or procedures•Trust people to do good•Min organizationallayers•Max company-wideparticipation in decisionmaking•Project financing
More than 45 years after Douglas McGregors groundbreaking book, organizations slowly recognize – at least in
new power purchase agreements (PPA’s), expanding capacity in existing facilities and building new power plants.http://www.energystoragecouncil.org/storage_valuechain.html
―We broke all the rules. Noovertime. No bosses. No timerecords. No shift schedules. Noassigned responsibilities. Noadministration. And guess what? Itworked!‖-Oscar PrietoLight Servicios de EletricidadeBrazil Oct 1998
California Power Crisis California power companies had suffered for more than a year as a massive gap opened up between the rates that Californian utilities were allowed to charge consumers due to price caps, and the price they had to pay for supplies in the wholesale electricity market. The Collapse of Enron Major power corporation overstates profits, causes publicscandal, and is forced to file the largest bankruptcy in business history within a month
The Convertibility Law maintained a fixed exchange rate of 1:1 between the peso and the US dollar. Why the Convertibility Law? The Convertibility Law was successful in eliminating the severe hyper- inflation inflicting Argentina and setthe stage for rapid economic growth in the years before 2001. However, theweight of a prior devaluation by Brazil, coupled with a prolonged recessionand a highly indebted public finance system, proved too much for thecurrency board contemplated under the Convertibility Law.
January 2002the Argentine Congress passed Law 25,561 (the ―Law‖) that revoked theconvertibility regime that established the currency board system.Important provisions under the theamended Convertibility Law-Debt restructuring-Obligations for Public Services-Price Controls
Depressed pricing brought on by the price controls hurt AES-Argentina marginsDollar denominated restructuring resulted in debt increases (in pesos) that AES could not support due to a low liquidity structurePesos coming in as revenue were no longer worth US$1 each, making the payment of debt virtually impossible
"Now I understand what AES stands for," one investor told Hanrahan. "Always explaining something."
WHAT Liquidity cushion More organizational centralization Remember shareholders HOW Decrease spending, sell less profitable assets, lessen dependence on debt financing Increase HQ say, implement functional office Add increasing shareholder value to company objectives
―We took our own model toan extreme. We took it to anexaggerated level.‖ -Roger Sant
Out with the old and in with the New‖Although AES has grown a great deal during my tenure, it became clear to me that this is a time for a new CEO.Different times require different leaders" -Dennis Bakke
Acted fairly quickly thanks to their decentralized structure Managed to escape bankruptcy Hanrahan: restored and maximized shareholder value Reconsidered a balance between Cultural Values and Shareholder Value One Thing: focus more on implementing a more global strategy as the company continues aggressive growth.
R&DThe R&D in electricity is expected to beespecially intensive over the next twentyyears because there are greaterinefficiencies to be worked out.
Pumped Storage Hydroelectric Only commercial bulk energy storage technique is prevalent today. Water is pumped up a hill to a reservoir using low-cost electricity at night time. During day-time peak periods, that water flows downhill to drive huge turbine/generators.storing electrical energy as mechanical energy of a flowing fluid Applied by compressing air, storing in it huge underground caverns, and then releasing it to drive gas turbine/ generators
―Managers control people and things. Leaders give up control and serve people. There’s a huge difference— and that’s the essence of creating joy at work.‖ -Dennis Bakke―We try to reinvent the wheel everytime we get a chance. The process of learning and doing is what creates engagement – fun.‖ -Roger Sant