Q&A: Larry Kellerman, Twenty-First Century Utilities
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Q&A: Larry Kellerman, Twenty-First Century Utilities


In his latest chapter in the power industry, Larry Kellerman is looking to wed utilities to the latest technology. “It is something that, frankly, I have wanted to do for an extended period of time, which is to raise the capital and acquire one or more regulated utilities and

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optimize those utilities, as the name of the company suggests, by using state of the art technologies and commercial models,” Kellerman tells PFR in his first interview since launching Twenty-First Century Utilities in January. Senior Reporter Olivia Feld spoke to Kellerman about the company’s plans for acquisitions and his take on the future of the utility model in this exclusive.

PFR: What is your plan for Twenty-First Century Utilities?

The plan is simple. It is something that, frankly, I have wanted to do for an extended period of time, which is to raise the capital and acquire one or more regulated utilities and optimize those utilities, as the name of the company suggests, by using state of the art technologies and commercial models. The business plan is premised on our strong belief that regulated utilities are and can be adaptive, innovative, value-creating enterprises that benefit society. What we would like to do is to help optimize and improve one or two of them and be part of a cleaner, more efficient, more customer-responsive industry.

PFR: What sorts of utilities are you eyeing?

Our business plan is going to be focused dominantly on the electric side and integrated electric and gas utilities but we are open to gas-only and other regulated utilities.

PFR: Are you targeting a particular geographical area in the U.S.?

Not in particular. We are considering utilities across North America and even beyond the coasts.

PFR: You said you’ll be looking to acquire a couple of utilities?

I’ll be happy when we land our first fish. But over time, our business plan, our business model, is to potentially grow beyond a single acquisition. Rome wasn’t built in a day, so it will take some time.

PFR: How are you looking to finance this?

We are in the process of circling funding and capital commitments. We are looking to have somewhere in the range of between five and maybe a dozen to 15 limited partner funding sources, who would be direct LP owners of the equity in the respective utilities that are acquired.

PFR: What would be the plan once you acquire these entities?

The plan is to turn them into the best utilities we possibly can and to focus on improving them along a number of parameters. We would be looking to optimize their structure to most effectively be able to serve their customers, to make sure we can deliver our product at the lowest possible regulated cost to our customers and optimize the product mix so that we can use the best, most meaningful and impactful of today’s technologies in serving the customer base. Whether those are renewable generation technologies, whether they are smart grid technologies to help manage the reliability and performance of the grid, or whether they are technologies that reach behind the meter to help customers manage and optimize their use of power, these technologies can help customers optimize their energy experience and minimize their energy consumption and cost.

This tool kit of new technologies that are cost-effective and available today, again on the generation side, on the T&D side and on the customer experience and customer energy management side, is as robust as has ever existed in the history of this industry. Our business model is going to embrace, not fight, all of those new, novel and impactful technologies, and we will do so under a regulated business model.

PFR: What is your targeted return?

With regulated utilities, we will be getting a regulated return as governed by the PUC, PSC or whatever the regulatory agency is that we are reporting to. Our objective, however, is to provide the best possible customer experience, the lowest possible customer cost.

I go back to the first utility CEO I worked for three decades ago, Phil Gould of Southern California Edison. He had a motto, and he said, ‘Look, we’re going to take actions and make decisions that are for the best for our customers. We’re going to do that because it’s the right thing to do. Over time, we hope and expect and anticipate that our regulators are going to notice the good things that we’re doing and the results we are achieving for our customers and reward us with a premium rate of return. But we’re going to do things whether or not we are rewarded because they are the right things to do.’

I cannot think of a better philosophy to have, and that is the guiding-light philosophy of Twenty-First Century Utilities. We’re going to do the best possible job for our customers in driving their costs down, in driving their experience up, and we will be hopeful and expectant that the regulators will notice this and reward us with some level of premium return on our invested capital. But whether they do or don’t, we’re going to do the right thing because the right things are the right things to do.

PFR: This is quite a different operation from what you’ve been doing at Quantum. How does it compare?

I’ve spent more than 15 years working in the independent power industry, at Quantum, Goldman Sachs and El Paso Corp. What I have been convinced of recently is that, in my estimation, the future belongs to the utility industry, and I would like to be a significant part of making that industry the best possible industry it can be.

PFR: It’s interesting to hear you say that this is the area of growth and you feel that this is the area of opportunity in terms of the business model.

Let me give you an example of that. Let’s take rooftop solar, which is one of the battlefields that exist today between the competitive energy space, if you will, and the regulated energy space. Let’s say I’m an electric utility in a given jurisdiction. I have three massive advantages over Elon Musk.

First, I have name recognition and a brand in my local community and in my service territory. Second, I have all of the infrastructure already in place, in terms of personnel, service facilities, trained people, trucks rolling down the highway, infrastructure, I already have it in place. Third, and this is the most important of the three advantages, I have a lower cost of capital than Solar City or any other newcomer out there and what is solar photovoltaic? It is all about capital cost, and whoever has the lowest cost of capital wins and I have three, natural and competitive advantages.

If I embrace, as opposed to fight, this technology, I should be able to provide better customer experience at a lower cost than all the competitors out there. I will win if I use my advantages, and by winning, I don’t mean crush the competition. I mean look at the competition and say I can offer a better product, a better service at a better price than any newcomers out there. Therefore, I should be in that business, not fighting it. I share this with you as one of the many examples as to what a utility can do these days, and there are many who are, but again, a number who are not.

PFR: Is your plan, going forward, to diversify? You said you’re going to be focusing on the electrical utilities model, but you said you want to take it into the next century. Will you be looking at things like opportunities in solar rooftop financing?

The answer is yes, but the answer is going to be highly dependent on which utility and where it is. If we’re going to be in a utility in the northern reaches of the Midwest, as opposed to the southern reaches of the Southwest, the answer is going to be very, very different because you have different opportunities, different locational objectives and a different milieu from the regulatory and cultural standpoint you work in. There are so many tools that new technologies are offering these days, again on both the supply and demand side. It’s going to be a function of assessing the needs and the status of the utility that is being acquired and then optimizing the set of new investments and change in business approach to embrace the most impactful and beneficial of those technologies that can benefit the customer base of that specific utility.

PFR: What’s your relationship going to be with Quantum?

I still remain on the board of directors of Quantum Utility Generation, and remain personally invested in their platform and projects. I am still working out the Quantum Energy Partners’ offices. I still have a continuing, and very important, relationship with them but it’s no longer my day-to-day job.

PFR: What are your plans for hiring personnel? What are your immediate plans for building the company?

The immediate plan is to secure funding for the management company, which is Twenty-First Century Utilities. That should be accomplished within the next month. We’re well down the road toward accomplishing that, and then bring on board, over a relatively rapid period, a set of senior team members to get this show on the road.

PFR: So you’re going to be looking to hire quite a few people over a couple of months?

I wouldn’t say quite a few, I would say somewhere between a handful to a handful and a half.

PFR: Why are you launching this outfit now? What external factors are at play that prompted you to take quite a different change in direction?

‘Why now?’ is a factor of a few things. This is something I have personally wanted to do for an extended period of time. I’m not ashamed to say that I believe in the regulated utility model and believe it is superior and much better for end-use customers when compared to the so-called competitive merchant model extant in many parts of the country’s generation market.

I look at the challenges the utility industry is facing today and I believe our firm can not only do well in this environment but also help be a leader and a positive example in this industry, a “city on the hill.” Now is the right time for this business initiative not because a new ‘business model’ is needed, but because proper implementation and adaptation of a tried and true, century-old regulated business model makes as much sense today as it did when I started in this industry. The same regulated business model, deploying new ways of interacting with customers, reaching behind their meters, reaching onto their roofs, interfacing with customers in different and increasingly constructive ways relative to what the industry has been able to do before. And we’d like to be a part of that affirmative evolution of the industry.

That is, whether it is rooftop solar, whether it is a Nest thermostat inside the customer’s home, whether it is a building energy management system that helps a commercial customer modulate and manage their peak load demand. All of these and a thousand other options allow utilities to do many more things today than they have ever been able to do before. ‘Why now?’ is because the tools are now available that allow a utility company to make significant changes in the way the customer experience is manifested and in the way the cost structure is managed going forward is much more impactful today than it has been at least in my third of a century hanging around this space.

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