THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Sunday, July 3, 1994 TAG: 9407020605
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY TOM SHEAN, STAFF WRITER
LENGTH: Long : 177 lines
To some directors of Dominion Resources Inc., the June 16 gathering was supposed to involve only housekeeping issues.
As it turned out, the board meeting at Dominion's Richmond headquarters that evening was anything but routine.
To the surprise of some directors, a faction on the Dominion board proposed expanding the group from 12 members to 15.
Adding members would be a way for one faction of Dominion's executives to better exert their will over the affairs of the company's largest holding, Virginia Power. They were, in effect, trying to stack the deck.
A simmering boardroom struggle over the utility's direction had finally come to a boil. The board had been deadlocked over the direction of Virginia Power - how the utility would compete in a changing business environment.
Dominion Chairman and President Thomas E. Capps and other proponents of expansion offered a slate of nominees, including a replacement for a director who was stepping down. Their measure was adopted, and the four nominees joined the board that night.
But the move to exert greater control over the board - and over Dominion's Virginia Power subsidiary - provoked an immediate response from Virginia's utility regulators.
In less than 24 hours, the State Corporation Commission issued a harshly worded order for an investigation into all ties between Dominion and Virginia Power.
In its order, the SCC described an increasingly strained relationship between Capps and Virginia Power President and CEO James T. Rhodes. And some of Dominion's directors may have overstepped their powers by seeking to replace Rhodes this spring, the commission said in the order.
``The current turmoil and uncertainty may already be affecting the personnel of both companies, to the possible detriment of utility operations,'' the SCC said.
When asked about the differences among Dominion directors and the SCC's investigation, Capps said he was not in a position to comment. At Virginia Power, a spokesman said Rhodes was not available for comment on these matters.
Their dispute involves more than a struggle for control of the Dominion board and Virginia Power. At issue are differences over how quickly a regulated electric utility should prepare for the competitive environment that is emerging.
Since the early years of this century, state regulators have provided electric utilities with monopoly protection from competitors in exchange for control over their rates and levels of service.
But the traditional structure - having one company generate electricity and distribute it within a defined geographic market - is eroding. Large users of electricity, including manufacturers and refiners, are pressing for the right to shop for cheaper sources of power.
In April, California's utility regulators laid out a sweeping plan that will allow large utility customers in that state to choose among different providers beginning in 1996.
By 2002, other users, including small businesses and households, will be free to select their sources of electricity, under the California plan.
A more modest experiment that allows some industrial customers to choose their suppliers of electricity is already under way in Michigan.
Like other electric utilities, ``Virginia Power has to balance the interest of its ratepayers with the interests of shareholders,'' says William S. Scherman, a specialist in utility law who is assisting Virginia Power.
The challenge for executives like Capps and Rhodes is, ``How do you navigate through this sea change, compete (with other energy providers) and still serve customers?'' says Scherman, an attorney with the New York firm Skadden, Arps, Slate, Meagher & Flom and a former general counsel at the Federal Energy Regulatory Commission.
Capps and Rhodes are both North Carolina natives and veterans of the electric-utility industry.
A lawyer by training, the 58-year-old Capps worked with Carolina Power & Light, Boston Edison and Florida Power & Light before joining Virginia Power in 1984 as an executive vice president.
The lean, balding Capps became president of Dominion in 1986 and took over as CEO of the holding company four years later. He was named chairman of the Dominion board in 1992.
Rhodes, a native of Lincolnton, N.C., with a doctorate in nuclear engineering, joined Virginia Power in 1971 as a nuclear physicist. The 52-year-old executive held senior posts in finance, power operations and other areas of Virginia Power before being named president and CEO in 1989.
The tension between the two executives and the split among Dominion's directors have attracted attention partly because details about power struggles in Richmond's buttoned-down business community rarely become so public.
Regulatory documents and press accounts have described Rhodes' inability to work with Capps and his threat to some Dominion board members to take early retirement. In April, the board responded by naming longtime director James F. Betts to be vice chairman and having Rhodes report to Betts.
But in May, members of the Dominion board's organization and compensation committee began discussing plans to find someone to succeed Rhodes.
``I don't think anyone would deny that there is something of a power struggle going on'' between Capps and Rhodes, says Douglas W. Hawes, a specialist in utility law who has been working with Dominion.
But Hawes, who advised Dominion Resources on the formation of its holding company structure in 1983, contends that Virginia's SCC overreacted when it launched an investigation into the affairs of Dominion's board.
To his way of thinking, the commission ``ought not get into the corporate governance arena unless there is a clear and present danger'' to the financial integrity of Virginia Power or Dominion Resources.
``Both companies are running fine,'' says Hawes, who is with the New York law firm LeBoeuf, Lamb, Greene and MacRae. ``I don't think there is any danger to the public.''
Eva S. Teig, the utility's vice president of public affairs, confirms that the dispute has not affected the service provided by Virginia Power. ``Customers,'' she says, ``should not worry at all'' about the reliability of service.
But Gary F. Hovis, a utility analyst with the securities research firm Argus Research Corp. in New York, expresses concern that Dominion's involvement in the day-to-day affairs of Virginia Power, especially Dominion's drive to cut costs, could eventually hamper Virginia Power's reliability.
``If Dominion Resources prevails, they will continue laying off people (at Virginia Power), which will affect the quality of service,'' Hovis argues.
To prepare for heightened competition among utilities, Virginia Power has already improved its efficiency by scaling back its capital spending and reducing the size of its work force. Since reaching a peak of more than 13,500 in 1988, employment at the utility has declined 18 percent to 11,100.
But some Virginia Power employees say Capps has rankled the utility's managers by trying to impose much more aggressive cost-cutting measures and going around Rhodes to make changes.
Concerns about this friction and about the pending investigation by state regulators have been reflected in the price of Dominion's common stock, which has retreated 9 percent during the past two weeks. After hitting a 52-week low of $35.88 last Monday, Dominion's shares closed at $36.25 Friday.
At least one major brokerage firm has reduced its evaluation of Dominion shares as an investment. Still, the company enjoys considerable respect among utility analysts because of its performance.
Dominion ``has a reputation right now of being a very well-run, very efficient company,'' says John F. Kasprzak Jr., an analyst with the securities firm Davenport & Company of Virginia in Richmond.
``The fundamentals are in place for this company to do well in a deregulated environment,'' says Kasprzak, who downplays the tension between Capps and Rhodes.
This sort of confidence is important because the investment community is already trying to distinguish those utilities that are likely to prosper in a more competitive environment from those companies that could falter.
As bigger electricity users gain the freedom to choose among suppliers, ``some utilities will have problems,'' says Dan Rudakas, a utilities analyst with Kemper Securities Inc. in Chicago. ``Some will merge as a way to cut costs and become more competitive.''
Virginia Power is already facing the possibility of losing a major industrial customer. DuPont, the large chemical manufacturer, and a unit of the Kentucky utility Louisville Gas & Electric Power have proposed building their own generating plants to serve DuPont's factories in Virginia, something that would eliminate DuPont's need to buy electricity from Virginia Power.
Virginia Power has asked the SCC to block the DuPont-Louisville Gas joint venture.
To counter the possibility of losing big industrial customers like DuPont, Virginia Power has devised a plan for building and operating generating plants for those customers large enough to have their own plants. In late June, a hearing examiner for the SCC recommended that the commission approve Virginia Power's plan.
Hawes, the attorney advising Dominion Resources on its response to the SCC, says the abrupt way in which Dominion's board of directors was expanded in mid-June may have been necessary.
``There are times when these sorts of struggles are resolved over a number of meetings and leisurely discussion,'' he says. ``At other times, people need to get something done in a summary fashion and by the book.''
Whatever the reasons for changing the composition of Dominion's board, the SCC demanded a separation of responsibilities between Dominion and its regulated subsidiary when the commission approved Dominion's holding company structure in 1986.
In its June 17 order for an investigation, the commission made clear that it was prepared to restructure the ties between Dominion and Virginia Power if necessary.
``An examination of the roles of the respective boards of (Dominion Resources) and Virginia Power is not merely an academic inquiry into corporate governance,'' the SCC declared. ``It bears directly upon matters which affect the utility and its ratepayers, and consequently, the well-being of Virginia citizens and businesses.'' ILLUSTRATION: Graphic
THE COMPANIES AT A GLANCE
[For complete graphic, please see microfilm]
by CNB