1. Page |1
AES - THE POWER OF BEING GLOBAL
Company
AES Corporation has emerged as the leading private power company in the world since its
establishment in 1981 with a capital of $60,000.
Its founders Dennis Bakke and Roger Sant came from a government and academia background.
After doing some research together on energy conservation techniques, they came up with a
business model recognizing an opportunity for independent generators to produce power at much
lower costs than the established utilities.
17 years later, in 1998, AES assets have reached almost $8 billion (SEC 10-K). Its phenomenal
success was attributed to a spate of mergers and acquisitions in an era of deregulation in the
Latin American region. Another factor was its driving principle of stewarding the world's
resources, which is firmly rooted in Dennis Bakke's Christian upbringing. To keep up with
competition, AES was engaged in a decentralized team approach to problem solving.
Today AES is a case study in how to bring discipline to a large company without killing its
essential spirit. 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. Meanwhile AES built power plants as fast as it could,
borrowing whatever money it needed. The payroll grew from 1,400 people to 50,000. They
tested the limits of how fast a company can grow before things start to fray around the edges.
Certainly unusual, the decentralized AES corporate structure included no human resources
office, no public relations unit, no safety or engineering departments. And in theory, at least,
AES executives exist largely to guide and provide counsel, while decisions on everything from
maintenance to financing are not made by leaders, but by individuals and team members.
Responsibility and creative thinking are demanded of employees, who are expected to learn from
experience. For AES, changing its "thinking" is an issue that goes to the very heart of the
company's existence. That's because the entire AES enterprise has been constructed upon what
began as its founders' unique notions about competitive power generation and the potential for
providing more reliable energy to consumers in a socially and environmentally responsible
manner.
Clearly, AES has a unique ability to get people to sit up and take notice when it talks of higher
ideals - ironically, such talk raised sufficient alarm at the US Securities and Exchange
Commission when AES first went public that regulators made AES list its pledge to place
principles above profits as a potential risk for investors. One might think the AES corporate
mission bizarre enough to scare the wits out of normally cautious investors and analysts. They
set out to do a corporate experiment, to see if you could create a company that would empower
the people in the field to take responsibility, to take culpability, to take entrepreneurial roles in
developing their own businesses...and it's worked.

2. Page |2
In this paper we are going to examine if it is possible to sustain this competitive advantage in
situations outside of the scope of regular business operations, for example in a crisis. We will
also look at how a company of this organization needs to change to adapt to the growing needs of
internalization.
Culture and Values
AES’s unique organization and management systems are the direct result of the values upon
which the company was established and continue to define every aspect of its management.
These values reflect the personal beliefs of the two founders. Bakke’s attitude to enterprise and
material possessions was strongly influenced by ideas of Christian stewardship, which
emphasized responsibility, building for the future, and sharing good fortune with others. Sant
became less committed to the church and increasingly active in the environmental movement.
From the outset, both men viewed AES as an opportunity for them to pursue their values and
effect a fundamental change in business practices. In a section of its 10K report entitled
―Principles, Values and Practices,‖ AES states:
A core part of AES’s corporate culture is a commitment to ―shared principles or values.‖ These
principles describe how AES people endeavor to commit themselves to the Company’s mission
of serving the world by providing safe, clean, reliable and low-cost electricity. The principles
are:
• Integrity – AES strives to act with integrity, or ―wholeness.‖ AES people seek to keep the same
moral code at work as at home.
• Fairness – AES wants to treat fairly its people, its customers, its suppliers, its stockholders,
governments and the communities in which it operates.
• Fun – AES desires that people employed by the Company and those people with whom the
Company interacts have fun in their work. The Company believes that making decisions and
being accountable is fun and has structured its organization to maximize the opportunity for fun
for as many people as possible.
• Social Responsibility – Primarily, the Company believes that doing a good job at fulfilling its
mission is socially responsible. But the Company also believes that it has a responsibility to be
involved in projects that provide other social benefits, and consequently has instituted programs
such as corporate matching of individual charitable gifts in addition to various local programs
conducted by AES businesses.
AES recognizes that most companies have standards and ethics by which they operate and that
business decisions are based, at least in part, on such principles. The Company believes that an
explicit commitment to a particular set of standards is a useful way to encourage ownership of
those values among its people. While the people at AES acknowledge that they won’t always
live up to these standards, they believe that being held accountable to these shared values will
help them behave more consistently with such principles.
AES makes an effort to support these principles in ways that acknowledge a strong corporate
commitment and encourage people to act accordingly. For example, AES conducts annual
surveys, both company-wide and at each business location, designed to measure how well its
people are doing in supporting these principles through interactions within the Company and

3. Page |3
with people outside the Company. These surveys are perhaps most useful in revealing failures,
and helping to deal with those failures. AES’s principles are relevant because they help explain
how AES people approach the Company’s business. The Company seeks to adhere to these
principles, not as a means to achieve economic success but because adherence is a worthwhile
goal in and of itself.
Sant and Bakke recognize that these values cannot easily be reconciled with the concept of a
shareholder-focused, profit-maximizing corporation, and both leaders have made it very clear
where their priorities lie:
―Where do profits fit? Profits...are not any corporation’s main goal. Profits are to a corporation
much like breathing is to life. Breathing is not the goal, but without breath, life ends. Similarly,
without turning a profit, a corporation too, will cease to exist...At AES we strive not to make
profits the ultimate driver of the corporation. My desire is that the principles to which we strive
would take preeminence.‖ (The Marketplace)
AES’s commitment to its values, at the expense of shareholder gain where necessary, is indicated
by the provision which AES inserts in all of its prospectuses for new security offers which
identifies AES’s values as a source of investor risk:
―The Company seeks to adhere to these principles, not as a means to achieve economic success,
but because adherence is a worthwhile goal in and of itself. However, if the Company perceives
a conflict between these principles and profits, the Company will try to adhere to its principles –
even though doing so might result in dominated or forgone opportunities or financial benefits‖.9
The AES principles and the way they are implemented reflect a set of assumptions about human
nature. Sant and Bakke believe in the ultimate goodness of people – ―Man is made in the image
of God,‖ declared Bakke. (Personal meeting)
Douglas McGregor provides a theory ―The Human Side of Enterprise‖ in which he suggests that
if the company encourages the positive sides of human relationship to work, the results can be
outstanding.

4. Page |4
Hence, within organizations, people can and should be trusted to exercise responsibility, and at
the same time should be held accountable. Critical to the ability to motivate people is the innate
desire of people to make a contribution to society. This implies that, for an organization to be
effective and to harness human effort and ingenuity, the organization must be committed to a
wider social purpose. These views are at variance with many of the assumptions upon which
many traditional management systems and techniques are based and imply a different approach:
―[t]he people in AES are not principally economic resources. We are not tools of the corporation.
Rather we hope the corporation is structured to help individuals make a difference in the world
that they could not otherwise make.‖ (AES Corporation Annual Report.)
AES’s annual employee surveys are an indicator of the importance which is accorded to the
company’s principles and values. Dennis Bakke has commented that he devotes more attention
to studying the annual employee surveys than the annual financial statements. Emphasis on
responsibility to the environment and to local communities is viewed as integral
to the efficient running of power plants.
Organizational structure
AES’s organizational structure and management systems manifest the company’s values and

5. Page |5
principles. AES describes the key features of its organization in its statement of values: integrity,
fairness, social responsibility and fun. In general, AES teams work extremely well in both
achieving a common goal and having fun while doing so. The following ideas provide insight on
what makes teams work well and what can stimulate true and productive teamwork.
―Teams imply friendship; not only the ability but the desire to work together. Starting with the
wonderful example set by the original AES team, Roger and Dennis, working together in small
groups has been a natural way to get big things done while preserving the dignity of each
person.‖ Tom Tribone (Senior executive at AES)
In order to create a fun working environment for its people and implement its strategy of
operational excellence, AES has adopted decentralized organizational principles and practices.
The project subsidiaries are responsible for all major facility-specific business functions,
including financing and capital expenditures as can be seen from the following example.
―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 and
Hatch 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.‖ (Wall
Street Journal)
There is no one person in charge of teams and there is no Human Resources department. Teams
are the basis of structure, and they encompass the four values of the company. 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. Consider this example:
―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 work necessary leading up to the
plant’s groundbreaking in October 1995. They secured 36 different permit approvals involving
about 24 regulatory agencies and arranged financing that involved tax-exempt bonds and ten
lenders. Within the industry, such a project would typically involve well over a hundred
employees‖. (Wall Street Journal)
―There are two reasons why teams are successful at AES: the type of people we have here and
the environment in which they work. People at AES tend to be independent and thrive in a loose
environment where roles and responsibilities are not always clearly defined. The environment at

6. Page |6
AES is one where responsibility is pushed down to the lowest level possible, encouraging
everyone to take ownership for not only their piece of the project, but for the project in its
entirety.‖ (Michael Cranna, Investor Relations)
For plant financing, for example, CFO Barry Sharp raised less than 10 percent of the estimated
$3.5 billion needed for AES's first ten power plants; most of the necessary financing was raised
by each plant's own multi-disciplinary project team, composed of a broad cross-section of AES
employees. By all accounts, this management system worked spectacularly well for AES. By
giving workers a greater sense of involvement in, and responsibility for their own professional
destiny, employee morale was boosted.
This is not to say that AES lacks formal structure altogether. The most striking feature of its
organization is the few layers of hierarchy: until recently there were only three organizational
layers between the front-line employees and the CEO. AES is divided into regional organizations
or ―groups.‖ These groups comprise the different plants, each of which is headed by a plant
manager. Within each plant there are typically seven areas or ―families,‖ each of which is headed
by a superintendent.
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.
According to Dennis Bakke, the key to effective decentralization is keeping the basic units of
organization small:
―I think of AES as a conglomeration of small communities. And I don’t think there’s any
company in the world that’s so big that you can’t organize this way. Even a plant with 400
people can be broken down into smaller groups. It’s a small enough community that there is the
ability to have an accountability structure within it, you know, a social structure as opposed to a
military structure. We will break down the Kazakhstan plant into four units. How can we stay
small and be big? By breaking the organization into groups with chief operating officers.17
The principle of self-organization imposes a very different role on managers from the
conventional management model. Indeed, the term ―manager‖ is seldom heard within AES; it is
at odds with the principle of letting people decide for themselves. The example comes from the
top. ―The most difficult thing for me as CEO,‖ confided Bakke, ―is not to make decisions.‖ If
individuals are to develop, they must be given responsibility and allowed to learn: [T]he modern
manager is supposed to ask his people for advice and then make a decision. But at AES, each
decision is made by a person and a team. Their job is to get advice from me and from anybody
else they think it’s necessary to get advice from. And then they make the decision. We do that
even with the budget. We make very few decisions here [indicating the headquarters office]. We
affirm decisions.‖ (Wall Street Journal)
Sant has made similar observations:
―If Dennis and I had to lead everything, we couldn’t have grown as much as we have. People
would bring deals for us to approve, and we would have a huge bottleneck. We’ve shifted to

7. Page |7
giving advice rather than giving approval. And we’ve moved ahead much faster than we would
have otherwise.‖ (Markels)
One consequence of this approach is the small size of AES’s corporate headquarters. At any
point in time there may be between 40 and 70 AES employees at the Arlington office, but in
terms of actual corporate staff, these number only about 35.
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 a
folk history of teams and individuals given huge responsibilities or thrust into unique and
unexpected situations. Consider the following:
‖Paul Burdick, a mechanical engineer, had only been at AES briefly when he was asked to
purchase $1 billion in coal. ―I’d never negotiated anything before, save for a used car,‖ he said.
Burdick spent three weeks asking questions of people both within and outside of the company on
how to accomplish the task. At AES, he says, ―You’re given a lot of leeway and a lot of rope.
You can use it to climb or you can hang yourself.‖ (Wall Street Journal)
Instead of trying to work backwards like many companies do by hiring different people and then
trying to incorporate the firm culture into them, AES has a more natural approach of hiring
people that already live by the same principles and values as AES. That way they don’t have to
constantly monitor people and make decisions for them.
Criteria for hiring new AES people include a person’s willingness to accept responsibility and
AES’s principles as well as a person’s experience and expertise. 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.
Issues such as hiring practices, leave periods, and promotion criteria, which in more conventional
companies would be spelled out in a ―Policies and Procedures‖ handbook, are left at the
employees’ discretion. When trying to find out how much time she could take off after the birth
of her daughter, a Project Director for AES Puerto Rico discovered that the company did not
have a policy about maternity leave. After investigating what other ―AES people‖ had done, she
decided to do what made sense for both herself and the business requirements of the project. In
the end she decided to take three months, but she made herself available at critical points in the
project’s execution. (Jeffrey Pfeffer)
The owners focus on characteristics that help determine how the candidate will fit with the
company’s culture and values. There is little importance given to the candidates’ educational
background or experience, as greater emphasis is placed on the candidates’ desire to learn,
contribute, and grow, as well as their personal values and self-motivation.
―As soon as you have a specialist who’s very good, then everyone else quits thinking,‖ Bakke
says. ―The better that person is, the worse it is for the organization. The information goes

8. Page |8
through the specialist, so all the education is to the person who knows the most.‖ (Wall Street
Journal.)
Because people are what make up AES, they have an organizational model.
http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullT
extArticle/Articles/1190120402.html
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.
Employees among different continents
The AES principles and its concept of the honeycomb organization imply a different type of
relationship between those employed and the corporation than that which characterizes most
companies. To begin with, the absence of functional specialists and the ideas about self-
organization require a tremendous amount of information-sharing. According to the company,
employees are given full access to the company’s operating and financial information. Because
of the extent of employee access to information that would normally be confidential at other
companies, AES lists all its employees as ―insiders‖ in its submissions to the SEC.
Nevertheless, AES remains committed to its principles not just for its US, but for its worldwide
operations. Bakke firmly believes that the AES principles are universal and are not culturally

9. Page |9
specific either to the US or to the West in general. AES’s experience so far is that its own
corporate culture can be transplanted in many different national cultures.
Bakke firmly believes that the AES principles are universal and are not culturally specific either
to the US or to the West in general. AES’s experience so far is that its own corporate culture can
be transplanted in many different national cultures. The challenges presented in running one of
the world’s biggest (and once one of the most dilapidated) coal-fired power stations in
Kazakhstan, and turning around heavily bureaucratized, former state-owned utilities in South
America have provided remarkable test-cases in AES’s ability to export its company culture. The
results have often been amazing. Even though AES has been unable to eliminate the distinction
between salaried and hourly paid employees within the US, in England, Argentina, and Pakistan
it has moved to an all-salary workforce.
International Expansion
Because of the rapid growth in electricity demand in many emerging markets, inadequate
generating capacity, and the trend towards privatization, Sant estimated that over 70
percent of AES’s opportunities lay outside the US. The fast-growing Asian markets for
electricity, especially the huge potential markets of India and China, were especially attractive.
In the early 1990s AES inaugurated its international strategy by acquiring two plants in
Northern Ireland and one in Argentina. International expansion involved participating in the
auctioning of state-owned electricity companies by governments, and bidding for long-term
power supply contracts from governments which were opening the generating end of their
electricity 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.
In Latin America alone, AES distributes electricity to nearly nine million customers, its
generators are capable of churning out more than 5,300 megawatts (MW) of power per hour, and
another 1,314 MW of capacity are now under construction. (See Chart on Latin American
presence)
Fueled by its growth in Latin America, AES has seen its total assets mushroom more than
fivefold from $1.44 billion when it first went public in 1991 to nearly $8 billion today. 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's original investment in Latin America was a paltry $50 million, a figure which pales beside
the estimated $5.16 billion AES has invested to date in the region. The company has pursued in
recent years what bankers say is a fairly textbook sandwiching of debt-equity-conversion
transactions. AES chief financial officer Barry Sharp thinks of it in terms of "a stairstep
approach" that allows AES to maintain an attractive securities rating (Standard & Poor’s gives

10. P a g e | 10
AES corporate credit a "BB," with "B+" on both subordinated debt and preferred stock), while
growing via the issue of low-cost capital.
Operations
The company owns a portfolio of electricity generation and distribution businesses on five
continents and in 29 countries, with generation capacity totaling approximately 43,000
Megawatts and distribution networks serving approximately 11 million people, as of December
31, 2008. In addition, the company has approximately 3,000 MW under construction in 10
countries. Its workforce provides electricity to people in various markets ranging from urban
centers in the United States to remote villages in India. It is headquartered in Arlington, Virginia
and employs about 25,000 people.
AES operates a generation portfolio which is diversified in terms of fuel source, market, and
geography. Its portfolio of power generation facilities employs a broad range of technologies and
fuel sources, including coal, gas, fuel oil, and renewable sources such as hydroelectric power,
wind, and biomass. In 2008, AES generated 41% of its power from coal, 33% from gas, 21%
from renewables, 2.5% from oil, 1% each from diesel and pet coke, and 0.5% from biomass.
In addition to being diversified in terms of fuel sources, the company’s generation operations are
also geographically dispersed. In 2008, it generated 34% of power in North America, 27% in
Europe, CIS, and Africa, 26% in Latin America, and 13% in Asia and Middle East.
Diversified and balanced generation portfolio reduces its exposure to the risks arising due to the
fluctuations in commodity prices, as well as changes in weather conditions and regulations.
Business
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. The company’s
portfolio employs a range of fuels, including coal, gas, fuel oil, biomass and renewable sources
such as hydroelectric power, wind and solar.
Generation
The company owns or operates a portfolio of approximately 38,000 MW, consisting of 93
Generation facilities in 26 countries on 5 continents at its generation businesses. It also has
approximately 2,900 MW of capacity under construction in six countries. Its Generation business
uses a range of technologies and fuel types including coal, combined-cycle gas turbines,
hydroelectric power and biomass.
Utilities
AES utility businesses distribute power to approximately 11 million people in 7 countries on 5
continents and consists primarily of 14 companies owned or operated under management
agreements, each of which operate in defined service areas. These businesses have various

11. P a g e | 11
structures ranging from distribution businesses to integrated utilities, which generate, transmit
and distribute power.
Segments
The company had seven segments of business: Latin America Generation; Latin America
Utilities; North America Generation; North America Utilities; Europe & Africa Generation;
Europe & Africa Utilities; and Asia Generation. Three regions, North America, Latin America
and Europe & Africa, engaged in both Generation and Utility businesses. Its Asia region only
had Generation.
Now the new organizational structure has three geographical areas each with two business lines:
1) North America, 2) Latin America and Africa, 3) Europe, Middle East and Asia.
Latin America
Latin America Generation: The company’s generation business in Latin America, AES Tiet
(Tiet), located in Brazil. AES holds a 24% interest in Tiet. The company has seven new
generation plants under construction—five coal plants and one diesel plant in Chile and one
hydro plant in Panama.
Latin America Utilities: Each of the company’s Utilities businesses in Latin America sells
electricity under regulated tariff agreements. Utilities businesses provide electricity serving
approximately 1 million customers.
North America
North American Generation: The company’s North America Generation businesses consist of
seven gas-fired plants, ten coal-fired plants, and three petroleum coke-fired plants in the United
States, Puerto Rico and Mexico.
North American Utilities: AES has one integrated utility in North America, IPL, which it owns
through IPALCO Enterprises, Inc. (IPALCO), the parent holding company of IPL. IPL is
engaged in generating, transmitting, distributing and selling electric energy to approximately
470,000 customers in the city of Indianapolis and neighboring areas within the state of Indiana.
Europe & Africa
Europe and Africa Generation: In 2006, the company began commercial operation of AES
Cartagena (Cartagena), its power plant in Spain, with 1,199 MW capacity. AES operates five
power plants in Kazakhstan. In 2008, the company completed the sale of a generation plant and a
coal mine in Kazakhstan.
Europe and Africa Utilities: AES has a 56% interest in an integrated utility AES SONEL
(SONEL). SONEL generates, transmits and distributes electricity to approximately half a million
people and is the source of electricity in Cameroon. Its distribution businesses in Cameroon, the
Ukraine and Kazakhstan together serve approximately 2.4 million customers.

12. P a g e | 12
Asia
Asia Generation: The company’s half of the facilities and generation capacity in Asia are located
in China. It also has a combined power and desalination water facility in Oman. In April 2008,
the company purchased a 92% interest in a 660 MW coal-fired thermal power generation facility
in Masinloc, Philippines (Masinloc). AES Amman East (Amman East) is a 380 MW combined-
cycle gas power plant under construction in Jordan.
Significant Events and Alternative Energy
The company owns and operates 1,060 MW of wind generation capacity and operates an
additional 215 MW capacity through operating and management agreements. Its wind business is
located primarily in North America.
AES has taken up several new international projects in recent years. The company’s project
backlog (projects under construction) as on December 2008, totaled 14 core power projects
totaling 2,993 MW (equal to supplying power for a year to a range of 1,197,200 to 2,693,700
homes) and 11 wind power projects totaling 410 MW (164,000 to 369,000 homes).
Strategy
The Company also strives for operating excellence as a key element of its strategy, which it
believes it accomplishes by minimizing organizational layers and maximizing company-wide
participation in decision making. 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.
The Company attempts to finance each domestic and foreign project primarily under loan
agreements and related documents which, except as noted below, require the loans to be repaid
solely 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. This type of financing is usually referred to as non-recourse debt
or project financing.
In the debt market AES has traditionally secured financing with the help of strong interest from
institutional investors, which is attributed to the combination of interest in the power sector's
mature-investment profile, plus the fact that AES is a growth company. Until recently, the
company tended to rely for project debt on syndicated loans, finding easy bridge capital via its
syndicated $600 million line of credit. A solid debt rating and the company's growth and
predictability have allowed AES to issue common stock at an attractive level, which permits
them to finance their expansion.
AES is determined to stick to its strategy of being the first into a country in order to get the best
opportunities. AES is absolutely resolute in its strategy to continue acquiring distributors in order
to conquer the Latin American power market. A power generator here, an electricity distributor

13. P a g e | 13
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.
Nevertheless, they don't do any strategic planning, no five-year plans. What does exist is the
AES mission: It's not profits and growth, the mission is to serve the world. AES owners hope to
keep its principles in focus as it seeks to remain a premier, global power company dedicated to
one thing: providing clean, safe, reliable power.
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 trusts people to do good and
encourages them to step a little bit outside the norm.
The company’s global presence insulates it from region specific problems. Increasing geographic
reach helps improve the market share and secures revenue growth. The company’s revenues and
operating profits have increased over the years. Higher revenues are attributed to higher
generation rates in Latin America, favorable foreign currency translation of approximately $350
million, and better utility tariffs and volume. AES described itself as: ―a global power company
committed to serving the world’s needs for
electricity in a socially responsible way.‖ (SEC 10-K).
It describes its strategy as:
• Supplying energy to customers at the lowest cost possible, taking into account factors such as
reliability and environmental performance;
• Constructing, acquiring, and operating projects of a relatively large size in geographically
dispersed markets;
• To the extent available, maximizing the amount of non-recourse financing;
• When available, entering into longer-term power sales contracts or other arrangements with
electric utilities or other customers with significant credit strength;
• Where possible, participating in distribution markets that grant concessions with long-term
pricing arrangements; and
• When available, entering into hedging, indexing, or other arrangements to protect against
fluctuations in currency, fuel costs and electricity prices.
Value Chain

14. P a g e | 14
Supporting activities are what makes a company stand out from all the other energy giants.
Because if you think about it, electricity is just a bunch of electrons, one supplier's product
indistinguishable from another's. The one exception is the fledgling attempt to sell "green"
electricity, electrons generated by renewable sources.
Infrastructure: As can be seen from the parts of the paper on organizational structure, the lack
of hierarchy, central planning or corporate strategy (which often pulls a company into a web of
bureaucracy), permits speed in decision making, preparing bids, and completing projects. The
non-recourse debt strategy requires the loans to be repaid solely from the project’s revenues
and provides 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. This
puts more pressure on the project managers, as they can’t rely on the headquarters to come and
save them. However, the return is a higher project completion rate as the people take more
responsibility over their decisions on a plant level.
Human resource management: As can be seen from the part on Corporate Culture, AES
human resources is the asset that is most valuable and hard to replicate.
Barney (1991) developed a model that demonstrates that, for a resource to be the source of
sustained competitive advantage, it must create value (V) for the firm; it must be rare (R); it
must be inimitable (I); and it must be non-substitutable (S).
Applying Barney's VRIS framework of sustained competitive advantage, Wright, McMahan,
and McWilliams (1994) demonstrate that human resources (defined as the total pool of human
capital under the control of the firm) have the highest probability (among all resources) of
being the source of sustained competitive advantage for the firm. This is because human
resources are more likely than other resources to be inimitable and non-substitutable, as well as
being valuable and rare (Wright, McMahan & McWilliams, 1994).
Letting the employees have access to all the information allows for an ―open source‖ sharing.
Assuming that they hire motivated and responsible individuals, it is likely to expect from the
employees to come up with new ideas on how to save money or make a project more efficient.
This proof can be found in the examples provided earlier how efficient the teams were when
left to themselves. The ability of employees to take part in such important decision making as
budget planning really takes the burden of the CEO’s who don’t mind the honest sharing of the

15. P a g e | 15
profits.
Technology: As with any decision, even in technology, AES is not focused on the highest
efficiencies, but on doing the right thing. An example from the Harvard Business School Case
supports this idea:
―Members of the development team for the AES Corp.'s power plant project in India must
decide what plant technology to specify in their application for techno-economic clearance
from the government of India's Central Electric Authority. 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. At the
same time, executives at AES headquarters in Arlington, VA, are considering whether the
company's traditional focus on meeting its social responsibility through CO2-offset programs is
the best approach to social responsibility as the company expands worldwide.‖ (AES Global
Values, 1998)
As can be seen from this example, their choice is not between cost-cutting or meeting
environmental standards; their choice is about what they want to support more – a sustainable
environment or the development of a local community. The picture below summarizes AES
Corporation’s attempt to provide energy while sustaining the communities and offsetting its
emissions by planting more trees.
Procurement: Is decentralized according to the company’s strategy.

16. P a g e | 16
The LDCs (local distribution companies) have largely been insulated from competition. That's
changing, and as a result of a decade or more of R&D, the gas industry has new commercial
products based on gas ready for the customer base. Many compete with products driven by
electricity.
In the new energy value chain, the consumption of electricity deserves special attention.
Because of competition and deregulation, a whole new area of energy services has sprung up
around electricity consumption. And many enthusiasts look to a new concept, a distributed
power network, to revolutionize how electricity is produced, bought, sold, and used.
At the same time, anyone connected with this industry will tell you that gross inefficiencies and
imbalances do exist throughout the value chain. Better application of information technologies,
telecommunications capabilities, and customer relationship management, can play a vital role
in optimizing the physical assets. Automation software, optimization routines encoded into
today's software, and better measurement and control devices extract more value from
refineries and power stations. Dispersed, modular resources can be regulated and controlled,
with respect to the distribution grid, as easily as one large plant's supply. New technology gets
the credit for the higher productivity we enjoy from our natural gas wells and the fact that we

17. P a g e | 17
keep finding new reserves that can be tapped for future needs.
The R&D in electricity is expected to be especially intensive over the next twenty years
because there are greater inefficiencies to be worked out.
Electricity is known to be among the most volatile commodities ever traded. Electricity is
different. First, electricity demand is largely dependent on the weather. Second, and this is
something that can be fixed, electricity can't be stored. You can store oil in barrels and tanks;
you can store natural gas in large tanks within the city gate or distribution system or in huge
underground caverns. You can't store electricity, but you can store the energy in another
form—mechanically as water pumped up to a higher reservoir or compressed air sitting in a
cavern overnight, or chemically in a battery or a fuel cell.
Today’s energy companies have answers. Part of that answer is building new transmission
lines, which have been almost impossible to permit over the last decade. But part of the answer
is technology which can increase the amount of power transmitted on a given line, allow the
remote monitoring of transmission lines and substations, and make the entire grid far more
flexible than it is today. The grid was built for limited amounts of power transfers between
regions of the country; it needs to be renovated and expanded for the flexibility demanded by a
competitive market.
If transmission is the neglected dimension, energy storage is the sixth dimension, the missing
dimension, at least with respect to electricity markets. Only one commercial bulk energy
storage technique is prevalent today. It’s called pumped storage hydroelectric. 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. That same concept, storing
electrical energy as mechanical energy of a flowing fluid, can be applied by compressing air,
storing in it huge underground caverns, and then releasing it to drive gas turbine/ generators.
Other energy storage devices, batteries and certain fuel cell designs, are being developed for
the distributed power markets and can potentially be scaled up to serve for bulk energy storage.
Electricity Value Chain with Energy Storage as the "Sixth Dimension"

18. P a g e | 18
http://www.energystoragecouncil.org/storage_valuechain.html
The primary activities in the value chain for an energy generating business are fuel/energy
source, power generating station, transmission, distribution, and consumption. The electricity
industry value chain consists of four elements.
1. Energy generation, requiring both a fuel source (e.g., coal, nuclear, natural gas, wind
energy) 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.
2. 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).
3. 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.
4. 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.
In general, distribution companies sell electricity directly to end users, such as homes and
businesses and bill customers directly. The amount distribution companies can charge
customers for electricity is governed by a regulated tariff. The tariff, in turn, is generally based

19. P a g e | 19
upon a certain usage level that includes a pass through of costs to the customer that are not
controlled by the distribution company, including the costs of fuel (in the case of integrated
utilities) and/or the costs of purchased energy, plus a margin for the value added by the
distributor, usually calculated as a fair return on the fair value of the company's assets. This
regulated tariff is periodically reviewed and reset by the regulatory agency of the government.
Components of the tariff that are directly passed through to the customer are usually adjusted
through an automated process.
Unlike gasoline or heating oil, both of which are liquid fuels and have similar networks,
electricity cannot be stored. Natural gas is transported through interstate pipelines to local
distribution companies (LDCs). The gas business has been "deregulated" for fifteen years but
most of that applied to sourcing and transport. A wave of energy deregulation swept electricity
markets in the 1990's.
Competitive forces
Electricity is a natural monopoly--there is typically only one power line connected to a house.
While one company may own that power line, they do not have a lot of say in the prices they
charge due to government regulations. If prices went up, it would be difficult to impossible to
change companies for people. However, due to the recent deregulation in the industry in the
attempt of the governments to lower prices by promoting competition among companies, some
of the subsidiaries face a lot of competition.
Most of AES utilities though operate as monopolies within exclusive geographic areas set by
the regulatory agency and face very limited competition from other distributors.
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.
AES faces most of the competition in contracted generation businesses prior to the execution of
a power sales agreement during the development phase of a project and as contracts near
expiration and they seek to extend contracts or seek new contracts with other customers. Due to
the long-term nature of sales contracts, they generally face very limited competition during the
operational phase.
Trying to conduct business under long-term contracts, AES relies on power sales contracts
with one or a limited number of customers for the majority of relevant plant’s output and
revenues over the term of the power sales contract. 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.
On the supply side, AES relies on a single supplier or several few for provision and

20. P a g e | 20
transportation of fuel. If suppliers fail, AES faces the risk of buying fuel at market prices
exposing the company to market volatility. To limit the exposure to fluctuations in fuel prices,
the company signs long-term contracts for fuel with a limited number of suppliers.
Consequently, the cash flows and results of operations are dependent on the continued ability
of customers and suppliers to meet their obligations under the relevant power sales contract or
fuel supply contract. Any loss of significant power sales contracts or fuel supply contracts, or
the failure of any party to fulfill the obligations there under, may have an adverse impact on the
business and financial condition of the company, eventually hampering the growth plans.
Utilities face relatively little direct competition due to significant barriers to entry which are
present in these markets. In this arena, they compete against a number of other market
participants, some of which have greater financial resources, have been engaged in distribution
related businesses for longer periods of time and/or have accumulated more significant
portfolios.
To keep up with the competition, the company is developing an alternative energy business as
these alternatives to the traditional fossil fuels are economically competitive. AES expanded its
wind and solar portfolio by 332 MW in 2008. At the end of 2008, renewables accounted for
21% of the company’s total operating fuel portfolio. AES also expects tremendous growth
opportunities for wind generation in China. AES also entered new markets for its wind business
in Bulgaria, France and Scotland.
Furthermore, AES developed utility-scale solar photovoltaic projects through a joint venture
with Riverstone Holdings. As of December 2008, the joint venture was operating projects
throughout Spain with advanced development activities throughout France, Greece, Italy, and
Spain. The company has also continued construction of a hydropower facility in Panama and
small hydropower facilities in Turkey, all of which will begin operations in 2010.
These investments will help the company capitalize on the growing demand for non-
conventional sources of energy, as well as cushion against the risks associated with its limited
presence in the utilities value chain.

21. P a g e | 21
Bibliography
AES Corporation, 10K submission to the Securities and Exchange Commission for 2008.
―A power producer is intent on giving power to its people,‖ Wall Street Journal, July 3, 1995, p.
A1.
An account of this period is found in ―AES Honeycomb A‖ (HBS Case 9-395-132) and ―AES
Honeycomb B‖ (HBS Case 9-395-122).
Dennis W. Bakke, ―Erecting a grid for ethical power,‖ The Marketplace, May/June 1996, p. 5.
Dennis Bakke and Roger Sant, Annual Letter to Shareholders, 1997 AES Corporation Annual
Report.
Alex Markels, ―Power to people,‖ Fast Company, 13 (March 1998), p. 155.
―A power producer is intent on giving power to its people,‖ Wall Street Journal, July 3, 1995, p.
A1.
Jeffrey Pfeffer, ―Human resources at the AES Corporation: the case of the missing department,‖
Graduate School of Business, Stanford University, 1997, p. 14.
―A power producer is intent on giving power to its people,‖ Wall Street Journal, July 3, 1995, p.
A1.
―Power plant builder tries to reenergize environmental image,‖ The Washington Post, July 6,
1992, p.
The power and the glory. (AES Corp.)(includes related article on AES's first Latin American
power distributor)(Cover Story)(Company Profile) Michael Tangeman. LatinFinance, April
1998 n96 p19(6)