Utility chiefs are juggling the conflicting goals of green energy and low rates—and self-interest reigns
Power companies used to have one simple task: providing inexpensive, reliable electricity to light up cities, power factories, and keep the economy humming. No longer. The once-stodgy utility industry is now in history's crosshairs. As the largest contributor to the emissions that cause climate change, it's being asked to spearhead a radical transformation to a cleaner, greener energy economy. This shift was a major topic at the G-20 meeting in September. And at the end of the month, the Senate introduced a bill to require reductions in greenhouse gas emissions, following up on a landmark bill the House of Representatives passed in June mandating an 83% reduction by 2050. If Congress doesn't act, the Environmental Protection Agency will. Either way, the electricity sector would be radically reshaped. "It will force a technological revolution," says James E. Rogers, CEO of Duke Energy (DUK), a utility headquartered in Charlotte, N.C.
The challenges for the nation's 3,273 utilities are huge. "Inaction on climate is not an option," says John W. Rowe, CEO of Chicago-based Exelon (EXC). "But we'll throw away billions of dollars if we screw up." A company could go out on a limb with a $10 billion nuclear plant, only to see demand plunge because of efficiency measures, or be undercut by cheap natural-gas-fueled electricity thanks to new gas field discoveries.
BUCKING POWERFUL INTERESTS
What makes the task even more difficult is a fundamental clash between the two goals that Rowe, Rogers, and other CEOs say they are passionate about: keeping power prices low to benefit customers and averting the potential catastrophe of climate change. The effort to curb emissions, after all, will significantly raise the price of coal-fired and other fossil-fuel-generated electricity and make alternatives more competitive.
In their search for clear rules, some CEOs have been willing to buck powerful business interests. In late September three major utilities, Exelon, PG&E (PCG), and PNM Resources (PNM), pulled out of the U.S. Chamber of Commerce because of the Chamber's opposition to climate legislation. Yet at the same time the utility industry has been working feverishly to shape the details of the legislation to its advantage.
The power of economic self-interest has also created clashes within the industry itself, since each twist of the coming regulations creates winners and losers among the individual companies. "We all have positions on these issues that reflect the different make-up of our generation fleets," explains Duke's Rogers. Billions of dollars are hanging on the legislation's details.
Embodying these tensions is a colorful and often fractious crop of CEOs. J. Wayne Leonard, CEO of New Orleans-based Entergy (ETR), for instance, has thought deeply about these questions. The son of an Indiana schoolteacher, he is self-effacing enough to be "amazed that a person like me ends up as CEO of anything," he says, yet he was one of the first utility chiefs to call for action on climate change. Entergy even filed an amicus brief on the environmentalists' side in the landmark 2007 Supreme Court case that affirmed the right of the Environmental Protection Agency to regulate greenhouse gas emissions. Most utilities weighed in on the other side. "Some of our board members thought we were going to bankrupt the company," Leonard recalls.
Those skeptical board members left or retired. "I'm a true believer," Leonard says. "It's hard for me to imagine why people would gamble with our planet." But he is also a shrewd businessman. During his 10-year tenure as CEO, Entergy has been at the top of utility charts, with a total shareholder return of 268% from 1999 to 2008, vs. 70.3% for the Philadelphia Utility Index and -13% for the Standard & Poor's 500-stock index. The gains came despite being burdened with overcapacity in natural-gas-fired plants and rebuilding efforts after the devastation of Hurricane Katrina. And Leonard is determined to deliver affordable electricity to his customers, many of them low income. Outside his office is a gallery of haunting photos of the poor and downtrodden he calls the Poverty Wall. "It reminds me, every day, this is what we do," Leonard says.
So when natural gas prices rose a few years ago, Leonard made a controversial bottom-line-driven decision: take a plant on the banks of the Mississippi and refit it to burn coal and petroleum coke instead of gas. The cost exceeded $1 billion. The move would increase emissions not just of carbon dioxide but also pollutants such as sulfur dioxide and mercury. "It was a tough one," Leonard admits. "We wanted more diversity in fuels and to reduce the price volatility."
The Sierra Club filed a lawsuit to block the plant, but Leonard was undeterred. Even if Washington raised the costs of using coal by requiring reductions of carbon emissions, the analysis showed it would be cheaper to pay someone else to make so-called offsetting emissions reductions than to keep using natural gas. "The savings we would have on fuel would pay for the offset, so the customer comes out ahead," Leonard argues. "Any time you give the customer more disposable income, that's a win."
In April, Entergy changed its mind, putting the project on hold. But it wasn't because of pressure from green groups—just the bottom line. The price tag for the retrofit had climbed to $1.76 billion, while natural gas prices had plunged. "That changed the economics completely," Leonard says.
For the Entergy chief the incident highlights the conflicting demands on CEOs. "Absolutely," he says. "There is a big tension that exists between doing what we believe is the right thing and trying to satisfy the needs of our customers."
Hypocrisy? Leonard's defenders won't hear of it, and they say his track record on climate issues has insulated him from attacks by environmentalists. "He's been by far the best CEO on the issue of climate," says one environmental policy expert.
Other chief executives haven't been so immune. Consider Duke Energy's Rogers, a former journalist and consumer advocate who rose rapidly once he joined the utility industry. While Leonard has been, until recently, a quiet behind-the-scenes voice, Rogers grabbed the spotlight as a strong and peripatetic advocate for action on climate change. In one recent month of meetings, he hopped from Copenhagen to Rome, zipped home to North Carolina, then went to China; Aspen, Colo.; Washington; Biloxi, Miss.; and Seattle. "What really makes other CEOs jealous is that he's on every conference, while the rest of us are slogging through personnel reviews," says David Crane, chief executive of Princeton (N.J.)-based NRG Energy (NRG). "All of us wonder, when does this guy run his company?"
Yet while Rogers has been on the road proselytizing, Duke has been working—and lobbying—fiercely to keep the climate rules from significantly raising the costs of electricity. Meanwhile, environmental groups have been trying to block two new coal-fired plants Rogers is building in Indiana and North Carolina. "He's the master of double-talk," says Frank O'Donnell, president of Clean Air Watch. "Under his leadership, Duke has one of the worst environmental records in the nation. What he's really trying to do is boost the value of his stock."
Rogers retorts that Duke is investing $1billion in wind power, $2.3billion in more efficient coal plants, $50million in rooftop solar panels, and millions more in energy efficiency. He's also planning to build two zero-carbon-emitting nuclear plants while shutting down dirty coal facilities. "I don't see anyone walking the talk more than I do," he says. Plus, he says, environmentalists don't understand the conflicting pressures he must juggle: "They look at power totally through the lens of clean. They could care less if it is affordable and reliable."
Rogers says that, like any pioneer, he has taken more than his share of arrows. Many of them come from his fellow CEOs. The biggest clash sets Duke, American Electric Power (AEP), Peabody (BTU), and other coal-heavy utilities against Exelon, Entergy, and others with more nukes, natural gas, and renewables. "Cleaner" CEOs such as Entergy's Leonard are upset that the coal utilitiesand the Midwest and Southeast regions they servehave long benefited from lower electricity rates, and thus have had a competitive advantage, because of their polluting ways. "Their customers have been paying 20% to 30% less than ours for 30 years because they've used coal," Leonard says. "So there's more CO2 in the atmosphere, which means we all have to reduce more because of what they did."
FORGING A COMPROMISE
Rogers objects. "The national policy of the country in the 1970s was to wean ourselves from oil, so the government said, 'Go build coal and nuclear,' " he says. "Then Three Mile Island happened, and all we had was coal. Now it is fundamentally unfair to punish people for having carried out national policy." If coal utilities were asked to shoulder a bigger share of the cleanup, "people in Indiana would be subsidizing people in California, and that's wrong," says Rogers
Besides, Entergy and Exelon are clearly motivated by their own self-interest, Rogers adds. If electricity prices soar in the Midwest and Southeast because of higher costs for coal plants, then Wayne Leonard and John Rowe can make a killing selling electricity into those markets from their low-cost nukes. "Trust me, if Wayne was still in the Midwest where he grew up, his story would be different than with the hand he holds sitting in New Orleans, with lots of nuclear," says Rogers.
Under pressure from lawmakers and the White House to pass the House bill, the utility industry put aside its conflicts long enough to forge a compromise that doesn't give a big advantage to either faction. But few of the companies are happy with it. As the action shifts to the Senate, where companies are pushing harder for their own interests, the fragile pact could fall apart. And the tiffs in this industry are a tiny slice of the larger battle as Republicans and business groups such as the U.S. Chamber of Commerce mount an all-out assault on the measure. After the high-profile defections, the Chamber now says it supports the general idea of carbon reductions but is still fighting the House bill. "An overwhelming number of our companies support our policy on climate change," says spokesman Eric Wohlschlegel.
Some say the politics of climate change present insurmountable obstacles to legislation. But the landscape is shifting. More than half of the states have mandated certain amounts of renewable energy, and many are imposing carbon caps. In addition, most of the industry's leaders now agree with Leonard and Rogers on the need to tackle climate change—even as they wrangle to lessen the impact on their own companies. Moreover, they realize it's in their own long-term interests to get rules in place now, providing the certainty that may prevent them from making costly mistakes building new power plants. "If our country wants a low-carbon-generation portfolio, I can build it, but I need to know the rules now," says Rogers. Plus, starting sooner lowers the bill. "If we don't do anything now, it will cost many, many times more later," says Leonard.
It's also clear what policies provide the financial incentives for cleaner technologies. Raise the price of emitting carbon dioxide, as with a cap on such emissions, and there will be more money to be made developing low-carbon alternatives. "Let us make money by being green, harnessing the power of American capitalism to push change in the way society wants," advocates NRG Energy's Crane. "I would not apologize for having the profit motive."
Leonard is hopeful. "The line I always remember from Winston Churchill is that you can always count on Americans to do the right thing, after all other possibilities have been exhausted," he says. "The good news is that we're there."