Electric Utilities Face the Future

Utility CEOs have two conflicting missions: To help customers by keeping rates low, and to protect the environment by shifting to costlier green energy

There's a row of haunting photographs outside J. Wayne Leonard's New Orleans office: Old men pass the time in a rundown Mississippi barbershop. Twins are out walking with their mother dressed in mismatched hand-me-down clothes. A weatherbeaten dog trader cradles a puppy in his gnarled hands. Leonard calls it the Poverty Wall. He set it up, he says, "to remind me, every day, this is what we do." As CEO of a major utility, Entergy (ENT), his job is bringing affordable energy to all these people.

But the pictures hold larger lessons as well. People and industries get left behind if they can't adapt to changing times. And now, it's Leonard's own stodgy industry that's being asked to adapt. Where governments around the world once demanded merely that utilities provide cheap electricity to light up cities and power TVs, now there's a call for a radical transformation to a cleaner, greener energy supply to fight the perils of climate change and dependence on fossil fuels. The House of Representatives has already passed a landmark bill mandating an 83% reduction in greenhouse gas emissions by 2050. "It will force a technological revolution," says James E. Rogers, CEO of Duke Energy (DUK), a utility headquartered in Charlotte.

The challenges for the nation's 3,273 utilities are huge. "We'll throw away billions of dollars if we screw up," says John W. Rowe, CEO of Chicago's Exelon (EXC). But what makes the task even more difficult is the fundamental clash between the two goals Leonard and other CEOs say they are passionate about: helping customers by keeping power prices low and averting the potential traumas of a warmer planet. The effort to curb emissions, after all, will significantly raise the price of coal and other electricity generated from fossil fuels.

Changing Financial Incentives

This conflict requires CEOs to walk a tightrope between their own economic self-interest and the larger interests of the planet. It also explains why they have been working so hard to shape the details of the climate legislation in Congress to their advantage. And the power of economic self-interest has 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 fleets [of power plants]," explains Duke's Rogers. Millions of dollars are hanging on the legislation's details.

More fundamentally, these tensions raise questions about the difficulty of balancing societal goals with the powerful entrenched financial interests of individual companies and industries. Striking such a balance is no easy task. Witness the difficulty in changing the financial incentives that are fueling the rise in health-care costs. But in the case of climate policy, the struggle may turn out to be less arduous—if only because industry and government leaders largely agree both on the need for change and on the general types of policies most likely to speed the transformation.

Entergy's Leonard, 58, has thought deeply about these questions. The son of an Indiana school teacher, he is self-effacing enough to be "amazed that a person like me ends up as CEO of anything," he says, yet bold enough to be one of the first utility CEOs to become a passionate advocate for fighting 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.

"Our level of commitment shocked some of our board members," Leonard recalls. "Some of them thought we were going to bankrupt the company."

Those skeptical board members are gone. "I'm a true believer," Leonard explains. "It's hard for me to imagine why people would gamble with our planet. And the idea of moving this to our children just doesn't work for us. What keeps me awake at night is worry about the time we are losing."

Leonard has been leaning green since his student days at Ball State University, when "I couldn't believe the horrible things we were doing to the environment," he says. 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.

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 still insists it was the right decision. Even if Washington raised the costs of using coal by putting limits on carbon emissions, the hard numbers 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 environmental groups—just the bottom line again. 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, 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," he says.

Leonard's strong track record on climate issues, though, has largely insulated him from attacks from environmentalists.

"master of double-talk"

Other chief executives haven't been so immune. Consider Jim Rogers, a former journalist and consumer advocate who rose rapidly once he joined the utility industry. Rogers became CEO of Public Service Indiana in 1988, which after an acquisition changed its name to Cinergy in 1995. He kept the top slot when Cinergy merged with Duke Energy in 2006. While Leonard has been, until recently, a quiet, behind-the-scenes advocate, Rogers grabbed the spotlight as a strong and visible proponent of fighting climate change. In July alone, he hopped from climate meetings in Copenhagen and Rome back to North Carolina, then on to China; Aspen, Colo.; Washington, D.C.; 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 NRG Energy (NRG) in Princeton, N.J. "All of us wonder, when does this guy run his company?" (He has a good team and he delegates, says Rogers, "and I kill them with e-mails.")

Yet even as Rogers is out there proselytizing for the environmental, Duke has been working—and lobbying—fiercely to keep the climate rules from significantly raising the costs of electricity. And environmental groups have been trying to block two new coal-fired plants Rogers is building in Indiana and North Carolina. "He's like other powerful, greedy CEOs—just better at the scam," says Jim Warren, executive director of North Carolina Waste Awareness & Reduction Network (NC WARN). There's even a Web site, jimrogerswantsyourmoney.com, set up by Clean Air Watch to expose what it believes is Rogers' hypocrisy. "He's the master of double-talk," says Frank O'Donnell, Clean Air Watch's president. "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 $1 billion in wind power, $2.3 billion in more efficient coal plants, $50 million 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." In contrast, he says, Duke has customers who are so aggravated by talk of carbon that they resort to calling global warming a hoax, "because they know it will drive up prices and make them less competitive."

Rogers readily concedes there is an inherent contradiction in his position. One of the most effective incentives for speeding the transition to a lower-carbon world is putting a price on emitting carbon dioxide, as a cap-and-trade bill such as the one spearheaded by Representatives Henry A. Waxman (D-Calif.) and Edward Markey (D-Mass.) would do. That would raise the price of coal-fired electricity and make cleaner alternatives more competitive. Yet Rogers is working hard to prevent such price increases. "I'm on a mission on behalf of my customers," he says. "I never forget the West Texas expression: The pioneers get the arrows, the settlers get the land. I'm hell-bent on getting the land."

Some of the arrows are coming from his fellow CEOs, as the tensions created by economic self-interest put companies at odds not just with environmentalists but also with one another.

The biggest battle 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 utilities—and the Midwest and Southeast regions they serve—have long benefited from lower electricity rates, and thus have had a competitive advantage because of their polluting ways. "Their customers are paying 20% to 30% less than ours, and they've enjoyed that for 30 years because they've used coal," Leonard complains. "Because they've used coal, there's more CO2 in the environment, which means we all have to reduce more because of what they did."

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.

All-Out Assault

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 none of the companies is happy with it. As the action shifts to the Senate, where companies are pushing harder for their own interests, the fragile agreement is in danger of falling apart. And the tiffs in this one industry are just a tiny slice of the larger battle as Republicans mount an all-out assault on the measure. To get enough votes to pass, "the bill in the Senate will have to rethink time lines and targets, and add cost containment ideas," predicts Rogers. If the legislation is substantially weakened, though, it risks losing the support of the environmental groups that have worked so hard to get it this far.

Some say the politics of climate change dredge up intractable problems. But finding a path to a climate policy ultimately may be less difficult than, say, reforming health care in the U.S.. For one thing, the landscape is already shifting under the utilities' feet. More than half of the states have mandated certain amounts of renewable energy, and many are imposing their own caps. In addition, the industry's leaders agree with the need to tackle climate change, even as they wrangle fiercely to lessen the impacts 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, it's cheaper to start soon. "If we don't do anything now, it will cost many, many times more later," says Leonard.

And unlike health care, it's clear what policies provide the financial incentives for cleaner technologies. It's simple economics. 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, for one, 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."

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