Wednesday, July 17, 2024

The passionate pragmatist

The passionate pragmatist

By Lisa Davis
People filing into the Charlotte Convention Center make their way around a small commotion. A woman robed as Lady Justice, glowing with gold paint, points her sword at a few chunks of coal on the sidewalk. Other protesters with signs and a megaphone denounce “the Hypocrite of the Year” about to be honored inside. The target of their ire: Jim Rogers, chairman, president and CEO of Duke Energy Corp., the Charlotte-based utility that is expanding a power plant an hour’s drive away in Cliffside. The plant burns coal, which is cheap and abundant but releases a noxious mix of pollutants, including carbon dioxide, a prime culprit in global warming. Down the sidewalk is another group that isn’t happy with him. It’s protesting his efforts to promote a mandatory cap on carbon emissions. That could prove especially costly to one of the nation’s largest electric utilities — which produces more than 60% of its U.S. power from coal — and its 4 million customers in the Carolinas and the Midwest.

His critics claim that Rogers is talking out of both sides of his mouth. Inside, accepting an award from the Charlotte Chamber, he puts it another way. “I am where I need to be,” he tells the crowd. “In the middle of the road.” He knows what direction that road is headed: to a “low-carbon world.” And he’s determined that Duke will have a say on the best way to get there. It’s not going to be an easy journey. Investing in new, cleaner power generation is putting pressure on its low rates. Complicating matters is an economic downturn that has pummeled industrial sales. He describes himself as “a passionate pragmatist.” To him, building Cliffside, promoting carbon legislation, developing smart-grid technology — it is all of a piece. “I’m pragmatic about the tradeoffs that have to be made.”

Our carbon footprint as a company is defined by three numbers — three, 12 and 41. We’re the third-largest emitter of CO2 in the U.S. We are the 12th-largest in the world. If we were a country, we’d be 41st.” This is how Rogers, 62, begins many speeches. “It’s almost confessional,” he admits. “‘Yes, I have a huge carbon footprint. I am for carbon regulation, and this is how we want to go about doing it.’ It gives you credibility to talk about it.” He’s talked about it in just about every place people are discussing clean energy — from the Copenhagen climate summit to the halls of Congress. This winter morning he’s ready to talk about it again, albeit on little sleep. He had flown in late the night before from Washington, where he’d had dinner with former Treasury Secretary Lawrence Summers, a top adviser to President Obama. That’s the sort of company Rogers keeps these days. He has spent much of his four years as Duke CEO trying to shape carbon legislation. “It’s the single largest issue facing our customers and the future of our company.”

To prepare for a speech he will give in a few hours, he has been jotting down ideas he got at dinner last night. He settles into an upholstered chair in an office he’ll be leaving later this year when Duke moves from its bunkerlike headquarters to a 48-story tower going up across the street. The utility will be leasing 21 floors from Wells Fargo & Co. — what was going to be Wachovia Corp. headquarters soon will be Duke Energy Center. It’s a high-profile move for the utility, whose CEO is always moving at full speed. Rogers “seems like a man on a mission,” says John Gartner, senior analyst with Pike Research. “He values his legacy and wants to be seen as someone who helped lead the company into a key transition. … He wants to be perceived as an agent of change.”

Rogers jumps up to retrieve his Blackberry from his desk. “This is another way to think about us,” he says, punching buttons. He finds the numbers he’s looking for: Duke is third in the Americas in producing carbon-free electricity — thanks to its international hydroelectric plants, three nuclear plants and small but growing wind-power production. That’s going into his speeches, he says with a smile. “I’m constantly recutting the numbers, retelling the story.”

Burning fossil fuels such as coal spews out sulfur dioxide, mercury, fine particles and other pollutants that can create smog, damage health and fall to the ground as acid rain. State and federal laws have tried to rein in air polluters. In the late ’80s, as a utility CEO in Indiana, Rogers stood apart from his industry to support national Clean Air Act amendments that required utilities to cut sulfur-dioxide emissions. He liked the market-based, cap-and-trade approach to regulation in which total emissions of a pollutant are set and companies get credits to emit a certain amount. Companies that cut emissions below their allowances can sell the excess to others. Supporting the legislation turned out to be a good move, he says. Emitters got room to maneuver as they installed costly pollution scrubbers, and acid rain lessened.

Attention turned to greenhouse gases, such as carbon dioxide, that trap heat in the atmosphere. The scientific evidence was mounting that they were causing potentially disastrous climate change. But technology to remove and store carbon is years away from being workable, if it ever will be. Even coal plants with the latest pollution controls pump tons of carbon into the air every year. It seemed to Rogers just a matter of time before legislators or regulators take action. Maybe what was done with sulfur dioxide could be repeated with carbon — a cap-and-trade system that would be good for the environment and, if he and his industry could work it right, not a costly nightmare for them. Rogers began calling for a cap on carbon. Better to do it sooner than later, he says, because uncertainty is bad for business. Utilities will have to develop new technologies and energy sources, and that takes time.

These days, he is no longer alone. Other utility leaders are also pushing for legislation and planning accordingly. But none has sought the spotlight like Rogers. That doesn’t endear him to colleagues, says analyst Roger Gale, CEO of GF Energy LLC. “He is insightful and does see the future better than a lot of the CEOs do. But most of them dislike him pretty intensely because he’s always got to be right. He’s got to be ahead of everyone else.” As Rogers sees it, if this is the journey utilities have to take, he wants to be in the driver’s seat. “He doesn’t like to leave stuff to chance,” Duke spokesman Tom Williams says.

When Obama came out last year in favor of a cap-and-trade system in which carbon emitters would have to buy all their allowances, Rogers hit the airwaves in protest. He popped up on Larry Kudlow’s show on CNBC and Rachel Maddow’s on MSNBC to plead his case for free allowances. Critics say this would reward major polluters such as Duke. Rogers counters that forcing coal burners to buy allowances at auction would drive up electricity prices sharply. Free, diminishing allowances would give utilities time to transition away from emitting carbon.

He has joined with other CEOs and environmental leaders to form the U.S. Climate Action Partnership. It put together a policy framework that served as a basis for the energy bill the U.S. House passed last June. Through USCAP, Rogers works with allies such as Fred Krupp, president of the Environmental Defense Fund. Duke and EDF have battled on many fronts — even to the Supreme Court, which ruled unanimously three years ago that Duke had violated the Clean Air Act by failing to install pollution controls when it upgraded some coal-fired units. “I appreciate that Jim represents the company’s interest, which is different from EDF’s,” Krupp says. But where their interests unite, they come together. The coal burner and the environmentalist have paid visits to Congress members to pitch carbon caps, timelines and free allowances. “It gets back to, let’s get something done, OK?” Rogers says. “And they want to get something done.”

Another USCAP member, Eileen Claussen, president of the Pew Center on Global Change, got a call from Rogers, who had been home sick and done a lot of thinking, he told her. Now he wanted to bounce ideas off her. Such a call isn’t unusual, she says with a laugh. “He’s always thinking about, is there a new way to frame this issue? Is there a new way to talk about this? What are the practical realities not only for my company but also for other companies? He asks himself questions all the time about whether the path he’s on is the best path.”

His company’s path began more than a century ago on the Catawba River, where tobacco tycoon James B. Duke and his partners produced hydroelectric power for the region’s textile mills. As demand heated up, Duke Power Co. built coal-fired plants that provided low-cost electricity to the Piedmont’s growing post-World War II economy. In the ’70s, Duke added its first nuclear plant. As CEO, the late Bill Lee — grandson of the company’s original engineer — was a champion of nuclear power. The company’s 1997 merger with PanEnergy Corp., a natural-gas distributor, brought a new name — Duke Energy — and the first step to becoming a broad-based energy company. But when industry deregulation derailed, Duke’s aspirations under Rick Priory to be a global powerhouse flickered out. In financial trouble, it brought in Paul Anderson, who cut loose ambitious ventures such as energy trading to refocus on the core power business. Anderson soon began looking for a like-minded CEO to team with.

He found him in Rogers, then chief executive of Cincinnati-based Cinergy Corp., whose coal-fired plants powered a slice of the industrial Midwest. “We saw a convergence of ideas and philosophies,” Anderson says. They both saw a consolidating industry, a tough future for coal and a potentially bright one for nuclear. They merged companies, and Rogers succeeded Anderson, who left to run the spun-off natural-gas operation. Within days of the merger announcement, Duke had issued another release: It planned to build two coal units at Cliffside. This was in the works before Rogers’ arrival, but he decided to go forward with it, and the N.C. Utilities Commission green-lighted one unit. As other utilities abandoned similar plans because of increasing costs and looming carbon restrictions, the green-talking utility CEO embarked on building a coal-fired unit.

Near a tiny town tucked in the foothills on the Rutherford-Cleveland county line, big trucks rumble down the road past a redbrick shell of an abandoned textile mill. They are headed to a construction site carved out of the woods along the Broad River. Beyond the large fields of metal parts and arching cranes rises the hull of a new coal boiler at Cliffside Steam Station. Here, some 2,200 workers, whose numbers will swell to more than 3,000 this summer are building unit No. 6, which towers over four older, soon-to-be-retired units nearby.

Cliffside has become a flash point for Rogers’ critics, who say it contradicts his claims that he wants to clamp down on carbon. Protestors have picketed Duke’s headquarters and even gathered on the lawn of Rogers’ home. Environmental watchdog groups have taken the fight to the Utilities Commission and to court. Rogers defends the $2.4 billion project: Duke hasn’t built a base-load coal or nuclear plant — the backbone of its power generation — in more than two decades. The goal, he says, is to “modernize and decarbonize.” By 2050, as its plants age and pollution limits become more stringent, “every power plant we operate today will have to be retired and replaced. So the question is, what is the right sequence?” No. 6 will boost output at Cliffside while reducing many of its toxic emissions. “The simple fact is, we build [a unit producing 825] megawatts that is far more efficient and shut down 1,000 megawatts. Our pollution footprint is much smaller because of that.”

But even with its pollution controls, Cliffside is still a traditional coal-burning plant that comes with what that entails — such as coal-ash ponds that can threaten water supplies, damage to the Appalachian mountaintops where coal is mined and the release of tons of carbon dioxide. The Southern Environmental Law Center has sued Duke, challenging its air-quality permit. “We are definitely in favor of seeing older coal plants retired,” says Gudrun Thompson, a senior attorney with the center. “But we think there are cleaner alternatives than building a new coal plant that’s going to lock in 40 or 50 years of very high emissions of carbon dioxide and other pollutants.”

One alternative is natural gas, which pollutes less than coal. Raleigh-based Progress Energy Inc. is shifting from coal to natural gas. But natural-gas prices are volatile, Rogers argues, and Duke is already building two units at its Buck plant in Rowan County and Dan River plant in Rockingham County as part of its modernization plan. At the core of that effort are two coal-fired units, one in Indiana that will convert coal to a cleaner synthetic gas, the other at Cliffside. When they open in 2012, Duke will shut down some older coal units. Duke is investing up to $15.2 billion over three years in capital expenditures, committing much of that capital to finishing the new plants, adding pollution controls to older ones and projects such as installing smart-grid technology.

New nuclear power is also in the works. Duke has filed for a federal license to build two reactors near Gaffney, S.C., and is evaluating sites for another in Ohio. Rogers sees nuclear as key to a low-carbon world. Duke hopes to have the South Carolina plant running by 2021, although the challenges are big — both regulatory and financial. The price tag to build both reactors could reach $12 billion, and finding financing will be difficult. It’s looking for partners to split costs.

The long-term investments are banging up against a hard here-and-now. A dwindling manufacturing base and sluggish economy are dampening demand for electricity. Last year, sales slipped 4%, with those to industry dropping 14%. Industrial demand seems to be steadying, but Duke doesn’t see a rebound anytime soon. It’s also being squeezed by competitive pressures in Ohio, where it has lost customers. The company earned $1.1 billion last year, down from $1.4 billion the year before. To ease the pinch, it cut expenses by $150 million. This year, it is offering employee buyouts and streamlining corporate operations to trim $200 million in costs.

Duke is not waiting to flip the switch on its new plants to start recovering costs from customers. An N.C. law it lobbied for three years ago allows it to earn off its investment in plants while they are under construction. In December, Duke got approval for its first base-rate increase in North Carolina in nearly two decades, in part to cover costs for Cliffside. South Carolina and Kentucky also have approved rate hikes. And more are coming. A priority this year — and crucial to going forward with its nuclear plant, Duke says — is pushing for legislation in North Carolina that will allow it to recover nuclear-plant financing costs from customers without having to request a general rate increase. And Rogers has more change in mind. “I think we need to totally rethink how we’re regulated,” he told analysts at Duke’s investor conference in February. In each state, Duke will consider pressing for regulatory changes that could boost returns.

On top of all that, it might be digesting an acquisition soon. It’s rumored to be a bidder for two Kentucky utilities put on the block by their German owner. Such a deal would fill in Duke’s footprint, but it won’t comment.

Spread across the flat top of a National Gypsum Co. wallboard factory in Mount Holly are some 5,000 solar panels. When it’s sunny, they can generate 1.2 megawatts of electricity, enough to power 700 homes. Duke leased the space and installed the panels as part of its distributed-generation pilot project, one of the largest in the nation. By next year, the company expects to generate 10 megawatts of power from the rooftops and grounds of homes, offices and factories around the state. With projects like this, Duke is building its renewable-energy portfolio, which must reach a state-mandated 12.5% of its production by 2021. Duke’s wind farms, primarily out West, are expected to produce about 1,000 megawatts this year.

Duke also has stepped up energy-efficiency efforts. The problem, however, is motivating a company that sells energy to sell less of it. Rogers thinks he has found a way around that with Duke’s save-a-watt program, versions of which have been approved in four of the five states it operates in. What separates save-a-watt from many utilities’ plans is its “avoided cost” model. As it helps customers reduce energy use, Duke will earn a return off a portion of the cost of the power plants it won’t need to build. The savings will be independently confirmed, and customers will see a monthly charge on their bills. “I am trying to change the regulatory paradigm,” Rogers says, “where we make as much money investing in energy efficiency as we do a power plant.”

The part about changing the regulatory paradigm concerns Richard Sedano, a director of The Regulatory Assistance Project, which advises public officials on energy issues. How do you fairly determine what an avoided cost is? Would a utility have built a coal plant or a nuclear plant? Added a transmission line? “There’s a huge amount of uncertainty that you don’t have if you simply say, ‘OK, we are going to compensate you based on your costs.’” When Duke proposed save-a-watt, it was slammed by critics who said it would earn too much for a meager effort. But Rogers campaigned loudly for it. “He’s willing to come up with an idea that’s unusual and put himself out there to test it,” Sedano says. “He’s willing to be a lightning rod.” Duke reworked the North Carolina plan with the Utilities Commission’s Public Staff, representing consumers’ concerns, and with environmental groups. The settlement kept the avoided-cost model but limited Duke’s return and tied it to meeting its targets.

Under save-a-watt, Duke could reduce North Carolina energy sales close to 2% over four years and up to 8% in the next decade. That would be a big leap for Duke, Thompson says. “By setting these goals, they are positioning themselves to be as aggressive as utilities that are leaders in the industry who have been achieving some substantial energy savings already.” Some of what Rogers envisions for Duke consumers can be found in the houses of about three dozen families in the McAlpine neighborhood of Charlotte. In a pilot project, devices were installed that could communicate with their appliances, delaying the dishwasher’s start for a few seconds, for example, or cycling down the refrigerator. The families were surveyed weekly and saw no change in the quality of service while reducing their energy usage 20%. Rogers “is propounding the vision of the utility as a service company,” Sedano says, “in a way that stretches our imagination.”

As an assistant attorney general in Kentucky, Rogers opposed a local utility’s request to put a pollution scrubber on the back end of its coal plant. His job was to be a consumer advocate, and this was the ’70s, before federal regulations required emission controls. It seemed too high a price for the utility’s customers to pay. He lost the case, but it got him thinking.

Son of a Kentucky lawyer, he had worked his way through the University of Kentucky writing for the local newspaper and also earned a law degree there. He soon headed to Washington, where he worked at the Federal Energy Regulatory Commission and in private practice. Rogers left law to manage the gas-pipeline business for Enron Corp. in Houston. In 1988, his career took another turn. PSI Energy Inc., an Indiana-based utility, was reeling from its $2.7 billion write-off of a scrapped nuclear plant. Earnings were tanking, and morale was low, recalls Larry Thomas, a PSI executive then. “We did not know what our future was going to be.” In came Rogers as CEO, a 41-year-old lawyer from the gas industry with no experience managing an electric utility. “He was the right guy at the right time,” Thomas says. “… Other companies with a failed nuclear plant had either gone into bankruptcy or had to lay off people. We did neither.”

Rogers negotiated with regulators and bankers, engaging anyone who would help determine PSI’s fate. Jim Turner, a young consumer advocate in Indiana, got a call from Rogers. A huge ice storm had hit, knocking out power to several hundred PSI customers. Would Turner like to take a helicopter ride with him to see the damage? Yes, he would. Turner still fought PSI’s attempt to recover its storm costs, but he was impressed by Rogers’ openness, which filtered down the ranks. “It was just a different feel that you got from [PSI], and that really served him well,” says Turner, who is now president and chief operating officer of Duke’s U.S. franchised electric and gas business. That engagement was invaluable when Rogers began trying to merge PSI with Cincinnati Gas & Electric Co. An Indianapolis utility offered a higher price, but Rogers worked his relationship with investors, consumer advocates and others to fend off the hostile bid and get the deal he wanted. In 1994, he took the top job at the newly merged Cinergy.

Over his two decades as a CEO, Rogers has honed an unorthodox management style. To keep his staff challenged, he likes to shuffle the organizational charts. “It’s very unsettling for some people in the management team,” Turner says. “And I have to admit there have been times it’s been unsettling for me.” He was moving up the ranks at Cinergy when Rogers invited him to investor road shows to talk about regulatory strategy. Then Rogers named Turner — a lawyer with no financial background — chief financial officer. At first, Turner admits, “it scared the hell out of me.” It turned out to be an event-filled year — Cinergy began holding quarterly earnings calls, issued $200 million in new equity and prepared to merge with Duke. “It’s made me a much better executive for having gone through that experience,” Turner says.

Rogers employs what he calls scouts — consultants who report directly to him — to bring him the latest thinking. And he doesn’t hesitate to pick up the phone and call someone four layers down to talk him through some issue. Inspired by a book — Rogers has given his senior staff Kindles so that they can download his constant stream of reading suggestions — he wrote a letter last year to his board of directors asking: What if I’m dead wrong? What if carbon emissions aren’t causing climate change and the EPA or Congress never limit them? What would Duke Energy do differently over the next five years? Not much, he concluded, perhaps unsurprisingly. He would still be retiring and replacing his plants and investing in energy efficiency and renewable energy, he says, because the battle over scarce global resources will only increase. The exercise, he says, “gave me as a businessperson more confidence about our strategy, because it was robust enough to stand if you took carbon off the table.”

Rogers glances behind his chair to where a painting used to be. He traveled to China last year and came away with deals to collaborate on commercial solar-power projects and clean-energy technology. He gave one of his Chinese partners the painting — of Menlo Park, home of Thomas Edison’s idea factory. Rogers says he is going to have a new one done. “I’ve always liked the idea of thinking of myself as an inventor, someone who is innovating in public policy.”

Carbon isn’t coming off the table, he says, and the faster the country addresses it, the better off Duke and its customers will be. Rogers knows the chances of a cap-and-trade bill passing the Senate this year are low, but he is still strategizing, still making his pitch. “He has this burning sense of urgency inside him,” Turner says. “I think he’s feeling that the changes that are on us, the transformation that the industry has embarked upon is sooner than we think.”

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