Duking It Out Over Pollution

For years Duke Energy (DUK) has produced cheap, reliable electricity thanks in no small part to a fuel that has a bad reputation these days: coal. And yet look who’s trying to help shape the national debate on reducing greenhouse gases: Duke CEO Jim Rogers. The 61-year-old former utility regulator has called for caps on carbon emissions and wants Duke itself to reduce its emissions by 80 percent by the year 2050. Rogers says that’s not as strange as it sounds, even for a company with 14 coal plants scattered across the Carolinas and the Midwest. As the anticarbon parade gets under way in Washington, he says he can either try to stop it or “jump in front” and help shape the outcome.

Rogers finds himself trying to keep his Charlotte, N.C., company ahead of the game on a number of fronts. Analysts say that since taking the reins at Duke in 2006, he has helped improve the balance sheet, giving the company the financial strength to ride out the credit crunch and continue to pay a generous 6 percent dividend. He’s also worked to maintain good relations with the folks who set Duke’s utility rates—regulators in North Carolina, South Carolina, Ohio, Indiana and Kentucky. But he may have a harder job meeting the company’s goal of boosting income by an average of 5 to 7 percent a year through 2013.

In 2008 Duke’s earnings slipped almost 2 percent, to $1.21 a share, as revenue rose nearly 4 percent, to $13.2 billion. This year the company expects earnings to be flat, as recession-plagued customers cut back on energy use. “We’re tightening our belts,” says Rogers, who has frozen merit-pay increases and put limits on new hiring.

In the long run, an even bigger concern may be how Washington comes down on the carbon issue. Indeed, as President Obama follows through on his promise to combat global warming, just about every utility’s future rests on how the government will regulate emissions. Duke, which gets about 70 percent of its electric output from coal, essentially wants free “allowances,” or permission to continue polluting for a period of time as it works to cut its carbon output. Some environmentalists prefer to auction the allowances to the highest bidder—a move that could stick companies like Duke with huge costs.

Rogers, who likes to assign his favorite books to top executives and then pepper them with questions about them, recently sat down with SmartMoney to answer a few questions himself, such as how the utility plans to pay for its costly investments, why he tries to listen to even his fiercest critics, and how he manages to sleep at night.

What impact has the recession had on your service area?

We see demand for electricity falling, primarily in industrial and residential customers. We have yet to see commercial parts of the business reduce demand. Worst case is that demand in 2009 will be slightly under 2008.

When was the last time you saw two consecutive years of falling demand?

In the Midwest we haven’t ever experienced it, and in the Carolinas, not since 2000 and 2001.

You’ve already cut spending because of the capital markets. What happens if they stay tight beyond 2009?

Capital is the lifeblood of our industry. If credit continues to be tight in 2010, we will scrutinize our spending and look for ways to reduce it consistent with the availability of money.

What’s up on the policy front?

The next two years will fundamentally transform our approach to environmental and energy policy—from the way we think about it to the way we invest in it. When you listen to the president talk about where we are going, I can’t think of a company that is as well-positioned to execute on contemplated public policy becoming reality. We have nuclear plants, energy-efficiency projects, coal gasification for carbon capture and sequestration, and wind and solar investments.

You’re also building a new coal plant in North Carolina. Doesn’t that run counter to your talk about reducing carbon?

I would call it a bridge plant to the low-carbon world. We can shut down older, higher-emitting plants that are not retrofitted and produce electricity with lower carbon intensity because of improved efficiencies. We don’t view that as the solution, and I wouldn’t call that clean coal in terms of addressing CO2. But it’s one of the cleanest plants that exist today.

But why build one at all? Why not do more to improve efficiency and reduce demand?

You have to be careful to not frame the debate as either/or. Every one of the options—coal, nuclear, wind, solar—needs technological advances to be a contributor in a low-carbon world. You can’t take any off the table.

With the recession shifting priorities and even the best companies having trouble borrowing money, how are these technologies going to get the financing to get off the ground?

Our industry should tell the administration to view this as a joint partnership. We will make investments in transmission, smart grids and renewable energy. It shouldn’t use taxpayer money. Perhaps the government can provide bonus depreciation or tax credits to stimulate private investment, but we will raise the money, and our investors will fund this. All we need is a clear road map and the regulatory underbrush to be cleared out—like getting eminent domain to build transmission lines.

It’s ironic to hear a coal-based utility position itself as part of the solution.

I looked at our 2050 scenario, and the a-ha moment for me was that virtually all our existing power plants would be retired by then. With each one I get a blank sheet of paper. What drives me is redefining the business, and helping our communities become the most energy-efficient in the world, and decarbonizing our supply. I believe I can do that, and I can make money doing that.

How do you pay for this?

It’s going to take a huge educational effort with Americans to understand “Yes, we can be cleaner, but it’s not going to be cheap or easy.” In the short term it’s going to be more expensive, but in the longer term it is going to put our economy on better footing.

You’ve been a big proponent of so-called cap-and-trade regulation to limit greenhouse gases. But there is talk the allowances could be auctioned off, a potentially onerous outcome for companies like yours.

A 100 percent auction would be devastating to people who rely on coal. Building coal plants was part of our national policy, and to punish people for carrying that out would be wrong. It’s all about fairness.

I heard you ignored your staff and went to a talk by climate scientist James Hansen, who has criticized you for building new coal plants.

I would rather spend time with critics than my friends to get a deeper appreciation of their views and help shape decisions in the direction I want to go. And I sometimes wish they would see my point of view.

You’re a Teddy Roosevelt buff. What lessons have you taken from him?

I’ve had a quote from him since I was 18 years old. It’s about the man in the arena, fighting the fight and daring to do great things even if he fails.

Utilities have typically been seen as defensive stocks. Given the uncertainties and the changes on the horizon, can you still make that case?

People buy our stock for the dividend. There’s a good probability we could see a policy evolving that if a company does green things, then maybe the tax advantage for its dividend would be kept. I’d be getting more dividends to you at a lower tax rate. That lets me attract more capital, which allows me to invest more in green.

What keeps you up at night?

Nothing. I take Lunesta.