PrintPrint EmailEmail ShareShare CiteCite


Panacea or Pipe Dream? Energy Policy and the Search for Alternatives: The United States' Future Need for Power and Energy

Speaker: James Rogers, President and Ceo of Duke Energy
March 13, 2007
Council on Foreign Relations Washington, DC

JAMES E. ROGERS:  Sebastian, thank you very much. 

It's been fortunate that I had an opportunity to sit in on the second panel and participate in the third panel, which gives me some sense of where you all have been today.  And I'm going to try to tailor my comments to sort of pick up on the conversations we were having then.  It was only, Sebastian, a coincidence because we had scheduled our press release before they moved the State of the Union back.  And it wasn't an effort on our part to try to jump in front of the administration on this issue; it's just how it played out. 

Let me, if I may, share with you all some of the meeting that I had last week; I had a very interesting opportunity.  And over the last decade, I've had chances to meet with the CEOs of the major power companies throughout the world -- the major utilities in Japan, Russia, South America, Europe, Australia and in the United States.  And we sat down and spent two days in a great part of the world, in Seville, and had an opportunity to really talk about the issues that we face as an industry around the world with different government, different local politics.  And what was remarkable about the session, it's the first time in a decade, the issues that we had on the table were very similar from every country. 

Oftentimes we have different political regimes, we have different regulatory schemes, we have different fuel mixes, but what was remarkable about it is that we had the same issues.  And I wanted to share with you some of those issues.  It kind of puts in context what we're trying to achieve here in the United States with the carbon issue and what we're trying to do to address our future need for power and energy in this country so we can support our economy and move forward. 

One of the similar trends -- and I'd like to talk about them and then I'm going to give you some headlines from abound the world that I heard in these conversations that will give you kind of how complicated and difficult this is going to be -- and then I want to have you sit in my -- take my job.  You can't have my compensation, but you can have my job -- (laughter) --p and what I would like you to do is to think about the choices that I have to make because as I said in the panel, I've got to make choices between a number of different fuel alternatives because I have to make the decision today because job one for me is to make sure there's reliable supply 10 years from now. 

And in the Carolinas, for instance, in just one part of our area, the population is growing.   From 2000 to 2030 we'll have a 50 percent increase in population with more homes, more businesses we have to serve and be prepared to serve during that time.  And then what I want to close with is a more provocative conversation about the role of energy efficiency. 

I'm the chairman of Edison Electric Institute this year and one of the -- I don't like doing those jobs, I've been chairman of a lot of things and those are fun to do and I love running board meetings, but the reality is I like to have a legacy -- I like to have something that gets done -- and I want to tell you what we're trying to get done on energy efficiency from the top, down because most of this action will happen at the state level. 

Let me give you a quick rundown and I'll do it kind of headline form on the trends and then give you some of the headlines.  I'm not totally over the jet lag yet, I just got back this weekend and in my sinuses I have to make a choice between breathing and talking.  (Laughter.)  And -- and water sort of facilitates that transition back and forth. 

First of all, around the world, the demand for electricity is really growing.  I mean, you can see it in this country.  I mean, we have a love affair with all things electronic -- Ipods, plasma TVs, cell phones.  If you look at the demand as fast as it's growing, it's pretty remarkable.  And in the United States -- footnote point -- in the United States the demand for electricity will have increased 40 percent by 2030.  And it's -- when I talked a few moments ago, there is no one answer to solve that, there really isn't because the growth is so great -- and that's a world-wide phenomenon.  Another world-wide phenomenon is the increasing cost of building coal plants, gas plants, nuclear plants and wind. 

Every choice -- we're in a building boom around the world.  In the United States alone, we have 150 coal plants on the drawing board.  And we see the costs going up astronomically.  We're trying to build a coal plant in North Carolina and the costs have gone from about 2 billion (dollars) in September, to today we're estimating it's more than $3 billion to build the same plant because the cost of materials and skilled labor over the next decade is really going up and there's such a demand to build plants.  And I'll talk more about the number of plants that are being built in China.  It's almost a cliche -- every other week, a new plant comes on line there, but more in a moment about that. 

The other thing that this group totally agreed on is that climate change is a serious global environmental challenge and it's something that we have to address now.  And that virtually every company there believes we'll live in a carbon-constrained world in the future and we have to find a way to provide reliable service in the context of these carbon constraints. 

The fourth trend is the incredible push for investment in -- the political push for investment in renewables -- even if they're not economical.  And it goes, and I'll talk more about it, the push in Europe to have by 2020 to have 20 percent of all the supply of electricity come from renewables.  In Europe alone, they're spending about $20 billion a year for renewables and they estimate that about 50 percent of that is above what it would have been from other sources of providing power.  And that's why it's so important to start to have regulation of carbon because we know the true price.  And when we do these economics, we'll know the price of carbon and that will allow us to make informed decisions.  Today we're making decisions that are probably uneconomic because we don't know the price of carbon. 

The other thing is is the recognition that there's been a chronic under-investment in energy efficiency around the world.  And I think that is really another really important takeaway. 

And lastly, I would say that as we look in every country, and in the United States, we've seen for the last decade and a half the real cost of power actually decline.  We're going to the nominal and the real prices actually increase over the next decade and that's going to be a worldwide phenomena. 

Now let me give you some factoids that put in context how difficult this is going to be.  Ontario made the decision to shut all coal plants down in the country -- I mean in the area by 2010.  They think of themselves as a country -- I'm sorry, I lost my head. (Laughter.)  But guess what:  They just announced they're pushing that date out to 2014.  

In Germany, they cut a deal with the Green Party that said we're going to shut all our nuclear plants down starting around 2020.  They're now in the process in Germany of rethinking shutting down those nuclear plants because they know they can't hit their carbon objectives and provide power for the country by shutting down the nuclear plants which have zero greenhouse gas emissions. 

Japan, they're the only county that really said no to cap-and-trade because they would rather use performance standards for developing technology.

And they are really starting to come around to cap-and-trade, but their situation is pretty unique compared to other countries in the world.  Only 7 percent of their energy is actually domestic.  They have to import all their other energy into the country.  And the energy security issue is front in mind -- front of mind with the Japanese in terms of how to solve that issue.  They're probably more advanced than any other country in terms of energy efficiency initiatives within a country. 

In Northern Europe, they have had significant congestion and stability problems with the grid because they probably integrated more wind power, which provides energy only when the wind blows.  And sometimes when the wind blows too hard, those units cut off.  And actually that instance almost created a cratering f the grid in Belgium and parts of Northern Europe because we haven't yet figured out operationally how to integrate such large portions of intermittent power into the grid.  We're used to running plants where we know what's coming, and when a plant goes down we know how to step in and turn on another plant and fill it in. 

The other remarkable thing is in Russia, they're going to build between three and four reactors, new nuclear plants, every year for the foreseeable future. 

Today, around the world, there are 24 nuclear reactors under construction.  Contrast that with the fact that in the United States, we have none under construction.  And if we went to work today to build a new nuclear unit to provide power in this country today, it would be a least a decade before we could bring it online.  So while the rest of the world is moving forward with nuclear, we're sitting here doing nothing.  And I think that's kind of -- and it's particularly important if we're going to try to catch up with the rest of the world and achieve the carbon goals that the other parts of the world are focused on, and we should be focused on going forward.

Another remarkable headline is in China, they added power sources last year equal to the entire grids of U.K. and Thailand combined.  And guess what?  Ninety percent of the generation was coal-fired, not new state-of-the-art technology, but old technology, although some of their plants are state-of-the-art because they're building them and they're looking at efficiencies are significantly greater. 

And the other thing is is a lot of people in this country say, "Well, we can't act until China and India act."  My judgment is we need to act first.  And we need to be a leader on this issue because China is coming to know the importance of climate to their country -- the impact on grain production, the severe water shortages; a statistic:  less per capita water than in Israel and Jordan.  And one-fourth of the land today is desert.  So they see very dramatically the impact from climate and other environmental issues on their country. 

And just last week, the 27 member European Union committed to cut greenhouse gases by 20 percent by 2020, below the 1990 level.  They also committed to 20 percent of European energy would be renewable by 2020.  And as a footnote to that, I may have mentioned it earlier, France convinced everybody that nuclear's renewable and new nuclear should count to the 20 percent target.  And everybody agreed, which I find interesting in light of the debates we're having here on renewable portfolio standards.  And the other thing that they said is they're going to dramatically increase in Europe the energy efficiency improvements.  

And the last point I made earlier:  We cannot take out of the equation the fact, as we try to solve the climate issue, that there's over 1.6 billion people that do not have access to electricity, do not have access to a modern life.  And we were having a conversation at lunch, well, do they really want access to this modern life?  That's an important point, but the most important point is if they do, that's going to exacerbate the challenge that we have because in the United States, I mean, that's five times the population of the United States.  And if you took and built a grid to serve them the electricity the way we use electricity, think about a grid that's five times the size of our grid in the United States. 

Now, as a CEO, I have to make choices, and I'm making choices between -- with the significant growth that I face, I ask the question, do I build nuclear, coal, gas put money in energy efficiency or put money in renewables?  And I'm the person that believes that there's no silver bullet.  We have to use all of them.  We have to keep all of them in the equation.  We can't take coal out of the equation.  Coal -- 50 percent of the electricity in this country comes from coal.  And all the projections show it will only grow as a percent of the total going forward.  Coal is abundant; we have a 250-year supply.  It's cheap, but it's not clean because every one of these five alternatives that I have, I hold them up to a criteria:  Is it available?  Can I build it?  Can I build it timely?  That's the first question.  Is it affordable?  Does it fit in with the blend of the assets I have to keep the prices low for my consumers so they can compete worldwide?  Is it reliable?  Can I count on it?  Because when I'm providing service to you, you look at me as the guy that when you throw the switch, I have to be there instantaneously.  And that's what reliability means -- be there instantaneously and have the capability to do that.  Does that source give me that kind of reliability?  And then the question is, is it clean?  And I use the example of coal.  Well, coal passes on affordability -- on reliable -- on adequate, but it doesn't pass on clean.

Wind, on the other hand, passes the test on clean, but it's not necessarily reliable because the load factory on wind is about 30 percent.  And when the wind blows it's there, but we don't have the ability to store electricity, so we have to use it instantaneously.  If we don't need it then, we can't use it.  And we can't store it up to use another time. 

And with natural gas, I mean, there's much less emissions in CO2.  It's reliable, it's somewhat clean, it's reliable.  But the question is, is it affordable?  I mean, look at what the price of natural gas has done.  It's up seven or eight times over the average price in the '90s, mainly because we spent a decade building nothing but gas plants when historically we've had a portfolio of -- approach to building plants in the past, nuclear, coal, gas, some combination. 

So my decision, if you're sitting in my shoes, is I've got to make choices and make trade-offs.  But at the end of the day, I only have one responsibility and that is to have it there when somebody throws the switch.  When we build a new home, it has to be connected, it has to be there.  We've got to be in a new business to maintain the quality of life. 

Having said that, let me focus just a little bit on energy efficiency because I want to be -- I want to leave you with a provocative thought.  And then we'll open it up for questions. 

I've been in this industry a long time.  I actually started my career as a consumer advocate in the '70s fighting rate increases to the utility companies.  I've come a long way.  (Laughter.)  I tell my friends in the consumer movement I'm doing more to protect consumers today than I ever did as an advocate with the decisions that I make.  They don't believe me.  (Laughter.) But I do believe that because I've thought about this issue from a lot of different perspectives.  And I want to kind of share with you how we ought to think about energy efficiency.  I do believe that there's been a chronic underinvestment in energy efficiency. 

As I look back over the many decades, we have not invested.  And we're -- I had an opportunity to see this in a broader way.  I was asked to co-chair the National Action Plan for Energy Efficiency.  It was sponsored by DOE and EPA and I co-chaired it with the chairman of NARUC, which is the organization that runs all the state commissions and commissioners.  And I had an opportunity to look at what the best practices were around the country in terms of regulatory regimes as well as what actual things were getting done.  And what was amazing is is that we do not have in place any state in this country -- and California comes as close as anybody but still they have miles to go before they sleep, in terms of getting it right -- is the right regulatory regime that really encourages energy efficiency, investments by utilities. 

And it got me thinking about it.  How can we change it?  In the past what we did is we would spend a lot of money in these programs educating people about the value of saving, conserving and using energy wisely.  And then we did studies of people that consume our product and what we found is is that their energy bill was not front-of-mind, like an Ipod or a BMW or some kind of current investment, it was back-of-mind.  It was not something that was really important to them because if they have two teenage kids, their cell phone bills are much higher than their power bill.  It's not something they wake up in the morning saying I -- I'm conserving today, unless it's a value that they have -- a personal value that they have.  And so it's very much back-of-mind.   And it represents a small part of the disposable income.  And the fact of the matter is they take power service for granted.  And I said to myself, well, shouldn't our challenge be for them to take energy efficiency products and services for granted and how do we get them to that place? 

Because we can't count on somebody that has something back-of-mind.  I can't spend enough money to move it to front-of-mind so they'll make an informed decision to use it wisely; I've got to come up with a regime that allows them to push it further back in mind so that they take it for granted.  And that's the counterintuitive fault here.  And so I said how -- how would we do that? 

And then I said, well maybe the answer is -- goes back to the very beginning of our industry -- I like to read history, understand how we got started -- but the way we got started in the early 1900s when we were building little power plants here and there around the country, before electrification had actually occurred.  And by the way, electrification, the National Academy of Engineers and one of my former directors, Neil Armstrong, which served on our board for over 20 years, headed that up at the end of the 20th century.  And the greatest engineering achievement of the 20th century was not computers; it was the electrification of America, because it transformed the world as we know it.  And thinking about how they created monopolies and -- and gave mandates to companies in certain geography to provide universal access to electricity.  And it's that idea that got me thinking that maybe what we really need to do is change the mission of utility companies in this country and the mission in the future should be to be the universal provider of energy-efficient products and services. 

So we get paid to create a Sav-A-Watt, reducing demand, in the same way we get paid to produce a megawatt.  So we see the marginal costs of a new generation every day.  Not many people, even if they had real-time metering, would pay attention to it very second, every minute, as we do.  We're in the best position to understand that marginal cost, to make those trade-offs, and make those investments.  The question is how do we become economically indifferent so we'll make money producing Sav-A-Watts in the same way we make money in producing megawatts.  And why would we be the one?

And then I thought, well, there's several reasons we should be the one.  First of all, you heard a conversation this morning about distribution and Vijay was talking about the smart grid.  I mean, we're at the very beginning of a revolution on how we use our grids.  With two-way communication, we're improving the efficiency of our transformers; we're looking at new meterage -- you heard John Bryson talk about new meter technology.  Our distribution system could be the backbone infrastructure for energy efficiency. 

Technology is the heart of energy efficiency going forward, but our distribution system will be the backbone.  We have trusted relationships with customers.  We know when we're providing energy efficiency the customer satisfaction levels go up, because they know we care about them.  We're not just taking them for granted by

providing power to them.   We have a lower cost of capital and longer payback periods than all our customers.  No residential customer has our cost-of-capital.  Most of the businesses, because of the size of our companies, still have our cost-of-capital.  So we can make investments -- where most businesses say, "We have to have payback in three to five years," we're used to making investments where we get paybacks over 20 and 30 years.  So all of a sudden, technologies that may not have made sense in a three- to five-year time frame might make sense in a 10- to 20-year time frame, and that allows us to get at greater production of Sav-A-Watts. 

The other thing is that we could change our investment. We make investments in generation and transmission and distributions.  Why couldn't we make investments in the homes of our customers or in the businesses of our customers, if it translated into them using less energy over time and making economic sense when compared to the incremental costs of new generation?  Because I think the most -- the lowest-cost, most energy-efficient power plant you ever build, with the lowest environmental footprint, is the power plant you don't build.  And I think that's a very important point.  And figuring out a way to incent and compensate companies to do that really allows us to go after it. 

So I would leave with you that -- and we're going to try in the five states that we serve, start to roll this idea out and try to sell the idea -- but the whole idea is we should get paid for producing Sav-A-Watts as we do megawatts, and my belief is you would see a dramatic increase in energy efficiency in this country.  And that's an area where we need to lead on also, because if you think about the 1.6 billion people, we ought to be doing the investments in technologies and all so when they want to hook up, they can hook up in a way that's more energy efficient, that can use better generation that makes sense.  They can have better systems that make sense.

So our challenge is the challenge of trying to take what I call the "fifth fuel" -- energy efficiency -- and turn the fifth fuel into a real competitor with nuclear and coal and gas and renewables.  Because if we could do that, that would put our country on the high ground.  In the same way we need to be on the high ground by passing regulations of carbon, we need to be on the high ground in leading in investment and energy efficiency in the future. 

Thank you all very much.


SEBASTIAN MALLABY:  Well, as you're getting miked, I will take advantage of my microphone monopoly, brief as it is.  Thank you very much.  There's a lot of stuff there to think about.  We're going to invite all of you to ask us questions in a minute; I'm just going to take my prerogative and get in there with a few first.

So let me just make sure I understand your Sav-A-Watt proposal.  So what you're saying is that people's desire to economize power is limited, because frankly it doesn't cost very much.  The cell phone bill costs most.

ROGERS:  Correct. 

MALLABY:  So therefore, the impetus for saving and conserving power has to come from somewhere else.  And people might say, well, isn't that what cap-and-trade is really about?  But ijs your proposal a sort of variant of cap and trade?  Is it something that you're proposing while we're waiting for cap-and-trade to become a reality?  How does it fit in there?

ROGERS:  One, it's something we can do while we wait, because the reality is, as we talked on the third panel, even if we passed legislation today and they used the same ready period for environmental legislation as they've historically used, it'd be five years before it went into place.  But there's a lot we can do in five years.  And particularly at the same time the smart grid is evolving, we need to be evolving the technologies that allow us to help our customers use energy more wisely -- or better than they've used it in the past.  And I think that's really the challenge.

Now, is it -- because here's the discipline on us.  I know what it costs to build a new coal plant or a new gas plant or a new nuclear plant.  What if I told you that I could deliver a Sav-A-Watt at 90 percent of that cost, and that was really my choice?  Then what I would do is I would go out, and if that was the rules of the game, I would go out and invest to get that Sav-A-Watt at that price and I would earn off that in the same way I would earn off of building a power plant.  I would be highly incented to reduce the use, because I get rewarded for coming up with ideas that create Sav-A-Watt.

MALLABY:  And the reward is paid to you by the state government, or --

ROGERS:  It's reflected in my rates, because today, if you take the average -- today our prices -- at averages, the way they do it in the regulated markets.  And so if they're at average any new plant t hat's dramatically over and it pulls up the average cost, so whether you build a new plant or a Sav-A-Watt, it would drive the price of electricity up, but the volume would come down and if the math is done right, the bill will be less, because the focus is not on the rate, it's on what the bill is.  And so if you can reduce usage by making investments and the bill is less, that makes economic sense, but it also make sense in another way.

When I build the most efficient coal plant, I still am going to have SOx, NOx and mercury emissions and CO2, because we haven't -- it's a long conversation about when will we really have carbon capture and storage in this country that makes economic sense.  And so as a consequence of a Sav-A-Watt, there's a value from not having those emissions into the economy -- I mean, into the air.  And so there is a value.  If you knew what the value of CO2 was and I could get 500 Sav-A-Watts versus 500 megawatts, the reality is there's a huge carbon footprint that's negated by getting the 500 Sav-A-Watts, which helps me hold my costs down because I don't have to look at either buying allowances for that new plant or any of the other sort of fallout from those incremental emissions.

MALLABY:  So would it be right to think of this as sort of one step beyond what we were hearing about California this morning.  In other words, the point about California was that the compensation for the utility was decoupled from the volume of electricity sold.  You're saying go beyond that, don't just not reward us for volume, but, you know, reward us for reducing volume through Sav-A-Watts.

ROGERS:  Yes, and you could either decouple or not, you could do it either way, but the reality is it's about turning loose the imagination and the ingenuity of people to come up with better ways. And that is if you can make money by really driving Sav-A-Watts, that could be highly motivating for a company to say, "We're going to get 500 Sav-A-Watts or 1,000 Sav-A-Watts," and the environmental impact is obvious because you're delaying building a new plant to serve the growing load.

MALLABY:  And what sort of political response are you getting to this idea?

ROGERS:  I think the idea has -- it's new, and I've tested it with a Wall Street analyst, because I want to make sure the investment community doesn't freak when they hear it -- (laughter) -- and they had -- that's a technical term, by the way.  (Laughter.)  And the notion is they basically said, "Might make sense, but show me."  And I've talked to a lot of regulators.  I have been involved in trying -- again, like any idea, it takes time to kind of roll it out.  And I'm of the school that believes that getting an idea on the table and having people debate it and talk about it is kind of the first step in the process of getting it adopted in the various states.  And so we're on that road, and within the next six weeks, in one of our jurisdictions, we're going to actually file for a proposal right along these lines.

MALLABY:  Okay.  I promise to go to the floor. So let's just start over here.  Just wait for the microphone, please.

QUESTIONER:  Jim Moody.  Thank you.  Is this working?  Yeah.

It seems to me the structure -- sort of the -- the structure of the problem is very similar to in building dams or highways in congested areas, namely serving the peak.  You have to build to the peak.

ROGERS:  Correct.

QUESTIONER:  And you've basically said that in different ways.  And you want to get the people's mind off -- you know, off -- put their mind on this issue.  Well, one of the old systems is called pricing, peak-load pricing.  It makes people think about, "Wait a minute.  Do I want to do my laundry at 9:00 p.m. or do I want to do it in the middle -- in the most congested part of the day?"  It's like when I drive downtown I want to pick a time of day that's not the most congested.  So peak-load pricing is a very powerful old system, but we seem to be allergic to it here in the United States.  A lot of people don't want to use it.  There's a feeling, well, we have to charge everyone the same price for the same thing, no matter when they do it, no matter how congested, and we do it with MRIs, we do it with 1 million things you could name.

But electricity is one area where it would really -- where the peak-load pricing has been shown to work, but I didn't hear it in your Sav-A-Watt announcement, which it is a form of Sav-A-Watt, because you don't have to build to the peak -- you spread the peak out; you don't have to build as much. 

ROGERS:  Well, here's what we found.  We found that it's so back-of-mind that even if you do the retrofit you need to have the meters and the information in the home, and that technology is just evolving and it's expensive.  Even if you did that, people are still focused on convenience and comfort, and because the cost is such a low part of the disposable income, nobody's going to wake themselves up at 3:00 in the morning -- to turn on the washer, or go out to the store to specially buy a timer that allows that to happen.  What I'm envisioning is something where I'm incented to go to every one of my over 4 million customers and every one of them's got a refrigerator, every one of them's got an air conditioner, I would be incented to put chips in their houses.  And then during that peak hour when the peak is going like this and all of a sudden goes like this at 3:00 or 4:00 in the afternoon, it comes down at 7:00 or 8:00 at night, I'd have the ability to cycle the air conditioning or turn the refrigerator off for an hour or an hour and a half, and when you can do it for 4 million customers, you're thinking about a couple of thousand megawatts of savings. 

QUESTIONER:  And also, businesses can economize.

ROGERS:  And businesses can.  We've actually done it with businesses. When the prices are high -- we used to have a thing called a quote in a co-option, where we paid you to stand ready with your business to shut your plant down.  And when the prices were really high, people would go, "No problem."  And they went through one summer of us doing to them three or four times and they'd go, "You can't pay me enough to do that."  I mean -- yeah, you can, but it's not in the current price. 

So what we found is a program that worked when the prices were reasonably high and they had limited experience with it, we could convince them to do it for the greater good.  But once they said, "I have to send my people home and it stops my production line," they said, "Not doing it."

QUESTIONER:  But there are some people in the market for whom it would be economic and you make it high enough, you get more and more people in that circle for whom it is economic.

ROGERS:  That's true, but I don't want to take my higher prices that high -- (chuckles) -- to make it economic.

I mean, the important point here is that we need more bang for the buck, and we tried to educate people to do the right thing, and a lot of people will do the right thing, and I think this generation of people are more focused on environmental issues as a value.  I think you see that more than maybe you did in the past.  But that's almost -- that's important, and yes that will catch up, but I'm thinking about speed-to-ball.  I'm thinking about what can I do the quickest to create the most energy-efficient customer base that I can, and this is an idea that allows me to accelerate.

QUESTIONER:  I want to analogize to the gasoline.  I lived in Italy where the gas and fuel was twice what it is here, and people did economize.  It got their attention; it began to be in their range of being really important.  They have smaller cars, less driving, smaller cars, more efficient cars.  The price system does work when it comes to automobile consumption -- or gas --

MALLABY:  I don't think you're really disagreeing.  I mean, the price response to consumers, that certainly exists; but the point Jim is making is that it's not constant.  You can increase the elasticity of response by giving the power company an incentive to go and put these chips in your air conditioner just so that you get topspin on their policy.  That's, I think, the point here.

ROGERS:  Well, and actually, I mean, I totally agree with you on the pricing.  I mean, I understand that.  What I'm really trying to do is think through a way of approaching this as something that is of value.  Electrification of America was a value, so we created a regulatory regime that allowed everybody to have access to electricity.  I think energy efficiency is a value, and that whether you're rich or poor, whether you're with a big company or little company, everybody should have access to the most efficient use of electricity they can have.  And the people that are hurt the most by rising prices are those that have fixed income and are poor.  This allows them to participate, because in the early part of the 20th century, the early people -- the first person that ever got hooked up to electricity in the home was J.P. Morgan in New York, okay?  He could afford it, plus he was promoting it. The fact of the matter is I think about all the people in this country that are on fixed income and even more with the baby boomers.  I mean, I'm a first-wave baby boomer, and -- that's at least what I tell myself -- (laughter) -- and so as a consequence, there could be more people on fixed income in the future.  And trying to get this to happen in real time I think is really critical.

MALLABY:  Let's get to our questions.  Reid Detchon had a question over here.

QUESTIONER:  Jim, one of the problems in the energy efficiency sector has been the so-called "new home" conundrum, where a builder of a new home is highly incented to keep it as cheap as possible, put in the cheapest, least energy-conserving materials.  And even the purchaser of a new home might anticipate living there for only a short period of time and might not want the higher-value appliances.  Do you see, in the scheme that you are envisioning here, where the utility might co-invest with the building to bring that up to, say, an EnergyStar standard and justify that with a longer pay-back period that's appropriate for a home and appropriate for a power plant?

ROGERS:  Absolutely. That's exactly what I envision.  When I say what we spend now in distribution, transmission and generation where we extend our investment into the businesses and the homes of our customers.  And, you know, one way to do it is with building standards and building codes, but that takes a long time and that's pretty contentious.  The other way to do it is co-invest, and then you're using kind of market approach to solving a problem that often is difficult to get done at the local level.

MALLABY:  Another question?  Okay, right here.  Right.

QUESTIONER:  Alan Wendt. There's one rather obvious area of energy consumption that I don't think we've touched on, and I say "obvious" because it affects the way people live and it doesn't seem to be related to the price mechanism, and that is, just to take one example, excessive use of air conditioning.  If you spend a summer in Washington, D.C. or probably any major city on the Eastern Seaboard, it is just unbelievable the way interiors -- government buildings, stores, private homes -- are cooled down to the point where they're colder in the summer than in the winter.  I have -- which to me is a sign of decadence.  (Laughter.)  I have had to wear a sweater working in the middle of the summer in U.S. government buildings.  And the price mechanism just doesn't seem to be able to work here.  How do we affect people's consumption habits?

ROGERS:  Well, see, that really kind of gets to sort of the -- a thought that underpins my proposition.  We've tried to do it with sort of the economics, we tried to do it with the value -- "We value this" -- and at the end of the day, I mean -- this cooling -- I lived nine years in Washington, lived in Houston, Texas, for four years, so I understand.  Understand?  (Laughter.)  I mean, when my wife would carry the coat that she takes to Colorado to go skiing into a restaurant -- maybe not quite that big, but close. 

But the problem is they try to -- the way the air conditioning is done, it's done to keep it at a certain level and they really never know the real ambient temperature in there because it's the number of people in there -- a lot of et cetera, et cetera, et cetera.   But no, I mean, the answer, I don't have an easy answer for that.  That's just the way it works.

QUESTIONER:  But think of the waste --

ROGERS:  I know.  I understand.  (Laughter.)

MALLABY:  Okay, let's have a question there.  The lady in the blue.

QUESTIONER:  Hello.  Marianne Lavelle from U.S. News and World Report.  Do you have a sense or a range of how much the rates would have to increase in your jurisdictions to fund this program, and will you be telling rate payers, well, your bill is going to stay level because of the energy efficiency, because you'll be using less, or -- a little more detail on how that, I'm sure, contentious part of the program would work.

ROGERS:  If I build a coal plant for 1,600 megawatts, it costs me $3 billion.  I can tell them exactly what the rate impact of that. The fact of the matter is it's hard for me to envision spending $3 billion on energy efficiency.  And -- I mean, I say that to you because we need to walk before we run on this.  There's a transition period, and the transition period is it'll take time to roll this out to every home.  So I can't guarantee customers day one that we'll have this device in. 

But one of the things that I envision is, as we start to implement it and measure it, and I think we're talking 50 (million dollars) to $100 million a year in any one jurisdiction, to start out, so those are really -- I mean, my capital budget is $3.5 billion a year.  I reinvest into my system over $10 billion over a three-year period.  I'm thinking, starting modestly, of 50 (million dollars) to 100 million (dollars) in each jurisdiction, investing.  And so these are really small dollars, relative to what I'm putting in.  And I don't know if people really appreciate -- because I don't want to do it so fast that it's uneconomic.  And it's like anything new; you need to have a transition period.  Once we get far enough in the transition period, let me give you another way to think about it.  Today -- and this really goes to your time-of-use-rate question, which was a good question -- is today to get green tariffs so they get all renewable or to get time-of-use, customers have to make a decision. They have to opt out. 

Well, what if I suggested that my standard service in the future will have all these energy efficiency bells and whistles?  So if you've got to work this energy efficiency service, you as a customer have to opt out.  That is a paradigm shift.  Now, to get to a place where you can -- provide that universally, it's going to take three to five years to be able to do all the type of investments you need to do.  But I can easily envision on that journey changing what becomes our standard service so that the energy efficiency service becomes the standard service and the service that we have today becomes "you have to elect out,"  because customers do need choices. 

MALLABY:  But the economics of this thing would be that you would say to a household, okay, we're spending X amount on making your household more energy efficient.  You are going to have that effectively added to your bill, but you'll also be using -- buying electricity from us, because you've had all this conservation stuff put in there. And so at the end of the day, you'll come out roughly neutral.  Is that -- that's the idea?

ROGERS:  That's -- that's the conceptual idea, but here's how it gets verified.  Because if I'm going to earn off of Sav-A-Watt, I've got to verify that the use has actually gone down that much.  And that's where the regulatory agency comes back in and verifies that that investment actually delivered that reduction.  So a key part to make this work, for people to have confidence in it, there's got to be way where -- because one summer you might not see it, but you might see it a lot the next summer or you might see it in two years, but over the life it's a pretty significant reduction.  You're not going to see it one-for-one at any given time just depending on what the weather conditions are, et cetera.  So we need away to be verified so consumers realize they're getting -- they're paying for something that they're getting.  But remember how I started the conversation.  I know what the marginal cost of letting that demand grow is, and I'm suggesting that I create something that's in a discount to that, and so the consumer's going to get a discount just by creating a Sav-A-Watt at the get-go, and forget the other environmental impacts.

MALLABY:  To me, that sort of business mystery here is that on -- either the consumer is going to end up paying you less or they're going to end up paying you more.  If they pay you more, the consumer's going to be mad at you.  If they pay you less, this doesn't work from your point of view.  I'm talking about aggregate payments, right?  So surely there has to be some kind of public subsidy in here to bridge that, to make this work.

ROGERS:  My judgment is they will pay me more on a per-unit basis, but they would have me even more on a per-unit basis if I'd built a plant to serve that growing load.  Because what happens is we socialize the cost.  I go out and hook up a new subdivision, it costs a lot more than what it costs to serve the existing ones, but those costs are rolled in an average basis. 

MALLABY:  But if you're measuring two world out into the future, one is where you build more megawatts; another one is where you build this mixture of Sav-A-Watts and megawatts.  In the second world you're saying that your total company revenue will be lower.

ROGERS:  Yes, it will.

MALLABY:  How can Wall Street live with that?  I mean, aren't these investors going to --

ROGERS:   My judgment is that the incentive for me is to take that Sav-A-Watt price -- and this is where you get real incentive to advance new technologies.  If I can bring it in below that Sav-A-Watt price that's negotiated with the regulator, that 90 percent of a marginal cost, then that's added return for me.  And so then I'm going to be motivated to get devices in every home as fast as I can, because that represents a spend of x and I know I get the most bang for my buck when I can pull all the air conditioners down, pull all the refrigerators down.  So I'm highly incented to try to bring the costs in below that Sav-A-Watt number.

MALLABY:  So your revenues go down but your profits go up, is what you're saying.


MALLABY:   I see.  Okay. 

Let's go over there.

QUESTIONER:  Andy Paterson with UBI, Jim.  Let's take your idea of the utility being the platform for energy devices, which is very progressive, and marry that with John Bryson's comments this morning about plug-in hybrids, which moves you into transportation efficiency.  When we talked to EPRI about this, they said the technology's coming but the liability issue is going to be the bottleneck.  In other words, you're providing a device into a home; it malfunctions, is it the automotive company that the lawyers go after?   Is it the utility, is it the device manufacturer?  And resolving the liability issue is going to affect design today.

ROGERS:   Well, I think that we'll solve the liability issue as we go forward with the devices that we're putting in the homes now.  So by the time we get there -- and by the way, I totally agree with John Bryson's view of plug-in hybrids. 

What I like about this approach to energy efficiency is it gives us -- by the time that comes on line, which is maybe a decade to a decade and a half off, by that time, if we're really accelerating investment in the smart grid, we will work through all those issues by the time that comes on.  So we will have a head start on how to operate the grid.  Because the one thing that's hard for people to envision is today our grid is an analog grid.  It's like a -- you know the old phones where you kind of dial the number?  Kind of remember that?  Or pick it up and say --

QUESTIONER:  (Off mike.)

ROGERS:  I grew up in Kentucky, so we had the phones you picked up and say, "Could you connect me to Billy Bob down the street?" -- you know, type of thing.  Well, maybe it was a little more advanced than that.  But my point is that we're moving an analog grid to a digital grid, and when we go digital our penalty to maintain reliability and do this will be enhanced dramatically.  And we're playing around with the technology now that's developed in Silicon Valley.  It's a little company called Dust, and Dust really has built these devices -- it's like the way -- they were developed, really, for the Army.  And the notion is that you throw these devices, you paint them, camouflage, you throw them around the campsite and they become an integrated grid because they communicate with each other, and they could tell if a person or an animal was coming into the campsite with their ability, this sensing capability in these disguised pebbles.  You take that Dust technology -- and we've already looked at it with our nuclear units -- we'll be able to put those sensors within our reactors and do a level of maintenance that we couldn't do before, because we'll see exactly what's going on within that reactor without having a person go into the reactor, which means taking the whole system down, et cetera.  So if you use that sensing technology within the homes and on our power lines, you can see how we could really accelerate our ability to sculpture energy delivery in a way that matches up to give people the most efficient use.

MALLABY:   Okay, there's a question over here.

QUESTIONER:  Chuck Weiss from Georgetown.  If your rates are regulated on new capacity costs more than existing capacity, why isn't it in your business interest to do this megawatt or Sav-A-Watt thing tomorrow, without any extra incentives?  You could always hire some private entity to verify energy savings by your customers.

ROGERS:  Because the way it is today, our rates only reflect -- I'm going to be really kind of candid here.  We make money by investing in our business.  We don't make money by selling more, and that's why the decoupling idea is somewhat appealing, because the reality is our rates are based on the number of kilowatt hours that we produce and the costs are spread over that amount. We still have an incentive to build power plants today because there's no regulatory regime that allows us to recover the cost of Sav-A-Watts.  We can't recover those costs in our rates, so we're not incented to spend the money to do it.  We're incented -- we make money by spending money.  The more we invest in our business, the more we make, all things equal. 

Now, here's an important point as a consumer advocate.  You can't blindly go do that and raise your rates, because it creates a political tension that makes it very difficult to run your business in a cost-effective way and to get the right returns.  So there's always a tension to keep your prices down in the regime.  But the short answer is you can't make money under the current regulatory regime by creating Sav-A-Watts.

QUESTIONER:  But you could avoid asking your public -- your utility commission, but you can, by investing in megawatts, avoid having to go to your regulatory commission and asking for a higher rate, which might also be in your interest.

ROGERS:  But -- it might be, but usually not because -- remember, we grow earnings by reinvesting in the business . 

QUESTIONER:  Sounds like a relatively modest cost to -- in your -- to change the regulatory regime, compared to other things you might do to incentivate.

ROGERS:  I agree, and I think this idea -- again, think about how the idea grew up.  It grows up under a fundamental predicate that we should allow all customers, regardless of whether they're rich or poor, big or small, to have access to the most modern, energy efficiency technologies so they can control their bills and control their cost of using electricity.  And that's the predicate for this idea. 

MALLABY:  Another question?  David Sandalow.

ROGERS:   I've done a great job of changing the subject on carbon, haven't I?  (Laughter.)

QUESTIONER:  How does a utility make money off of Sav-A-Watt in a deregulated environment?

ROGERS:  Well, it's actually happening.  There are companies today, there's a little company -- I can't remember the name of it now -- out of Boston that has created a software capability where they go in to like the Texas market and they have created through their software connections with different people that use electricity.  And they can create 150 megawatts in a deregulated market and then sell that to people who want to shave their peak, because usually on peak is when the prices really go up pretty dramatically.  So yes, it's been experimented with in deregulated markets.

The issue really is that we have a hybrid market in this country.  About half -- about 19 states are deregulated, and the remainder are regulated.  And what I propose, because four out of the five states we operate in is regulated, this is something that works in a regulated regime.  I think it can be adapted quite easily to a deregulated market.

MALLABY:  Any more questions?  I think you've shown so much stamina that you've exhausted the room.  (Laughter.)  Congratulations. 

ROGERS:  Thank you.








More on This Topic

Foreign Affairs Article

Upgrading the Grid

Author: Brian Warshay

The U.S. electrical grid has hardly changed since the 1880s, and its reliability, effectiveness, and affordability are increasingly being...