Energy People: Jim Rogers

PUF's Steve Mitnick: Could you cite one or two of the greatest challenges you've had, that you had to meet head-on and try to overcome?

Jim Rogers: I think there were two major challenges that I faced in my time as CEO. They were the challenges around negotiating and then seeking approval of mergers in the electricity sector and responding to new environmental regulations.

If someone looks back at my career, they would see a merger threat running through it all. I started in 1988 with a company [Public Service of Indiana] with a market cap of about a billion dollars, plus or minus, on the edge of bankruptcy. Four years later, we combined with Cincinnati Gas and Electric, and created Cinergy.

But there was a hostile takeover attempt of PSI before the deal could close.

Some people say it's one of the nastiest corporate battles of the 1990's. We won the shareholder vote on the hostile proposal by a vote of 2 to 1 on August 23, 1993.

The merger was announced in 1992. But didn't close for another two and a half years because of the hostile.

The second deal was with Duke Energy, which effectively acquired Cinergy in 2005. That regulatory approval was quite fast. It was within a year. Then, in 2012, we announced the combination with acquisition of Progress Energy.

As you think about those three distinct deals as a timeline, from 1992 to today, Duke is now made up of five companies that existed in 1992 [Public Service of Indiana, Cincinnati Gas and Electric, Duke Energy, Carolina Power and Light, and Florida Progress, the latter two earlier merging to become parts of Progress Energy].

There are three difficult tasks in doing a successful combination.

One is to negotiate it. I can tell you a lot of stories of attempts that failed with different parties in the industry.

The second, maybe the most difficult task, is actually getting the approval at both the state and federal levels.  

And lastly, the really hard work of combining the companies. It's getting the cost savings as well as the revenue enhancements associated with the transaction. It is keeping the most talented people.

PUF's Steve Mitnick: Could you articulate how you were able to do these, and quite successfully?

Jim Rogers: First, like many things in life, it's not just one person doing it. It takes commitments by the people of both companies. Second, there was the serendipity of good timing.

Prior to when we did the merger in 1992, there had been no mergers in the electricity sector, except for the acquisition of really troubled companies. Those mergers were really very low-value transactions.

Over time, the Energy Policy Act of 1992 created a robust competitive marketplace. In 1992, there were over one hundred investors-owned utilities in the U.S. Today, there's less than fifty.

The CG&E and PSI combination was on the first wave. The good fortune for us, from a timing standpoint, is that we'd been on the first wave, and some of the subsequent waves of combinations. And we were able to get proposed transactions across the goal line.

My only point is, I personally believed at the beginning, and I believe today, that given the changes that have occurred and are coming in the future, combining companies and creating scale in this industry is necessary.

Larger companies are well-positioned to reinvent themselves in the future, as new technologies and new policies are implemented in the U.S.

PUF's Steve Mitnick: You were able to see where companies should and could being combined?

Jim Rogers: I'm going to say this in a careful way. Two out of the three times, we (PSI and Cinergy) were effectively acquired.

The subtlety of that is not well known. We were paid double digit premiums in both of the first two transactions.

I used to laughingly say, "I don't give premiums, I get premiums."

Yet, a combined management team emerged each time. And the good fortune for me is, I ended up as the CEO. It's not something that I've ever talked much about. I don't really like to.

I believe two companies together can create more value. We were able to work with people in other companies to make that happen.

I believe what differentiates my career from many others is being able to successfully make that happen three times.

PUF's Steve Mitnick: These transactions paid off hugely for consumers? Wouldn't you make that case?

Jim Rogers: I would make the case, not only in lower prices for consumers, significantly lower prices. But also make it from an environmental standpoint.

You think about starting with a company like Public Service of Indiana, the ninety-five percent of PSI's power production came from coal.

Today for the combined company, Duke Energy, only twenty-nine percent of its power production comes from coal. There's been a significant change in the mix of generation. It's better positioned for a low carbon world in the future. This is good news for both customers and investors.

I'm positive I didn't understand the environmental benefit of the combinations when I started. That's a little bit of twenty-twenty hindsight - post-hoc rationalization.

But the ability to combine ultimately with Duke Energy, with a huge nuclear portfolio, and with Progress Energy with more nuclear and natural gas, that's really changed the overall portfolio of someone who owns a share of Duke's stock. Or once owned Cinergy. Or once owned Public Service of Indiana.

PUF's Steve Mitnick: Could you touch on that important period when climate change legislation was considered by the Congress and your role in that?

Jim Rogers: The opportunity that presented itself during that period, like many things, was the consequence of focusing on environmental issues in a much earlier day. For instance, as I understand it, I was the only CEO in the electricity sector to support the Clean Air Act Amendments of 1990. It provided for a cap-and-trade regime.

I also knew, in complying with sulfur dioxide regulations, that it would translate into more investments in the businesses. This ultimately translates into greater earnings and cash flow over time, as well as cleaner air.

I saw the economic advantage, as well as corporate reputation advantage, of being a leader on environmental issues. I was the chairman of the environmental policy committee of the Edison Electric Institute for some five years, back in 1999 to 2004.

Remember, I started the world in a small company. If you think about utility companies size-wise, they're in three buckets. There's the small ones, mid-sized, and big ones.

Then, during the time I was chairing the environmental policy committee, for five years, I was at a mid-sized company. When I ended up being chairman of Edison Electric Institute, my company - Duke - was in the large bucket. 

Often, it's harder for CEOs of small-sized and mid-sized companies to become chairman. I think of all the work I did on environmental issues, primarily the multi-pollutant proposed legislation - sulfur dioxide, nitrogen oxides, mercury.

Those who were in the leadership position at the Edison Electric Institute reached down and said: Okay, maybe it wouldn't be a bad thing to get this guy from a mid-sized company in the Midwest to be the chairman of EEI. Certainly, environmental issues are growing in importance. He seems passionate about it.

This is what I believe they were thinking. Or, at least, what they said to me.

In 2005, we dedicated our entire annual report at Cinergy, before the merger with Duke Energy, to finding a way to be prepared if we had to move into a low-carbon world.

We actually talked about, what are the sign posts that we'll see? What sign posts will indicate there's going to be regulation of carbon? It's wasn't clear at that time in history.

Then, when the time came, we became founding members of USCAP [United States Climate Action Partnership]. Then, I became the chairman of EEI. The timing of becoming the chairman of EEI and a member of USCAP was a tricky period.

We operated under Chatham House Rule in putting together USCAP's blueprint. [When a meeting is held under the Chatham House Rule, participants are free to use the information received, but neither the identity nor affiliation of speakers and participants may be revealed. Also, the negotiating parties agree to meet confidentially.]

Contemporaneously, with the final negotiations of the blueprint, we had our January meeting of EEI CEOs. And I did something that had never happened before.

On the issue of carbon legislation, I went around the room to get the CEOs of small companies, mid-sized, and large companies to go on the record as to what they think about this carbon issue.

What should we do with it? What position should EEI take? The meeting ran over by more than an hour.

I really couldn't share with anybody that I was working on this blueprint with USCAP. Then the blueprint was issued.

Subsequently, several of the CEOs at EEI sought to remove me as chairman of EEI. Because they thought I misled people by pushing forward to build a consensus at EEI on carbon while at the same time working with USCAP.

At the end of the day, EEI didn't ask me to step down. We issued principles in support of climate change legislation, which ultimately became the position of EEI. And legislation passed the House of Representatives.

PUF's Steve Mitnick: But then climate change legislation stalled?

Jim Rogers: It could have passed in the Senate, but the White House was MIA. Because they had just passed health care. They weren't prepared for another major legislative push. There is a lot you can read into the fact that they took a pass.

Also, there were seventeen moderate Democrats from states where more than fifty percent of power production came from coal. These Senators and Majority Leader [Harry] Reid were reluctant to act on climate change legislation at that time. You had both a Democratic Senate and administration not pushing for passage. 

We should have resolved this issue then. We could have resolved it. But the Democrats said no.

PUF's Steve Mitnick:Another take-away, as we have seen many times in history, the Edison Electric Institute chairman can have a big impact. This showed it. Almost moved the nation there, addressing climate change. It came close.

Jim Rogers: It came so close. It was good for EEI to be leading on this issue. Actually, the great fact that I love is that between 2005 and 2015, with no price on carbon, the industry has reduced carbon emissions twenty-one percent.

Duke Energy reduced emissions twenty-eight percent. Southern Company reduced twenty-six percent. Both companies have a large percentage of coal generation. So, they had more to reduce.

My point is, the industry understands the challenge. We are the most capital intensive industry in the U.S. We are a very long cycle business. But our industry has gone to work in solving this problem.

I think that is a real tribute to the industry; it is well-positioned for the future with much work still to do. The power industry was once the largest emitter of carbon. Today, the transport sector is the largest emitter in the United States.

PUF's Steve Mitnick: The industry is criticized a lot. We are, some say, completely changing our business and regulatory model.

Jim Rogers: When I entered the industry in 1988, it was a vertically-integrated regulated business. Today, we have a hybrid configuration. Nineteen states passed legislation and are now in competitive markets. The remainder are vertically-integrated.

There has been an erosion of the industry's generation monopoly. It has been further eroded with renewable portfolio standards, which dictate in thirty states including the District of Columbia the purchase of renewable generation.

The generation monopoly has been eroded in the majority of states. Along the way there has also been an erosion of the transmission monopoly, but not completely.

In two-thirds of the states, the utilities are in regional transmission organizations, where control over transmission and the building of transmission is by them. So, that has eroded the monopoly with respect to transmission.

Then lastly, you have the New York REV. They are starting to redefine the regulation of distribution. It seems to be a natural monopoly. It may well lead to the erosion of the distribution monopoly. Further complicated by net metering, solar on the roof, etc. 

So, you have seen this continuous erosion of generation, transmission and distribution in the power sector. What you have today is this very complex mess. Some generation is regulated, while other generation is not. Some transmission is in regional transmission organizations, while other transmission is not.

The regulation of distribution is starting to change and states are acting differently on the net metering. My only point here is, there is not one model today. Because you are starting with a complex set of models, there are a number of ways it can go in the future.

Will we all come together down the road with one model for the industry? I don't see that happening given where we are today, and in the context of where we started in 1988.

PUF's Steve Mitnick:I notice your choice of words. You use the word erosion. Many people consider this forward progress. Using the word erosion suggests that there are also complications, risks and consequences of changes?

Jim Rogers: As a former CEO, it's easy to speak in blunt terms. I speak from the perspective of someone who has operated a regulated monopoly in generation, transmission and distribution, as well as assets in competitive markets.

There is no convincing proof yet that, over time, the competitive model delivers lower cost and more reliable service for consumers than the vertically-integrated regulated model. There were studies showing the affordability differences based on the price of gas by Severin Borenstein [Professor at Haas School of Business, University of California - Berkeley].

I think at the end of the two studies by Professor Borenstein, he said the main driver was gas prices. When he did the first study, the price of natural gas was high and there was more gas generation in competitive markets. It was clear that the vertically-integrated regulated company was doing better for consumers at that time.

The second time he did his study, the price of natural gas was low. It appeared the prices for consumers were lower in the competitive market at that time than the regulated market.

The single factor driving that difference was gas prices. Again, there was more gas generation in the competitive market than the regulated market.

I think much has changed. I know Duke Energy has plans to shut down some ninety coal plants and add new natural gas generation. Some of this change has already occurred.

The primary driver of both Duke Energy and Southern Company, causing a dramatic drop in carbon dioxide emissions, is just simply switching from coal to gas.

I believe that by 2050 virtually every power plant in the country will be retired and replaced except hydro. Of course, this depends on whether the licenses of nuclear power plants are changed from sixty to eighty years. If you had to replace all this generation, the sooner we start doing it the better for consumers and investors.

If you look across the country, it is the utilities that are vertically-integrated and regulated that are building nuclear. Take Southern Company building a nuclear plant. Take South Carolina Gas and Electric, they are building a nuclear plant. Most of this is happening under the regulated model. 

Look at all the changes to gas from coal. That is not happening in the competitive markets. But it is happening in the regulated markets.

To me, the pace of modernizing is another measure of who is doing a good job for consumers in preparing for the future.

PUF's Steve Mitnick:The drive to change seems to be based on a fervor to make power production nearly carbon free, and it is presumed that can only happen through radical changes.

Jim Rogers: I'm not sure radical changes to the regulatory model are needed to move to carbon-free production of electricity. The number two solar market in the country today is North Carolina. It is a vertically-integrated regulated market. You don't have to be in a competitive market to embrace low carbon ways to generate electricity.

NextEra Energy leads the country in wind generation. Duke Energy is on the way. [Duke Energy CEO] Lynn Good recently announced they will have eight thousand megawatts of renewable generating capacity by 2020. Southern Company is buying and building renewables.

Those three companies I just mentioned, NextEra, Duke and Southern, are all vertically-integrated regulated.

One other company driving renewables is MidAmerican Energy. It's also vertically-integrated regulated in every state it operates in.

PUF's Steve Mitnick:You were extraordinary in being a voice for the industry. You communicated a view that was progressive, and embraced by a lot of people. What would you say to our industry today to best make these points?

Jim Rogers: We need to be forward thinking. We need to describe the grid as indispensable. I believe it will continue to be indispensable in the future.

Think of it as a battery. It is continuously charging and discharging electricity twenty-four-seven. And, we are going to transform it from analog to digital grid.

We are going to be able to facilitate time-of-use rates; solar on the roof; bi-direction flow of electricity, and renewables.

We are going to lead in facilitating new technologies on the indispensable grid. I think that is a powerful message. 

I did research on storage technology. I actually believe most storage will be deployed within the grid. It will create a more resilient grid. The grid will be better able to smooth out variable sources of power such as wind and solar.

A way to think about it is, these storage technologies will plug into the largest storage capability in the world. The grid. I have not talked about it this way very much. But this concept of the grid as a battery is just a great analogy to use.

If we focus our conversation around that, then whatever we do in building generation or building transmission is all in support of this indispensable grid.

So, utilities will be a leader in the deployment of technologies - back to our roots. They will convert the analog grid of the twentieth century to a digital grid in the twentieth-first century. This new grid should facilitate all the coming new technologies.