Keeping it real

By Natalie Brandweiner, Deputy Editor

As CEO of America’s largest electricity generator, Michael Morris takes a pragmatic approach to building our renewable energy future.

“Today’s economic recession/depression is nothing compared to where we’d be if we don’t have energy to fuel the massive productivity of the world”
-Michael Morris

According to recent forecasts, the US energy grid will be adding 20 percent more users in the next 10 years. With its 39,000 miles of territory, American Electric Power will have a major role to play, and AEP CEO Michael Morris believes the grid to currently be in a state to handle these demands. He notes the mistakes made by previous energy growth forecasts, and the likelihood that those being made now have just as much potential for inaccuracy. "Whether they're wrong on the high side or wrong on the low side is important, but if they miss it by a small amount, the grid will be fine," he says.

"There are some very important subsets, though, to what we need to do. When we had the 2003 outage, a lot of people said we had a Third World grid. That just isn't accurate. What we have is a very bifurcated grid. It was not built regionally, it was built very locally as each utility served their own needs, and ultimately over time we have knitted that together.

"The American Electric Power 765 backbone grid serves 10 percent of all the energy that flows through the Eastern Interconnect, which is everything east of the Rocky Mountain region. American Electric Power's transmission grid also handles about 10 percent of all the electricity that flows across Texas, so we will be a major player, no matter how this unfolds. Therefore, it's very important to our customers, very important to the states we serve and very important to our shareholders because we see it as a real potential growth opportunity in an earning sense," Morris explains.

However, the question as to whether the grid should be regulated at federal or state level is no longer the primary issue. During the 1930s the interstate gas companies were forced to abide by federal regulation while the electric companies, under the Federal Power Act, chose to be continually regulated by the states. This was then hard to change because of the footprint already established within the utility industry, says Morris.

"Today if you look at energy consumption and the ability of technology to allow energy to flow over great distances without as much loss, federal regulation is essential," he explains. "And not only federal regulation but ultimately federal allocation of the cost, because what we do today is spend an inordinate amount of time arguing over who should pay.

"The benefit of an interstate electric transmission grid will inure to the benefit of everyone who lives in the country, so why shouldn't you spread it across the entirety of the gigawatt hours that the system is able to handle? If you do that and you have federal control over it, you'll see a tremendous amount of transmission capacity added to the system, which will bring renewables into play and also change the way that we build power production facilities.

"You take a region of the country where you think you may need four or five stations to be built. If the grid were truly interconnected, you might only need to build two or three of those stations. Today a new clean coal plant or a new nuclear station may cost as much as $7 billion. Build three of them instead of five and you've saved the US economy a tremendous amount of money. So, yes, it should be federally regulated."

New infrastructure
Understanding the grid and how to make it a more efficient tool for both the utilities and their customers seems to be the missing link in terms of transmission and distribution. Morris notes that despite an abundance of wind in certain areas of the US, because very few people live in those areas, this resource is not used as effectively as it could be. The most logical conclusion in light of the current recession, and one reiterated across the industry, would be to rebuild the infrastructure - creating jobs and simultaneously reorganizing power transmission and distribution.

Morris notes that this issue receives no federal oversight control or cost allocation decisions, and as a result is being swept under the administrative carpet. "We always use it as a poster child - and it's a bit out of date only because it was in a different era, a different timeline - but the last line that our company built, which was about 100 miles long from West Virginia into Virginia, took 18 years from the time we originally developed the need and the time that we actually energized the line. It was 16 and a half years to get the permits and 18 months to build the line," he says.

The NIMBY attitude adopted by so many Americans is an added challenge to those already mounting against renewable growth. "There is an attitude in the country of 'nothing in my backyard'," says Morris. "We all want energy. We want all of it that we can get. We want it cheap and we want it clean, and we want no opportunity to see where it came from. We hear, 'I don't want to see the plant, the transformers, the transmission or the substations. I just want it to appear magically.'

"That's not the way it works. The wall socket is really an intriguing piece of equipment -behind it are trillions of dollars of equipment across the world that make it work, but people don't want to see it. That's part of the problem," he says.

Morris fully endorses the restructuring of the current generation and transmission system and advocates the benefits it can provide. Surely such an overhaul and those jobs created would also provide federal benefits, helping President Obama reach his self-set target of creating five million new green collar jobs. "If we're ultimately going to make the country greener and less dependent on fossil-based fuels, it's essential. Federal legislative control and cost allocation authority will take down the barriers that are holding back the capital investment needed," he adds.

He notes the current activities of Senator Bingaman and the work he is currently undertaking with one of the principal committees in the Senate as a move towards this, describing it as, "A pushback from the Republicans, oddly enough.

"It's a states' rights issue versus federal government intervention. It's the cost allocation. Why would somebody in New Jersey want to pay for a transmission line built in North Dakota to bring wind to the Twin Cities? That's no different from asking why would someone in Columbus want to pay for a bridge spanning Tampa Bay in Florida?  But that's the way the federal policy has always worked.

"Governor Pataki has been helping us on this issue, and he's got two great analogies that are absolutely irrefutable. At the turn of the 20^th century, De Witt Clinton, the mayor of New York City, suggested that they fund the Erie Canal. He had no idea it would make New York the financial capital of the world for decades, and it has.

"Dwight Eisenhower, when he was President, for different reasons believed very strongly in putting together an interstate highway system. He had no idea it would make California the eighth largest economy in the world, but it did. So the point here is if we built the electric grid in the same way we built the interstate highway system, we would build out a technology-enhanced greener footprint that is a less carbon intensive, less costly undertaking for the country, which would allow us to continue to have technological advantages over all the countries that we compete against."

Shareholder growth
Addressing AEP growth at a recent shareholder meeting, Michael Morris said that actions taken in late 2008 and early 2009 were aimed at assuring the company's stability in these weak economic conditions and have it positioned to resume growth when the economy recovers. BP CEO Tony Hayward recently faced the task of publicly denying that the company had turned its back on renewables, as it reported a loss of 53 percent in second quarter profits. Renewable energy is not a fast ensurer of ROI, and so how can Morris be so sure that his investments are sturdy?

"Well, there's a lot of credit here to the finance committee of the board of directors as well as our Chief Financial Officer and those inside of the finance group that we were early to move to take down lines of credit that we had negotiated back in the 2005/2006 timeline," he replies. "We were fearful. We are an A2P2 credit rated utility as it pertains to commercial paper. Companies like ours and other utilities around the United States depend substantially on commercial paper to fund the day-to-day operations of a business for paycheck, to pay for coal as it's delivered, to pay the transporters, their bills as they send them to us, the entire business.

"Worried that that might not sustain through an extended credit crunch if it came, we took down those lines of credit. And what was predicted happen did. A2P2 commercial paper was unavailable toward the latter part of the fourth quarter of 2008 and totally unavailable in the first half of Q1 2009. That's beginning to ease some now, but that gave us some financial flexibility. 

"We then moved quickly into the equity markets in Q1 2009 to take advantage of what we saw as an opportunity to put additional equity into the system, help to balance out the debt-equity ratio in our balance sheet and support more strongly the notion that our ratings from the three principal rating agencies are not only right but sustainable now and into the near-term future.

"As many people know from our earnings call and updates, we've cut our capital budget to $1.8 billion for 2010. If times were different, we would have that capital investment up in the $2.5 billion to $3 billion range because that's the kind of money that needs to be spent on the system to make sure that we continue to provide reliable, cost-effective power to our customers," he asserts.

Morris admits there was an internal focus on cost savings, but not at the expense of compromising technological innovation. He gives as an example the Turk coal-fired plant that the company is currently building in Arkansas, describing it as, "ultra super-critical, higher temperatures, higher pressures, less carbon footprint than any coal-fired power plant in the United States, and in the entire Western Hemisphere - a technological breakthrough that no other utility here in the United States has done."

He compares managing his Fortune-ranked 196 company and the organization of his staff through the current economic downturn to the running of a general household. "You all have an economy that you run. It's called your household. Ours is no different than your household.  It's just a few more zeros," says Morris.

"I'm sure that every one of our employees has throttled back some vacation planning or new car purchases or some of those things, probably saving more than they did historically. All of those things, paying down credit cards more rapidly than they did before, making sure their mortgage is in good shape, renegotiating it to lower the cost if they can. That honest conversation is essential. The trust and confidence that I hope the men and women of this company have in me and the leadership team - and I get plenty of indication that it's there - has a lot to do with us being honest and frank

"In the latter part of the third quarter last year, early end of fourth quarter, we told everybody no salary increases in 2009, the first utility to make that statement, and around 70 percent of corporate America came to that same conclusion. I received enough emails back from the folks in this company that led me to believe they understood that. Was anybody happy, me included? No, of course not. Everyone thinks every year you ought to make more money, but the truth is that saved us a tremendous amount of revenue going forward. The 2008 plan did pay off, and we were honest about it, and we calculated the incentive compensation that everyone earned and everyone got it.

"There are 21,640 men and women who have dedicated their lives to keeping the lights on in the 11 states that we do business. They're bright people. They want to be told the truth, and that's what we do," he explains.

Investment
A conservative approach, while it may not be the tactic that quickens the heart of a company's shareholders, often ensures that solid foundations are built. Maintaining that balance between risk and reward is something Morris has adequately achieved. He believes that those who invest in regulated electric utilities ought to have a relatively conservative profile themselves. He notes that today, with no growth in the share price, investment in AEP can yield around 6.1 percent per year; if that dividend is then reinvested, it's a multiple of that, which he describes as being a "pretty good rate of return." Comparisons to equally conservative investments in banking money market funds is likely to yield 1.5 percent per year.

"We're a relatively risk-averse organization," says Morris. "So as I reach out to the shareholders; I'd love to have more individual owners because 6.1 percent yield on an investment is pretty good, and that's the dividend. You can either take the checks and use them for your own purposes or you can reinvest them and get a multiplying effect of that 6.1 percent yield, and that's with no share price growth.

"The share price will grow over time. There's not question about that. The earnings will grow. The multiples for utility will come back to a more normal range; they're very depressed right now, but that dividend yield's pretty attractive. If you're a great, big institutional investor and you want to get in or get out with a lot of growth, don't invest with us. This isn't some end of the rainbow massive $10 move in three or four days that you can take advantage of. That's not what regulated utilities are about."

Morris was recently quoted as saying of the energy mix, "There is an issue here that is larger than many of us think. There are answers, but the cost of energy is going to go up. I hate it when I hear Democrats and Republicans saying we need wind, we need solar, we need nuclear, and costs will come down. The politicians think it is going to be free. It isn't." It's not a comfortable message for these times of increased focus on the benefits of renewables.

He explains his viewpoint as being based on the transparency between AEP and the communication between their employees. "The American people are bright, and all you need to do is tell them the truth. Politicians on both sides of the aisle - at the local level, at the state level, at the federal level - almost everywhere I bump into politicians, they always want to sell happy dust, the whole notion that we can do this without any pain. It's like the commercials on TV: 'You can lose 30 pounds and eat all the chocolate cake you like.' Wouldn't you love to believe that? But you know it's not true."

He notes the Energy Information Administration and the data they release as being "typically wrong." Statistics such as 'Wind is 15 cents a kilowatt hour; biomass is 12 cents a kilowatt hour; a well-run fossil plant with all of the paraphernalia, even with carbon capture, is approximately six or seven cents a kilowatt hour.' As the expenses of functioning the way we have been continue to increase, Morris emphasizes that the American people need to become more aware of this, need to be given a more honest message.

"My average customer still pays $70, maybe $80 a month. If that bill goes up by $8 or $16 a month, for many of them $80 or $96 is tolerable. But for many of them it isn't, and those who are really, really tight on a budget - retired folks, older folks, people who today are unemployed - they need to know that you're going to have to plan for these things as you go forward. Honesty rings well in the ear of Americans, no different than it does in the employees of American Electric Power.

Carbon capture
Ever the technologist, Morris' solution has been to embrace renewables, but to do so with realistic and viable methods. Coal, one of AEP's major energy sources, accounts for over 50 percent of this nation's electricity and over 32 percent of its carbon emissions.

To combat the problem of the utility's emissions, AEP's Mountaineer Carbon Capture and Storage Project, which comes online later on in the year, is built to remove between 100,000 and 300,000 tons of CO₂, a significant amount but still less than four percent of the plant's total annual emissions. Morris will need all of his expertise to manage the transition period when the technology is almost there, but not quite.

"That's the other side of the honest equation of, again, I want to lose weight, but I still want to eat my chocolate cake. The fact of the matter is we're improving the technology. This is so different from the Clean Air Act. In the 1980s and 1990s we all knew how to capture sulphur, we all knew how to capture nitrous oxides. We knew the technology was out there, but it hadn't been tested.

"We all want to do this. I don't think there's a utility in the United States that doesn't - and, again, I interface with the world utilities frequently - most of us want do it. The technology is just beginning to get laid out and beginning to be scaled up. Again, we think at AEP it's essential for our customers and for our shareholders, because we're the largest coal burner in the United States, that we push that technology, and we are.

"However, you wouldn't want, nor would you expect, us to spend $1 billion, maybe even $1.2 billion, to retrofit the entirety of the station to find out after that we never did enough advancement of the technology. This is too big; it doesn't work. So our plan is to do the small step this September and be in operation. Everything's being built: the wells have been drilled, the pipes have been laid, and the capture technology is being constructed even as I sit here. We hope by 2011, 2012 we'll upscale that to commercial size, 1300 megawatts, at Mountaineer. That means I need four of the commercially available technologies deployed at that station.

"We believe it'll be shovel-ready, in today's phraseology, in 2015 or so and deployable, not only for our system but other systems. And again, equally important, employable around the world. If we as a people don't retrofit the current stations that supply - China's 70 percent coal, India's 64 percent coal, Russia's 60 percent coal - we need to retrofit that existing fleet or the lights are going to go out and the economy goes down all over the world. Believe me, today's economic recession/depression is nothing compared to where we'd be if we don't have energy to fuel the massive productivity of the world," he states.

Some environmental think tanks coal-burning utilities of enagain in very high levels of PR around clean cola, say that there is in fact no investment to back up the carbon emission promises. Morris says that while that may be true of some companies, is is not true of AEP. The Mountaineer Project has a price tag of approximately $100 million, which the company is deeply invested in, with its ultimate expansion being in the order of $400 million. "We're working with our checkbook rather than with our mouth," says Morris.

AEP is developing the technology used at Mountaineer with Alstom, the largest French manufacturing engineering firm. Morris notes that the technology is proprietary to Alstom. "The piece that will be important to us is what's called the parasitic impact. In the early go, everyone thought that there would be as much as a 20 percent energy requirement to run the machine. So if I've got a 1000-megawatt plant, now I've got an 800-megawatt plant. We think we can get that number down with things that we'll do on our side of the equation, and of course, that will be our intellectual property," says Morris.

Realistic goals
Despite these technological advancements, utilities may be unable to keep up with the demands imposed upon them by the federal carbon emissions targets. As public awareness of climate change continues to grow, it is expected that people and politicians will want instant change on carbon reduction; but do these perceptions need to be reset in terms of realistic timelines and procedures?

"The current plan is that we'll begin to make some serious reductions by 2020," Morris says. "Right now the plan calls for reductions that technologically won't be achievable. The latest work out of the house has us reducing by 17 percent by 2020 rather than the 20 percent, which was the original plan, so we're making progress."

Morris explains a more realistic number to be somewhere in the region of between 10 and 15 percent. "I'm a big believer in the men and women of AEP. When we said that we would begin the build-out of a lot of clean air things and have them done in three or four years, everyone said, 'I don't know how we'll do that, Mike,' but we did it, so I love visionary goals, but I like them to be realistic rather than just political phrases that get you a big buzz and then nothing happens.

"If you look at Kyoto, it's a perfect example. The entire world supposedly signed on to Kyoto. As you know, we and Australia and a couple of other countries, for obvious reasons, said, 'Wait a second. There are only two or three nations out of the entire world that will hit their 2012 requirement.' So great political phrases are always tainted by political reality.

"California is a great example. In 2010 California was supposed to be free of internal combustion engines on laws that were passed back in the 1980s and 1990s. Last time I was there, there were a lot of internal combustion engines on those freeways. Far too many, as a matter of fact."

AEP is also exploring the avenue of cleaner and more independent energy as a partner in The Picken's Plan - the alternative energy plan put forward by well-known businessman T. Boone Pickens, which includes the establishment of an extra high voltage transmission superhighway. The plan would also short-term and mid-term benefits by increasing the number of green collar workers. It is, however, being met with some resistance, even from those who share its long-term aims.

"There's nobody better to win the hearts and minds of the people of this country than Boone Pickens," laughs Morris. "I've known him for a long, long time, and he truly is an iconic American. He's a firm believer in the creativity of the men and women of this country, and he's lived that life.

"He started out as a geologist and created Mesa Petroleum and turned it into a real juggernaut and them moved on to help restructure corporate America where he thought it was headed in the wrong direction, particularly in the energy development business, He says it simply, 'Either you're with me or against me.' If you're against him, that means you're for foreign oil, and if you're with him, that means you're for domestic production of natural gas and oil.

"His theory is quite simply this: if we don't do something about transportation fuel in a competitive sense, then we, as a nation, will continue to be an importer from countries that don't think much of us; in fact, countries that would just as soon see many of us not around anymore if they had a chance to do that. His statement is very simply that. We're out joining him everywhere that we can: we had a public forum recently where we had hundreds of people at a town hall meeting here, and we played off of each other and did well, and we continue to do that.

Morris points out that Pickens has put a lot of his personal money into an advertising campaign promoting the use of natural gas in big vehicles and putting plug-in electric hybrids in day-to-day travel business. "Next year Nissan will have a viable SUV in this country that you'll be able to plug in. Colleagues of mine at Northeast Utilities are already working on building plug-in stations at different locations throughout part of their service territory. We'll start doing those kinds of things at American Electric Power as well.

"Since the first embargo of 1973, this country has said we need to be energy-independent. If we don't do something about transportation fuels, we'll never be energy-independent other than going back to foot pedal and bicycle pedal and horse transportation, which clearly isn't going to happen. So we're big believers in it. The other piece of it that works for us is if you're going to have plug-in electrics and you're going to have an electric grid that's able to handle that on a national basis, again, you go back to federal regulation and federal cost allocation."

Legacy
Michael Morris has been involved in the utilities industry since the 1970s and has held the position of CEO not only at AEP but also at Northeast Utilities System and Consumers Energy, and has witnessed some of the industry's most innovative moments, with the latest round of innovation emerging with Obama's Plan for America. However, his involvement in the industry is coming to an end, and for many he will be known for his work behind the scenes, leading up the future structural reform.

"My timeline will be up in 2011, and that's pretty sad because, quite honestly, there's no better time to be in this business. I've seen lots of ups and downs, lots of challenges, but we're there. I had a chance to do what we call the University Listening Tour throughout much of 2008, and I went to campuses from MIT in the East, Stanford in the West and many in between. The young men and women who are being educated on campus today see this as a challenge. They are technologically advanced compared to where my generation is, and they are up to the challenge. So I'm a firm believer in the creativity of the American way of doing business.

"Silicon Valley is working on solar power, which is great news. It's currently working on retrofitting existing transportation vehicles to make them plug-in viable or multi-fuel viable. You're seeing a tremendous amount of capital being invested in renewables and a lot of capital being invested in what to do with carbon when you capture it. The whole capture storage idea is logical, but it's silly when you think of it. You ought to capture it; you ought to take the CO₂. O₂ is very viable and valuable; C is very viable and valuable. Let's figure out the energy equation because today it's more energy to split them than it is to capture them and store them, but that doesn't mean it'll be that way tomorrow. As I call them out of due respect, 'the kids' on campus will help solve these problems as we go forward, so it's a great time to be in the business."

Morris says he wants to be remembered as somebody who had passion and brought vision and motivated people and helped people grow, and that when he is long gone, people will look back and say, "That was a lot of fun when he was here."

"I've had the enjoyment of four very unique, different career stops along the way," he says. "I had 12 years in the gas business. To this day, people will bump into colleagues and say, 'Oh, I knew Mike back at American Natural Resources, and he was always a fair dealer and honest guy,' and those kinds of things. And then three utilities: the biggest utility in Michigan, Consumers Energy; the biggest utility in New England, Northeast Utilities; and now the biggest utility in the United States. If along those ways I've touched some lives and made some difference, that's plenty of legacy for me."

Michael G. Morris is Chairman, President and CEO of American Electric Power Co., Inc.

The Pickens Plan
An alternative energy plan put forward by T. Boone Pickens, Founder and Chairman of BP Capital Management, which alls for building new wind generation facilities that will produce 20 percent of our electricity while using our domestic natural gas supply as a transportation fuel as well as for power generation. It aims to

• Create millions of new jobs by building out the capacity to generate up to 22 percent of our electricity from wind, with additional solar generation capacity.
• Build a 21st century backbone electrical transmission grid
• Provide incentives for homeowners and the owners of commercial buildings to upgrade their insulation and other energy saving options
• Use America's natural gas to replace imported oil as a transportation fuel in addition to its other uses in power generation, chemicals, etc.

[Source: www.pickensplan.com]