An Interview Exclusive: Dave Spano, CFP® + Gale Klappa

Good to be with you. Thank you for having me.

I did radio, worked my way through college as a newscaster actually.

So it was a great experience, really enjoyed it, worked at WOKY back in the heyday. Great, so it was a really fun experience and always fun to get back to my roots.

Well I've been fortunate to be able to host a courtside show mostly with Coach Bud, but with all Bucks, it's a weekly show actually here on TMJ during the season. I see Coach Bud from time to time, he likes to play golf and so I see him at the court. But from time to time does he ask you what you think about trades and playing time of players? I've tried to give him my input and he's polite about it.

I got a ring. The ring is incredible, yeah. It really is, I can't wear it because I'd have a lost time injury. I mean it is so big and so heavy, it fits on Janice's hand. Well on mine, you know, it's like holy cow. But it's a once in a lifetime experience. I hope we get more rings.

Absolutely, the report caused a lot of stir and got a lot of media attention and obviously a lot of consumer concern. Right. And really what the report said was particularly this summer if there are way above average temperatures in parts of the middle western section of the country and if there are unplanned plant outages at the same time we might have extreme temperatures then things could get a bit dicey in terms of reliability of the supply of electricity. So let's talk about that. It wasn't a bit dicey, a bit dicey meaning there might be a need for conservation, there might be a need to interrupt some interruptible industrial customers. We haven't had to do that in a long time. But Dave, I think there are probably three factors that led to that warning if you will. And if I could, it might be helpful for your listeners to just get a level set on how the power market works. So these days very different from 15 or 20 years ago. The country is divided up into big power markets and those power markets are run by independent operators. Every company like ours that owns and operates power generation plants basically tells the Midwest grid operator in this case before every day what plants we have available. The Midwest grid operator under federal law is responsible for keeping the lights on in a broad swath of the country, in this case the Midwest. And the Midwest grid operator tells us what plants to run and at what level. And that theoretically guarantees customers to get the hourly price as best and as cheap as they can. So the most efficient plants run at the maximum level on any given day. When it's summertime hot temperatures and if there are unplanned power plant outages then you have a tight supply. We have had a day already at 100 degrees in Milwaukee.

In our case Dave I can honestly say we've planned well but there's a lesson here that I think is very important as we look to the future and that is that there is no perfect fuel source and what has served customers best over time is to have a diverse supply of fuels for power plants ranging from coal to natural gas to hydro to biomass to solar to wind. And we have that diversity of supply right now. It has served our customers in Wisconsin particularly well. And I can give you an example. A year ago February Presidents Day weekend we had a polar vortex event. Now normally Dave you only have to worry about power supply being tight in the summertime but it got to minus 42 degrees and the day before the windchill minus 42 degrees in northern Wisconsin. Never got above zero in some parts of our service area for an entire week. And it took everything we had, every fuel source, every power plant we had to keep the lights on. And as you recall that very same weekend the energy system in Texas failed. But here as you've pointed out it's a matter of life and death at times. So reliability is really important to us and having that diverse supply I think is really a differentiator for us and has helped us stay reliable for customers when they need it the most.

Well I think you're making a great point. There's no turning back on decarbonization. In other words, the goals that are being set by countries and governments and companies around the world to basically reduce dramatically the carbon emissions into the environment, those goals are going to have to be met. To do so though and keep costs affordable, keep the system reliable and continue to get cleaner, we need advances in technology. Now having said that, we have set one of the most aggressive goals in our industry for carbon reduction. We expect and we have an operating plan to do this, we expect to have about a 60 percent reduction in CO2 emissions by the end of 2025. That's amazing. And an 80 reduction by the end of 2030. We believe we can do that without major advances in technology. But to get well beyond that 80 reduction is going to require advances in technology. There's a lot of work going on. An example: battery technology. It is very difficult to store much electricity today. Usually it has to be generated at the point of demand. But today you can install utility scale batteries that can give you four hours of energy, but four hours won't get you through a polar vortex. Advances in battery technology that can be much longer duration batteries could help. There's a lot of research going on on carbon capture which could allow coal-fired power plants to operate without CO2 emissions. There's a lot of work going on. But the transition Dave is not going to be in a straight line. The transition is going to be up and down. And we have to, and I think we're learning this with just the war in Ukraine if you will, right? Energy can be a weapon, a weapon against society, against the West. And we simply have to approach this in an intelligent way. I think we can do both. I think we can get to an 80 percent or better reduction in CO2 emissions, stay affordable, and stay reliable. But we have to be sensible about the transition and do it in a path forward and in steps.

One of the downsides is that a huge percentage of the minerals that are needed for expanded battery production really come from China and other parts of the world not the United States. So as you say there has to be a transition it has to make sense we cannot in my opinion we cannot let up on our focus on reliability and affordability it's what fuels the American economy it's what provides jobs and what keeps this economy among the strongest in the world we're very focused on making sure that yes we make progress but as you say in important steps and do so while while maintaining the record of outstanding reliability.

Yeah I do too yeah.

Yeah it's a great point Dave. So we serve electricity and natural gas to most all of the major industrial manufacturing companies in Wisconsin. Many of them have signed up to what we call our interruptible rate. And what that really means is they get a price break for us to have the ability to call on them to either shut down or materially reduce their energy use if we get into an emergency situation. Now the good news is we haven't had to do that in years but that would be the next step if back to your first question regarding the warning about tight supplies in the Midwest this summer, if things got a little tight and there was a real concern about having enough energy demand in a given hour that's the first step we would take.

That is correct. And we have a system in place of immediate communication with these customers and we also can give them advanced warning because generally the Midwest grid operator will know a day in advance how hot the next day's temperatures are likely to be. And an important point here which we wouldn't have talked about even 10 years ago is how much wind is going to be blowing in the Midwest. One of the sticking points, and look we're big believers again in all of the above, so wind has an important part in our energy supply, so does solar. But I'll give you an example: there are about 25,000 megawatts of wind capability in the giant Midwestern part of the country, that's about four times the size of our own system. But just last week for example that went from the availability because of lack of wind went from that 25,000 megawatts to 5,000 megawatts overnight. We have to find, in the Midwest there has to be something else that you can actually count on to make up that slack.

It would take a condition very extreme this summer right. And I'll give you just a theoretical example: let's say that in northern Wisconsin the temperature got to 103 degrees and there were seven or eight power plants around the Midwest that suddenly had outages that weren't planned. That's the kind of thing that could be an extraordinary circumstance that could result in some interruption of customers. We don't see that happening right now, we think we're in pretty good shape and we prepared for it. We're prepared for it, we really are. In fact, probably what's more likely is a summer storm with huge winds that takes out a few hundred thousand customers until we can repair the distribution network. We actually have had some storms in June where we had a lot of customers offline but we've repaired the system, everybody's back.

We have electric distribution in northern Michigan we sure do. We also are the gas distribution company in the city of Chicago, in the Chicago suburbs, the northern Chicago suburbs. We supply customers with natural gas in western Michigan and all over the state of Minnesota. So we're one of the, as you probably are aware, we're one of the 10 largest publicly traded utility networks in the country. And by the way I don't want to get into compliance issues but the stock is trading great, low P/E, great dividend and you're probably very proud of that.

What I can say and we are, well let me first say we are spending millions of dollars a year on cyber security and cyber protection. That's not unusual for a large company these days. But I will say this: the cooperation between our industry and Homeland Security, the FBI, the Federal Energy Regulatory Commission, I have been amazed, positively so, about the cooperation and the information flow. Early on a number of years ago the federal government designated the utility industry as one of the critical infrastructure industries and there's a coordinating group set up in Washington. And oftentimes as you know these government agencies are slow to react and it's not necessarily a positive experience. This has been a positive experience. The information flow is terrific, the advance warnings are terrific. And we really have to have that kind of cooperation with the federal government because a company like ours is simply not privy to a lot of the threats and a lot of the foreign government threats related to cyber security. So I've been really pleased with this cooperation and this designation. It has given us a lot of really good information, it has helped us to prevent several attacks. But as you know on a subject like this you never rest easy.

Absolutely, absolutely. There's also a big push of course to EV vehicles and really this comes, we're having this conversation on the tail of the Tesla and Twitter conversation but Elon Musk has got his hands full alone with the EV production much less getting into Twitter. But what happens if all these folks decide that you know you could drive around, you see more Teslas every day and more EV vehicles every day, what if they have to go home and plug in? I mean that's going to further cause an issue, right?

That's exactly right, wow. So what would have to happen? Well the distribution network, you see poles and transformers and lines coming into your home, that distribution network would have to be upgraded. We'd have to put in a larger transformer, we would have to definitely upgrade the distribution into that particular neighborhood.

We're staying ahead of that, we're certainly trying to. In fact we have before our state regulator right now a plan that would cost over a number of years about 700 million dollars to upgrade and harden the grid, harden it for storms but also upgrade the grid for the potential additional investments that need to be made to accommodate EV charging.

Well it's a great question. I would say that as we think about the need to continue to decarbonize that there may well be a role for nuclear power. Two different possibilities. Today we buy energy from a nuclear power plant that this company built in the 1970s called the Point Beach Nuclear Power Plant. We buy energy from that plant today. That plant is due to retire the first unit in 2030, the second unit in 2033. So there's a possibility that the life of that plant, even though it's 60 years old at that point, there's a possibility that plant's life could be extended. Governor's reprieve. He could get a gig exactly, exactly, yeah. Might not get the death penalty. So we're working on that possibility right now. The second little bit longer term possibility is a new technology that are called SMRs, small modular reactors. These would be much much smaller units that could be placed in many locations but particularly on the site of an older power plant. They're modular, so they're smaller in terms of capacity, they're built off-site, so it's not like building a brand new huge structure on site. And the small nuclear reactor technology is really in the demonstration stage right now. So we'll see in the next 10 years or so if that technology, which would be carbon-free, could basically be economic and reliable. But that's something that we're all watching, something that we're looking at the demonstration information on, something that could be a part of the future. And you know the first thing that listeners might hear is what's the safety of that, right? I'm sure that's first and foremost with this conversation.

Yeah, and I think the safety of those are really significantly better. I just have a couple more questions if you have another moment or so.

We look at energy in general as really starting with the infrastructure. And I think that's an important point: you can drill all the oil you want or you can find all the natural gas through fracking that you can find, but it has to be delivered to the end customer. And where I think there is both investment opportunity and societal need for customers going forward is really in continuing to advance and build modern infrastructure in this country. We talked about just what might need to happen to our distribution system for more EV charging. We're going to continue to need a growing amount of energy in this country. In fact, the energy economy of this country needs to be turned on again. Not only for energy security and affordability here for customers in the US, but also given what we're seeing in Europe and around the world, the US can be a major player in political stability in the world by continuing to turn on our energy economy.

We do, we do. Even if you look back at some of the policies and some of the speeches from President Obama, he was what I call an all-of-the-above guy. Again, we're not going to ignore the decarbonization trend, we're not going to stop reducing CO2 emissions, but we can do both in this country. We can have a robust energy supply and we can continue to improve the environmental performance of the networks. But we have to do it in a way that makes sense.

The only thing that I can tell you that is a direct quote from Coach Bud is he's excited about the roster, he's excited about the re-signing of some of the free agents. As he said to me, Gail, I already believe we can compete with the best.