COMMIT!Forum 2015 - One-on-One Interview with Gale Klappa, Chairman & CEO, WEC Energy Group

Well Elliot, we've talked about this, and I think in looking back for all of us, the formative years are really important. And my parents, I grew up in a little town in Wisconsin. It was a mill town actually, about 18,000 people. And my parents ran a small family shoe store. They were kind enough, Elliot, to let me help out from about age six. And over the years, and I think just by osmosis, I got a real sense of town work, how my parents believed in doing business. And really, many of the things we are all doing today on a much grander scale with different vernacular, we're really what they were doing back then. I mean, a focus on customers, a focus on bettering the community, a focus on efficiency. Those things, I think, were really formative for me as I saw how my parents believed in conducting business.

Well, I think it goes back to the way in which we try to embed corporate responsibility into our business. It's not, and I think this is really important, Elliot, it's not a separate program, it's not a team of people sitting over here thinking about responsible things to do. Our belief is it's really important to embed corporate responsibility and the values of productivity, efficiency, safety, betterment of the community into the business results of all of our operating units. So what we do is basically have certain goals each year that my direct reports and I agree on that focus on these things as part of how we're running the business.

Every quarter we give some advice to people here that they can give to their CEOs and other CEOs who are here in the audience about the best way to manage that to have the kind of program you guys do. We have, and this is not unusual, all of you probably are very familiar with this, but we have an office of what I call our office of the chair. And we have an office of the chair meeting about every six weeks. All of the major initiatives that are central to the achievement of our business plan for the entire year are reviewed every six weeks. So basically, when there's a corporate responsibility initiative, and there is for each one of our business units, that gets talked about, that gets critique, that gets reviewed on an about every six weeks basis. Again, it's embedded in how we do business.

I was very lucky in one sense in that when I joined Wisconsin Energy, now WEC Energy Group, back in 2003, there was really an energy crisis in the upper part of the middle western US. Wisconsin in particular was very short on power plant capacity, on transmission capability. And one of the big issues in the gubernatorial race back in the early 2000s was, is the state going to be able to keep the lights on? So we developed a plan out of necessity in terms of something had to be done to improve the energy infrastructure and expand the energy infrastructure in the region. But along with that plan was a priority in my mind that we could not increase emissions. So we had to find a way, Elliot, to basically expand our power generation capacity, as it turns out by fifty percent, but in the process produce more power, have more power generating capacity, but in the process find a way to actually lower emissions. And I will tell you, with the technology that we chose and with what's been available to us, and this is something our company is very proud of, we now have fifty percent more power generating capacity today than we had in the year 2000, but our total emissions of sulfur dioxide, nitrogen oxide, mercury, and particulate matter are down in total by eighty percent. So fifty percent more capacity, fifty percent more production, eighty percent fewer emissions.

Actually, believe it or not, only once. One of the things I found at Wisconsin Energy when I came there was a very strong, very strong corporate responsibility, very strong environmental improvement ethic, and that was exceptionally helpful. I think the question really became, what could we really do? Eighty percent? Do you think if we made the right technology choices we can do twenty percent or thirty percent? Actually, to be honest with you, we ended up setting the goal at seventy percent. We exceeded the goal. But there was a lot of, and I think because of the kind of ethical people we have at the senior level, they understood how important it was going to be for Wisconsin to be an environmental leader.

A lot of the operating metrics all revolve around efficiency. Okay, so for example, the new power plant capacity we've built, we have a clean burning coal fired power plant that is literally one of the cleanest from an emission standpoint, one of the cleanest burning power plants in the world. And it is in part, there are two reasons it is that efficient and that productive from the standpoint of emission reduction. One is the effectiveness of the environmental control technology that we chose, but the other is what we call heat rate. In other words, that's a term in our industry that essentially calculates how efficiently do you take raw fuel and turn it into electricity. And so we measure heat rates at our plants and we try to improve our heat rates because improving our heat rates makes the units more efficient and reduces the environmental impact. So that's one of the big metrics that we look at on the dashboard. On the distribution side of our business, and as many of you know, the world is changing a great deal in terms of how electricity is actually produced and delivered around the world, particularly in the US, with more efficient from an economic standpoint, more efficient renewable technology and more efficient distributed generation. So we look very much also at what we call line losses, or the efficiency of our delivery network. And we've been able to reduce our line losses, in other words improve the efficiency of our delivery network for electricity, by literally thirty to thirty-five percent over the last decade. So that reduces the amount of coal burned and the amount of effluent and ash and emission, all those things exactly.

I am glad you asked. I'm beginning to think, given the audience reaction and no one having heard of, one person raised their hand. Sure, what company do you work for? Wow, shop. Well, we have one convert. That's great. Yeah, exactly. Ben, and maybe I'm beginning to think we need to come up with a different term other than beneficial, something sexier than beneficial electrification. Because I really believe, Elliot, personally, that if we're going to meet the environmental goals of the next 20 years as a society, not just as in an industry but also as a society, beneficial electrification is going to have to play a huge role. And here's what that means. All of our energy use, and let's just take, and I'm not picking on this sector, but let's take automobiles for example. We're never, in my mind, going to get to society-wide a 35 or 40 or 50 percent reduction in greenhouse gas emissions, for example, without beneficial electrification in the transportation sector. And what I mean by that is, let's take for example forklifts in warehouses that run perhaps on diesel. Let's take at airports and seaports, buses and transport vehicles that run on either oil or diesel. There is significant greenhouse gas and other pollutions emitted from those vehicles. Well, if we can turn to a much greater market share, for example, of electric vehicles, it is going to reduce societal emissions. In essence, what we would be doing is taking one efficient source of emissions and eliminating the individual set of emissions from transportation across the United States and across the world. I think you're seeing, for example, in California where they have set very specific goals for increasing electric vehicle market share, again simply because it is part of an efficient solution to lowering emissions. But that concept really extends even beyond the transportation sector to a lot of areas of society. So in essence, the amount of coal or fossil fuel you need to burn to move a car one mile, you produce far more energy, far less emissions out of a scrubbed stack, if you will, above a boiler, than from the tailpipe of individual cars. Or we would produce zero emissions from a wind farm to accomplish the same thing.

Well, first we're starting with our own by setting our own example. We have, as some other companies have done as well, we have begun to electrify our fleet. So now when we have to go out on a service call and put someone's power back in, you might see us coming out in an electric bucket truck. We are testing out a number of different electric technologies to electrify our own fleet.

So I practiced a lot before that.

But also, like you will continue to see, because there's an enormous amount of research being done and dollars being spent to improve battery technology, and Tesla's been a real breakthrough.

But be happy to talk about that. First, let me just say, Elliot, based on the studies we have done, and remember, most power plants in our country go to sleep at night. I mean, demand for electricity goes like this at nighttime. So basically, there could be, in terms of all light transportation in the United States, if electric vehicles had a 35% market share, we could meet the energy needs of those vehicles without adding a single new power plant in America. Wow. Particularly if people were incentivized to do the most of their charging overnight. So number one, there is capacity because we obviously have to build our network and build our system to meet peak demand, which occurs usually during the afternoons, right? But then you have all that capacity sitting idle overnight. But you are absolutely correct: if we were to charge 35% of the light vehicles in America overnight, there would be more natural gas burn, there would be more coal burn. There wouldn't be much more solar because it's pretty dark at night, but there would be more wind energy consumed. And we have, and I think this is one of the pioneering things we have done in terms of dealing with the byproducts in our case of burning coal. Our company made a technology decision years and years ago, before I came, that we would not store the byproducts of burning coal, call it fly ash, bottom ash, whatever you'd like to call it. We would not store or landfill in any permanent way that type of byproduct. Instead, we have found a revenue stream, we have found a beneficial use for the byproducts. And the fly ash is very strong, very strong particles. So we are selling almost 100% today of the fly ash that we generate by our coal-fired power plants. We are selling that fly ash for road building, for road building. Much of the fly ash is also being used in concrete and in sidewalks and in foundations for buildings. So literally 100% of what we are producing in terms of fly ash as a byproduct of generating electricity from coal is being put to good, positive societal use, and we're very proud of that.

It does, it affects all of us. Honest truth is, I have a mixed reaction to what you're referring to. It is the Clean Power Plan, which the rule is now being finalized and being published in the Federal Register, and it sets goals, excuse me, or targets state-by-state, differing targets state by state for reducing CO2 emissions. Look, the world is on a track to reduce carbon. I think there's any question about that, and we certainly will do our share. I think the question I would have about the Clean Power Plan is, first of all, it unfortunately does not give companies like ours any credit for early action. And I think that's an issue that we continue to talk to the EPA about. In some ways, we may have been better off from the standpoint of the targets if we had not done all the things you've just described and invested more than three billion dollars in new environmental controls and more efficient generating capacity. So that's a bit of a problem. But my bigger concern, my bigger concern is the timeline. 2022 is the first target for major reduction in CO2 emissions from our sector under the new rule. But the target in 2022 requires all of us to get almost two-thirds of the way to the ultimate target. Right. So we're sitting here in 2015. 2022 is not that far away, and it is in an industry where there's a significant lead time to ordering equipment or to putting plans in place that could have a material effect. I worry that we can't get there cost effectively for customers by 2022. So my first real big concern is, is the 2022 interim target realistic? And then secondly, if it forces us to do things that are not as efficient for the long term, what is that going to mean to the price of electricity? And I'm cognizant of one other responsibility that we take very seriously, Elliot. In Wisconsin, we still make things in Wisconsin. There are more than 500,000 manufacturing jobs, and we have a real responsibility to help keep those manufacturers cost-competitive with our supply of electricity. So I'm really concerned about the time frame and about whether or not we can get there in the most cost-effective way by 2022.

What many companies in our industry are installing workplace charging. And yes, there's a question and it unfortunately becomes an IRS question of whether or not there's a benefit. We have to work through that with the IRS, and different states are approaching it a little bit differently. I know in California, the utilities are being encouraged not only to install workplace charging, but also as I mentioned, Elliot, earlier, very convenient charging networks and charging facilities at shopping malls and other places where you can fill her up very economically and very conveniently. But yes, most companies in our industry are installing workplace charging again as an incentive for our own employees.

We have not, we have not put in any solar-powered charging stations. In part because Wisconsin probably is not the greatest state for solar. And when you want that electric vehicle charged, you want to charge it up. I'm sorry, yes it has. The industry's in the early stages of exploring it, but right now the most cost-effective thing would not be a solar powered vehicle charger. It certainly could be one day.

Very good question. First of all, one of the ways that all of us would hope that we could achieve some of the greenhouse gas reduction goals would be with carbon capture and storage from central station coal-fired power plants. So that we could keep what has been the backbone of the system, backbone of the energy delivery system in the United States. We could keep the most efficient coal-fired power plants in operation. But the only way to do that and eliminate CO2 emissions from a coal-fired power plant would be to have capture and storage of the CO2 emissions that come out of that operation. Our company worked with a French company on a brand new technology that actually looked pretty promising and is technically very promising to capture CO2 emissions. The problem with it, it works. We tested it in the field for the first time a few years ago. The technology works extremely well, but it adds 35% to 40% to the cost of producing electricity from a particular facility. So when Ernie and others are talking, Ernie Moniz and others are talking about we've got to bring those costs down, we've got to find a way technologically to bring those costs down. I absolutely agree. And I think they're probably thinking about that's the big nut we have to crack in terms of bringing costs down. How we would look at preliminary anyway, how we would try to get to the 2022 or 2030 goals for CO2 emissions probably would be two ways. One, EPA is suggesting that all of us run our natural gas-fired units at a 75% capacity factor. They're running at about 35% today. That is technically possible. And if we can get enough gas at peak times in the winter, we could get about halfway there in terms of the greenhouse gas reductions that our company would need to make. We could get about halfway there by basically running our gas-fired fleet at a much higher level than we're running it today. The remainder we would have to get by adding renewables.