Episode 384: WEC Energy Chair Gale Klappa Shoots From the ARC to Make the Utility a Winner

Well, delighted to be with you.

Well, Giannis is under contract for at least two more seasons. And knowing a little bit about Giannis, he is not an LA guy. He's not sparkle, he's not glitz. He's all about winning, he's all about family. And I suspect there'll be a long storied history still to come in Milwaukee for Giannis.

Well, goodness. When I was growing up in Wisconsin, Wisconsin was one of the most important manufacturing states in the US. Still is in terms of its history, in terms of the companies that we serve with energy. It still is one of the leading manufacturing states in the US. And I think growing up, a couple of things, not only just seeing companies survive and thrive and grow in a business environment that was very supportive, I think that had an impact on me. But believe it or not, the Green Bay Packers had an impact on me. Back in the day, Vince Lombardi turned the Green Bay Packers around, turned them into world champions, and the state was just incredibly excited about what Vince Lombardi had accomplished, what the Packers had accomplished. And there were a couple of things that always stuck with me about Vince Lombardi's management style and his philosophy. One was back in the day, he had the smallest playbook of any head coach in the NFL, but it was all about focus and concentration, execution and excellence. And those factors, I think, have played a huge role in how I try to help guide our company and our industry today.

Actually, no. But I did have an opportunity early in my college days. I worked my way through college as a newscaster. I did have an opportunity to actually go to Lambeau to be in the media room to interview a number of the coaches and players. And that was an exciting time for a teenage guy working his way through college.

I have not been able to visit the Lombardi residence, but understand the man cave is preserved exactly and is just a great place to visit.

Oh, there's a great story. I'm glad you asked. There's a great story behind Haribo's decision to locate in Pleasant Prairie, which is just north of the Illinois state line, tucked in the southeastern corner of the state of Wisconsin. So, just as an aside, I've been involved for nearly two decades with a public-private economic development partnership in Wisconsin we call the M7, the Milwaukee 7, stands for the seven counties of southeastern Wisconsin. And our M7 team actually visited Haribo in Germany. Now, Haribo is a legendary company in Germany, making gummy bears for distribution all over the world. But Haribo was thinking for the first time in its more than 100-year history of making a major investment and building a confectionary plant outside of Germany. They chose Pleasant Prairie. I think in part because we convinced them it was the best place in the United States for them to make a huge investment. They now have, and they're up and running, a 500,000 square foot plant pumping out – this year they will try to pump out 132 million pounds of gummy bears. That's a lot of gummy bears. And just recently, they announced a major expansion. They are going to double their footprint in Pleasant Prairie. They're very happy with their investment. And one of the reasons why they chose southeastern Wisconsin, other than great utility management – I'm kidding – is the fact that Wisconsin and the Upper Midwest is less prone to natural disaster events than almost any other region in the United States. We don't have hurricanes, we don't have earthquakes, we don't have major wildfires. And they were very concerned, when making that type of huge investment for the first time outside of Germany, to actually find a place that they could feel comfortable that when they made that investment, it would stand.

Well, the state of entrepreneurship in Wisconsin is growing. And part of the ethic of people wanting to turn their passion into a business has been amplified by this show that we call Project Pitchit. Project Pitchit is essentially the Midwest nice version of Shark Tank. So we don't argue about who's going to invest in what or not invest in what. But three entrepreneurs per show, they go through a boot camp and are chosen to be on the show. And if they're on the show, they get one of three prizes. We have five of us who are panelists, who are judges. And this will be my third season coming up on Project Pitchit. It's a lot of fun. It's a great outlet. And it's amazing how people present their ideas and how people come up with these tremendous ideas and turn them into businesses. So it's just been great fun to be a part of that effort. And season 8 is coming up.

Season 8 will be found on WITI TV, which is the ABC affiliate in Milwaukee. It'll be on their website, but also broadcast on virtually every major television station across the state of Wisconsin.

Oh, you have done your homework. So, back in the day, to level set everyone, I worked my way through college as a newscaster. And my first opportunity upon graduation, I was offered the morning news anchor slot at a station in Minneapolis, and that was a top 10 market. That was a big deal to be offered the morning news anchor slot at a station in a top 10 market just coming out of college. It was basically Fast Eddie and Joe Gail in the morning, and Fast Eddie had been a nightclub comedian in Vegas, so it was quite an experience to work with Fast Eddie. You were the straight man? I was definitely the straight man. So I was in Minneapolis for about a year, got offered to be a news director in Atlanta at a chain of stations. And this was at the dawn of FM radio. Before this particular genre of radio came into being, FM was pretty much just elevator music. But a company called General Cinema, the movie theater company out of Chestnut Hill, Massachusetts – you nailed it – they were rethinking their business model and they were acquiring licenses for FM stations to turn them into real broadcast stations. So I was offered to be the news director at one of the stations in Atlanta that they had just purchased. And then they asked me a few months later to become the national news director, which was responsible basically for hiring and staffing and setting the policies for newsrooms across the stations that they were purchasing. So that was a great opportunity for me, a great experience. And believe it or not, this kind of falls under the category of 'if you want to make God laugh, tell them your plan for your life.' I was literally paging through the Sunday edition of the Atlanta Journal Constitution and I saw, honest to goodness, this blind box ad. And it said 'Fortune 500 company, Fortune 500 energy company needs spokesperson.' And I thought, energy and Watergate were the stories of the 1970s, they were the stories of the decade. And I thought, well, it might be interesting on a lark. I'll send in my resume. I did, I was hired. And probably one of the most fortunate things that's ever happened in my life is the then CEO Alvin Vogle, who is a true World War II hero, his exploits basically formed the movie The Great Escape with Steve McQueen. He took me under his wing for whatever reason. He almost treated me like a son. He really required me to learn the business. I think, thank goodness, he saw some spark of potential in me. And I will never forget his advice to me, his training to me, and his absolute kindness to me. I ended up writing his speeches. He had a photographic memory, so when he liked the speech, he never took the script. That really led to a long career in the energy and utility industry, and I hope I've made a positive difference.

Well, I think at one time over almost 29 years at Southern Company, I think I counted that I had 14 different positions. So one of the very good things that Southern Company has always done a really, really outstanding job with is grooming people. And if they see some potential, they give you more to do, they give you more responsibility and test you. So my last position at Southern was Chief Financial Officer, and that position I think really helped to broaden me. But the most broadening experience is the one you mentioned earlier, which was Southern was the first American company to buy a British utility. That was back in 1995. It was the largest acquisition Southern had ever made at that point, $1.8 billion. Southern wrote a check for a billion, we put in $800 million of debt, and we parachuted in there. And what was interesting about that was first of all, it was highly controversial. I mean, to many Britons, selling one of their prized utilities to an American company was like selling the family jewels. What city was it in the UK? It was the UK's second city, as they call it, Bristol, which is the gateway to the West Country of England. So it was highly controversial. And we took over a company that frankly had been run by the government for many years and had just been privatized by Margaret Thatcher only a few years earlier. So there was a ton of work to do to really modernize the management and to really focus on customers and customer satisfaction. And I think going into a brand new situation with an entirely different set of regulatory rules than anything different than we've ever seen in the United States, it really forced me and my management team that I was allowed to take over to Britain with me, it really forced us to completely relearn the business in a different way. I think that was the most broadening thing that I've ever had the opportunity to do. And thankfully, very successful. The last year that I was there before coming back to the US, we achieved a return on equity of 25%. So we went from worst to first in a national survey of customer satisfaction.

Well, I think it starts with one fundamental principle. And that in our industry, in the utility industry, we are in a scale business. Scale really does matter. And when we had an opportunity at a very competitive price to put together two Midwestern utilities whose service areas really abutted one another, we had an opportunity essentially to combine the two companies and to drive to the efficient frontier. So as an example, we have been able to basically eliminate $300 million a year of annual operating costs from the combined entity. We've done that in a number of ways, including essentially putting all of our major systems on one platform. So you know, we had two customer information systems, we had two general ledgers, we had two employee payroll systems. All of those systems have now been combined into one platform. And we've shared best practices across the seven customer-facing utilities that we have now as part of our family of companies. So driving to the efficient frontier and focusing on continuous improvement, those things are really important, along with the scale that it gives you from being a company now that's one of the largest in our industry and serves over 4.7 million customers.

No, not necessarily. We can, and if there's an opportunity, we will look beyond Wisconsin's borders. But the way we will grow is really through the proper investments that drive efficiency, emission reductions, and affordable, reliable, clean energy. So we have today, just to give an example, a five-year investment plan that totals $20.1 billion. And under the regulatory concepts that we work under, we're allowed to earn a return on those investments that are approved by the regulator. So $20.1 billion of new capital investments, much of that will come in essentially retiring older, less efficient power plants that are fueled by fossil fuels, replacing them with solar, with wind, with battery storage. And we are on track to achieve one of the strongest emission reduction goals in the industry. We're planning on reducing our CO2 emissions by 80% by the end of 2030 off of a 2005 baseline. So we will grow by making prudent, proper investments. And just to put that all in a capsule for you, everything we look at is through the prism of what I call the ARC: affordable, reliable, clean. That drives our decision making on investments.

As we look at how to plan our business and how to basically continue to, as you say, balance the needs of regulators, consumers, shareholders, really, if you line them up and the objective is basically to meet the needs of all three, what you really find is those needs are not different. And we sum it all up by every decision we make now, particularly on capital allocation and capital investment, we sum it all up with basically what I call the ARC. So every capital decision we make, it has to follow the prism of the ARC, which stands for affordable, reliable, clean.

That's a great question. And I'll start with the A, the affordable. So let me give you an example. When you retire an older, less efficient power plant, say fueled today by coal, you eliminate a tremendous amount of operating costs to keep that plant maintained and alive. You eliminate fuel purchases. You don't have to truck in or by train, you don't have to bring in coal. You eliminate fuel handling. You eliminate a significant amount of operating cost. And if you replace that with wind or solar, your energy is basically free past the investment. So one of our calculations which I think directly addresses your question is that just with that $20.1 billion capital plan that we've announced for the five-year period starting this year, over 20 years we expect those investments, that $20.1 billion, to actually save customers $2 billion as compared to the status quo. So doing this right and with the right mix of solar, wind, batteries, and yes, modern efficient natural gas fuel plants, those efforts, those investments actually drive cost savings compared to where we are today. So I think that's a good example for you of affordable. Reliable is why we need to continue to invest in modern efficient natural gas fired generation. When the wind doesn't blow, when the sun doesn't shine, when you have a polar vortex that lasts a week, and I want to give you an example about that. Batteries won't get you through that polar vortex. So we have to have the right mix as we continue to decarbonize our system. And just as an example of how important that right mix is to stay reliable, not this past winter but the winter before, a polar vortex event hit Wisconsin on Valentine's Day weekend. In the northern part of our service area, the temperature dropped to minus 42 degrees Fahrenheit, that's before the windchill. It never got above zero for an entire week. When it's that cold and that harsh and the conditions are that difficult, you simply have a core responsibility to keep the lights on, to keep heat flowing. And that's why it's so important that we focus not only on the A and the C, not only on the affordable and the clean, but couple that importantly with our core responsibility of being reliable.

Well, we're already seeing the companies that have fleets make a major transition away from gasoline powered vans and vehicles to electric vehicles. But I will give an example of how it will positively affect our company. So if you buy one electric vehicle, that's equivalent in terms of a normal driving pattern, that's equivalent to adding one and a half of the energy of a new household. So two new EVs equals one new household demand. If you think about the potential here, for example, there are not that many electric vehicles on the road in Wisconsin today, roughly maybe 10,000. But a recent study by the State Department of Transportation in Wisconsin projects, and we'll see if we get there, but projects 300,000 EVs by the end of 2030. Even if it's half that much, we will see a significant increase in energy consumption to fuel those electric vehicles. That also means though grid hardening and grid upgrades. So if you're in a neighborhood and two or three houses get EVs, we're going to have to add a bigger transformer, we may have to rewire the subdivision. So there's a tremendous investment opportunity as America goes electric and goes cleaner with its transportation.

Hydrogen and natural gas. What we've done at the A-Plant is blend hydrogen with natural gas fuel. We have pipeline supply for our natural gas, we have tankered high-pressure hydrogen. We blend the hydrogen in at ratios of 5 to 25%, and during that burn we took emissions and performance data for each test point. Go all the way to the Upper Peninsula to do this test away from view where the polar vortex is coming down. What have the results been so far? Just terrific actually. That experiment, which is the first of its kind in the United States using a blend of natural gas and hydrogen with this particular power generation technology, achieved everything that we expected it to. Emissions came down. We were concerned about whether there would be any corrosive effect on the power generation equipment. There was no corrosive effect on the power generation equipment. So we hit our emissions targets, the plant performed exceptionally well, it did not lose efficiency. We're very excited about these results. And frankly, one of the reasons that we wanted to be an industry leader in trying that experiment is that we, I think a number of us believe that hydrogen could be a very major factor down the road, in the next 15 years or so, in helping to solve the decarbonization issue that we're all facing today.

It's been an interesting part of our growth strategy. We have a segment that we call the WEC Infrastructure Segment, and that's investment in the Samson Solar Energy Center near Dallas is exactly what you're talking about. It's one of the projects that we have invested in, it's working out very, very well. We have wind projects in the Dakotas, in Kansas, in Nebraska, we have this solar farm in Texas that's been doing very well. And long story short, we know we're going to need a lot more carbon-free energy in the decades ahead, and these investments not only give us growth today but also give us the opportunity to potentially move some of these assets into our regulated business at very competitive prices down the road. So we're building optionality for our regulated business in Wisconsin because the power markets are such where you don't necessarily have to have an asset inside of Wisconsin to serve Wisconsin customers. So it's been an interesting adjunct, if you will, to our growth story. I will say this though: we intend to cap the amount of investment in that infrastructure segment at no more than 10% of our enterprise. Frankly, our core business is going to be growing so fast that we're going to need to focus a lot of our capital allocation increasingly on our core business going forward, which is really good news.

We are working in the battery space. In fact, we have a new experimental pilot project that will be starting up in just a few months. We have, through the Electric Power Research Institute, which is a nationwide organization based in California that does tremendous research work, we've combined and hooked up with the Electric Power Research Institute. And we have found a battery company in Germany actually, the name of the company's called CM Blue. It's been around a long time producing batteries, and they believe at CM Blue that they have found a new green battery technology that does not use some of the rare earth minerals that are so difficult to get and found in places not friendly to the United States. They believe they have a green energy storage technology that we're going to test for the first time anywhere in the United States on our grid. And we're going to do it. We've actually moved back the test schedule so that we can test these batteries in the dead of winter in Wisconsin. And we'll see. They believe they can get 10 hours of battery storage from this technology. State-of-the-art today is roughly 4 hours. So if we could double or better than double the duration of battery storage at utility scale, it would be a very positive breakthrough. So fingers crossed, we'll be testing it this winter.

Yeah, it's clearly a focus for all of us that have what the federal government has deemed, properly so, to be critical infrastructure. So we could operate the grid without electronic support, no question about that. And I will say this: I mean you never are comfortable because as Tom said, the bad guys keep getting more and more clever and keep doing more and more alternative things to try to attack our systems. But I will say this: one area where I think there's been tremendous cooperation and support and learning is essentially the cooperation between the federal agencies that are responsible for overseeing cybersecurity efforts and our industry. The cooperation, the information flow, the learning, the changes that we're making to continue to protect our systems—that is one area where the federal government and the private sector have worked extremely well together. So I'm encouraged. We actually at our company survived a cyber attack just about 18 months ago with very minimal disruption. One would never have noted if he were a customer. And I was really pleased because we actually survived very, very well with the protections that we had in place what could have been a pretty serious attack.

It's time to go courtside with the Milwaukee Bucks. Here's your host, Gale Klappa. Hello everyone, I'm Gale Klappa and this is Courtside with the Milwaukee Bucks. You can feel it in the air: the intensity building. The Bucks with the best record in the NBA striving to lock down the number one seed in the East. And the team has loaded up for the stretch drive and beyond, adding veteran talent and playoff experience to the roster. Perhaps the biggest move was signing a player who Wisconsin fans know well, a star at Marquette. He blossomed as a pro: big body, can shoot threes, dogs it on defense. Our guest tonight is newly acquired power forward Jae Crowder.

It's been a great outlet for me, just a lot of fun to be involved with the Bucks, to follow the season as closely as we can follow it with a weekly show, and to have access to virtually anyone on the team. This coming year, our new head coach Adrian Griffin will be doing ten of the shows with me. And then we'll have the President of the Bucks, we'll have the GM of the Bucks, we'll have Brook Lopez, we'll have Khris Middleton, we'll have a number of the stars on the show. And it's just been a terrific, fun outlet for me to do. And I think the Bucks have been very positive about letting me do it.

Well, I think—and perhaps Milwaukee is unique in this respect—the fans in Milwaukee have just been so supportive of the team. And when you talk to the players, they just love playing in Milwaukee. They love the fan support. They love the fact that we have the most modern arena in the country. And many of the players, even though a few of them have their own podcasts, are more than willing to spend a half hour with me during the season just because they're so grateful to the fans and they're happy to talk locally to the fans in Milwaukee as well. Although this podcast now will go worldwide.

Well, actually the vetting was with the President of the Bucks, Peter Feigin. Mark was very aware of it. And there is a story behind it. So the Bucks were about to hire a new coach, Mike Budenholzer, five years ago. And I happened to be sitting in Peter Feigin's office, we were visiting on a number of things. And Peter was talking about the coach's new contract and what elements should we put in there, what he was thinking out. And I said, well why don't we put a coaches show in there? And he said yeah, let's do that. Have him do a weekly coaches show, great idea. So he puts it in the contract. A week later, Peter called and said who are we going to have do the show? And I said I'll do it. And Peter laughed and he said seriously? And I said no, I would love the opportunity to do that. And he said, I know you're a minority owner, but I just can't. I mean, you're going to have to audition. So I said fine. So I auditioned, and apparently Peter liked it. And fast forward, this will be season number six.

Oh my goodness. Well, I can only speak from my experience. When I was invited to become a minority owner of the Bucks, I actually had an hour-long sit-down with Wes Edens, who is the governor of the Bucks now and one of the majority owners, and Mark Lasry. Mark came to visit me in person. We talked about Milwaukee, we talked about the Bucks, we talked about how the team might move to improve, we talked about building a new arena. They asked for my ideas on how to get things done in Wisconsin in the right way. And I think they were really testing to see what your business philosophy was like, and what you know, and what commitment you were willing to make in terms of helping the Bucks move forward. We don't get involved on the ownership side—as you know, we do not get involved in player decisions. As much as I might like to make some suggestions, we don't get involved in player decisions. But it's been a very interesting ride. We have monthly owners calls, so we're very up to speed on the financials, on the direction of the Bucks, on some of the marketing opportunities. And I will say one thing: the vetting—once you're invited by the current ownership group to join that group, the vetting by the NBA is incredibly extensive. It's almost a full FBI investigation. It takes at least six to eight weeks for the league to clear you for ownership. So it's very extensive and very carefully done.

No. But Mark Lasry almost got me in trouble at the end of one of the seasons a couple of years ago. I interviewed Mark as we were going into the playoffs, as the Bucks were going into the playoffs. And we tape it live. I was asking Mark to explain the luxury tax in the NBA, which is incredibly expensive. So he's walking through the impact of a luxury tax, and it's a ton of money—I mean a ton of money that an NBA team has to play if their player salaries are over the league cap. So I said, as he was explaining this, I said, 'Wow Mark, where I grew up that's a boatload of money.' And he said, 'You know what, where I grew up that's a shitload of money.' And then he says, 'I mean a shitload of money. Can we say that on the radio?' Well, we can't. It's one of those words that the FCC has still banned, as we all know from George Carlin. Exactly. So that turned into a bit of a controversy. We had to go through the censorship of the station, etc., etc. But it was really kind of fun at the end of the day. We had one other tape that went to the league office. Mark had been fined a few weeks before that for some remark he made that the league office took as player tampering, and it was really very innocent, but he was fined. And I assumed that since he had been fined just recently for that, that he would know where the bright white lines were. And it turned out he did, but he got close to the line. And I got a call the next day from the Bucks saying your tape's on the way to the league office, we think it'll be okay, but heads up.

Actually, and I really mean this sincerely, I have watched our young general manager with the Bucks, his name is Jon Horst. Jon came up through the ranks with the Bucks through the front office. He was assistant GM for a while. When Wes Edens decided, as governor of the team, to name Jon Horst the new general manager, Jon was the youngest GM in the league. And I will tell you, the way he approaches his preparation, his insight, his incredible instinct for player development—I think Jon Horst is, even though he's very young, I think he's an absolute role model in the NBA today. But then when you look back, obviously from the standpoint of player development, you have the legend in San Antonio, who is the coach Pop, who's just incredible. And then back in the day, you mentioned Red Auerbach, but there's a legend that will be a long, long time in the annals of the NBA. I was just with some Spurs executives last week talking about Popovich and the way he loves to travel and visit restaurants and enjoy fine wine. What's his favorite place to go to in Milwaukee, or what would you recommend that he see this season when the Spurs visit? Two places. There's an incredible steak place with great wine called Carnivore. And if he happens to be in a mood for seafood one night, there's a place called Lake Park Bistro that I think he would really enjoy. And both have excellent fine wines, which I know coach Pop enjoys.

So I would say, and I would quote what General Manager Jon Horst says because I think he's got an insight here that is absolutely worth repeating, and that is: to win a championship, three things have to happen. You have to be healthy, you have to be good—and I think we're good—you have to be healthy, and you have to have a little luck. So to me, the chances of the Bucks coming back home with a trophy all come down to: can the team and the players stay healthy?

Giannis and I have not talked personally about sustainable finance. But I can tell you that with Mark's leadership and with Wes's leadership, a number of us in Milwaukee have been invited to sit down with players and talk with them about potential investments that they might make in Wisconsin and Milwaukee. And in particular, I've been fortunate enough to give some advice to Khris Middleton, who now is a gentleman farmer. He's actually invested in farmland in the middle western part of the United States. But also, you have this great opportunity as a teacher to talk about not only how you are going to provide and are providing energy to Wisconsin and Midwest states, but the tremendous challenges of electrifying Africa. Yeah, no question about that. And all of these players across the NBA really want to use their platform for good. And to give you an example, Jrue Holiday, he has started his own foundation, but his foundation is giving grants to startup minority businesses to help them succeed. So there's tons of ways that these players are really trying to make a difference, not only on the court but for the betterment of society.

Well, I think it boils down to two things, at least in my opinion. And the first is: you can't be overly swayed by the short term. You have to build a competitive enterprise for the long term. And that's really what the Bucks are trying to do, that's what we're trying to do. I mean, we've been in business for over 125 years, and there's still room to grow. So I think two concepts: one, don't be overly swayed by the short term, build for the long term to stay competitive and to continue to grow. And then secondly, the way you continue to grow is to get a little bit better every day. I saw a fascinating statistic the other day, and this was around the time of the US Open here in New York. So what that statistic showed was that if you're a pro tennis player and you're a middle-of-the-pack pro tennis player, you win 48 to 50% of your points during matches. If you're the world's best tennis player, you win 4.9% of your points during matches. Think about that. Small difference. Such a small margin. Such a small margin. The difference between greatness and just good is a small margin. But it's also the mindset of getting better every day, improving every day, being honest with yourself, driving forward, and always knowing that you can get better—a little bit better every day.

We will be, I believe, on the cusp five years from now of achieving our 80% reduction in CO2 emissions while maintaining that arc of affordable, reliable, and clean. And we will have, I think, an incredible track record. And I'm very proud of the Microsoft investment and this billion-dollar minimum investment that they're going to make, and not just building one data center but a data center complex. Their reliability requirements are beyond anything we've ever seen. So I would hope five years from now I could sit across the table from you and say we have done an incredible job of keeping Microsoft reliable and chunking the data out that they need to basically provide for their customers—affordable, reliable, clean.

Thank you for having me. It's been great fun.