How I Did It: The CEO of Duke Energy on Learning to Work with Green Activists

The Idea: When James Rogers became CEO at then-ailing PSI (now Duke Energy), he was determined to listen to all its stakeholders. But environmentalists posed a particular challenge: The green movement had long viewed the energy industry with skepticism. “How can you advocate for a low carbon future when your company is among the largest emitters of carbon dioxide in the United States?” I’m asked this question a lot. It reminds me of a time about two decades ago, when I was 42 and in my second year as a CEO, trying to lead a utility back from the brink of bankruptcy. The effects of acid rain from burning coal had become clear. Much of our industry denied the facts and resisted any regulation of sulfur dioxide emissions. My company took a different path. I believe that a price on carbon is inevitable, and utilities that take a long-term view will be part of the solution. Smart public policy can serve the interests of both business and society. It pays to be collaborative and build a consensus. But that isn’t easy. 100 Days of Listening I wasn’t sure I had what it took to be a CEO when, in 1988, I interviewed for the job of leading Public Service Indiana, which had just written down a $2.7 billion loss on a half-constructed nuclear plant. PSI generated most of its electricity by burning coal in a number of aging plants in America’s heartland. At the time, I didn’t consider myself an environmentalist. I was a lawyer with a background in energy, and I was looking for something with greater challenges and more responsibility. PSI, once a highly regarded utility with deep local ties, had plenty of challenges: Its finances were in disarray, morale was damaged, and leadership had lost the confidence of regulators, shareholders, and customers. I spent a week preparing for my job interview with PSI’s board of directors and developed a plan I called “100 days of listening.” The idea was to meet with the company’s many stakeholders before taking action. That would help me to identify the issues, set priorities, figure out whom I could trust, and start repairing and rebuilding relationships. The other candidates had far more industry and leadership experience, but none of them came prepared with a plan. I was given the job. All the members of my management team were much older than I was, and all of them advised me not to meet with any environmentalists. It was an emotional time for PSI’s veteran executives; their largest construction project had just been killed by the very groups I was planning to talk to. Internal opposition to my proposal was so strong that I considered changing course. But that felt like a cop-out: I had proposed a plan, and now I needed to execute it. Plus I was curious about the environmentalists’ point of view, and I believed in the power of collaboration to address tough problems. I decided to follow my instincts. My management team was not pleased. Some of its members thought I was naive. Had PSI not been on the verge of bankruptcy, its dividend suspended and emergency rates in effect, I might have faced a mutiny during my second week on the job. On a Saturday morning I drove 100 miles south to the Ohio River Valley, where our abandoned nuclear plant was located. There I sat down for coffee in a diner with leaders from the environmental groups that had blocked the plant. I started by telling them I was new to the job and wanted to better understand their point of view. Soon enough they were talking straight about their perspectives, as midwesterners tend to do. I learned that their opposition was based on three beliefs: Nuclear energy was too costly, waste disposal was unmanageable, and the additional 2,360 megawatts of baseload generation capacity wasn’t needed. I disagreed with some of their positions, but I listened. The nuclear power they opposed would have replaced old coal plants with serious carbon dioxide emissions, but that issue hadn’t yet surfaced. Today some of them are rethinking their stance on alternative sources of power as they confront climate change. Stake in the Ground I tried to create a collaborative environment internally as well as externally. I strongly believed that we needed a culture respectful of divergent views, in which problems could be identified early and unconventional solutions could be found. The 100 days gave me time to learn the business and the personal dynamics. Then I prioritized my tasks. Near the top of my list was one that had arisen in a meeting with a state senator who chaired the environmental committee: PSI needed to integrate environmental risks into its decision making. Failure to do so had nearly caused the company to break down. Prior management hadn’t seen the risks from environmental opposition as legitimate until it was too late. Beginning with “100 days of listening” gave me time to learn the business and the personal dynamics. I proposed that we study the corporate environmental charters of other utilities and then create one for PSI. To my surprise, we found not one utility with a board adopted public statement about environmental considerations in its decision making. We decided to write a charter by convening our diverse stakeholders: customers, investors, state government officials, consumer advocates, employees, and environmentalists. Some members of my team worried that dialogue would further empower groups that opposed us and would evolve into a negotiation. They were right—but that was part of the reason for doing it. We wanted a charter that established enough common ground that we would never again waste billions of dollars on half-constructing a plant. We held meetings with about two dozen leaders from different stakeholder groups. Each meeting began with an acknowledgment of our objective: to provide clean, affordable, and reliable electricity to our 575,000 customers 24 hours a day, 365 days a year. Everyone agreed with this mission, but environmentalists focused on “clean,” consumer advocates stressed “affordable,” and factory owners put a premium on “reliable.” Nevertheless, the framework gave everyone in the room insight into the practical trade-offs involved in providing universal access to electricity. Using that framework, we negotiated a 10-point corporate charter. (See the sidebar “What Rogers Learned on His “Listening Tour””) What Rogers Learned on His “Listening Tour” PSI’s 1990 Environmental Charter 1. Incorporate environmental considerations into our planning process. 2. Consider and compare the environmental consequences of choosing certain suppliers and contractors when purchasing supplies or services. 3. Maintain and enhance internal procedures for handling environmental emergencies and meeting other environmental requirements; periodically conduct formal reviews and report results to the board of directors. 4. Educate all employees on the importance of their corporate conduct in protecting our environment as well as their own health and safety. 5. Make environmental responsibility and innovation a guideline for measuring employee performance. 6. Make available to employees, customers, and the community all relevant information on emissions, waste products, and PSI Energy activities which may affect their health and safety. 7. Seek and implement cost-effective technologies and practices to minimize emissions, and reduce or safely dispose of waste products in our operations. 8. Pursue methods to prevent pollution and conserve raw materials, including recycling waste and promoting the efficient use of energy by our customers through cost-effective means. 9. Promote sound environmental practices within our industry, including the sharing of experiences with others and the continued support of research and development in environmental improvement. 10. Develop and maintain open and constructive relationships with environmental groups, regulatory agencies, public officials, business and residential customers, employees, and concerned citizens. Our board ratified the charter in 1990. We printed it in our annual report, and I hung a copy above my desk. We had planted a stake. Now we needed to follow our words with actions. The First Cap and Trade Acid rain became more prominent in the public debate in 1989, after the findings of a 10-year federal government study on the effects of sulfur dioxide emissions were released. I spent two months consulting various experts on the issue, and met with members of Congress in Washington. I concluded that legislation to curb SO2 emissions was inevitable. The practical questions were: What would that legislation look like? What impact would it have on customers in Indiana and the 22 other states that generated more than 50% of their electricity from coal? President George H.W. Bush soon began championing an innovative market-based solution called cap and trade. Instead of the Environmental Protection Agency’s traditional command-and-control approach, Bush—in collaboration with the Environmental Defense Fund and other groups—proposed a declining cap on SO2 emissions. The cap would be combined with an emissions-trading mechanism and a declining allocation of free allowances to spur innovation and create a market for new low-cost solutions. Cap and trade was a smart and creative compromise. It departed from uniform regulations that failed to consider the generating portfolios and geography of individual utilities. It generously allocated allowances to utilities in coal-dependent states in the early years and provided incentives to open low-sulfur coal mines. Most important, it enabled utilities to modernize their plants and meet aggressive emissions targets without sending electricity prices skyrocketing. I assumed that my industry peers took a similar view of this idea. However, most executives at the 1989 annual meeting of our trade association, the Edison Electric Institute, were opposed to government action. The CEOs of the largest utilities took the hardest line. They disputed the science. They argued that the health hazards hadn’t been proved and that the technology to reduce emissions was too expensive. Most of them were dismissive when I spoke up to ask, “Isn’t there a way we can support this to our benefit? The technology is evolving, and it seems like we could do this.” These power brokers saw PSI as a small player without influence and me as a young guy not yet aware of how the industry worked. But my belief deepened that some form of cap and trade would come about and that our stakeholders would benefit if we took a stand in front of the issue. After all, as a regulated utility, we earned a return on all our capital expenditures, including those for environmental compliance. In the spring of 1990 I testified before Congress in support of market-based cap and trade. Some of my industry peers were upset by my action, but others began to acknowledge that the world was changing, and having a seat at the table could be helpful. It was certainly helpful for PSI. The Clean Air Act Amendments established cap and trade that year, and PSI and other coal-dependent utilities were allocated a relatively high number of allowances, which gave us time to make a deliberate and sustainable transition to cleaner generation. The results spoke for themselves. From 1990 to 1993 our market capitalization increased by more than 65%, from $900 million to $1.5 billion. Significantly, this increase in shareholder value did not come at the expense of our customers. In fact, we lowered our real price of electricity in Indiana from 6.2 cents to 5.87 cents per kilowatt hour. Our rates were among the most affordable in the country. By 1995 we had also reduced our SO2 emissions by 30%. Our ties to local communities strengthened as PSI developed more of a national reputation. That helped us grow and attract new talent to the company. In 1994 we merged with Cincinnati Gas & Electric, effectively doubling our size and extending our service territory into Ohio and Kentucky. Among my first actions as CEO of Cinergy—the new company—was to create an updated environmental charter, which was adopted at the first meeting of the board. Fast-forward a decade to the issue of global climate change. Here, too, we were early advocates for action. As we investigated the science connecting carbon emissions to the rise of the earth’s temperature, I remembered the days of the acid rain debates. I heard similar voices of resistance and denial among my peers at industry meetings. But this time we were a major player in the room. In 2006 Cinergy merged with Duke Energy, headquartered in Charlotte, North Carolina, and I was named chairman, president, and CEO. The Tide of a Low-Carbon Future “There is a tide in the affairs of men,” Shakespeare wrote. After a deeper investigation into climate change, it became clear to me that the science was sound: Burning fossil fuels contributes to global warming. As an industry, we needed to figure out how to operate in a carbon-constrained world. As a company, we needed to understand the issue, stay ahead of it, and help shape a sustainable solution. And, just as when I was the new CEO of PSI, we needed to build a diverse coalition of stakeholders who could collaborate, negotiate, and proactively face the challenge. In July 2006, thanks in large part to the leadership of General Electric and the World Resources Institute, a first-of-its-kind coalition of 22 companies (16 of them on the Fortune 500) and five leading environmental organizations created the U.S. Climate Action Partnership. The purpose of USCAP was to urge the federal government to enact strong legislation to reduce greenhouse gas emissions. As soon as USCAP was launched, critics tried to discredit it. A few people even called on me to resign as chairman of the Edison Electric Institute. Those reactions weren’t surprising. We knew we were taking a risk, and we had anticipated resistance. A key moment occurred at an EEI board meeting in January 2007, shortly before USCAP issued its first public call to action. I proposed that we go around the room and let each CEO express his or her views. Some of those from small and midsize utilities spoke forcefully about our need as an industry to deal with the realities of carbon emissions. Surprisingly, no one openly disagreed. Even the most skeptical CEOs acknowledged that if we didn’t have a seat at the table, we would be on the menu. We left that important meeting with an industry consensus: The way we produced and consumed electricity was not sustainable, and we needed a set of principles to guide our support for legislation establishing a price on carbon. Cap and Trade, the Sequel? Over the past four years USCAP and EEI have advocated for a comprehensive cap and trade policy for carbon. They have helped give the business community a voice in the discussion about how to responsibly transition to a low-carbon future. Recently, however, our efforts have suffered a setback owing to political gridlock and misunderstandings. This is unfortunate, because the longer we wait as a nation, the more difficult it will be for the U.S. to remain competitive in the new energy economy. We need bipartisan solutions, because regulatory uncertainty complicates business decision making. This is especially true for utilities, whose investment decisions are based on time horizons of 20 to 60 years. Regardless of what happens in Washington, the fact is that we have been living on borrowed time in the U.S. electricity markets. The real price of electricity remained flat for more than five decades in much of the country, largely because we didn’t replace our aging power plants. Many of them were built in the 1950s, 1960s, and 1970s; as they are retired and replaced, the price of electricity will increase substantially. We have been living on borrowed time in the U.S. electricity markets. Absent a constructive national energy policy, we must continue to innovate and integrate new technology that will help us generate cleaner, more sustainable electricity. Once again, we find ourselves collaborating with groups that some may consider controversial. For example, we’ve formed partnerships with a number of leading energy companies in China to share best practices and learn from the Chinese as they bring new energy technologies to scale. My bet is that technology developed from unique collaborations will bring us to a low-carbon future faster than national or worldwide policy can. But we still need smart government action. We still need a road map, for the sake of business, society, and the environment. So when I’m on the road these days speaking about our vision, and I’m asked that question: “How can you advocate for a low-carbon future…?” my answer begins with four words: “How can we not?”

How I Did It: The CEO of Duke Energy on Learning to Work with Green Activists

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