Xcel CEO charts steady course to less-intensive carbon future

Source: Rod Kuckro, E&E reporter • Posted: Monday, July 28, 2014

Xcel Energy Inc. Chief Executive Officer Ben Fowke may have found the sweet spot as the leader of one of the nation’s largest utility holding companies.

It’s not that his four regulated utilities with operations in eight states aren’t challenged by the multiple trends shaking up the electricity industry across the U.S. They certainly are.

It’s that Fowke, 56, views the challenges more as opportunities as he navigates a careful course toward a less carbon-intensive future.

And it doesn’t hurt that stakeholders from Wall Street to the environmental community have offered kudos on his stewardship since he took the helm from longtime CEO Dick Kelly nearly three years ago.

Xcel’s creditworthiness is among the best in the industry as judged by ratings agencies Standard & Poor’s and Moody’s Investors Service, both of which credit its financial strength to a “conservative” management strategy.

“Xcel’s rating reflects its straightforward, low-business-risk profile as a sizable owner of rate-regulated utilities,” Moody’s Senior Vice President Mihoko Manabe said in January when explaining an upgrade of Xcel’s debt.

“I give Xcel high marks on leadership on wind power, demand management and clean energy transmission,” said Michael Noble, the executive director of Minnesota clean energy advocate Fresh Energy. But, “Xcel is stuck in neutral on rooftop solar, demand response in wholesale markets, electric vehicles and distribution system innovation,” he added.

“Ben’s got a lot pressures on him, but he knows where he wants to end up,” Noble said.

Xcel collected more kudos Thursday, when the sustainable investors group Ceres issued its first scorecard on electric utilities’ renewable energy and energy efficiency performance. Xcel ranked first out of 32 utilities, with 21 percent of its 2012 retail sales attributed to renewables.

Fowke sat down with EnergyWire recently in his Minneapolis conference room to talk about some of those opportunities, including controlling greenhouse gas emissions, balancing renewables on the grid, security, reshaping his workforce and the “luxury” of doing business in regulated jurisdictions.

Xcel’s four vertically integrated utilities operate in the Midwest (Michigan, Minnesota, North Dakota, South Dakota and Wisconsin), Southwest (New Mexico and Texas) and Colorado. They serve approximately 5.3 million electricity and natural gas customers and operate in two of the less troubled regional transmission organizations: the Midcontinent Independent System Operator and the Southwest Power Pool.

Taken together, they make up the largest utility play between the Mississippi River and California with a diversified power supply mix dominated by coal (46 percent) but that also includes more than 5,000 megawatts of wind power, making it the nation’s leading utility in that category.

Xcel has been gradually reducing its coal-fired generation in anticipation of U.S. EPA’s recently issued proposed rule to curb greenhouse gas emissions from existing power plants. Fowke wants EPA to ensure that companies like his get credit for “early action” from 2005 to 2012, when it replaced coal plants with natural gas units and invested in energy efficiency.

“Listen, we have already reduced, here in Minnesota — and actually across all of our jurisdictions — we’ve reduced our carbon footprint by more than 20 percent since 2005. We’ve done all the right things, and in fact, we believe we’ll reduce carbon by 30 percent by 2020,” Fowke said.

As other utility CEOs have recently, he expressed confidence in EPA Administrator Gina McCarthy as the rule gets shaped.

“We have been planning for this day for a while, so I think to have to almost start from scratch would be very disappointing. But I also think the administrator is very pragmatic. She’s not an outsider. She’s very interested in rules that are going to be legally defensible, and she wants to build consensus,” Fowke said.

Asked why there is a disconnect between some politicians and industry trade groups who excoriate the EPA rule and how he and many of his peers are approaching it, Fowke said, “I think that’s because our industry has a track record of if you give us enough time and the rules are sensible and fair to customers, we can make them work. I’m concerned about getting to that cleaner state but making sure that we do it in a way that is cost-effective for our customers.

“We are in the middle of a major infrastructure refresh here at Xcel Energy, and I think I speak for the industry as well, you don’t want to pile on [costs]. So you have to give us the value of time to transition.

“That’s a challenge, but the opportunity — and I’m speaking for myself now if not for my colleagues — is that with natural gas prices where they are today and forecasted to be, we can move more to natural gas. We at Xcel Energy, we’ve been the No. 1 wind provider for a decade now, renewables are getting increasingly more affordable and on parity with fossil.”

The nation also has to address its nuclear power plant fleet, he said. “That’s going to be essential to any kind of real carbon strides we make in the future, and of course if we go backwards, that is just going to raise the bar that much more,” he said. Xcel operates three nuclear units at two sites, both in Minnesota.

Fowke dismissed as “very, very hard” the notion that states could collaborate on a plan to meet EPA rules or that an RTO such as MISO could play a role in coordination. “Fundamentally, I think each state, at least initially, has got to develop their own plans; and as you know there’s a lot of disparity between the targets that each state has.

“So we have these opportunities to start moving towards a cleaner, less-intensive carbon future and not hurt the economic pocketbooks of our customers, but we’ve got to do it in a fair, equitable and practical manner,” Fowke said, adding, “But we’re a long way from the final rules — and if you look at the history of proposal versus final — they can deviate quite significantly.”

Renewables in the mix; wind trumps solar for now

Fowke is bullish on Xcel’s investments to date in wind power and says he would continue to invest even if subsidies such as the production tax credit are allowed to expire and the price of the unsubsidized electricity competes with natural gas generation, where in many places he says it is “absolutely” competitive.

Most of the 5,080 MW on Xcel’s systems is contracted for through power purchase agreements. The company owns just three wind farms with 327 MW of capacity. But it plans to add 1,900 MW more to its systems by 2016.

“Could we continue on? Yeah, we could continue on, because I have been nothing but impressed in the improvements with the wind technology. Six, seven years ago, we had [wind turbine] capacity factors of 35 percent; now you’re talking about capacity factors of over 50 percent.

“So wind is seeing some, if not breakthroughs, some real significant improvements in cost. The PTC, obviously, is helpful in buying that down. I think we would advocate that at some point it does need to transition out, maybe similar to the [investment tax credit], you know, it’s going to drop down to 10 percent, but then it’s permanent, maybe there is a compromise like that,” he said.

When it comes to solar power, Fowke is more circumspect, particularly about the effect of distributed generation on the cost of maintaining and operating the transmission grid.

Xcel’s investment in solar is modest. At the end of 2012, Xcel had 266 MW of solar power on its system, including 129 MW of customer-sited solar.

To go further and satisfy growing customer demands for the choice of having photovoltaic panels on their roofs will require “getting the rules right,” Fowke said.

Crafting those rules is something the Edison Electric Institute (EEI), representing investor-owned utilities like Xcel, and the Natural Resources Defense Council (NRDC) are working on. The parties earlier this year expressed their intention to support new state-level rate regimes on practices such as net metering that allow continuing expansion of solar power while keeping utilities financially whole and able to maintain the grid (EnergyWire, Feb. 13).

The EEI-NRDC agreement “was a recognition that the grid is fundamental to our security of and reliability of our energy future. The grid is a great bargain today, it’s absolutely a phenomenal bargain, and to replicate it independently, to truly get off the grid is — at the residential level, is probably — if you leased the equipment and everything else, would probably be in the $250- to $400-a-month range,” Fowke said. An expense in that range would far exceed the national average monthly residential electricity bill, according to U.S. Energy Information Administration data.

“That would be if you decided that you were going to completely get off the grid, not just put rooftop panels, but get voltage regulation, get the power you need to start up your air conditioner, you know, the stability, it would be extremely expensive to replicate. So let’s not shortchange the grid,” Fowke said.

“But unless you’re completely disconnecting from the grid, you need to have that grid there. You’re using it just as much as somebody that is a more traditional customer. In fact, you’re using it more because you’re importing, exporting and you’re asking the grid to do a lot of things,” he said.

“We still need that grid, and somebody needs to pay for it, and our rate design really hasn’t evolved as quickly as the technology.”

Inevitably “some customers are going to want to do more on their own. They’re going want to have some on-site generation and it’s not just renewables, it could be self-generation, the other options that are coming available there,” he said. “We increasingly have to incorporate distributed generation and other alternative forms of generation into our long-term planning mix.”

Fowke believes that “customers are willing to pay a little bit more to be greener, but I don’t think they’d be willing to pay a lot more.” While some customers might be willing to pay anything to be green, for most, 5 percent to 10 percent more is where “you’re probably going to get some pretty good acceptance. I think over 10, I bet you is probably a good break point.”

Security is important, but ‘there’s a risk-reward to everything’

While Fowke is committed to participating in industry efforts to secure utility assets from the threats of physical and cyberattacks, he wants guidelines on those efforts to be “pragmatic and not overly prescriptive.”

On the day of the interview, the Federal Energy Regulatory Commission proposed a rule that would require owners and operators of the bulk power system to identify critical facilities, as well as threats to and vulnerabilities of those facilities, and to create a security plan to protect against and mitigate physical attacks on that infrastructure (Greenwire, July 17).

That same week, the nation’s utility regulators, at their annual meeting, passed a resolution urging that standards be written with an eye on the cost associated with their implementation.

“We have to be very, very diligent,” but “there’s a risk-reward to everything,” Fowke said, noting that providing security “is expensive, but the threat of not doing it is very expensive too.”

“You’re never going to spend enough money to absolutely prevent it; you have to spend the right amount of money in a pragmatic way to avoid as much risk as economically possible and let people know what that price tag is and make sure they understand they’re willing to pay for it. But you can take it to extremes. I mean there are limits to what we can do. Frankly, at what point do we need an army?”

Fowke is especially optimistic about the benefits of a relatively new software solution crafted by federal researchers that links utility networks with national security databases to guard against cyberattacks. “There are plans to roll that across the entire industry. It gives you real-time understanding of what’s happening across the whole space. So if you see it coming, you can draw up the bridges, basically, and keep it from happening.”

No longer a ‘fuddy-duddy industry’

Fowke is acutely attuned to the transformation occurring in his utility workforce, where, like elsewhere across the industry, companies are moving “from basically a baby boomer to a millennial-type generation.”

Gone are the days of “a 30-year veteran” being the norm at a utility, Fowke said. “I think we’re getting some really exciting talent attracted to our industry because they see that, hey, this is an industry that’s changing, this is an industry that’s in the newspaper, it’s not kind of an old-fashioned, fuddy-duddy industry.

“There’s plenty of opportunities as that workforce turns over. So challenge-opportunities, you know we started with that, I think the workforce turnover is obviously a huge challenge because we are a complicated business, tremendous institutional knowledge could walk out the door, so we’ve got to figure out how we capture that, simplify processes. ”

Another demand of a younger workforce — as with a new generation of customers — is the need to communicate. “The millennials were raised with connectivity and so they’re very connected, and in this day and age, you have to communicate,” Fowke said.

“In the past, I think utilities have been pretty humble — do the job, don’t talk about it, your efforts speak for themselves.

“You still have to do the job, but we have to talk about it. We have to let people understand more what their choices are, what we’re trying to accomplish. So I think the new breed of CEO communicates far more outside and both internally. The new generation wants a lot more feedback, they demand it,” Fowke said.

One example of that feedback is Fowke’s use of Yammer, an enterprise social network, to host quarterly “Yam Jams” with Xcel’s 11,000 employees. “That’s just kind of the ante in today’s world.”

Challenges remain on the horizon

Xcel is more than a bit fortunate that it operates traditional utilities in regulated jurisdictions, where it has no exposure to the kind of price issues afflicting merchant generators and those exposed to capacity markets. “I think there’s a lot of investor preference to see a good piece of your business in the regulated versus the merchant space these days, given the depressed prices that you’ve mentioned,” Fowke said.

While the RTOs are “very efficient at what they do — dispatching generation on a variable basis, improving reliability — you don’t have to carry quite the reserve margins with a larger footprint, and streamlining and making transmission pathways more efficient and better planned,” he said.

But RTOS are not “in the position to design market pricing to encourage capacity investment.”

Each utility should decide on how to plan for its reserve margins by working with state regulators and stakeholders and then coordinate with the RTO. “We’re not facing some of the challenges where I think you’re trying to put a round peg in a square hole.”

Being in regulated states has other advantages, such as helping to support Xcel’s nuclear fleet. “We’re feeling the same kind of cost pressures that everybody else is, but we have the luxury of being in regulation,” Fowke said.

In the next year, Fowke hopes to establish a “transco,” which would help capture returns from its interstate grid. “We are the largest developer of [345-kilovolt] transmission lines in the country,” Fowke said, and a transco will allow Xcel flexibility to collaborate, at a lower cost of capital, on projects with municipalities, other investor-owned utilities and rural cooperatives.

In almost all of its states, Xcel is this year pursuing rate cases to recover the cost of billions of dollars in spending on transmission, generation and emission controls. “Every state has their own unique view,” Fowke said. If regulators balk at the returns Xcel wants, it could slow the company’s business plan, he said.

“Well, we’re making decisions today that we’re going to live with for 20 or 30 years; it’s kind of the nature of our business,” Fowke said.

Xcel is slated to report its second-quarter earnings Thursday morning.