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June issue
By Karen Blakeman
KC BUSINESS MAGAZINE
CO2 Target 2020
When Great Plains Energy subsidiary Kansas City Power & Light announced in March that a six-year environmental battle with The Sierra Club had ended and it would expand policies to cut pollutants, environmentalists met the news with rare praise.
The utility set out a plan to cut planet-warming greenhouse gas emissions 20 percent by the year 2020. Leaders said they would pursue that goal by working with environmentalists and local officials to increase use of green energy, help customers consume less electricity and make existing coal-burning plants run cleaner. Several years ago, it would have seemed unimaginable for a utility to embrace such a broad environmental commitment. Welcome to the brave new world of energy in America. Will it last?
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The Sierra Club's decision to stop all pending legal action against KCP&L after six years of litigation might seem like a surprising departure from the contentious relationships typically held between utility companies and environmental groups. How often in the past have environmentalists publicly praised a utility company preparing to bring online a new coal-burning power plant?
"We'd like to applaud KCP&L for leading this community-and for leading its peers in the industry-in how we address global warming from this point forward," said Missouri Sierra Club's Melissa Hope after the March agreement was reached. "We've turned the corner for dealing effectively with climate change right here in Kansas City."
Local environmentalists and community leaders say KCP&L is doing more than paying lip service to the growing national environmental movement. Though they now expect the local utility-and energy corporations throughout the country-to do even more in the future.
Instead of running from that challenge, many energy executives are asking the environmentalists for help. Call it a sign of the times. As scientific evidence mounts, public concern increases and pressures for new federal legislation rise, interest in controlling greenhouse gasses is becoming a bottom-line necessity for energy companies. Big utilities and environmental activists-once on opposing sides of courtrooms, legislative hearings and negotiation tables-are developing an entirely new relationship.
"I don't think the public fully appreciates what a big deal this is for this region," says James Joerke, air quality program manager for the Mid-America Regional Council, a group that works with regulators and utilities in Kansas and Missouri. "I've been working in air quality for 10 years, and this is easily the biggest thing that has happened since I've worked here. ... The Midwest isn't usually on the forefront of these issues, but I'll say with this: We're moving toward the top."
While much deeper cuts in greenhouse gas emission will likely be required in the future, community leaders say KCP&L has made a good start. Under the agreement with the Sierra Club, KCP&L will, by 2012, increase its use of wind energy by 400 megawatts (enough to power about 400,000 average-sized homes), assist residential and business customers to use energy more efficiently to the tune of an additional 300 megawatt savings and employ other measures to completely offset emissions from Iatan 2, the company's newest coal-fired plant now under construction near Weston. The other measures could include upgrading older and more troublesome plants and the possibility of closing the utility's aging Montrose plant near Clinton, Missouri will be studied.
For their part of the agreement, the Sierra Club of Kansas and Missouri and the Concerned Citizens of Platte County have dropped their legal battles to halt construction of Iatan 2, which is expected to emit more than 6 million tons of carbon dioxide (CO2)-a greenhouse gas linked to global warming-each year after it goes online in 2010. The Sierra Club and Concerned Citizens also agreed to work closely with KCP&L to lobby regulators on further improvements—including a program called net metering that will allow customers to feed excess energy back to the grid and further uses of alternative energy-that will cut carbon dioxide emissions from all the utility's plants by 20 percent over the next 13 years. KCP&L, which produces most of its energy from coal, estimates it has emitted between 15 and 20 million tons of CO2 annually since 2005.
In this new world of energy in America environmental groups and utility companies might make for strange bedfellows, but by joining together they see a way to accomplish their respective goals. Environmental groups get curbs on pollution. Power companies can find new ways of making profits. "It's not like we've agreed to do anything they want," Hope says. "We'll work together to find common ground, and we do believe that, in the long run, the costs will be cheaper with energy efficiency and wind than with coal."
Energy Democracy
Michael Chesser, chairman and CEO of Great Plains Energy, and William Downey, president and CEO of KCP&L, say the agreement with Sierra Club-six years of litigation aside-is an extension, rather than the beginning, of policies and improvements already underway as part of KCP&L's Comprehensive Energy Plan. "Call it Chapter 2, if you want," Chesser says.
The utility's recent requests for rate increases-8.28 percent in Missouri and 10.82 percent in Kansas-will help to cover ongoing expenses associated with the plan, as well as to cover increased fuel costs and increased operating expenses. (KCP&L declined to speculate on how much the new Sierra Club agreement will cost.)
Chesser and Downey-new to their positions in 2003-approached the Comprehensive Energy Plan using a management concept they would later employ in the agreement with the Sierra Club. While the usual model was to develop energy plans in-house, then present them to others in an attempt to garner support, Chesser says, Great Plains and KCP&L reversed the process. They held a series of seminars involving more than 2,000 people-including customers, community leaders, government officials and KCP&L employees as well as representatives of several environmental groups-and allowed the participants to help define the issues to be included in the plan. Because of the work that went into that collaborative process, and the environmental gains that came from it, Great Plains Energy was named one of four national finalists for the Edison Electric Institute's Edison Award, lauded as the most prestigious in the industry. (The winner will be announced June 17.)
"Environmental concerns and climate change are becoming bigger and bigger issues by the moment but energy demand is not going down," says Ed Legge, spokesman for the Edison Electric Institute, an association of U.S. shareholder-owned electric companies.
"We're all going to have to work together to find solutions, so this sort of collaboration-bringing stakeholders to the table and employing compromise and creativity-is something we want to promote."
Although the agreement with the Sierra Club was made after the finalists for Edison Award were chosen, Legge notes that similar collaborative approaches are key to the agreement. "Great Plains and KCP&L are doing this collaboration thing all over again, aren't they?" he notes.
Chesser says the agreement with Sierra Club hasn't escaped the notice of his peers. "We've gotten a lot of positive reaction," he says. "We've had other companies call us and say: 'You know, that looks like a very interesting model. How did you go about it?' Some companies much bigger than we are have been very complimentary."
Green is Good Business
Environmental gains aside, Chesser and Downey are quick to point out that energy company officials will always have an eye on the bottom line. "If it is not good for our shareholders," Chesser says, "we're not going to be highly motivated to do it."
But the traditional problems of balancing shareholder interests with climate change-the root of the traditional conflict between environmentalists and utilities-may soon disappear, says Manik Roy, director of congressional affairs for the Pew Center on Global Climate Change. As political pressures build, finding ways to control greenhouse gas emissions is becoming a smart business move.
"If I were a shareholder," he says, "knowing what I know about the science of climate change and where the states are going and where Congress is going, I would certainly want my company to be fully accounting for the regulation of greenhouse gas emissions in any future plans-and certainly in anything as long-lived as a power plant."
Roy predicts that by 2010 at the latest, and most likely before that, federal legislation will be passed that will require businesses to limit greenhouse emissions. Even a year ago, that prediction might have seemed overly optimistic.
"We're facing one of the largest challenges of our histories," says Bruce Nilles, the Sierra Club's director of the Midwest Clean Energy Campaign, "and we've had a complete lack of action on the federal level-denial by the administration that has set us back enormously over the past several years."
While President Bush had called for industries to voluntarily reduce greenhouse emissions in 2002, few complied. "Emissions have continued to go up dramatically in that time," Nilles says, "and we have continued to make investments that make the problem worse."
Nilles says the six years of litigation and negotiations that have helped Chesser and Downey pave the way to balancing environmental and business issues have been easy compared to working with other Midwestern energy CEOs, at least one of whom still denies the existence of global warming. Those who share that opinion, or aren't sure whether human activities are to blame for rising temperatures, or who think the science is just too contradictory to draw any conclusions about climate change, can still find experts to back them up. Many of those experts, according to a report issued in January by the Union of Concerned Scientists, have links to organizations funded by ExxonMobil, the planet's largest oil company and a top emitter of greenhouse gasses. ExxonMobil has denied the charge.
Regardless of their sincerity or independence from corporate influence, dissenting voices have become less resonate in recent months. Roy says a number of factors have coalesced to turn the situation around, and among the first were environmental changes too pronounced or extreme to ignore.
Melting Ice Caps and Hurricanes
In the Midwest, those changes include annual temperatures that have topped 110-year averages for eight straight years in Kansas and seven of the eight in Missouri. While many regions weathered periods of drought, other parts of the world were besieged by floods, and images of communities obliterated by mudslides have appeared in the news with alarming frequency. Helped along by the 24-hour news, nature provided a dramatic example of climatic extremes in 2005 with Hurricane Katrina. Ominous radar images of the approaching storm dwarfed the Gulf Coast and bore down on one of the country's most vulnerable cities, giving way to nightmarish levels of destruction throughout much of Louisiana and Texas. Devastating weather events, Katrina demonstrated, were not restricted to countries outside the U.S.
That same year, Roy says, frustrated states began to take matter into their own hands. California Governor Arnold Schwarzenegger veered away from the national Republican stance when he proposed global warming legislation for his state. Other states, particularly in the Northeast, began to follow his lead. And beyond the Atlantic, the European Union was setting carbon emissions regulations that would affect international corporations doing business in that part of the world.
Debate was heightened last year with Al Gore's Oscar-winning movie, An Inconvenient Truth. Its scenes of melting glaciers and polar bears stranded on ice flows, presented alongside charts and graphs, fueled public interest and tipped the public perception of climate change as a frightening reality.
Since the election of a Democrat majority Congress, federal debate on global warming has changed. Senator Barbara Boxer, a California Democrat who supports climate change legislation, became chair of the senate environment and public works committee. The previous chair was Senator James Inhofe, an Oklahoma Republican who has referred to global warming as "the greatest hoax ever perpetrated on the American people." When the two clashed over a point of order during Al Gore's committee testimony in March, Boxer waved her gavel to remind Inhofe he no longer held it. "You don't make the rules," she said. "Elections have consequences, so I make the rules."
In terms of momentum, 2007 may be a banner year. It began in January, when 10 high-level corporate officials-including the CEOs of Duke Energy, DuPont and General Electric-announced during a joint press conference with environmental groups that they were calling for the federal government to act swiftly in passing legislation to curb greenhouse emissions. They issued a report titled "A Call for Action," detailing what they thought were the best steps for accomplishing the goal.
A few weeks later in February, the first of three reports scheduled to be made public this year was released by the United Nations Intergovernmental Panel on Climate Change (IPCC). The first 2007 report detailed how an international group of top scientists had concluded, with 90 percent certainty, that climate changes affecting the planet were driven by billions of tons of carbon dioxide and other greenhouse gasses that human industry has been spewing into the atmosphere over the past half century. The IPCC released a second report in early April, warning that further weather-related disasters and climate changes are expected. The third report is expected to examine ways of mitigating those effects.
A few days before the IPCC released its second report, the U.S. Supreme Court waded into the fray. In what some consider a slap in the face to the Bush administration's climate change policies, a majority of the justices ruled-in a case involving transportation sector pollution, but having much broader consequences—that the Environmental Protection Agency (EPA) has the authority to regulate greenhouse gases, a point the EPA had previously contested.
The court's written opinion in favor of the states that had sued the EPA noted that "the harms associated with climate change are serious and well recognized."
Fallen Dominos
Just about all of the presidential forerunners, Republican or Democrat, are likely to be more supportive of climate change legislation than the current administration, and few business leaders are likely to misread the trend. With federal legislation now imminent, energy leaders-much like Great Plains and KCP&L-are beginning to respond. Some are working with environmental groups to draft and propose legislation they can submit to Congress before all their friends on Capitol Hill are gone.
Likely scenarios include cap-and-trade-a program similar to the effort used to control acid rain in the 1980s, which involves setting a limited number of pollution credits that utilities can buy or sell to one another-or a carbon tax applied to those who initiate the pollutants with costs passed on to each user in turn. Others energy companies, like Great Plains, are responding to pressures by working to reduce carbon output before reduction is forced upon them.
A Texas utility, TXU, Roy says, has yet a different approach. "TXU is the poster child for the wrong way of addressing the issue," he says. In what many thought looked suspiciously like an attempt to drastically increase carbon dioxide emissions before federal limits could be enacted, TXU's board announced plans in April 2006 to quickly build 11 new coal-fired power plants. Environmentalists were outraged.
What followed was a battle in which the activists were joined by an unusual ally-an investment group, led by private-equity firms Texas Pacific Group and Kohlberg Kravis Roberts & Co., which were looking to buy TXU. "So the buyers in this takeover said, 'OK, we're going to buy you, but as a part of the deal you're going to build a lot fewer of those plants and the ones you do build you're going to build better,'" Roy says. TXU scrapped eight of the 11 plants. "I am confident that sent a very strong message throughout the country-maybe the world."
Governor Schwarzenegger, during a recent visit to Washington, D.C., to promote global climate change awareness, restated that message with tough-guy aplomb. Those who don't get on board with efforts to control global warming, he warned, "will become a political penguin on a smaller and smaller ice flow, drifting out to sea. Goodbye my little friend," he said.
Two-Way Energy Flows
Some of the energy innovations that KCP&L and the Sierra Club have agreed to pursue could help customers save money. Chesser thinks energy-efficiency strategies have the most immediate potential.
Many recently developed technologies are already in place and being promoted by KCP&L, including rebates for using energy-efficient florescent bulbs and offers for free, remotely operated thermostats. The thermostat allows the customer to turn his or her heater or air conditioner down before leaving for work or travel, then crank it back up to comfortable levels remotely-including by Internet-before returning home. In return, the utility gets to access the thermostat on peak usage days, making tiny adjustments to control energy flow.
Susan Brown of Concerned Citizens of Platte County is excited about working with KCP&L toward legislation that would support net metering, a process that would allow customers in Missouri and Kansas to employ their own alternative energy sources, such as solar panels or wind generators, and feed excess energy back to the power grid. Those customers would not only save money by cutting back on energy consumption, they could also make money by selling electricity to the utility. "We see this as leading to a whole new group of entrepreneurs," she says.
In the not-so-distant future, Chesser sees a day when improved battery technology will allow customers to charge hybrid electric vehicles in their garages overnight, during times of low energy use, and discharge some of that electricity back into the system while their cars are parked at work during the day. "Just imagine," he says, "instead of paying for that parking space, you will get paid."
Having energy fed back into the grid at peak usage times will save the money for the utility, which now fuels those high-demand days in the heat of summer or cold of winter by kicking in small, expensive natural gas "peaker" units.
Developing the grid to allow two-way feeds will require upgrades, Chesser says, so money will have to be spent and, with regulator approval, recouped with a return on the investment in rate increases.
Chesser has recently been named to the chairmanship of board of the Electric Power Research Institute, an organization that focuses on energy research and development, and is also co-chair of the Edison Electric Institute's energy efficiency task force, which works to develop business models that will make those new technologies attractive to customers as well as palatable-and profitable-to shareholders. The balancing act can be tricky.
Shareholders, who make money when utilities build new plants then earn a rate of return from the investment, will see utilities encouraging customers to use less of their product so that fewer plants will be built. To keep investors from fleeing in droves, utilities are proposing that regulators allow them to treat financial investments made toward energy efficiency as though they were power plant improvements and allow the utility to earn a rate of return from that investment. Now it is the customers' turn to experience a moment of cognitive dissonance: they could be paying higher rates for the opportunity to use less electricity.
Chesser and Downey think it will work.
"I think it is something that utilities around the country are getting excited about," Chesser says. A recent industry-wide meeting on energy efficiency, hosted by Great Plains in Kansas City in January, drew more than 50 top utility executives. "Five years ago," Chesser says, "you could have held that meeting in a phone booth."
Both utility executives say they believe their customers, too, would accept changes necessitated by environmental pressures. KCP&L customers, Downey says, like most Midwesterners, are pragmatic people who enjoy their lower cost of living, including energy price rankings in the lower quartile of the nation. But they are also practical enough to understand the necessity of protecting the environment and well informed enough to see that air quality improvements will make Kansas City and the surrounding areas more desirable.
"We're not saying they'd be supportive of dramatically expensive environmental strategies," Chesser says. "But I think the average customer will be supportive of cost-effective strategies, and my point is this: There are a number of them available to us."
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