Electric Utilities Face the Future

Utility CEOs have two conflicting missions: To help customers by keeping rates low, and to protect the environment by shifting to costlier green energy

By John Carey

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There's a row of haunting photographs outside J. Wayne Leonard's New Orleans office: Old men pass the time in a rundown Mississippi barbershop. Twins are out walking with their mother dressed in mismatched hand-me-down clothes. A weatherbeaten dog trader cradles a puppy in his gnarled hands. Leonard calls it the Poverty Wall. He set it up, he says, "to remind me, every day, this is what we do." As CEO of a major utility, Entergy (ENT), his job is bringing affordable energy to all these people.

But the pictures hold larger lessons as well. People and industries get left behind if they can't adapt to changing times. And now, it's Leonard's own stodgy industry that's being asked to adapt. Where governments around the world once demanded merely that utilities provide cheap electricity to light up cities and power TVs, now there's a call for a radical transformation to a cleaner, greener energy supply to fight the perils of climate change and dependence on fossil fuels. The House of Representatives has already passed a landmark bill mandating an 83% reduction in greenhouse gas emissions by 2050. "It will force a technological revolution," says James E. Rogers, CEO of Duke Energy (DUK), a utility headquartered in Charlotte.

The challenges for the nation's 3,273 utilities are huge. "We'll throw away billions of dollars if we screw up," says John W. Rowe, CEO of Chicago's Exelon (EXC). But what makes the task even more difficult is the fundamental clash between the two goals Leonard and other CEOs say they are passionate about: helping customers by keeping power prices low and averting the potential traumas of a warmer planet. The effort to curb emissions, after all, will significantly raise the price of coal and other electricity generated from fossil fuels.

Changing Financial Incentives

This conflict requires CEOs to walk a tightrope between their own economic self-interest and the larger interests of the planet. It also explains why they have been working so hard to shape the details of the climate legislation in Congress to their advantage. And the power of economic self-interest has created clashes within the industry itself, since each twist of the coming regulations creates winners and losers among the individual companies. "We all have positions on these issues that reflect the different make-up of our fleets [of power plants]," explains Duke's Rogers. Millions of dollars are hanging on the legislation's details.

More fundamentally, these tensions raise questions about the difficulty of balancing societal goals with the powerful entrenched financial interests of individual companies and industries. Striking such a balance is no easy task. Witness the difficulty in changing the financial incentives that are fueling the rise in health-care costs. But in the case of climate policy, the struggle may turn out to be less arduous—if only because industry and government leaders largely agree both on the need for change and on the general types of policies most likely to speed the transformation.

Entergy's Leonard, 58, has thought deeply about these questions. The son of an Indiana school teacher, he is self-effacing enough to be "amazed that a person like me ends up as CEO of anything," he says, yet bold enough to be one of the first utility CEOs to become a passionate advocate for fighting climate change. Entergy even filed an amicus brief on the environmentalists' side in the landmark 2007 Supreme Court case that affirmed the right of the Environmental Protection Agency to regulate greenhouse gas emissions. Most utilities weighed in on the other side.

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