Conversations From the Corner Office

FULL INTERVIEW TRANSCRIPT

Duke Energy Corp. Chairman, President and CEO James Rogers talks with Kai Ryssdal

KAI RYSSDAL: Jim Rogers, welcome to the program.

JAMES ROGERS: Thank you. I'm delighted to be here.

RYSSDAL: I want to go back a little earlier in your resume than running a big power company. When you were a younger man, you were a reporter in Lexington, Kentucky, at the Herald-Leader there, and I have a question for you where I want you to put on your reporter hat. You ready?

ROGERS: I'm ready.

RYSSDAL: All right. So if a guy running a big company in industry X came out and said, "I have a plan for regulation for this industry, and I'm gonna take it to government and see what they have to say," would your cynicism and questioning antenna go up and say, "Now, wait a minute. What's he got going on here?"

ROGERS: I would probably ask that question, and I would probably say, "Well, why?" Why now? What does he see? What's the advantage to him of moving forward on this now rather than laying back and reacting to it, which is a more traditional corporate approach?

RYSSDAL: And so what . . . now let's flip-flop again and put you in the CEO role and say, "Why now?" Why have you decided, as the guy running Duke Energy, that now's the time to step up on greenhouse gas regulation and on global warming?

ROGERS: Several factors come into play. One is that I've been studying the issue for a number of years. I've watched the science evolve. And relying on the science says that there's . . . global warming is occurring, and now's the time to start to address it.

Secondly, I'm a pragmatist, and I'm in an industry that's one of the most capital-intensive, longest-cycle industries in the U.S., and recognize that it takes decades to really change the . . . our industry, to change out our power plants, and the sooner we go to work, the better in terms of making the transition in a smooth way, without having adverse impact on customers.

RYSSDAL: So let's say you could write the regulations, that you could sit down, and, Jim Rogers, out of your pen would come the rules and regulations for power industries in this country. What would they be like?

ROGERS: Well, first of all, I would set a long-term objective, like 2050 — in other words, recognizing that it took us over 100 years to build up our use of fossil fuel, and to look out and say, "Do we need to set a clear target in the distance?" And then I'd go to work developing milestones, and the milestones I would develop in terms of emission reductions would be tied to what I believe the technology would allow us to do over that period of time.

The other thing that I would consider is a nationwide cap and trade approach, because I think, most importantly, what we need to understand is what the price of carbon is. And once we have a price of carbon, then we can go to work . . . we understand the economics and we can go to work developing the technology that will allow us to provide energy with a minimal carbon footprint.

RYSSDAL: Let's explain the mechanics of cap and trade, for those who don't follow it probably as closely as you do. The government would come in and set a cap on carbon emissions for an industry, and perhaps down to specific companies. And then that industry would institute a market-based system whereby you may trade the right to pollute, in essence.

ROGERS: In essence, what we would do, we'd look at the cost of reducing emissions with existing technology, changing the operation of our fleet, maybe running nuclear more, if possible, reducing the operation of our coal plants so that we start to reduce our carbon emissions tied to the amount of power we have to supply to our customers. We would look at other companies that can reduce it at a lower cost. And we might buy allowances from them, if they produce a greater reduction than they are required to under the law.

It's all about a partnership between the government, who sets the targets, and industry going to work to find the least-cost solution that would allow us to get the reductions required by law.

RYSSDAL: Why cap and trade and not just a straight carbon emissions tax?

ROGERS: In my judgment, we really need a transition period, and the carbon tax, one of the difficulties is, it creates revenues for the government, but there's no guarantee that the government would use these revenues to reinvest in R&D or to offset the cost to consumers. In a cap and trade system, if you go back and look at SO2, how the system was implemented under the Clean Air Act Amendments of 1990 -

RYSSDAL: SO2 being sulfur dioxide, right?

ROGERS: That's correct. And basically what happened is they allocated allowances to those that would be most adversely affected by compliance. They phased those allowances out over a period of time. They allowed time for technology to evolve. And, as a consequence, we were able to reduce dramatically the SO2 in the country, but do it without having an adverse impact on those regions of the country that are heavily dependent on coal.

In the same way, a cap and trade system would allow that to happen, because in the U.S., there are 25 states where more than 50 percent of the electricity comes from the burning of coal. Those are the states that would be adversely impacted.

Think about California. California has limited reliance on coal to generate electricity, so the people of California wouldn't be adversely impacted in the same way those from Indiana, Ohio, Kentucky, in the industrial Midwest, where they're heavily dependent on coal to generate electricity. This allows the smoothing out of that over time.

RYSSDAL: So you would have a different system than some for allotting those emissions quotas. You would allow it based on what — the number — the amount of carbon dioxide that you put into the atmosphere right now, as opposed to the amount of electricity provided, which is what some others would.

ROGERS: That's correct, because think about in the last two decades, starting with the Clean Air Act Amendments, basically what we have done is we've basically done allocations of allowances based on technically what they call the input method, which is the BTU content of the coal. And so effectively what you've had is the EPA has adopted it, and this has been the way the allocation has worked.

What we're really calling for is a continuation of a precedent that's been used for SOx and NOx in the past in this country by both the Congress as well as the EPA. Those that are calling for taxes or calling for different allocations, or the output method of allocations, are asking to change from the way we've always done it in this country, which is predicated on assuring that those that are disproportionately affected by the new regulations have time to comply without an adverse impact on those consumers.

RYSSDAL: But you and the people in the coal-fire-powered industries are the ones emitting the most carbon dioxide, sir.

ROGERS: That's correct, and we're the ones that are most affected by the new law. And the thought here, and one of the reasons I've been such an advocate, is to be at the table, to make sure that those that I . . . four million customers that I serve in North Carolina, South Carolina, Ohio, Kentucky and Indiana, are not disproportionately affected by a new carbon regulation in this country, that we have time to comply, we have time for new technologies to develop.

I mean, about 98 percent of our electricity comes from coal and nuclear, and to smooth out the transition to a world where our emissions are significantly less, we need time, and we need to smooth out the cost impact on our customers and the regions of the country that are most affected.

And, by the way, the political science of this is really driven by the fact that 25 states have more than 50 percent of their electricity come from coal, while across the country, on average, 50 percent of all the electricity in the U.S. comes from the burning of coal, but in some states is significantly more than others, as we have been talking about.

RYSSDAL: What's your take on what a greenhouse gas emissions bill coming out of Congress would look like? Is there any doubt in your mind it'll be cap and trade instead of a carbon tax?

ROGERS: It would be my judgment, based on conversations that I've had with those on the Hill, that it will be cap and trade. There is a great distrust of a tax, because there's no guarantee how the government will subsequently use the money, and it really doesn't lead to smoothing out the impact on those that are most affected by the proposed regulation.

RYSSDAL: Let me get to the specifics of cap and trade for just one second. So the government puts a cap on. It allocates allowances or quotas for emissions. How do you propose that the government allocate those quotas? Do you want them free or are you prepared to pay for them?

ROGERS: Well, I think the way that it historically has worked over the last couple decades is they've been allocated free . . . as free. Those costs . . . I mean, those are automatically given to the consumers. This isn't a case of corporations keeping it and then charging customers. This is a situation where those costs automatically flow through to the consumer. It reduces their power bills during this period of time over what they would've been if they had to go into the market and buy them.

As a consequence of that, it buys time for new technologies to develop so we can retrofit, as we did with SO2 and nitrogen oxide. We retrofitted our units to reduce the emissions. So the goal line is to, over time, put the hardware on that actually reduces the emissions as we meet the more stringent requirements.

The way the law works today is is they phase those out. For instance, in 2010 there'll be another cut in the number of free allowances that are allocated to us that we pass through to our customers, holding their bills down.

RYSSDAL: But let me make an analogy, if I might, to national broadcasting. You know, I mean, you have to pay for the right to use the airwaves in this country. Phone companies do it. Broadcasters do it. Why not require payment for the right to use the air, as it were, and make industries pay for emissions quotas?

ROGERS: I think it goes back to imposing a regulation based on where we are today. And where we are today, we developed coal generation in this country because it was an abundant natural resource. And when these plants were built, there was no law that prohibited emissions of CO2. We built the plants in good faith that we were in compliance with the law.

As the laws have changed on sulfur dioxide, on nitrogen oxide, we spent the money, we reduced the emission. In fact, our company alone will have spent $5 billion reducing emission of sulfur dioxide and nitrogen oxide by 2010, and that's what we've spent really over the last decade.

As we look out to CO2, we're prepared to spend those incremental dollars, but we recognize the need to make a transition. And this is about making a transition so those that are adversely affected, disproportionately affected, in this country don't continue to be affected by this new regulation that didn't exist when these plants were built.

So this is about transition. This isn't about what life will be like for new plants that are built. For instance, any new plant we build will have to buy, if it emits CO2, CO2. This is all about the past and making the transition. It's not about the future and the building of new plants, all of which will require us to make sure we have adequate allowances, purchased or as a result of technology, reduced from the emissions of those plants.

RYSSDAL: You know, you've mentioned a couple of times, Mr. Rogers, the phrase "time" and how you need time to make this transition and time to install the equipment and time to figure out new technologies. Almost no matter where you stand on the science of climate change and global warming, there is a press here that maybe we don't have a lot of time to make some of these changes.

ROGERS: I agree that we need to go to work now. And the first thing we can do is invest in energy efficiency, because that's the most cost-effective way to start to reduce our carbon footprint. Secondly, we can start to use more renewables in this country, as we are, across the country. Thirdly, it's gonna really change how we think about nuclear, and that's gonna require a new conversation about the advantages of nuclear, which has zero greenhouse gases emitted but at the same time gives us the power to drive our economy and maintain our standard of living.

So, yes, it's gonna take time. But we need to go to work now, and that goes back to your original question: Why would anyone in my position be advocating carbon regulation? And why would they do it now? They would do it now because we have a sense of urgency about dealing with this problem, and the more the evidence comes in, the greater our sense of urgency.

The sooner we go to work, the sooner we solve the problem. And because I recognize, as many do, that we're not gonna solve this in one day, one month, one year, one decade. It's gonna take a number of decades, and it's gonna take a sustained effort to get this done.

Because what . . . today, the power in this country comes from power plants that were built to last 40, 50 and 60 years, and the retirement of those plants, the replacement of those plants . . . I mean, I wish I could snap my finger and say, "No more CO2 emissions." But think about how unrealistic that would be in the context of 50 percent of our electricity coming from coal, a resource in our country that's abundant but unfortunately has . . . the burning of it has significant emissions of SOx, NOx, mercury, as well as CO2. We've solved the first three. Now we've got to get about the business of solving CO2.

RYSSDAL: What are your thoughts on the Bush administration's decision not to follow the Kyoto Protocols?

ROGERS: In a sense, when I think back about President Bush making that decision, he was just reflecting what the vote had been of the Senate, which almost unanimously rejected the Kyoto Protocol in the late '90s. I think our thinking as a country has really evolved since then. In the last six years, our thinking has slowly evolved.

And what we ought to be focused on is what happens post-Kyoto, and that's 2012. It is critical for the United States to act on carbon, because the rest of the world, in my judgment . . . and part of what I was doing in Madrid was meeting with a group from the U.N. Foundation and the Club of Madrid to basically talk about what happens worldwide after 2012. And I think that's what we need to focus on. And it's going to be critical that the United States act, and I have every belief that we will, so that we'll be part of post-2012.

RYSSDAL: You know, as I did research for our interview, a phrase that keeps popping up when reporters and people they talk to talk about Jim Rogers is "unexpected advocate," that you are not necessarily a guy that people might expect to be in the vanguard of calling for regulation on climate change. Why you, and why now?

ROGERS: Several reasons. One, I recognize that it's a problem. Two, I think it's gonna take a long time to solve it. The sooner we get to work, the better. Third is we're the third largest consumer of coal in the United States. We emit as a consequence of burning that coal almost 100 million tons of CO2. We have a special responsibility to go to work on this issue and come up with solutions. I owe it to my customers, who are so dependent on coal. I owe it to my investors, who have invested in us, to come up with solutions that make sense and allow us to make the transition.

And I guess the last observation I would make, it's really about applying the grandchildren's test. As you know, as a CEO I get judged every quarter about performance, and I get . . . they look at me every year in terms of performance. To me, the real test is, is what would my grandchildren say about my stewardship when they get my age and they look back and said, "Were the decisions my grandfather made about climate and regulation of it and dealing with the problem, did he make good decisions and are they still good decisions today?" And I want them to be able to say, "Yes, he made the right decisions for future generations."

What makes this issue so difficult for politicians as well as corporate leaders is that we have to address and spend money to address an issue today, incur the costs today, and the benefit will be for future generations. And that's very difficult to make those kind of decisions, but I think this is one where we need to move forward and make those decisions, because it's really about the future that we're making these decisions, not about today.

RYSSDAL: You were instrumental in something, in the formation of something called the U.S. Climate Action Partnership, big businesses, in essence, calling for something to be done on the issue of greenhouse gases and global warming and what companies might do in that regard. When you talk to your peers who are running big Fortune 500 companies about this, what do you say to get them on board?

ROGERS: I talk about the importance of stepping up and addressing the issue. I talk about the void in leadership in America today, both on the political as well as the corporate level, to address issues that have a profound impact on our society and could have a profound impact on our economy over time. And it's helpful that I'm very affected by this issue. And as a consequence of that I talk to them about we've got to go to work now. It will smooth out the cost impact on them and on our customers and allow our economy to adjust as we reduce the emissions going forward. And I think that is . . . that is convincing. It seems to be convincing as I talk with them.

RYSSDAL: If you really think about it, it makes sense that you would want to be at the table for discussions and negotiations on regulation of carbon emissions. I mean, it's your job and you've got a vested interest. How, though, do you avoid the perception that the process of regulation is thus tainted because you were at the table?

ROGERS: One of the great things about our democratic system is that we want everybody at the table. We want every voice heard. We want every opinion expressed. Because the whole process allows us to weigh the pluses and the minuses. I mean, that's why they have hearings on the Hill. I've testified twice now in the last six months on carbon regulation under oath. They ask questions. They challenge my assumptions. And it gives them an opportunity to test the truthfulness of the representations that I'm making. And I think that's a very important part of the process.

I spent nine years practicing law in Washington and watching the process. And what I learned, it's very important to have compromise. I mean, it's the only way we really move forward in this country is by compromising, and part of my job is to make sure they're educated as to the issues. And they will make the judgments as to the way forward.

RYSSDAL: Once this bill gets written and passed and goes to the President's desk, no matter who's in the White House and who's in Congress, what's the one issue or a couple of issues that might make you dig in your heels and say, "No way. Uh-uh. Can't go along with this"?

ROGERS: I think there are a couple issues that we need to be watching out for. One issue is whether China participates or not. I'm of the school that believes that we ought to move forward even if China isn't ready to go today, but we ought to have a mechanism that allows us almost what you'd characterize as an off ramp in the event five years from now or ten years from now they don't move forward.

I think the second thing is is that it's important from my perspective to make sure that we have those who are disproportionately affected by this, that there's some transition mechanism in place. And as we've talked about that earlier, I think that is a very important thing, and that's actually one of the first things I talk about. I'm prepared to do it. We need to go to work now. But we need to make sure there's a transition mechanism with respect to those that are affected by this.

I'm fine. I would just make another observation, and this is from the meeting that I was in Madrid. It's the recognition that there is a tension in the world that we need to be aware of, and it's kind of broader than just the United States. As I said a moment ago, we have to be part of this. We should be a part of this or the rest of the world won't move forward without us being part of it. No question about that.

RYSSDAL: Well, then, I have to ask, though, why you would want, you know, an off ramp in five years if the Chinese don't go along with this? What about the issue of moral leadership and the United States emitting the overwhelming percentage on a per capita basis of carbon dioxide into the atmosphere? What about the issue of America just doing it because it's the right thing to do?

ROGERS: Well, one, it is the right thing to do, but we have to be careful about the metrics we use. Because this year China will emit more CO2 than the United States in terms of absolute emissions. They will pass us. They thought it would be another two years from now, but it'll be just this year. And if you look at U.S. emissions as a percent of our size of our economy, we are significantly more efficient, a more efficient economy, than the average of all the economies in the world.

So I think it's important — and this really gets to the point I was making earlier — there's a tension in the world. As we look out, 1.4 billion people today do not have access to electricity or to modern way of life. At the same time, we have significant emissions, and we know we have to reduce them by 2050 significantly below the 1990 levels. Everybody understands that. And that's the tension.

And the other important point is, if you look around the world — and this is what I listen to former presidents of countries talk about — there are different countries with different capabilities, and therefore they should have different requirements at different times in order to be able to address this issue. And so, yes, with China, who is a developing country, there might be a different timeline for them and different requirements, maybe different for India or Brazil, or maybe different for countries in Africa.

But the bottom line is, we need every country in the world involved in this going forward, because this is a worldwide problem. It needs a worldwide solution. But we need to be tolerant of the different positions people are in as we address this issue. Because it would do no good for us to reduce our emissions in this country if we can't bring along China and India, because they would swamp any reductions that we would have based on their incremental emissions that are projected based on the new plants that they're building.

RYSSDAL: Let me get back to the issue of a cap and trade market for just a second. You know, the Europeans instituted a cap and trade market a number of years ago, and in the time since, it's actually been proven not to have worked so well. The price of carbon has, in essence, collapsed. Emissions there are up. How can we know that we would get it right over here?

ROGERS: Because we have gotten it right with the sulfur dioxide cap and trade market. We should build on the lessons learned from their implementation. First of all, they didn't get the allocation of allowances right. The governments didn't handle it very well. They had a short time frame. They really didn't . . . in a three-year period or five-year period they didn't really change their behavior, because they knew the whole game would be over in 2012.

And that, quite frankly, is another one of those lessons and ties into the off ramp question you asked earlier. This is an issue that gets solved over decades. We need to have a plan that's long term. We need to kind of revisit certain things if people like China are not participating 5, 10, 15 years out. And I don't even know what the time frame is to revisit it. I'm just throwing that out as a way to think about it.

The important point is we need to recognize that it's going to take time, significant investment, it's going to take changes of behavior by corporations. It's going to take changes of behavior on consumers in terms of how they use energy, for instance. It's going to take time for hybrid cars to emerge. We need to rethink biodiesel. I mean, there's a set of things that need to happen to solve the problem.

And one of the things I've learned is there is no silver bullet. There is no one single answer. It takes a lot of changes in behavior. And it would be a mistake just because the European Union didn't do it perfectly to say, "No, it doesn't work." Our experience with SO2 tells us a different answer.

RYSSDAL: You know, you mention sulfur dioxide, SO2, but it's my understanding that actually at the plant there's sort of a different mechanism for getting those two gases, CO2 and SO2, out of the emissions, and you can't basically just slap something on there at a reasonable cost and get the CO2 out. Doesn't that then affect the pricing of the substance emitted?

ROGERS: It does, and in fact that's . . . that's exactly the point I'm making. With SO2, when we first passed the law in 1990, we had not perfected the scrubber yet to reduce SO2. So a lot of us bought allowances to supplement the allocations to allow us to meet our growing demand. Job one for me is to make sure there's a reliable supply — when somebody throws a switch, the power's on.

And so . . . but as the years advanced, the prices went up of SO2 because we got the cheaper SO2 credits first from the market. As the prices went up, the technology was improving, and then we started building scrubbers on the back end, and when we complete the building process by 2010, we will have put 29 scrubbers on the back end of our plants. They are more efficient than the ones in the early days, the ones that we're building now.

And so my point is is that on CO2 the same thing will happen in a cap and trade system. We might not build . . . because the technology is not commercially available yet to capture carbon and store it, but we believe it will be in 10 to 15 years. And so that buys time — as we look at ways to meet our emissions with allowances — buys time, importantly, for the technology to evolve so someday you can put a carbon-type scrubber on the back end of these existing coal plants and take out the CO2.

RYSSDAL: How do you . . . in a cap and trade market, how do you set the price for carbon dioxide? I mean it's, you know, what's the index? Where do you go to figure out what the price is that day?

ROGERS: I think what happens is is you start to trade it and the price the market determines . . . will . . . the price will evolve. People will offer up at a certain price. People will buy it at that price or bid a different price. In the markets the bid and ask will converge, and you'll have a market price.

So I'm confident that it will happen. And I think it . . . and it worked in Europe, but not perfectly. And so the important thing is is that we ought to learn from that as we design going forward, because I do believe it's a cost-effective way to address the problem.

RYSSDAL: How do you say it worked in Europe, though, if emissions are up and the price of a ton of carbon dioxide has gone from, I think, $38 to like $1.40?

ROGERS: It has to do with the phased-in periods and the fact that the period expires in 2012. I mean, you can't buy allowances for after '12 unless they're at a very deep discount. And what happened is once the market realized that they had over . . . they had given too many allocations, there wasn't a strong demand for allowances, so the price fell.

In the early days, they didn't have any understanding of how the governments in these countries would allocate the allowances. Germany is a wonderful example where they allocated them to the companies, the companies didn't pass through the benefits to the customers, and it translated into higher prices for customers and a windfall to the companies in Germany. That was a failure by the German government.

RYSSDAL: Okay, so if there is a disagreement about how to set the price, whether it's the government not getting it right or whether the market, in essence, can't quite figure it out . . . why not then just go to a straight carbon emissions tax, where you know what the price is because the government says, "This is what the price is"?

ROGERS: Because under a carbon tax system, the government gets the revenue, and they might use it for Social Security, or they might use it for road building. They're not gonna use it to invest in R&D. They're not gonna use it to help smooth out the transition period and offset the price increases that are gonna hit the heartland of our country, that part of our country that's heavily dependent on coal.

So my point here is it's very important to recognize we're in a transition period, and we shouldn't adversely impact. We should smooth out that transition. Cap and trade is proven to do that.

And if you go talk to Fred Krupp at Environmental Defense or any of the leadership of any of the NGOs in this country, they all will point back and say the SO2 trading markets worked in the United States, and it translated into significant reduction in SO2 in a very low-cost . . . in a very cost-effective way.

RYSSDAL: Jim Rogers is the Chairman and CEO of Duke Energy, based in Charlotte, North Carolina. Mr. Rogers, thanks so much for your time.

ROGERS: Thank you. I'm delighted talking with you.

[NOTE: The text above is an extended excerpt of the interview and may have been edited. It should not be taken as a verbatim record.]

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