On February 11, a team from American Electric Power (AEP), including CEO Mike Morris, spoke to KLD analysts and clients. AEP is a utility company that runs the nation’s largest electricity transmission system and owns 36,000 megawatts of generating capacity. It’s also the largest user of coal in the Western Hemisphere. The company’s executives visited KLD to explain how they’re preparing for a future of sharply constrained carbon emissions.

This article will summarize AEP’s policy positions as presented to KLD. Part Two will provide more detail on the technological, political and economic challenges facing coal-burning utilities, which power much of the US (and global) economy.

“Our window for timely action on climate change is fast closing, which makes it essential for investors to engage bellwether companies like AEP,” said KLD Senior Analyst Andrew Brengle.

As part of its engagement efforts, AEP has committed to annual sustainability reporting and dialogue with stakeholders, including activist investors represented by Ceres. At the KLD forum, Mr. Morris presented an overview of his company’s efforts to produce and/or purchase more renewable energy for its more than 5 million customers.

He also asserted the continued importance of coal as a source of electricity. Mr. Morris was candid about the political calculus behind AEP’s position:

“We have 25 ‘coal states.’ That’s 50 Senators whose states depend on this economy.”

The heart of AEP’s response to a carbon-constrained future is “clean coal” technology. This is a controversial topic – pro and con recently dueled on the New York Times op-ed page – and AEP has bet its future on clean coal’s potential.

AEP’s Commitment to Coal

In response to a question from KLD Analyst Sharon Squillace, Mr. Morris described AEP’s involvement with two clean coal R&D initiatives: carbon capture and sequestration (CCS) and integrated gasification combined-cycle (IGCC). CCS prevents carbon from being released into the atmosphere, while IGCC converts coal into a cleaner-burning gaseous hydrocarbon.

AEP was also a key participant in FutureGen, a government-sponsored pilot program that would combine IGCC and CCS at a single plant. FutureGen is currently in limbo, but AEP and others would like to see the project revived under the Obama stimulus plan.

Mr. Morris on CCS:

“[We’re] demonstrating that carbon capture works. If CO2 emissions reduction is the law of the land, that’s what we’ll do. Nobody in our space is moving as aggressively on this issue.

“Through the chilled ammonia process, we capture exhaust and re-segregate it into pure ammonia and pure CO2. Opening this September is a 20 megawatt plant with capture and storage capabilities. [In 2011 AEP will have a] 235 megawatt plant with CCS.”

Mr. Morris said that AEP will incur a cost of $600 million for the first plant, with five additional plants planned at a cost of $200 million each. To keep this in perspective, he made clear that “We still have a massive investment in our existing facilities,” he said. “We have $5 billion invested and we will not just walk away from that.”

The as-yet-unbuilt FutureGen plant is designed to employ carbon capture and storage and also uses IGCC. Gasified coal burns more cleanly than solid coal, allowing for a smaller carbon capture system than is required for a conventional coal-burning plant.

Mike Morris explained AEP’s position on FutureGen:

“Our Mike Mudd is president of the FutureGen alliance. We believe that the government made a massive mistake by pulling the plug. It’s designed, bid out, shovel ready, ready to go.

“The formula they used to use [to cancel FutureGen development] is no longer viable. Back then, $2 billion was a lot of money. In this stimulus package, they ought to build out the whole thing. It would mean 3,500 big time jobs. Put $2 billion towards something that really matters.”

Carbon Credits: Auctions vs. Allowances

The KLD Blog has previously considered plans to account for carbon emissions, including the “cap and trade” concept that President Obama endorsed as a candidate and includes in his first budget. Mr. Morris told his KLD audience that “I’m not against a carbon cap,” but he does have reservations about the auction of carbon credits. He would prefer the free distribution of allowances to utilities:

“Allowances should come after the cap [is defined and implemented], not before. The feds should come back to utilities with allowances to apply towards supplies of carbon. We believe that allowances should be distributed to those of us who need to put capital to work.”

If carbon credits were to be auctioned, Mr. Morris does not believe the resulting revenue should be disbursed to ratepayers, as some have proposed in a “cap and dividend” program:

“An auction would be a massive revenue machine. The reallocation of that capital will look like a handout program, for better or for worse. If your goal is redistribution, that would do it….If funds were collected from auctions and sent out to customers, we will miss an opportunity to do the right thing.”

Pat Tomaino, an analyst at F&C Management, asked, “Could there be a ‘middle ground’ between allocations and auctions?”

Mr. Morris replied:

“We need to target monies back to those forcing technology in the field. If we don’t force new technology into the field, we’re going to run out of energy. Our ‘middle ground’ is a sacrosanct funnel back to local distributors [such as AEP].”

“A states’ rights issue”

In response to a question by Anita Green of the General Board of Pension and Health Benefits, Mr. Morris described AEP’s position on the balance of regulatory power between states and the federal government. As an interstate company, AEP must work with many separate regulatory regimes, but the company is concerned that greater federal involvement could lead to other problems:

“We provide zero resistance to the idea of state by state renewable energy standards. …We argue strongly against the notion of penalties if standards aren’t met. This is a states’ rights issue. … Anything else is a cost to our customers without any benefit.

“If the federal standard is 20% [of total energy use coming from renewable sources] by 2020, ok. But if West Virginia can’t hit 20% because of its particular circumstances, then there shouldn’t be any penalties. I don’t want to see my customers pay a fee, really a tax, for something they can’t do. … Paying a fee because we can’t hit an unrealistic target is unfair to our customers.”

AEP also supports greater federal investment in the long-distance electric grid. Increased transmission capacity could help distribute power from renewable-rich states to those with less potential for wind or solar generation.

Again using West Virginia as an example, Mr. Morris said, “I would accept higher standards for renewable use in West Virginia if I could sell them wind energy from Oklahoma.”

AEP’s Positions in Perspective

AEP’s multibillion dollar cleaner energy initiatives show that the company takes sustainability seriously, as does its willingness to engage stakeholders such as Ceres, KLD and our clients. AEP’s ongoing commitment to coal, however, is a bet on future technological and political developments that are by no means certain.

While CCS, IGCC, and other processes show promise, they have never been applied on the scale envisioned by AEP. Politically, the company is urging the US government to revamp the entire interstate regulatory structure, while also funding FutureGen and a massive expansion of the transmission network. AEP also resists the auction of carbon credits and the disbursal of fee revenue to consumers, rather than utilities.

Company CEO Mike Morris indicated his willingness to work with the Obama Administration, but his company’s positions are at odds with many of the President’s stated priorities. Still, the President’s home of Illinois is one of the “coal states,” and to judge by his recent address to Congress, the interests of coal producers and users will continue to shape US energy policy.

Can the US build a sustainable economy while remaining a coal-burning nation? AEP’s policy positions and investments show that it believes we can. In Part Two, KLD Analyst Benjamin Blank will consider the implications – and risks – of this commitment to clean coal.