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by Nancy Spring, Managing Editgor
Congratulations to FPL Group, Electric Light & Power’s 2007 Utility of the Year.
Green, clean, renewable, efficient; global warming, carbon-constrained world, greenhouse gas emissions. Think or write about 2007, and these are the words that come to mind. What better choice than FPL Group for 2007 Utility of the Year, then?
FPL Group’s at the forefront of clean energy production and energy conservation and hasn’t shied away from the global warming debate-in fact, it’s assumed a leadership position. FPL Group is already No. 1 in wind energy production in the U.S., No. 1 in solar energy production, and No.1 in energy efficiency programs, and now it’s No. 1 with us for 2007.
Like any “overnight success,” it’s taken years, but today almost 89 percent of the energy FPL Group generates is from clean or renewable fuels-wind, solar, hydro, natural gas and nuclear. FPL Group has one of the lowest emission rate profiles in the U.S. electric industry. And the company’s very sensitive to environmental issues. At the St. Lucie nuclear power plant, for instance, FPL maintains an extensive sea turtle monitoring and research program, and supports the Loggerhead Marinelife Center in Juno Beach, where sick and injured turtles are rescued and rehabilitated.
Apparently, it’s a great place to work, too. This year, FPL Group was ranked No. 1 in Fortune’s Most Admired Companies among electric and gas utilities.
All this, after two high-profile merger attempts ended in failure, causing turmoil that might have stopped a lesser company in its tracks.
A green sea turtle. FPL maintains an extensive sea turtle monitoring and research program at its St. Lucie nuclear power plant in south Florida. Photo, FPL Group. Click here to enlarge image
The Entergy merger was terminated in April 2001 and the Constellation Energy deal fell through in October ’06, but disappointment in that arena didn’t slow the company down for a minute. Today, with annual revenues of nearly $16 billion and a growing presence in 27 states, Juno Beach, Fla.-based FPL Group (NYSE: FPL) is widely recognized as one of the country’s premier power companies. Its principal subsidiary, regulated electric utility Florida Power & Light Company, serves more than 4.5 million customer accounts in Florida, while FPL Energy LLC, FPL Group’s competitive energy subsidiary, is a leader in producing electricity from clean and renewable fuels.
We talked with Lewis Hay III, chairman and CEO of FPL Group, about this remarkable company, but first, a little background on just what makes the company special.
Climate change: Take action today
Perhaps it’s in the debate about global warming that FPL Group has most clearly shown its true colors. In June, when Hay testified to Congress on climate change, he said that there is enough evidence of global climate change to warrant taking action today. “We know enough to know there is a risk of severe consequences, and just as we buy insurance, we need to address that risk.” He strongly endorsed a carbon fee as the best way to achieve meaningful reductions in greenhouse gases.
In early November, when a sub-committee of the Senate Environment and Public Works Committee voted to move a climate change bill entitled America’s Climate Security Act to the full committee for hearings and a markup, Hay said that while FPL Group is a strong proponent of mandatory climate change legislation, the act is fundamentally flawed.
“We need to enact a mandatory, economy-wide program that slows the growth of carbon emissions and ultimately reverses the trend,” said Hay. “But we must take the time to get it right. Compromising on key provisions, like giving away allowances to the biggest emitters or failing to include a clear safety valve, is not the way to start.”
FPL Group’s 36,000-megawatt power generation fleet has one of the lowest carbon dioxide emission rates in the country. As part of the EPA’s Climate Leader Program, FPL Group committed to achieve an 18 percent reduction in emissions rates of greenhouse gases by 2008, compared to a 2001 baseline. And FPL is also the largest U.S. power company to have joined World Wildlife Fund’s Powerswitch! Pioneers program.
FPL Energy and Florida Power & Light: Trailblazers
FPL Energy, the competitive energy arm of the company, is a leader in the world of clean and “alternative” energy. FPL is tops in wind energy in the U.S. and operates the two largest solar fields in the world.
By year end 2007, FPL Energy will have more than 5,000 MW of wind assets in the U.S., with more than 50 wind farms in 16 states, which, according to a recent article in the New York Times, means the company will have $6 billion invested in wind energy production. “Around the world, FPL Group is the second-biggest wind generating utility, after Iberdrola of Spain,” wrote the author of the Times article.
Wind turbines at Wilton Wind Energy Center, in central North Dakota. Owned and operated by a subsidiary of FPL Energy, the facility produces 49.5 megawatts of electricity. Photo, FPL Group. Click here to enlarge image
In July, FPL Energy made another major decision aimed at reducing greenhouse gases, unveiling a $20 billion plan to triple its wind generating capacity. The company expects to add between 8,000 and 10,000 MW of wind energy by the end of 2012.
Two months later, FPL Group announced a $2.4 billion investment program aimed at increasing U.S. solar thermal energy output. Initiatives include investments of up to $1.5 billion in new solar thermal generating facilities in Florida and other states over the next seven years, starting with a project at Florida Power & Light. The utility will also spend up to $500 million to create a smart network that will provide its 4.5 million Florida customers with enhanced energy management capabilities.
FPL Energy plans to launch a nationwide renewable energy program early next year that will allow residential and business customers to take an active role in reducing greenhouse gas emissions and help develop new sources of renewable energy. Under this program, consumers will be able to purchase products associated with Renewable Energy Credits (REC) generated by FPL Energy’s renewable energy facilities. The project is expected to generate revenues of about $400 million during its first five years of operation-and 100 percent of those revenues will be used to develop new capacity in renewable energy.
“These new investments…demonstrate FPL Group’s continued commitment to improve the environment and reaffirm our leadership position among U.S. utilities to combat global warming,” said Hay.
FPL Energy also operates 83 hydroelectric power units at 24 stations in Maine and numerous natural gas plants in other states. On the nuclear side, FPL Group operates four nuclear power plants and recently acquired a fifth. There are the St. Lucie (1,678 MW) and Turkey Point (1,386 MW) plants in south Florida; a majority interest in Seabrook Station in New Hampshire (1,244 MW); and a 70 percent interest in the Duane Arnold Energy Center in Iowa (605 MW). A proposed uprate at the two Florida plants could add approximately 400 MW to the output of those plants by 2012. Just recently, FPL Energy completed the purchase of the two-unit, 1,023 MW Point Beach nuclear power plant in Wisconsin from We Energies.
From outsider to industry leader
Lewis Hay III, chairman and CEO of FPL Group, joined FPL Group in 1999 as chief financial officer. He was promoted to president of FPL Energy the following year, and then in June 2001, he was named president and CEO of FPL Group and chairman in January 2002.
In other words, after less than two years with the company, Mr. Hay was elected president and CEO.
In his interview, Mr. Hay talked about the new directions FPL Group is taking. Maybe because he’s an engineer, when he approaches a problem like controlling greenhouse gases, he tries to solve it logically. (Why does FPL prefers a carbon fee? “First, it is simple.”) Maybe because he was an “outsider” to the utility business when he started, he’s been willing to break new ground. (“We have sought to look ahead and anticipate rather than to wait and react.”) Whatever the reason, FPL Group, our 2007 Utility of the Year, is an exciting company now and one we’ll be watching for years to come.
The utility industry has a reputation for being conservative and slow to adopt new ideas. Is that changing?
I believe that is generally the case. We’re proud that FPL Group has, for many years, been an industry leader in successfully developing and implementing new ideas. We have sought to look ahead and anticipate rather than to wait and react. We began investing in wind and solar power in the 1990s, well before many businesses understood the importance of clean, renewable energy, or saw the opportunities for growth and profitability. We were among the first electric utilities to adopt a strong public position on the need to control carbon dioxide emissions that contribute to climate change and we’ve taken environmental issues seriously for many years.
Florida Power & Light, our regulated electric utility, has steadily reduced the emissions rate from its fossil fuel plants over the years and is on the forefront of developing new nuclear generating capacity-which produces no greenhouse gas emissions-for its 4.5 million customers. FPL Energy, our competitive energy subsidiary, is moving ahead with investments aimed at tripling its nearly 4,500 MW wind generating capacity and earlier this year announced plans to develop the first-ever plant to convert citrus waste into ethanol. We’re also planning major investments in new solar energy capacity at FPL and FPL Energy.
Parabolic trough at the Solar Electric Generating System (SEGS) in California’s Mojave Desert. FPL Energy is the largest generator of solar energy in the country through its operations there. Photo, FPL Group Click here to enlarge image
Of course, all utilities would be in a better position to make more timely decisions if our federal government would pass greenhouse gas legislation.
FPL Group leads U.S. utilities in wind and solar energy production and in energy conservation programs. What are your near-term plans for renewables?
FPL Group has some exciting plans in renewable energy. In July, FPL Energy announced a $20 billion investment program for adding between 8,000 and 10,000 MW of wind power by the end of 2012. And at the Clinton Global Initiative conference in New York City in September, FPL Group unveiled a plan to invest $2.4 billion to increase solar thermal energy and reduce carbon dioxide emissions. Of this total, as much as $1.5 billion is planned for new solar thermal generating facilities in Florida and other states.
As part of this investment package, FPL Energy will launch a nationwide program designed to reduce carbon dioxide emissions and develop new sources of renewable energy. Residential and business customers will be able to purchase Renewable Energy Credits (RECs) backed by FPL Energy’s renewable energy production. This project, to be supported by a nationwide educational effort, is expected to generate revenues of $400 million during its first five years of operation. One hundred percent of these revenues will be used to develop new renewable energy capacity.
In Florida, FPL recently inaugurated the state’s largest photovoltaic solar facility and is developing a pilot wind power project on the Atlantic coast. It also is planning a 10-MW test project for solar thermal energy and is studying an expansion of its Florida solar thermal energy production to 300 MW.
FPL currently buys about one-third of all renewable energy capacity in Florida from producers of biomass and waste energy, and is seeking proposals for additional capacity.
Our governor, Charlie Crist, has proposed some far-sighted goals for developing new renewable energy sources and reducing greenhouse gas emissions. We support these initiatives and are ready to take the next steps, as long as we can do so without creating excessive costs for our customers.
How does nuclear fit into your generation portfolio? Would FPL Energy consider building a nuclear plant?
Nuclear energy clearly represents an important share of our generating portfolio, and we expect it to play a much larger role, especially in Florida, where demand for electricity is growing vigorously. Nuclear power produces no greenhouse gases, and it’s an affordable, long-term source of energy for our customers. It also helps diversify FPL’s fuel mix, which is now skewed toward natural gas, and will reduce our dependence on fuels like natural gas and fuel oil, which experience price volatility.
Since 2002, FPL Energy has acquired three nuclear power plants, including the recent purchase of the Point Beach nuclear facility in Wisconsin. While FPL Energy has no plans to build a nuclear plant, Florida Power & Light has proposed a major expansion of its nuclear capacity through uprates of our four existing reactors in Florida and the addition of two new nuclear power plants. The uprates would add more than 400 MW to our nuclear facilities at Turkey Point and St. Lucie by 2012. FPL also is planning to add two new reactors, with up to 3,000 MW, to Turkey Point by 2020.
To address climate change, you favor a carbon fee instead of a cap-and-trade program. Can you tell us why?
First, I want to make it clear that we support mandatory, economy-wide controls on greenhouse gases. These include certain cap-and-trade programs and a carbon fee. However, after a lot of research and analysis, we believe that a mandatory, economy-wide and escalating carbon fee is the best approach for addressing global warming.
There are several reasons why we prefer a carbon fee. First, it is simple. We propose a modest initial fee imposed on every ton of CO2 ($10) that would escalate $2 per year in real terms. The fee would be imposed upstream when carbon enters the economy, at roughly 2,000 sources, making it very easy to administer.
Unlike cap-and-trade, there is no need for a long and complex rulebook for trading, nor is there a need for numerous governmental agencies to administer it. One look at the proposed Lieberman-Warner bill will show you how complex cap-and-trade really is and the large number of agencies required to manage it. The simplicity of a fee also offers the benefit of rapid implementation. A fee could be implemented years ahead of cap-and-trade.
The second benefit of a fee is its transparency. Everyone will know the costs and the impact on our economy and on each participant. Many of the proponents of cap-and-trade want to avoid discussing the costs and impacts. This is because the costs in their proposals are unacceptably high and U.S. consumers would not stand for it if they knew the costs, or because certain groups (usually large emitters) would obtain enormous quantities of free allowances worth billions of dollars. As Rep. Dingell says when referring to cap-and-trade, “It’s a hidden tax, which is precisely why so many politicians like it. I haven’t found many [environmentalists or economists] saying cap-and-trade works. But that approach happens to be politically easiest because people can say the program isn’t a tax, which is a bare-faced lie, as you know.”
We need to face the fact that there is a cost to transitioning away from carbon and somebody will have to pay for it. This cost is hidden under many of the cap-and-trade proposals, while it is fully transparent under a fee.
Similarly, a carbon fee provides cost certainty for the long-cycle, large capital investments our industry must make to provide clean, reliable energy. Economic research suggests this cost certainty will lead to more investment in carbon reduction technologies than a similarly configured cap-and-trade program with volatile carbon prices.
We believe a carbon fee is also fairer. Everybody pays the same rate. But the worst emitters pay more on an absolute basis and those who have already made improvements pay less. Companies will win or lose based on their ability to innovatively invest to reduce carbon emissions-not on how successful they are in lobbying Congress for free allowances.
Our proposed fee is also fair to consumers, as we propose recycling most of the gross receipts back to consumers (e.g., a carbon allowance). This will benefit low-income consumers, who typically do not use much energy, and it will increase the costs to higher income consumers, who typically consume much more energy. So, unlike cap-and-trade, which is highly regressive, our carbon fee is progressive.
Turkey Point nuclear plant, Biscayne Bay, Fla. Most of the property remains in its natural state, home to more than 60 species of birds and animals, 17 of which are endangered — including the American crocodile. Click here to enlarge image
This is not to say that a cap-and-trade system cannot be made to work effectively. If a carbon fee turns out to be politically unfeasible, the next best alternative would be cap-and-trade with a majority of allowances fully auctioned and with the remainder being allocated on the basis of energy output rather than input. In addition, a “safety valve” should be included to protect against severe market disruptions, with a floor and ceiling for prices.
From severe weather to rapid population growth, Florida Power & Light’s service territory is very challenging. How is the utility preparing for the future?
You’re right, we face some tough challenges in Florida. Florida Power & Light is better prepared today for hurricanes than ever before. Since 2006, our utility has invested more than $100 million to upgrade its system to withstand higher winds, strengthen critical infrastructure projects like hospitals and ports and improved pole inspections and vegetation management. We call the program Storm Secure. Going forward, we plan on spending about $50 million per year on O&M and making $100 million to $150 million a year in capital expenditures for Storm Secure. FPL is also encouraging the conversion of overhead lines to underground.
Another big challenge, of course, is growth. Florida has one of the nation’s fastest-growing populations and is expected to replace New York as the third largest state by 2030. FPL is adding about 85,000 new customers each year and its existing customers are using more electricity than in the past.
To meet part of this demand, FPL is building two state-of-the-art, natural gas-fired combined-cycle generating units in Palm Beach County. Other natural gas generating plants are on the drawing boards. And, as I mentioned earlier, FPL is planning a major expansion in nuclear generating capacity.
In addition, we’re pushing ahead aggressively with energy efficiency and energy conservation programs, which we expect will meet about 26 percent of future demand growth. In recent years, these programs have allowed us to fully meet our customers’ energy requirements while avoiding the need to build 11 power plants.
What new technology holds the greatest promise for our industry?
At the top of my list would be new technology for economically capturing and sequestering carbon dioxide. Of course, at FPL Group we’re always on the lookout for new technologies in areas such as wind and solar energy, as well as applications for other types of renewable energy and new ways to make existing generating facilities more efficient.
FPL Group is successful in its home state and 26 others. What do you think of the continuing debate over “deregulation”?
It’s too soon to tell whether or not deregulation will be successful. In general, I am a big believer in competitive markets. But the electricity industry has unique issues that make it difficult to be truly deregulated, and different regions of our country have approached deregulation in different ways.
For the near future, I don’t see any move to deregulate electric utilities in Florida. Florida has a progressive approach to regulation that has served Floridians very well. Rates at FPL are below the national average, we have an adequate supply of power and our system reliability is significantly better than the nation-wide average.
FPL Group is ranked No. 1 in Fortune’s Most Admired Companies among electric and gas utilities. Can you talk about one of the eight key attributes of reputation, “social responsibility”?
For FPL Group, social responsibility means showing a real commitment to the communities we serve, to the environment and to future generations. At the community level, we help people by providing assistance to customers in crisis who can’t pay their electric bills, building energy-smart homes for low-income families and contributing to United Way, to name a few of our programs. Concern about the environment is not a recent fad at FPL Group. It has been one of our guiding principles for many years. We believe that meeting our customer’s need for electricity must go hand-in-hand with protecting the environment.
As for the future, we must take effective action to slow, halt and reverse greenhouse gas emissions. We need to ensure that our children and grandchildren do not suffer the effects of climate change because this generation failed to act.
It’s been a year since the Constellation merger was called off and several years since the Entergy deal fell through. Is it important to keep looking for merger opportunities?
We were disappointed, or course, that we weren’t able to complete the Constellation merger. Constellation is an excellent and innovative company that would have matched up well with FPL Group. But as I said then, I have great optimism for the future of FPL Group as a stand-alone company.
Florida Power & Light is a premier electric franchise with customer growth that exceeds the industry average. FPL Energy is one of the best and most consistent performing wholesale generation businesses in the nation, and has outstanding growth prospects. It is increasingly contributing a higher percentage of our earnings each year, while maintaining a lower risk profile than most unregulated generation companies. FPL Group has one of the strongest balance sheets in the industry, affording us the ability to consider a variety of opportunities to add to our portfolio, as well as to reinvest in our business. I’m confident that FPL Group will continue to grow shareholder value in the near and long term.
Having said that, scope and scale do matter in this business, and we believe there will be continued consolidation in the industry. FPL Group is well positioned going forward on a stand-alone basis. However, if the right opportunity presented itself, we would take a serious look to see if it could help us to further grow value for our shareholders.
If you were talking to a young engineer just starting his or her career, how would you describe FPL Group?
If you were talking to a young engineer just starting his or her career, how would you describe FPL Group?
The need for abundant clean energy is one of society’s key challenges today. At FPL Group, we’re driven by engineering and technology, and we’re one of the industry leaders in developing new solutions. We’re a company that cares about our customers, our employees, our shareholders and our environment. We have outstanding growth opportunities going forward – especially for bright, energetic people. Join us and help create the future.