AEP: committed to coal and the environment: Mike Morris, chairman, president and CEO of American Electric Power, explains how AEP intends to make it work

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John M. Powers, online/associate editor

Michael G. Morris, chairman, president and CEO of American Electric Power, doesn’t waste time getting to the point. He can’t. He’s got a utility company to run. And he’s got the climate to protect. Perhaps that’s an overstatement, but the fight against climate change is an important issue to this outgoing EEI chairman.

It took Morris all of 16 minutes to fully and succinctly answer every question we threw at him. In the process, Morris explained that AEP wants to lead the way on climate change, with its integrated gasification combined-cycle (IGCC) clean coal plants and an unwavering view that every country, including emerging industrial giants China and India, must commit to providing customers with environmentally responsible energy.

EL&P: Historically, AEP has been successful in pursuing acquisitions. Will the repeal of PUHCA affect the company’s M&A strategy?

Morris: Well, I don’t really think so. The first half of your sentence is pretty accurate. Over the years, of course, American Electric Power was put together by a series of acquisitions that started more than a hundred years ago. The Central and Southwest merger was a very creative undertaking that challenged the whole notion of how contiguous companies need to be and how contiguous can be defined. So the repeal of PUHCA will have almost no effect on our M&A strategy.

In today’s world, I don’t think anyone would be acquiring for the sake of acquiring. The whole notion would be, if there were a company that had an appealing industrial logic to it, that had some strategic advantage, and could over some period of time prove to be accretive and beneficial to your shareholders, you’d surely want to look hard at it.

I think our appetite for M&A remains as it was. We will continue to always have our eyes open for those kinds of opportunities.

EL&P: In May 2004, AEP reorganized its distribution and customer service operations to give more decision-making power to regional utility presidents. Has that change improved operations? And is there a “lesson learned” for other utilities contemplating “mega-mergers”?

Morris: I think that it has; that change has really worked quite well. We continue to experience very favorable regulatory treatments as well as economic development support in the states where we’re doing business-executive office support, legislature support. So, there’s a local face and a local name and if there’s a lesson to be learned, I would say to my colleagues who are contemplating mergers that they cling to the historic names. There’s nothing better than “Public Service of Oklahoma” as compared to “American Electric Power.” Even though that may be the best name in the business, it doesn’t mean a great deal to the people of Oklahoma, while PSO does.

EL&P: AEP received the top score for utility climate change strategy from a Ceres investor coalition report. What is AEP’s commitment to the issue of climate change?

Morris: I’d like to think AEP has been among the leaders on this issue in the industry. We are 100 percent committed to having coal in the near- and long-term mix. We are very bullish on the notion that coal can be, and in fact, should be, burned in the most environmentally responsible manner that you can. And I would argue that that’s exactly what we’re trying to do.

We have joined in the debate over Clear Skies. We have joined in the activity with the Asia Pacific Pact that brings China and India into at least the discussion loop. And we think those are incredibly important steps forward. We’re one of the founders of the Chicago Climate Exchange. We’re really dedicated to the notion of doing all that we can to make the most cost-effective energy available to our customers with the largest domestic fuel source that this country has and doing that with an absolute dedication to try and be as respectful as we can of the environment.

EL&P: AEP has proposed building two IGCC clean coal plants to meet projected demand. Can you tell us why you chose that technology and why clean coal is AEP’s alternative energy of choice?

Morris: When you look at the history of AEP, you see that in 1917 we began the notion of mine mouth coal plants and taking the load to our customers over the transmission and distribution system. We look at coal as the fuel of choice for us because that’s what our history tells us and we think that the integrated gas combined cycle technology is the very best technology dedicated to the climate change issue that we just spoke of. When you look at that technology, it’s been in the world for a long time, it’s just never been adopted here in the United States other than in a few facilities that have been DOE-funded or government sponsored/co-sponsored projects and/or chemical facilities that have been gas-firing coal for chemical feed stock. And of course you’ve got the huge plant out in Beulah, North Dakota, that I was lucky to work on as a young energy guy, and that’s turning coal into pipeline quality gas. So, it’s a technology that’s there. GE standing behind the technology makes it much more palatable, and therefore acceptable, not only to us but others in the space.

EL&P: Do you trust things like solar and wind?

Morris: Of course we do. But with solar and wind, a big project would be 100 megawatts. The IGCCs are 620 megawatts each.

EL&P: So, more bang for your buck with clean coal?

Morris: Indeed.

EL&P: Do you see a major role for nuclear power in the nation’s energy portfolio? Will it figure into AEP’s generation mix?

Morris: As to the first part of the question, there’s no doubt that we are strong proponents for nuclear being in the energy mix going forward. In fact, it would seem to me that we need that blend of demand side management, we need the blend of renewables, and they together might tally up 10 percent, give or take, of the overall laod growth as we go forward. The rest of that load growth needs to filled with clean coal and nuclear.

As to the second part of the question, we are the proud owners and operators of the D.C. Cook plant. Two units, 1,200 megawatts each. We will continue to have them. We have licensed life extension ability now from the NRC. But I don’t see American Electric Power playing in the new nuclear game.

EL&P: AEP has proposed a “transmission superhighway” stretching from West Virginia to New Jersey. It’s a $3 billion, 550-mile project designed to reduce congestion costs and enhance reliability in the East. What are some of the major challenges you anticipate going forward with the project?

Morris: Well, there are two issues here. One, how will the Federal Energy Regulatory Commission view this project? Will they see it as the interstate highway it’s intended to be and give it appropriate regulatory approval in that sense? I fully believe that they will. The DOE is going to have to designate this-or we would like them to designate this-as one of their identified corridors so we can have the backstop imminent domain that is attached to that kind of an undertaking. Short of that, a 550-mile line to be built from West Virginia to Jersey would be almost impossible with the American dislike of having anything built anywhere where they might see it. So the biggest challenge quite honestly will be obtaining the permits and the rights of way to go forward and build the facility. Our comparator is our Jackson’s Ferry Wyoming Line, which is 90 miles long and took 16 years to get the ultimate permits and authorities to go forward.

I think it’s essential that this country really addresses that issue. And that’s why we were such strong proponents for the back-up siting authority at the FERC and the DOE as the 2005 Energy Bill was coming forward.

EL&P: Are you willing to wait 16 years for the superhighway?

Morris: Well, we’ve built into the schedule to 2014, so that’s a pretty comfortable time. The real benefit of that line is that it could save the customers in the PJM power pool as much as a billion dollars a year in congestion. So you would think that this would be a great project for us to go forward with. And we’re sure strong believers in the benefits it could bring.

EL&P: AEP has fully funded its pension program, covering pension obligations for more than 40,000 individuals. Can you comment on this commitment to the future financial well being of your employees and retirees?

Morris: I really think this is one of the most important things a corporation can do. The people who give us their entire career, or huge chunks of their career, and have built this great organization, and move into the retirement phase, they need to know they can count on us to pay their pensions. That’s part of the bargain for exchange in a historic sense. We are now a cash-balance company going forward, but I think it’s very important that we have the opportunity to ensure that our retirees get the bargain they stood for, and fully funding the pension is our way of committing to them that the funds are there and will be there for them. I worry a great deal as the Financial Accounting Standards Board continues to look at this issue and may well make some changes that penalize companies that have, in fact, fully funded their pensions. If the culprits are the steel folks, and the car folks, and the metal folks who have not funded their pensions, why penalize those of us who have? We worry about that a great deal. But for my employees and the retirees, we are sending absolutely the crystal clear message.

EL&P: We’ve touched on mergers & acquisitions, generation, transmission and human resources issues. As the outgoing chair of EEI, what do you anticipate being major topics of discussion and debate at the EEI Conference? Do you have a new perspective on the industry after being the chair of EEI?

Morris: Two really great questions. As to the first, I think that the entire issue of global climate change will be discussed. That includes the issues of mandatory vs. voluntary emissions controls, utility-only controls versus including all of U.S. industry, or only U.S. industry including utilities accepting emissions controls versus India and China being included in an international commitment for greenhouse gas control like Kyoto except with them included and making commitments. I think that’s the biggest issue in front of the utility industry and quite honestly, in front of manufacturing America, without question. If your goal is truly to do something about global warming, doing something in America without having China and India also committing and in fact living up to those commitments has zero positive effect on global warming. So, I think that’s a huge issue that we will see debated in the near term and hopefully come to some resolution in the next half decade or so.

As to the second part of your question, it truly has. I can tell you that the staff of the Edison Electric Institute is an incredibly dedicated and talented group of people who really do all that they can to make being a member in EEI a viable and valuable opportunity. I think that Tom Kuhn stands out among the best of the Washington association leaders. And equally important, I think the engagement of the chief executive officers of the member companies is outstanding. People come to the meeting prepared. There’s a good give-and-take dialogue. The executive committee is extremely dedicated to seeing that they bring good ideas to the board of directors. EEI is not run by the chair. It’s run by the board through the executive committee and votes that are brought to the board. I walk away as one humble individual to have had a year to sit in the chair of that fine organization. And I hope that in that timeline I’ve been able to add some value.

AEP will make significant investments in all parts of its business in 2006, including pioneering new ways to produce and deliver electricity more cleanly and more efficiently.

The company plans to build additional base-load generation for the first time in several decades, including constructing the first large-scale, base-load integrated gasification combined cycle (IGCC) clean-coal plants in the world. AEP recently received approval and recovery from the Public Utilities Commission of Ohio for the first phase of a proposed 629 MW IGCC plant in Meigs County, Ohio, and has filed for a Certificate of Public Convenience and Necessity to build another 629 MW IGCC plant adjacent to its Mountaineer Plant in New Haven, W.Va. AEP has also submitted self-build proposals, including IGCC proposals, in response to RFPs for up to 1,200 MW of base-load generation to serve growing electricity demand in its western service area.

AEP announced plans Jan. 31 to build a 550-mile, high-voltage transmission superhighway from West Virginia to New Jersey. The 765 kV line would reduce congestion costs and transmission line losses within the PJM Interconnection, enhance reliability in the eastern transmission grid and provide more flexibility and opportunity to site new generation. With an estimated in-service date of 2014 and a projected cost of approximately $3 billion, the new line is the first interstate transmission proposal submitted in response to the Energy Policy Act of 2005.

While proposing first-of-their-kind projects for new generation and transmission, the company remains focused on significant investment in environmental improvements on its current fleet of coal-fired power plants. In the last two years, AEP has invested more than $1 billion in technology to reduce emissions of sulfur dioxide, nitrogen oxides and mercury on its coal-fueled plants and plans to spend an additional $3 billion on retrofits through 2010.

AEP is working to improve the reliability of its vast transmission and distribution system. The company invested more than $1.1 billion in its system in 2005, $370 million more than in 2004, and projects a $1.3 billion investment in its energy delivery system in 2006.

One significant improvement to AEP’s energy delivery system will be completed this summer. The 90-mile Wyoming-Jacksons Ferry 765-kV transmission line to strengthen the transmission system serving West Virginia, southwestern Virginia and eastern Kentucky should be energized by July. The line uses a number of innovative technologies, including the first 765-kV six-bundle conductor configuration in North America. This cutting-edge technology reduces the audible noise level of the project to approximately half that of earlier lines.

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