Full transcript of the first event in the Global Energy Center’s CEO Series with Thomas A. Fanning, Chairman, President, and CEO of Southern Company. 

Atlantic Council

Global Energy Center’s CEO Series:
The Future of the Power Industry in an Era of New Technologies

Thomas A. Fanning,
Chairman, President, and CEO,
Southern Company

Paula Dobriansky,
Member, Board of Directors,
Atlantic Council

Richard Morningstar,
Founding Director, Global Energy Center,
Atlantic Council

Location: Atlantic Council, Washington, D.C.

Time: 1:30 p.m. EDT
Date: Tuesday, March 10, 2015

Transcript By
Superior Transcriptions LLC


PAULA DOBRIANSKY: All right. Well, welcome and good afternoon. Let me introduce myself. I’m Paula Dobriansky. I’m a board member with the Atlantic Council.

And welcome to all of you to today’s discussion entitled the power – The Future of the Power Industry in an Era of New Technologies. And I’d like to especially welcome you because today’s program is a first. It’s a first of the new Global Energy Center’s CEO series. And I’d say we’re really in for a great treat. We’re fortunate indeed that Southern’s CEO Tom Fanning will launch this series. And I’ll also add, I’ve had the good fortune to – and the great pleasure to work with him.

Tom Fanning, is – he’s chairman, he’s president and CEO of Southern Company. It is the largest investor-owned utility in the United States. It also has the distinction and the unique element of being a U.S. company committed to developing a full portfolio of energy resources, and also at the same time investing in R&D. Tom Fanning’s leadership at Southern Company I think can be characterized as a kind of common-sense national energy policy that helps to achieve North American energy security – a common-sense approach and looking at energy policies that undergird and bolster North American energy security.

Toward this end, significantly, he has led in the development of a diversified energy generation mix. And you’ll hear about the panoply of that mix. He also has placed a premium under his leadership on the importance of innovation and technologies, and also has put forth as a priority the restoration of America’s financial integrity and the role that Southern can play toward that end. He’s worked at Southern, and I was very struck by this, for more than 30 years. And you’ve held 15 different positions in eight different business units. So you know that company cold. (Laughs.)

He also serves as vice chairman of the Edison Electric Institute. He’s a member of the Business Roundtable. And if I could say very proudly, he’s a member of the Atlantic Council’s International Advisory Board, and a founder of this new Global Energy Center. Tom really is a visionary. He’s a dynamic leader. And he combines, I think, an ability not just to dream about a new energy future, but he also – he has the capacity and the drive and the leadership to make his dream a reality.

He’s going to be joined on stage with Ambassador Richard Morningstar, who is founding director of the Atlantic Council’s new Global Energy Center. He has a very distinguished diplomatic career, and also career in the private sector. I’m going to mention just two highlights. He did serve recently as former ambassador to Azerbaijan. And he also was ambassador to the EU.

So without further ado, I’m going to invite them to the stage for their discussion and just welcome. Let’s give them a round of applause. (Applause.)

RICHARD MORNINGSTAR: Well, I’d also like to add my welcome to everybody here. We are really very excited to have Tom Fanning here with us today in the first of our CEO series. I think we’re going to have a very exciting – a very exciting discussion. Our new Global Energy Center is off to a very fast start.

We’re dealing with a wide range of issues, from geopolitics to the environment to alternative technologies, which the latter two will be part of the – will be part of the discussion today. For those of you who are not aware, we have – Secretary of State Kerry is coming on Thursday to speak about – to give his views on issues leading up to the climate summit in Paris this coming December.

Tom Fanning and the Southern Company have been great friends of the Atlantic Council. Tom was with us at the – at our Istanbul summit last – this past November and participated on a wonderful panel there. And I know that you’ll be very excited about today’s conversation. And we’ll look forward to your questions and comments.

I’m going to turn it over now to Tom, who will give a few minutes opening remarks and then we’ll open it up for questions and discussion.

THOMAS FANNING: Thank you, sir. Ambassador, thank you so much. I think the work you’re doing here in the Atlantic Council, but specifically around energy, is really important right now.

And I really get excited talking about this stuff because no time in my lifetime, your parents’ lifetime, have we been in a position where, for all the challenge the world is facing – whether it’s economics or geopolitics or a variety of other things – we are able right now I think to create energy policy based on the principle of abundance not scarcity. And I think that has the ability to transform what we might do.

See, I think energy security for the world breeds national security, and that breeds economic security. And I know these sound like lofty principles and everything else. And whenever I kind of get esoteric like that, I always try and translate it down to a person. And it deals with not folks like us, probably, but the vast majority of people that have a difficult time participating in economic growth and a reasonable future. And for those families, for their children, their parents want for them a better place to live, better food on the table, better medical care, better education, a job, a growing income, a better life.

And I think the energy complex now has the ability to play offense in that challenged environment where we see economic malaise and unrest in kind of the geopolitics of the world, right? I think we can do things – I think people are thirsting for a way to play offense. It’s funny, I tend to go on CNBC or some of these other shows. And I’m always struck by the notion that when you go on they say, good morning, and then they’ll spend the next hour telling you why it’s not a good morning.

In fact, I can tell you with some certainty that the energy complex around the world can be good news to so many people. Now, what do I mean by that? Well, I will translate this into electricity, but then I would love to take any question because really I have kind of a broad view as to how we should all play in this very kind of exciting opportunity. The simple answer is this: There are three things that I seek in terms of policy around the world to try and made this the benefit that it can be to mankind.

Number one is, let’s take advantage of all of the blessings of resources that we have. Let’s make sure that through the innovations that we all are able to bring to bear in today’s and tomorrow’s markets that by taking advantage of the full resources we promote a full portfolio – nuclear, 21st century coal, natural gas, renewables and energy efficiency. Let’s use every arrow in our quiver.

The second principle is really to promote energy innovation. Now, I think energy innovation – a lot of people translate that to the idea of consumption. Oh, I’m going to have a more efficient light bulb or I’m going to do whatever. When I think energy innovation, I think of the full range of make, move and sell and consume energy. The third area really goes to a broader concept, but it’s easy to dial it down. And I welcome your questions or comments about industry structures or tax policy or fiscal policy.

But when Paula mentioned this idea of promoting America’s financial integrity, I really do espouse that on a variety of different fronts. But I think beyond kind of America’s financial integrity, what are some of the fiscal policies around the world that need to be present in order to promote excellent electric infrastructure and markets that will permit the growth in energy to drive a better economic future. So that’s what I’m after there.

Let me close my opening remarks with just this thought: It can never be about us. It’s got to be about them. In other words, it’s not about how to promote the success of Southern Company. It’s how can we be a better citizen wherever we serve, to make the communities better off because we’re there? It is to provide – my responsibility as CEO of one of the most important companies in the world in this space is to assure that we can provide a balance of clean, safe, reliable and affordable energy for the benefit of this nation, of the world, and to lead the way in not espousing rhetoric, but providing real common-sense solutions.

MR. MORNINGSTAR: Great. Thanks very much.

So let’s open it up. Let’s open it up for discussion. I have some questions, but I don’t really need or want to ask them. I’d just as soon you all participate right from the outset. I might editorialize occasionally, but let’s hear from you.

MR. FANNING: And please, the more controversial the better. Anything you want.


MR. FANNING: Bring it. Yes, sir.

Q: I think the – it’s sort of a historical moment now because –

MS. DOBRIANSKY: Can you introduce yourself?

Q: Sorry. My name is Hart Schwartz (ph).

There’s a historical moment because there’s so many new technologies developing for energy. But as an energy company, is it possible that by adopting the new technologies you make yourself obsolete because you –

MR. FANNING: Oh, man, that’s a great question. That’s wonderful. I just talked about that. Just – my concept is called creative destruction. And when you think about the potential for new technologies to destroy an infrastructure or a business model or whatever, and then to do something new completely new, my first answer is: In any business strategy there must be elements of offense and defense. And I think what you find – and I can give you a great example in energy efficiency – but I think what you find is a lot of people in industry get threatened by the kind of change that could destroy the old model, right?

So I use a funny expression. I say that there’s three kinds of companies in the world. There are birds of prey, there is moving prey and there is road kill. And what determines your ability to be categorized as one of those three is determined by your ability to succeed in both the short and long term.

In my view, birds of prey are those companies that begin with the highest priority of maintaining the longest-term sustainable viability as an enterprise, and always have an objective – something other than EPS and kind of this quarter’s net income – in terms of delivering something for the future. They’ve got to have an ideal. Those companies, prioritizing the long term, then work to make short-term results make sense. Moving prey are companies that always optimize this quarter’s result. And they imperil, but certainly lose sight of, the long-term objective. Of course, road kill doesn’t get out of bed in the morning, right?

Energy efficiency. A lot of people view energy efficiency as, oh man, you mean they don’t have to consume as much of my stuff as they could otherwise in the past? That’s defensive thinking. These are people that want to keep the waves off the beach. We know through innovation market forces will overwhelm any defensive strategy. A defensive strategy by its nature is temporal. It has a time effect that will evaporate. You must play offense.

And so my concept in playing offense is creative destruction. What I’ve done at Southern Company is, number one, promote innovation. We remain the only electric utility in America that has a robust proprietary research and development operation – has been in place since the ’60s. Moreover, I’m trying to approach cultural innovation and celebrate it through the creation of something called the Southern Energy Innovation Center, linked with universities, but otherwise incubating kind of innovation to entrepreneurship and developing new models for the future. So we’re kind of doing that.

The other thing that I think is so important in thinking about, there’s a difference between innovation and sex appeal. I want to do things that work. And so when I think about market models, I am convicted in the market model where in the southeastern vernacular, it is an integrated regulated model. That is, in the world of make, move and sell electricity accountable to a customer, it’s us, period. The so-called deregulated markets, the so-called organized markets have segments of responsibility where their incentive is not tied ultimately to the ultimate consumer of energy because, remember, it’s not about us, it’s about them.

Whenever you create friction or reduce linkages between what you do and what ultimately is consumed by a customer, you create a series of impediments to success. And so I can go on to that in much deeper detail, but let’s make sure that when we think about innovation in business models we create innovation in terms of things that will ultimately make sense to consumers. Let’s not integrate a business model that isn’t broken or that otherwise clouds responsibility for the ultimate product, the ultimate value.

The other – the other thing I’ll just add to that: If I am responsible for clean, safe, reliable and affordable energy, then I want to make sure that I deal in market structures, regulatory structures that provide for a lens that is able to balance all of those objectives at the same time. That is very hard to do, but that’s what we need.


Q: Peggy Duxbury.

MR. FANNING: Hey, Peggy.

Q: I consult with several energy trade associations.

This is somewhat – this is somewhat related to the earlier question, but a little more specific. There was an interesting article in the Sunday Washington Post about rooftop solar and the boom that’s happening in rooftop solar and concerns that utilities across the countries are having, or some utilities. I’d be curious to know what you think for Southern Company. How this is going to affect both your company, the utility model, and also consumers who seem to be increasingly wanting to have this product in their homes?

MR. FANNING: Piece of cake. Thanks for asking that. (Laughter.)

I’m all for distributed generation in any form, but I think there’s a much bigger issue out there than distributed generation. It’s really distributed resources. If you think about – our model – in fact, this Southern Energy Innovation Center, one of the early innovative business models we’re trying to develop is the whole idea about infrastructure beyond the meter.

See, I think there is always going to be an infrastructure business in the United States, right? You’re always going to need central station generation, unless we’re way in the future, maybe you don’t. But for the next 50 years, let’s just stipulate you will need. And then you’re going to need electric networks – I think one of the most overblown ideas is this idea of microgrids – and then distributed generation.

OK, I absolutely are for distributed generation. In fact, Georgia Power Company was named by the Solar Energy Industry last year as the investor-owned utility of the year. And yet, it is not known as one of the utilities that’s in the middle of a fight. We’re playing offense, not defense.

What is the issue here? Is it one of disruption? See, I view distributed generation as an idea that is a natural evolution of what has otherwise been a central station infrastructure business – so big nuclear plants, big coal plants, big gas plants. And so I think there’s lots of ideas – so now we’re doing – we’re one of the leaders in the United States. I’ve always been a fan, I could tell you why, among all renewables of photovoltaic solar generation. In fact, let me just hit that real quick.

One of the biggest environmental issues that we’ve been dealing with for a long time has been air quality, right? I think the bigger environmental issue of the future is water. And therefore, I tend to migrate away from thermal kind of – I mean, thermal solar generation to photovoltaic. But here’s the deal, I think there’s lots of more sensible things than putting a panel on a rooftop.

Now, here’s – let me do something with you, because I think even central station solar is just more economic and everything else. But I absolutely accept the fact that some people want that. And if they want that, I want to sell it to them. But let me say this, how many people here own a convertible. Oh, there’s one right, there you go. Paula, you do. You do! You are out of your mind. (Laughter.) Isn’t he? Because anybody who drives a convertible is making a choice that it’s not nearly as safe as this thing I drive, costs more to insure. You know, he’s got a host of disadvantages. But you love your convertible.

MR. MORNINGSTAR: It’s my wife’s.

MR. FANNING: OK, well – (laughter) – we knew she had a sense of humor, right? Just kidding.

People will have a value system. I used to have engineers come to the Southern Company management council meetings all the time and tell me why distributed generation was such a stupid idea, because you put that panel up there – it’s 30 percent more expensive than if you do central station solar. And you know, now you got to have somebody crawling around on your rooftop. And now you got to have a fire department that’s going to be reluctant to put out your – listen, I can hear all that. There are people that have a value system that want to have rooftop solar. Good for them. I want to sell it to them.

I also want to develop better ideas. And remember, I said distributed generation. Well, wait, let’s talk about distributed resources. The infrastructure business of the future – beyond the meter, beyond central station generation, beyond transmission and distribution lines – may be anything energy-related in the house. And let me go to a couple ideas.

One would be a solar panel on your roof – terrific. They key here – why is that not disruptive? Because it doesn’t work at night. And you’re going to need the network, you’re going to need backup generation somewhere. What if you could combine storage in an economic way with rooftop solar? Now you’ve done something. So we’re working on storage as one of our deep research efforts at Southern, along with EPRI and along with a lot of other people around the United States.

And what about combined heat and power? And what about maybe – oh, I don’t know, even a more elegant vision in the future for HVAC? And what about the idea – so I’m a fan of Nest. And in fact, we’re working with those folks in kind of a strategic way right now. Y’all are familiar with Nest, yes? Nest. Nest is an adaptive thermostat, OK? So it will actually learn your behavior and run your house, kind of in a thermostat sort of way, based on what you do.

And the joke I always tell about this one is, imagine – you’re probably familiar with the house that Bill and Melinda Gates have? So they have these pictures in the house, and when Bill Gates walks in the living room, the picture’s of the stuff he likes, right? And then when Melinda walks in the room, the picture’s of the stuff she likes. And when they’re both in the room, the picture’s of the stuff she likes. (Laughter.)

What a Nest thermostat does is adapt to your behavior and make much more efficient the HVAC systems in your house. But what’s cool is – sorry for these dumb jokes; the Southern people are rolling their eyes – one of my jobs in the past I was a CIO. You guys know what CIO stands for, right? Chief Information Officer. I thought so many days that job stood for Career Is Over.

And I can tell you, especially when cyber challenges of today – we can get into that if you’re interested – when you think about all the cyber challenges and protection of data and everything else, this is a big, important issue. But one of the things our technology research people say is with the advent of new control equipment, microchips, everything else, it could be not so far in the future that any asset in your house worth a hundred bucks or more will have its own control device. And now perhaps son or daughter of Nest is not an adaptive thermostat, but rather it is the server in the house for the internet of things. And now all of a sudden we have a quantum leap in terms of how energy is consumed.

But here’s my point: That sounds very threatening to an energy provider. In the Southeast – one of the highest growing economic regions in the southeast – fully 46 percent of the families that we are privileged to serve make less than $40,000 a year. Let’s broaden that concept to worldwide demographics and think about the imperative for greater well-being and economic growth. It’s the Southeast on steroids. I can tell you that if you can make my product cheaper, more attractive, then people will use more. They’ll live in a better place – better food on the table, better medical care, better education.

I think rising tides float all boats. And this is where I want to get back to the concept of playing offense with energy. Worldwide lives will be better by consuming more. This is a good thing. And I think we can really help.

Sorry for that, she asked a DG question, for heaven’s sake.

MR. MORNINGSTAR: Question over here.

Q: Thanks. My name is Claire Magee. I’m with KPMG’s Power and Utility’s Consulting Group.

And I am wondering, in the new paradigm that you’re talking about, you know, does a re-evaluation of rate design play a role in that – greater transparency, disaggregation? And if so, you know, what lessons do you take from what just happened with Salt River Project over in Arizona trying to do just that?

MR. FANNING: Yeah, absolutely it does. It’s kind of a geeky question. (Laughs.) But you’re absolutely right.

So this industry was birthed on the idea of selling essentially 100 percent variable or very small fixed cost. And the – what Salt River Project is trying to do is more accurately reflect fixed changes and then smaller variable charges. Now, people think that’s some response to distributed generation or a variety of other things. I don’t believe it is. I think we would be better off as an industry to have more fixed variable pricing, and then get much more innovating on kind of the pricing schemes that association consumption of our product.

Let me give you an example. I wish – Christy Ihrig here, who is with our corporate comm, you’re going to have to give a speech here – no, she just freaked out on me. Bring more material on SO Prize next time. If you want this, we can give it to you. Christy here. She’s our corporate com guy. When I said this importance of innovating for the future and playing offense, one of the ways I tried to tap into innovating – or celebrating innovation within the culture.

So I talked about this Southern Energy Innovation Center. Before I started that institution, y’all have heard of X Prize? X Prize? We did a SO Prize. And I opened it up to anybody. We pained a vision of the future, kind of in the 2025 to 2030 timeframe. And the first thing we did was ask all the employees to comment on that future – did they agree with it or not? And it was fun to see kind of the disparate views. I love a good food fight.

But then we saw, for whatever future we agree to, tell me how we can win. What are the things that we need to do – products, services, pricing schemes, regulatory structures, et cetera. And we started out with – and I can remember a company named Mindjet advised us on this. And they’ve done lots of other interventions with other – interventions makes it sound like something bad – but lots of other work with other companies in terms of innovation and stuff like that.

Our employees responded six to 10 times more than the stretch goals Mindjet put out for Southern Company. It’s a curse and a blessing. It’s a blessing in that people were engaged and it was exciting. And the how of that effort was as valuable as the what – the product. The curse was I think they were just waiting to be asked. Isn’t that interesting? So how did we institutionalize the ask? The what ended up as six ideas that now that now are in some form of incubation in the system.

One of them is your idea. We need to change how we think about pricing our product. And so there’s a whole interesting set of innovation around that. Now, I’m connecting that in with another winner that thought about the metadata implications and perhaps, therefore, the products and services that may be combined in the infrastructure business of the future, OK? All of that is something we called SO connected – get it, SO, Southern, connected? Really good stuff.

MR. MORNINGSTAR: Let me – let me follow up and ask you this question, being – you know, us being the Atlantic Council and being concerned about international applications.

If you take the five elements that you were talking about at the beginning – not necessarily each one – but how would – and if you were asked to advise with respect to how do you develop – take Africa, for example, where, you know, dozens and dozens and dozens of smaller villages in certain areas that don’t have electricity, what kind of lessons from what you’re doing would you apply in developing electricity in those kinds of places, and then in a different kind of situation, maybe in China or India? So –

MR. FANNING: Sure. So let me – let me go through that. That’s actually a wonderful question. Boy, it’s another long one. I’ll try and keep it short.

So let’s say that we’re dealing with a really underprivileged area. When I think about the portfolio, there’s a couple of things that make sense, right? So I said the portfolio was nuclear, 21st century coal, natural gas, renewables, energy efficiency. And then I said the second big thing was energy innovation. And remember I said the third thing was – you know, I dealt with America’s financial integrity, but within that rubric you could talk about market structures and a variety of other things.

Here’s what you’re going to need to have in place, I think, to succeed in those areas. Number one, let’s go to market structure first. This is one of the most capital-intensive, big infrastructure industries around the world. You need to put in place a market structure that supports the formation of capital. Remember from business school, you all remember, value is a function of risk and return, right? Risk matters as much as return does in attracting capital.

And we all know that if you’re going to finance long-term assets a nuclear plant might have a life of 60 to 80 years. You better have long-term liabilities, right? Nobody would finance a house on a single-day note and roll the note over and roll the note over and roll it over. You could, but you would pay a big premium, right? So you want to have long-term liabilities. You want to have a mortgage.

In order to support a long-term liability, tell me about the security of revenue to service that liability. It must also be long term. That’s where organized markets, so-called, have a risk premium problem in the United States and have trouble attracting long-term capital, long-term investments like nuclear plants, new 21st century coal plants and other things.

And so you want to create a market that is integrated, remember my dogma there; that has a market structure that supports the optimal formation of capital, OK? And then, because I’m going to surmise you’re starting with a lack of infrastructure, distributed generation now becomes more important. And all of a sudden, what may appear not to be sensible in the United States may make beautiful sense in Africa, OK?

So I could see much more penetration of wind and solar and taking advantage – biomass – taking advantage of the resources that are there. Remember going back to this notion of set policy based on abundance not scarcity. What do they have that can be brought to bear in an economic way that can promote energy security? I think that’s so important to geopolitics and the world today.

So let’s go to those things. And let’s not forget – so I know renewables, energy efficiency, all that makes sense. You’re still going to need, I think, deep infrastructure. And if you want to go to an innovative approach here – is the Westinghouse person here? I was with the Westinghouse person – oh, here you go. You’re not going to build an AP1000 in Africa maybe – you might. But you might do the small modular reactor – do something smaller, right? Do something on more of a bite-sized basis.

And it may be the future for taking advantage of kind of the next innovation. That’s something we’re working on right now. We love our AP1000 technology, but I think the idea of what’s the next technology, that’s where America needs to go. Nuclear must be a dominate solution in America, in the world. It is emissionless and therefore we need to develop it.

The other thing that is kind of endemic with underprivileged areas, typically you’ll see, taking advantage of whatever resource exists, they are the biggest consumers of coal from a growth standpoint. We got to figure out a way to use coal in a responsible way. We have developed a technology, us and Kellogg, Brown and Root here in the United States, where we can consume coal and have a smaller carbon footprint than natural gas. That’s pretty cool stuff.

So maybe – think about geopolitics, think about abundance of resources – 50 percent of the world’s coal reserves are low-grade coal. That’s perfect for our technology. We’ll gasify it. We’ll strip out the CO2. We’ll create other valuable byproducts, like ammonia and sulfuric acid, which can be used to develop their infrastructure. And then we can produce more natural gas that will be consumed as electricity.

Oh, and by the way, the CO2, it’s not a waste stream. In Mississippi, we’re going to take it, push it in the ground and push out more oil. So we don’t just have almost 600 megawatts of electricity. We also produce, in Mississippi we estimate, about 2 million barrels of oil a year – not bad. That could make a lot of sense in a developing economy.

So when you think about – now, I just did a developing economy. When you think about China and other people, their growth is so big that when I think about environmental concerns, like carbon constraints and a variety of other things, I think they’re going to serve the growth first, they’re going to do everything they can probably on carbon. But along the way, there need to be solutions like I just outlined.

So I think I’ve outlined kind of two ends of the spectrum. And I think China, India, Indonesia, a variety of other people can play in that spectrum, wherever it makes sense for them. Remember, we’re not going to run, I don’t think, the energy policy of the world strictly by carbon. It’s an awfully important issue. But it’s the balance – clean, safe, reliable, affordable – is what’ll win the way.

MR. MORNINGSTAR: All right. By the way, the couple of guests who are here who don’t have seats, there are a couple of seats up here. If you want to sit down, feel free to come up.

MR. FANNING: You have to walk in front of everybody.

MR. MORNINGSTAR: Walk in front of everybody.

MR. FANNING: We’ll all make fun of you when you do it. (Laughter.)

MR. MORNINGSTAR: Anybody else? OK.

Other questions?

MR. FANNING: Yes, sir.

Q: Ian Butterfield from PACE Government Relations.

Could you flesh out a little bit your comments you just made on Gen IV nuclear development?

MR. FANNING: Well, there’s a variety of flavors.

Q: And second, on a totally unrelated subject, could you give us your views on the future of the hydropower sector?

MR. FANNING: Yeah, sure.

Well, let me hold off on the – light water reactors, thorium reactors, you tell me what, I think ultimately will have a great future in this country. And we’re working really hard to try and figure that out. I know our industry is as well. What we need to do is demonstrate a plan. And so we’re kind of thinking that through right now. How do we do that?

Hydro – there’s got to be a way to responsibly harness the power of water. And it’s fascinating, one of the other ideas in this SO Prize competition was an idea called water, water everywhere, the combination of desalinization and the electric industry is kind of interesting. Georgia is the only state in the United States whose waters are solely originating within the state. There’s no – unless we move the border north into Tennessee – which we’re thinking about – (laughter) – we have our own water supply.

And so we worry about the economic development impacts of that, the environmental impacts of that. So one of the ideas we’re considering is should we consider along the coastline desalination. It solves the economic development issue, environmental issue and it uses some electricity along the way. We need to continue to develop hydro resources in a responsible way.

Who else? Yes, sir.

Q: Walter McLeod (sp) with – (inaudible) – Capital Policy (sp).

Southern Company is right in the – thank you – right in the heart of what are probably the most productive woodsheds in the United States, in terms of your territory, in the Southeastern United States. There’s a lot of wood and timber available. What are your thoughts about the pros and cons of developing that as part of the renewable sector of your portfolio?

MR. FANNING: I’m absolutely in favor of biomass. I know there’s some argument about whether that’s net carbon neutral or not. We actually run – I think it’s the nation’s largest bubbling bed biomass facility, I think it’s in the world. I think we’re tied or right at the top of just biggest biomass facility in the United States. It’s in Nacogdoches, Texas, believe it or not – kind of eastern Texas, supplies energy for the benefit of the citizens of Austin, Texas. It’s part of our competitive generation company, Southern Power.

I think it makes perfect sense. Here again, principle – take advantage of the blessings of resources that you have and make the most use of them – energy security breeds national security breeds economic security. And I think it’s going to be a great thing so I’m all for it. Did you want to go somewhere else with that?

Q: No, I just wanted to get your sense of the pros and cons of that.

MR. FANNING: Yep. Well, OK, so I guess I just gave you the pros, right? We have plentiful resources. The wood we use is wood waste – it’s stumps, it’s tree branches, it’s stuff like that. Here’s what seems to be crazy to me. I mean, this is a lesson learned I think by crazy environmental/economic signals that get produced from time to time.

There is a big wood industry in the Southeast that will take trees, cut them up into wood pellets and then sell those to Europe, OK? The reason is, that’s because the market structure attracts that. The economics of that are a little troubling to me. So that is a business that is purely in business because of market signals that are tied to social policy. Now, in some places that’s fine. But if you’re interested we can get into tax policy here in the United States. I would argue that there’s better ideas than that.

MR. MORNINGSTAR: Question over there.

Q: Thank you. Kevin Massy with Statoil.

A couple of years ago, at the end of 2013, The Economist magazine had an article headlined: How to Lose Half a Trillion Dollars. And it was about the European utilities and the loss of value in their market capitalizations based on European energy policy. Since then, they’ve lost about another half of their value. So it should have been how to lose three-quarters of a trillion dollars.

I wonder, as a CEO of a major U.S. utility, looking across the Atlantic at what’s happening in Europe to the major European utilities, what lessons or cautionary tales you’re identifying and whether you’re talking with policy makers here about how to avoid some of those.

MR. FANNING: I’ll talk with anybody that’ll listen all day long, number one. And I – Southern takes it as an obligation, not an option, to engage with policy makers. And we do it on all different fronts. I’m active, talking to anybody in Congress, in the administration.

I know Nick Akins, I see my friend here from AEP – where’d – there you go, my friend of AEP. Nick Akins now chairs the energy policy group at Business Roundtable. Before Nick had that, I chaired the National Energy Security Plan with a guy named Dave Cote from Honeywell. Both Nick and I are vice chairs – what are we, co-chairs, vice chairs? I don’t know what we are – of the Edison Electric Institute. That’s our industry group.

So it is our obligation of leaders of the enterprise, not representing Southern or AEP now but representing what’s good for America, not even the electric utility space in terms of growing the economy. Now, specifically to Europe, let me kind of point out maybe three things that I would do completely differently. And I can go into detail here if you want.

We are leading the renaissance of nuclear in America. And we had started that project before Fukushima. I am proud to say our company, our board had the vision and courage to continue even after Fukushima. Europe’s response broadly was to shut down nuclear. And that was an incorrect response.

The second issue I’ve already touched on, our market structures. Remember, I am an advocate for integrated, regulated market structures that provide correct signals for the investment of long-term capital. When you disaggregate, as I suggested, you now invite a series of probably academic-related solutions to what is otherwise a capital market. And you will create all sorts of dislocations. And you will have difficulty attracting long-term capital. So I prefer integrated, regulated market structures.

The third thing is a carbon market. I – this is not a comment on carbon and climate change. This is a comment on the right solution to deal with problems. Let’s go back to offense and defense. There is tax – and if you want to, I’ll get into America’s financial integrity, what I believe about tax policy – I’ll refrain. But putting things in place to deal with an issue important as carbon creates a host of consequential actions that may or may not support the total good of the continent.

And so that’s why we see the importation of wood pellets in Europe. And that’s why we see now the regeneration of cycling coal plants and shutting down nukes – it doesn’t make sense. There are offense, defense, carrots and sticks in public policy. I am much more a proponent of incentives rather than sticks and penalties in terms of achieving long-term objectives.

And I’ll just add one more – just being parochial now. Right now we have EPA and 111(d) is their pitch at trying to do something about carbon. Our view has always been that – I understand kind of the importance of the issue. What we would rather do is rather than put in place a complicated network of regulations, promote optimal energy portfolios in the United States – like we have done – and create a performance-based clean, safe, reliable, affordable structure that helps ultimately the families we are privileged to serve.

At the end of the day, we can never define our success or even our impact by us. It’s all about what happens ultimately to the folks that need our product to survive and succeed in otherwise this challenged economic environment. I could go into deeper detail if you want, but I think there are optimal portfolios around the United States that are a much better solution than attacking a single problem on one of that spectrum of responsibility.

And just give – let me give you the stats. The closest we came to law was Waxman-Markey in terms of regulating carbon. And I think it was a 80 percent objective by 2050. And I think it called for by 2020 a reduction in carbon like 18 percent. We’ve reduced – Southern Company has reduced by 26 percent already. So we way exceed what the law would have required. And I think we’ve got a portfolio using nuclear, 21st century coal, natural gas, renewables and energy efficiency, that even have the potential to exceed what EPA wants to do. But the way we’re trying to do it, I think, is just not well-advised.

So my three comments – back to Europe, right – it was market structures, right, it’s incentives and it’s nuclear, particularly. And kind of building out the portfolio.


Q: Hi. Cristino Gauratti (ph) from Embassy of Italy.

I have two questions, if I may. The first one, do you think the current low price of most of the sources of energy – oil, GPL, even for – (inaudible) – and so on will have an impact on the pace of innovation? I mean, there is less incentive today for innovation. And the second one is, if you have to bet on an innovation which will shape the next five years among all of them you mentioned, which one you think will be more significant from here to the, say, 2018, 2020?

MR. FANNING: Give me your thing – give me your iPad. So this is what’s causing energy to go crazy. In fact, there’s a great statistic – I think this is right; somebody’s told me this – that if I download a Netflix thing on here I think it’s once a week – if I look a movie once a week, when I think about all the servers I’m lighting up down the road it’s like the equivalent of buying a new refrigerator every year. (Laughter.)

Since – I think it’s 1995, I may be – I may have the day off a little – but around there, something like 80 to 85 percent of all increases in energy consumption has been to electricity. And so my sense is there’s going to be an enormous future in increased consumption of electricity. And in fact, when you think about innovation in the commercial markets, it’s going to be electricity driven, I think, until we get somewhere else. But that’s kind of what I think right now.

So number one, my concept of cheap energy – remember, it’s playing offense in the energy efficiency environment. If I can make it cheaper, more efficient, that allows me to sell more. Wouldn’t it be cool if we had Apple watches? That’s kind of the thing this week, right – Apple watches that now can intervene on your medical condition, it can tell you whether you got high blood pressure or a funny heart rate or whatever. What if we had those for everybody in Africa? And what if we had those that were driven by electricity, you know.

Look, the potential here is enormous – more attractive, lower cost, more efficient, allows me to sell more. The latent demand out there is enormous. So I think of a growing market all the time.

What was your second question? Which one – which part of innovation was most important or which part of the value chain?

Q: I mean, which would be the innovation which will shape the future of the next five years?

MR. FANNING: Next five years.

Q: Yeah, the next – (off mic) – and –

MR. FANNING: OK. OK, so next five years. Probably – if we continue on the translation efficiency of sunlight into electricity, if we continue on the production cost efficiency of solar, that might be the biggest one. But it’s not a game-changer. It just makes it more attractive and you use more of it. I would still say that the advantages of central station solar overwhelm kind of rooftop solar, but they’ll make it more accessible to more people, et cetera. So that’s good.

Energy innovation is something that I’m really interested in. Have I told you about Nest here? I have. See, I think that’s cool. So I think the idea of the server for the internet of things is something that’s not far away at all. And I’m starting to see elements of that. That could really change, OK? When I think about back-stream innovations, they’re already occurring. We always see kind of step improvements in gas turbines and step improvements in the heat rate of any kind of generation.

Transmission, where you’re going to see innovations there is going to be kind of the smartgird stuff. Southern Company spent over the last, I forget what it is, almost 10 years – it’s a little shorter than that – a billion dollars in smartgrid. We were doing smartgrid before it was cool. But the idea is you’re going to have predictive ability. Just as I talked about an adaptive Nest thermostat, predictive ability in terms of running your plants and your wires is going to improve energy efficiency and that’s going to be a good thing. You guys will never see it. All you’ll do is turn the lights on and the lights will be on more often than otherwise and your bill will be lower. That’s good news. It’s good news for everybody.

MR. MORNINGSTAR: OK, we have time for a couple of more questions. I see two over here.

Q: Dan Shawhan of Resources for the Future.

What’s your view on the likelihood that electric vehicles will see a large market penetration? And secondly, what do you think are the most important policies for a utility to adopt to adapt to having a lot of electric vehicles on their grid?

MR. FANNING: You bet. I drive a Tesla. It’s fabulous. It’s the sexiest car made – way cool. Let me tell you something, I think EVs are terrific. So the equivalent cost, I think, on a per gallon basis is about a buck per gallon is the equivalent of EV. And I think what you’re going to look for there is battery technology to improve to increased range. My Tesla gets 240 miles per charge. So it’s terrific.

The most important kind of thing for utilities to do to adopt that – in fact, this is also one of the ideas in our SO Prize competition that’ll now be incubated at this Southern Company Innovation – Energy Innovation Center, we call it revolution. But the idea is that not only will you promote electric vehicles and create pricing streams – back to your geeky question – that will enable people to use more of it, right, that’s the idea, why not think about infrastructure for electric vehicles not as some discrete plug sitting somewhere, let’s call it part of our distribution infrastructure.

It’s nothing more than a plug. And we can put all sorts of charging mechanisms on that thing. Run your thing through there, supercharge and, you know, whatever, and move on. The other thing that needs to happen – one of the challenges I think we’ve had in electric transportation – and we should think more broadly. When I say electric vehicles, I mean electric transportation.

One of the things Southern Company did our area, we’ve replaced a lot of the diesel cranes in the ports of Mobile and Savannah with electric cranes – good for the environment, good for the ports, sell more electricity – what a concept! What about Hartsfield? You fly into the busiest airport in the United States. Most of the ground handling equipment that tugs your plane around or handles your luggage is electric now, it’s not gas or – natural gas or diesel.

So let’s think differently about what it is and call it part of our infrastructure. This is what I mean. When some people will say – and I violently disagree – that this is a – what do they call it – a death-spiral. No. The infrastructure will change over time. What you’ve got to do is play offensive and engage in that infrastructure. The other thing we’re doing is really pretty interesting too.

So GM sells most of its cars with gasoline. And after you drive an electric vehicle for a while, you’re going to feel bad when you go to a pump and fill yourself up with gasoline – you just will. Let’s think about places where we can give customers – remember, it’s not about us; it’s them – a way to compare all electric vehicle choices.

So let’s have a showroom of GM cars and Ford cars and Nissan cars and Tesla cars – oh, and by the way, we’ll have at the same showroom contractors available to do your garage and put a charger in there – full service, electric transportation for the good of the public, that’s what we got to get behind.

Yes, sir.

Q: Yeah. Alex – (inaudible) – Corporation.

I wanted to follow up on what you mentioned in terms of water. You have two great infrastructural utilities – water and electric power. And for the most part, they really don’t work together very much. And there’s ways to do that. And I’d like you to expound on perhaps, you know, your thoughts in that regard.

MR. FANNING: Well, so interestingly a Southern Company person, Susan Story, used to be CEO of Southern Company Services. And she’s a buddy of mine. She now runs American Waterworks, OK? From that standpoint, we’re really pretty different. Where I see much more synergy will be in the origination of water – and I talked about desalinization. But otherwise, I think the bigger kind of environmental issue for us will be minimizing the use of water or, where we use water, to return it to the environment in a pristine fashion. We are all in favor of that.

The only – to my knowledge, the only big research project that works on water minimization and return is sponsored by Southern Company at Plant Bowen. We’re doing that there. So these are – you know, we have this kind of slogan at Southern. We don’t run around and bombastically say all this stuff. We’re not about rhetoric. We’re about solutions. And that’s how we’ve been kind of programmed ever since the ’60s.

MR. MORNINGSTAR: OK. I think we’ve reached the end of our time. It’s been a tremendous discussion, I hope illuminating for all of you.

MR. FANNING: I need the last word here.

MR. MORNINGSTAR: OK. And then after your last word then I’ll thank Paula and –

MR. FANNING: No, you’re going to have the last word. (Laughs.) Let me thank you all for being here. This is a tremendous opportunity. I don’t know why you came here – (laughter) – but let me leave you with this: This idea I started out with of being a good citizen wherever you serve, being – making sure the communities are better off because we’re there, every stakeholder in the room wherever you come from must have that long-term objective, bird of prey objective, as your mindset.

And here’s the opportunity: When you think about what we can do in energy, we can make America better, we can make the world better than anytime in our lives and your parents’ lives. It’s a wonderful time to be engaged in this issue. Thanks very much.

MR. MORNINGSTAR: And thank you and thank you Paula and thank you Tom. (Applause.)