Southern Co.'s Tom Fanning bets big on nukes

December 19, 2011: 11:49 AM ET
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FORTUNE -- "Sleepy" hasn't been the right word for the electric utility industry in many years, but the business has felt particularly strong zaps lately. The Japanese earthquake and tsunami rewrote the future of nuclear power, which had been in the midst of a renaissance. The Environmental Protection Agency wants to impose the most stringent emissions rules the industry has ever faced. And the rapid development of shale gas in the U.S. could revolutionize electrical generation. These are tense times for any utility -- especially one like Southern Co. (SO, Fortune 500), which is building a major new nuclear power plant near Augusta, Ga., and generates most of its electricity by burning coal. Running the enterprise since last December has been Tom Fanning, 54, who joined the company right out of Georgia Tech. He's well prepared: Among his 14 previous jobs at the company have been CFO, CIO, strategy chief, and CEO of one of Southern's operating companies, Gulf Power. It helps that Southern is the world's most admired utility (tied with NextEra Energy in Fortune's latest ranking) and by far the most valuable utility in America. Fanning talked recently with Fortune's Geoff Colvin about nuclear power's future (bright), the smart grid (smart), those proposed new EPA rules (impossible), and much else. Edited excerpts:

Q: The Nuclear Regulatory Commission has just wrapped up hearings on your application for the first nuclear plant license in this country in 30 years. Is it the most important project at the company?

A: Sure, I think that's pretty clear. I listed four or five priorities when I was named chairman, and one of them is associated with being successful at Plant Vogtle 3 and 4 [site of the new nuclear project; two other plants already operate there].

Your company and the whole nuclear industry have a lot riding on Vogtle. What makes you confident that you'll avoid the cost overruns and delays that plagued the previous generation of nuclear plants in the '70s and '80s?

Start with the characteristics that put Southern in a paramount position to move forward on this renaissance of nuclear. We have scale. By market capitalization we're the largest electric utility in the U.S. Think about this: Vogtle 3 and 4 is going to cost about $14 billion and will take about 10 years to build. So you don't want to bet your company. We own 45.7% of Plant Vogtle, so it's about $6.4 billion to our account. But we're big enough to withstand that kind of financial pressure.

Another factor is credibility. We already run an excellent nuclear program. This is not a business for beginners. Also, it's a different time in America. We need all the arrows in the quiver. We need new nuclear, coal, natural gas, renewables, energy efficiency. We have a constructive regulatory environment in our states and broad public support, all of which give us a stable environment in which to commit to a project of this scale. And the U.S. understands that moving forward with nuclear is a national imperative, so we've seen great support out of the Obama administration and Congress.

A couple of other utilities have decided to get out of nuclear. Constellation (CEG, Fortune 500) got out of plant development earlier this year, and NRG (NRG, Fortune 500) pulled out of its nuclear project in Texas. Is this just a case of differing business judgments, or is there something else?

It goes back to scale, credit quality, and credibility. When you think about the challenges that a small company will face building a $14 billion deal, that gets rather daunting.

The U.S. really is divided into two electricity markets. Some years ago many states deregulated, and they have what's called merchant markets, where the price for electricity is largely set a day ahead or week ahead or month ahead. Remember this is going to take 10 years to build, and it's going to be the largest capital asset in your portfolio, and you're going to need to run it 30 to 50 years to earn that money back. Putting that magnitude of capital in a deregulated merchant market is exceedingly risky. Thankfully, Georgia Power operates in a vertically integrated regulated market where legislation and regulation are stable and constructive and will support this over time.

Southern Co. generates most of its electricity using coal, so you have a big interest in how emissions are regulated. What do you expect in coming years?

Southern Co. has invested more in environmental controls than anybody else in the U.S. -- $8 billion -- and we'll invest between $2 billion and $4 billion in the current program by 2013. We've increased energy output about 40% since the '90s, yet we've reduced emissions 70%, and at our flagship units, the biggest, newest units we have, we'll have reduced emissions about 90% by 2015. Four years ago we produced about 70% of our energy from coal. In the first quarter of this year it was about 51%, and by 2020 I think it'll be in the low 40s, maybe 41%. The transition is already occurring. But we've got to find a viable way to consume this resource going forward.

The very first time I met with Energy Secretary Steven Chu, he was lamenting the fact that the Chinese had outstripped the U.S. in technological innovation. In this case they have not. Along with our partner, Kellogg Brown Root, we've developed a technology where we can gasify low-grade coal -- about half of U.S. coal is low-grade coal -- and strip off about 65% of the CO2, then take that CO2, push it underground, and push out more oil. With the remaining gas we're going to run some electric technology and produce electrons. More domestic oil, more domestically produced energy, producing tax-base jobs. This is technology that we developed here. We've beaten the Chinese to the punch on this important development, and in fact we are licensing our domestically developed technology in China.

Whatever the new emission requirements may be, are we going to be using carbon capture and storage, or is there another way to deal with future requirements?

No one knows. There's a collection of proposals today from the Environmental Protection Agency that, taken together, will have the effect of raising energy prices in the U.S., depending on where you live, 10% to 25%. They will force a significant closure of coal plants and could remove over a million jobs from the economy, reducing GDP about 0.9%. Why now, on the back of a challenged economy, do we want to put that burden on our customers? Why now, with unacceptably high unemployment, do we want to remove those jobs?

You've testified that those proposed regulations are unachievable on the proposed schedule.

That's absolutely correct.

What happens if they go into effect anyway?

That's a fascinating question. It just can't happen. Southern Co. has built more scrubbers -- environmental control equipment -- than anybody else in the U.S. I think we've put in place 16 of these scrubbers. It takes about 54 months to build one. [Under the proposed rules] we have three years to complete them. It won't work. Think about the magnitude of what they're asking us to do. You can't just shut down significant segments [of generation]. You've got to stage the outage schedule, the construction schedule, of these really big assets over time. EPA estimated that they would shut down, as a result of these rules, about 10,000 megawatts of electricity. The Federal Energy Regulatory Commission produced a study that said it's going to be more like 81,000 megawatts before it's all over. When EPA made their estimate of 10,000 megawatts, they said it would cost about $10.9 billion a year. Well, if it's not 10,000 and it's 81,000, what's the cost? It's enormous. We can't do that.

Here's another interesting question: If you start shutting down coal, what will you build? About 95% of all new generation since 1995 has been built with natural-gas-fired generation. That's great. We're all excited about the new finds of tight gas and shale gas, but there are real big issues here. There are environmental concerns around the practice called fracking, and we've got to resolve those. And that gas is not where we need the generation. We have to build infrastructure to move the gas from where it is to where it needs to be. I've gotten a couple of letters from the providers of interstate pipeline services in the Southeast. They say their capacity is completely filled, and it will take a minimum of 31D 2 years to build the infrastructure necessary to meet this transition. That won't meet the time frame either.

Southern Co. has invested considerably in the smart grid. Earlier this year the CEO of another utility, Exelon, said the smart grid costs too much and we're not sure what good it will do. What makes you confident it is a wise thing to pursue?

When we think about the smart grid, we think about it in three segments. One is what we call smart power. How can we achieve greater efficiency in converting a fuel source to an electron? We run the most efficient generating capacity in the U.S. So for smart power we take the traditional fleet, we add on renewables, and then we think about the future, where we might do a lot more distributed generation. Maybe you'll have a solar cell in your house, or maybe you'll have some other technology in your neighborhood that will be very efficient and friendly to customers.

The second segment is smart grid. To us that means wires -- a transmission system, a distribution system, a little wire going to your house, culminating in smart meters. We have about 3.3 million smart meters deployed, and we'll finish our deployment by the end of 2012 with about 4.5 million smart meters. We've been able to justify the deployment of that capital by removing meter readers from the field and trucks from the road. That's good for bottom lines, and it's good for the environment. We've invested about $1 billion in our transmission and distribution system with smart technologies and self-healing networks. When a lightning strike happens, you may have a blink, but it cures itself.

The third area is what we call smart choices. This is everything beyond the meter. We saw Google (GOOG, Fortune 500), Microsoft, and a host of others move in this space [with technology to let consumers manage home energy use]. I think that excitement is wearing off a little bit. [Google and Microsoft (MSFT, Fortune 500) shut down their offerings earlier this year.] I don't know where these value chains will emerge or where Southern Co. will play. We're making lots of little bets, doing pilots all over the Southeast, trying to see what makes sense for our customers.

What's your usage data telling you about the state of the economy right now?

It's fascinating. Since the recession our industrial recovery has actually been really good. Our industrial sales went up 7.7% in 2010 compared with 2009 -- a robust recovery. And then in the first quarter of 2011 compared with the first quarter of 2010 -- so comparing against a good year we're up 4.9%. That's pretty good. One factor is that export markets in the Southeast, particularly to China and Latin America, have been really strong. But the thing that hasn't shown up yet is jobs. During the downturn we think a lot of our big industrial facilities took the opportunity to retool, and we think there's been about an 18% increase in production efficiency. So we're seeing an increase in sales, but jobs haven't come. And in fact since the recession our residential and commercial sales have been relatively flat.

The Energy Information Administration forecasts that electricity demand will grow nationally at a slower rate over the next 25 years than it did over the past 25 years. What's the reason for that?

Well, let's think about that one. An area of emphasis for our R&D right now is electro-technology, supplanting other, worse forms of energy. There are obvious ways you do that. One way is electric vehicles. We spend $1 billion a day on foreign oil. You can fill up your electric vehicle today for about a buck a gallon equivalent. That makes sense to me. So let's get that infrastructure out there and let's get that going in a significant way.

When people talk about less per capita use, it's based on the notion that we're going to be much more energy-efficient. Southern Co. is a leader in that area, and we're all for being energy-efficient, but I don't buy the notion that that means we're going to use less. In fact, if I can persuade customers to use electro-technologies more efficiently, I think I can gain share against other forms of energy, and it becomes a growth area for my company. So we're investing a significant amount of R&D in the development of electro-technologies. I think it's a good way to play offense.

The Leadership Series: Formerly called "C-Suite Strategies," this is the latest interview with a top executive by Fortune senior editor-at-large Geoff Colvin. See video excerpts of this interview at fortune.com/leadership -- plus find Colvin interviews with Charles Schwab, the team of Jeff Immelt (GE) and A.G. Lafley (P&G), Pimco's Mohamed El-Erian, H arry Brekelmans of Shell, Nils Andersen of Maersk, and many more.

This article is from the November 21, 2011 issue of Fortune.  To top of page