Q&A with Nick Akins, American Electric Power

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From the November 2013 issue of Columbus CEO

In 1906, electric power in America was a revolutionary technology. The company that would become American Electric Power was incorporated that year; a century on, AEP’s president and CEO Nick Akins is leading the company through a new revolution.

“The AEP name’s been built over 106 years, and certainly this company will be around for a lot longer. And for the next hundred years, I’ve got to start it off right,” says Akins. AEP’s fifth CEO and current non-executive chairman Michael Morris passed the torch to Akins in 2011, a time of regulatory, technological and cultural change for the energy industry.

Akins has applied his 30 years of generation and fuel-sourcing experience to guide AEP, its shareholders and its 5 million customers in 11 states through the challenges of the day. Sustainability is at the heart of AEP’s strategy under Akins’ lead. He’s leading AEP’s shift from coal to a variety of fuel sources including natural gas, nuclear, wind and solar. At the same time, he’s guiding AEP’s development of more efficient, reliable power grid technology.


How have the first two years as CEO gone?

For a new CEO, it’s a pretty daunting task when you move into that role--to finally understand that, pretty much, the buck stops there.

It’s challenging, it’s exhilarating, it’s certainly one of those areas where you learn and grow in the process and you become more accustomed to that role and the expectations around it. I think it has been a definite learning and growth opportunity.


What have you learned so far?

Right off the bat we had challenges in Ohio with the deregulation activity that was occurring at that point in time. It was immensely challenging because it not only challenged the company financially, but it challenged the company from a relationship perspective as well.

In the end, the company wound up stronger as a result because (of) the galvanization of the management team here, the focus placed on emerging with a solution in Ohio that made sense for our company and the customers. That was critical and it was a learning process for all of us, but one I think in the end made us a lot stronger as a result.


Which relationships were challenged during the deregulation process?

Our relationships with the Public Utility Commission (of Ohio) were challenged. Certainly from a customer side during that transition that occurred, and we had to manage through that. I think those relationships have become much stronger as a result and, I think, with a vision for where Ohio has chosen to go in terms of a deregulated market.

We have certainly fallen in line with that. We have a plan that everyone understands and we’re able to move forward in a positive fashion. It’s been that kind of experience.

Probably one of the most interesting aspects of being CEO of AEP is you can actually have an impact on energy policy in the country. You’re much more seen on a national scale in terms of the issues that we deal with in Washington.

It’s sort of interesting, even from a market perspective…I’ve been on “Mad Money” seven times now with Jim Cramer, and he obviously wants to know what we have to say because we are the midsection of the country.

When you look at residential growth, industrial growth, commercial growth, it says a lot about where the economy is going. During this two year period that I’ve been CEO, we continue to have a struggling economy. One, though, that has been pretty interesting and fascinating in the way, not only from a regulatory side and what’s happened from a Washington perspective, but also what’s happened from a pure fundamental perspective with shale gas and the other things that are developing. So there (are) true opportunities in our service footprint, but it’s a matter of unleashing those opportunities that we seem to be held up.


What effect do you think shale production in Ohio will have on AEP’s commercial, residential and industrial customers?

I think it has the potential for having a dramatic impact. We watch it from two perspectives: one is development of the resource itself which we could ultimately use. The other is the industrial and manufacturing base that could be developed around it a well. We look at the improvements in customer load, those types of things. It would be great to have an economy that’s flourishing so that that kind of development could continue to occur.

We’re always saying the industrial and manufacturing base is critically important to this country. And for commercial customers, the growth associated there…residential customers, in fact, follow suit based upon that industrial and manufacturing base. I think shale gas activity, in particular in Ohio and Texas, are very positive because the Utica shale in Ohio is much like the Eagle Ford shale in Texas. Both of them are wet-gas type of activities, where it’s not only the natural gas but the chemicals themselves that are being extracted. And that is a key positive for the state of Ohio.

When I look at the states that we’re involved with--certainly the one that I came from, Louisiana, is an energy state. Texas is an energy state, Ohio is an energy state. Ohio has so much going for it now in terms of the development of natural gas. It still has the coal resources, it has nuclear resources and certainly from an energy efficiency and renewable standpoint, that continues to develop, so there (are) some real opportunities here in Ohio. We just need a vibrant economy that’ll make things take off.

One of the challenges we have in Ohio, though, is the deregulated market, the structure of it….The electricity market from a resource side is driven by what’s called PJM—it’s a regional transmission organization that has rules on how the market actually develops. One challenge we face is in those competitive markets—and that’s not just true here, that’s true in any competitive market, whetehr it be California or texas or any of those markets that have moved to competition. The challenge is having long-term price signals for the development of new generation. Those market signals do not exist and that’s a challenge that I think needs to be resolved for the Ohio market to flourish. I believe that those long-term price signals need to develop so that people can invest with a level of certainty around these large capital-intensive resources, particularly (the) central station generation that would develop.

So, for natural gas, moving back to that side of things, for a natural gas combined-cycle facility to be built in the state, an investor needs to know: can they actually sell in the market and get an adequate return on that investment? And right now, the market mechanism doesn’t provide that kind of a surety, so that’s a challenge and it will continue to be a challenge for Ohio.


Q: How does the Ohio energy market operate differently than others?

A: In all of our other state jurisdictions we still have integrated, regulated utilities. So, in other words, all that means is that the generation transmission and distribution all remain state regulated. And in Ohio the generation piece of it has been moved out in a deregulated environment. Same is true for a portion of Texas; the portion of Texas where we have two operating companies, that’s been moved out as well. So in those integrated, regulated jurisdictions, there’s resource plans that match up the generation needs for what the customer expectations are going to be in terms of demands in the future. There you have a model in place where you can invest. You get approval from the state regulator to build a new generator to support load increases that are occurring in the future, and you go build it, and you invest and you recover.

In a deregulated market, you have to have price signals from the market that say ‘we need to build,’ much like if you’re building a bridge that’s out there…there has to be a demand that’s created and you have to support that demand. Same is true for deregulated markets in generation. The only difference is, if you build a generation facility, it’s in the billions of dollars. So you’re making a pretty heavy investment and you need that price certainty around that. It the other states we have that. In the deregulated states we don’t, at this point.


Q: What is the benefit for AEP separating it’s generation from its distribution and transmission operations in response to deregulation?

A: If there were proper price signals, the benefit would be that you would have a competitive environment around the development of those resources. That’s really my argument about any of our competitive markets—whether it be Texas, whether it be Ohio—you have to have those adequate price signals for the building of new capacity and to support existing generation that’s in place. If you have that then you have the ability to leverage into a supply that is among several resources that are bid into the market. That could potentially be a benefit to customers.

Now, with that comes a certain amount of volatility, because the market response is going to be very different (than) it is to a regulated marketplace. That’s something that I think customers need to understand going into it. If natural gas prices are low and you’re building natural gas-fired generation, you may be able to take advantage of those lower prices from a resource perspective. But if natural gas prices go up, there’s (going to) be volatility associated with that.

There’s a certain amount of volatility associated with a deregulated market that you don’t have with a regulated market. A lot of people argue, ‘Well, prices are less in a deregulated market.’ That can be true some of the time, not true for other parts of the time. Sometimes you have volatility in that market verses a more steady regulated market.

Ohio made that decision back in 2001 and because our rates were significantly lower than market, we wound up in successive agreements that we would stay regulated until recently. And that’s where this all sort of blew up two years ago when the state and commission decided (they) wanted AEP to move to a deregulated market. So we started that process, and that’s the transition that we find ourselves in today. We won’t be fully deregulated until 2015 on the generation side.

Now, keep in mind, we continue to be regulated on the wire side—the distribution and the transmission side of things, and we’re investing heavily in Ohio transmission and distribution.

 

You’ve been in the industry for 30 years—how does the energy market and the regulatory environment compare to previous periods?

I think there hasn’t been a more challenging time than there is today, and the reason is because not only are you seeing changes in the resource mix with the advent of shale gas—(and) other forms of capacity as well, renewables and so forth-- but you’re also seeing changes on the technology side.

You’re seeing a lot more data farms, you’re seeing more computer usage and that kind of thing, electric vehicles, that’s starting to take place as well. So it’s not only changing at the generation side of things and the resources side of things, it’s changing at the customer side of the equation as well.

We have to think of our business as an integrator of those technologies, and that’s what we’re focused on at this company.

 

That’s a lot of moving parts.

A: A lot of moving parts, but it’s exhilarating at the same time…With the innovations and the technology and the changes that are occurring in this industry today, it is exhilarating to be a part of that.


How has your experience from your earlier work as AEP’s executive vice president of generation informed the direction you’re taking the company in terms of fuel sourcing?

Shale gas has obviously made a big, big difference. We have what we commonly call our eastern footprint and our western footprint. Our eastern footprint is Ohio, Michigan, Indiana, Kentucky, Tennessee, West Virginia, Virginia. Our western footprint is Arkansas, Texas, Louisiana and Oklahoma. Before shale gas came, really natural gas wasn’t prevalent in this part of the country. We had pipelines that were getting built, but shale gas transformed it dramatically. From a resource perspective, if you look at what’s going on with the Environmental Protection Agency requirements on coal, coal is being challenged primarily because of the regulations coming down on one direction, then the advent of natural gas on the other direction. As coal gets squeezed out, more natural gas is starting to come in to fill the role.

If you look at it in the future, AEP has plenty of coal. We’re probably the largest consumer of coal in this hemisphere. But we are backing off on that. Because of EPA regulations we’re retiring about 6,000 megawatts of coal-fired generation.

From a resource perspective it has to be a broad set of resources that includes not only natural gas, coal, nuclear and those types of resources but also energy efficiency, smart grid technology and transmission.


What does AEP’s Smart Grid mean for your customers in terms of lowering demand?

I think, really, it’s up to the customer. The technology advancement relative to Smart Grid can be tremendous it just depends on what customers choose. We’ve done a huge Smart Grid pilot here in Ohio, $150 million I think, half of it was funded by the Department of Industry and half of it we did…It’s been focused on technologies that are really key for us in the future.

There’s technology on our side of the meter and there’s technologies on the customers’ side of the meter. We find that optimization of the grid on our side of the meter provides a tremendous benefit.

On the customer side of the meter, it really is managing their electric cost--deciding when to run appliances, deciding when to use different types of internal resources that may be available. We find that most customers at his point are relatively passive in that regard. They really want the appliances to be energy efficient. They really want to be able to do that in an efficient manner.

It depends on the price, to really get their attention. To really approaching ‘When I run the washer, when I run the dryer, do I run my refrigerator at 42 degrees versus 38 degrees?’ It’ s those kinds of decisions that consumers can make and are able to make but it’s all done in the context of how high prices are….We haven’t seen as much interest on the customer side as we have been doing on the utilities side of the meter, and that’s because of the price.


Can a company like AEP can play a role in getting citizens on board with energy-efficient technologies?

Absolutely. We’ve certainly been encouraged to do that with energy efficiency program and those types of things, and the smart grid pilot alone has taught us a lot in terms of the applications of some of these technologies.

It’s different in our part of the country than it is northeast or California. Northeast and California pay twice as high rates as we do in our part of the country….Instead of 10-11 cents a kilowatt hour which our customers would pay, they’re paying more like 25 cents a kilowatt hour in the northeast and California. So when the price gets that high, customers start to think about how they use their electricity.

I also think that the economy itself has driven more customer awareness of how they utilize electricity. We’ve seen efficiency gains, our load growth has been relatively stagnant during this period of economic downturn. We don’t know how much of it is efficiency driven versus the customer is making decisions about how they use their electricity, and we’ll ultimately know that as the economy improves. But it is interesting though that you have somewhat of a forcing function around the economy and where it is today and customers having to make decisions about where they save money on their electric bill.

 

How do you balance your responsibility to AEP shareholders with your obligation to the public?

I think we take that obligation very seriously. (It’s) the only way we can have shareholders that benefit. And most of our shareholders invest in us because of the dividend that we’re able to pay.

As long as we’re able to invest and provide adequate level of recovery, we can provide a relative sense of certainty to our investors going forward. But we have to do that in the context of our customers and what their needs are.

We’re very careful about how we spend money, where we spend money. And (PUCO) obviously is a huge window in terms of what the customer expectations are in terms of pricing and in terms of where we spend capital. I think that changes over time, but it’s important for us to make sure that we’re always focused on our customer. Because with happy customers you’ll often have happy shareholders.


What needs to happen to spur long-term investment in the energy grid for the future?

There’s a couple things that are important. We have to be able to invest in the rehabilitation and continual improvement of our grid, to provide the reliability and service expectations that our customer expects. The other thing that we have to do is really address new and emerging issues that the industry has. After super-storm Sandy, after the derecho that occurred in Ohio and the other states, it’s become very apparent that we have to work on the resiliency of our grid.

We need to be able to accommodate that type of investment to ensure that we’re able to not only make the system as flexible as it can be and responsive, but also to make sure that we’re able to recover the system as quickly as possible. And we’re working with the federal government on that as well, and the state governments. The other aspect is cyber security. The utility industry is one of the prime targets that our adversaries have because obviously they’d like to take down the grid. So we have to address cyber security from two perspectives: One, from the critical assets that we have and make sure that they’re secure and then, as well, the business systems that have customer information.

The other part of it is we need to be able to make sure we have a portfolio of resources in this country for the future that adequately serves the needs of our customers. That means that coal has to stay in the picture, natural gas, renewables, nuclear, transmission, all those resources—energy efficiency—need to be in play so we can solve a total energy picture for this country in the future. And that way, we’d have the certainty around the investments that we’re making to support that.

 

Do you believe projections that the U.S. is on track to be a sustainable energy producer in the future?

I think it’s possible that this country can be. The question is: are we going to utilize all the resources that are at our disposal? Because right now we’re shutting down coal units. You still have some challenges relative to the expansion of natural gas, and there has to be, certainly, financial support for these huge capital investments.

This industry needs to spend $2 trillion over the next two decades just to refurbish the grid and put new generation in place. That is a huge number. This industry is the most capital intensive industry in the country, so we have to be very careful and wise about how we invest. That’s something I think federal energy would provide for, but also from the state perspective the ability to make investments and do it in a way that is responsive to customer needs.

 

As a member of the Columbus Partnership, how do you work with other CEOs to understand the energy challenges facing their industries?

The Columbus Partnership is a great organization. There (are) a lot of discussions about issues that are central to all of our companies, whether they’re workforce related, education related, and all those types of activities. Energy is one of those prime issues as well.

I recently went with a delegation of about four or five CEOs from the Columbus Partnership to Washington to talk to the White House staff and, as well, Congressional members. It’s a tremendous vehicle, that and the Ohio Business Roundtable, to have those discussions. …Those two organizations are very positive for Ohio in getting its message across from the Washington standpoint.

This position is sort of interesting because I’ve had the opportunity to sit across the table from President Obama on two different occasions to talk about the issues relative to grid resiliency, cyber security and those types of things. It’s an opportunity for us to have a voice, and Ohio definitely has a voice.


During your conversations with President Obama, have AEP’s veteran-hiring initiatives come up?

Absolutely. We have a Troops to Energy program in the electricity industry, and AEP has been very focused on reaching out.

It’s sort of interesting because our business, when you see people climbing poles to restore service, when you see all the discipline around the safety parameters associated with our business--I mean you can get killed in an instant if you’re not doing the right thing with the right procedure and with the right emphasis placed on safety.

All those systems, procedures, the shift work associated with it—those are really the essential components of what our soldiers are dealing with. And those core competencies are aligned in a tremendous fashion. It provides us an ability, along with the leadership capability that’s provided through the armed services, to really (recruit) great employees for our company.

That’s why we started a new employee resource group, a veterans group. We have a veterans group, we have an African-American Group, we have an Asian Group, we have a gay/lesbian group as well. And those resource groups are not only instrumental to the cultural objectives we have as a company, but also the objectives of insuring that when someone comes to work here, that they’re exposed to a very open, collaborative workforce that respects each individuals’ beliefs, and that’s important to us.


What are a few examples of your employee “intrapreneurs,” as AEP calls innovative staffers?

AEP has a 106 year history of being the first in several respects. We have the first super critical generating unit in this country; the first ultra-super critical unit that we just completed in Southwest Arkansas, it was just named the power plant of the year by Power magazine. We won the Edison Institute’s highest honor, the Edison Award, for that power plant as well. That was the first ultra-super critical in the United States.

We just now received or are in the process of receiving a patent for a new type of transmission line that we call our bold line. It’s much more efficient…in terms of its scope, we don’t need as big a right-of-way, and it’s not as high up. That is a tremendous accomplishment, and we’ve achieved other patents as well….We had the first integrated carbon capture and storage facility in the world that we built in the last five years.

We have a very energetic workforce, and for young people coming into our company…for new employees on the engineering side, we tell them ‘You can change the word at this company.’

That’s all a part of employees wanting to work at this company. They see the ingenuity, they see their ability to contribute and they see the work environment that they’re in and the inclusiveness associated with it.


You must count that as a sign of your success as a leader.

Oh yeah, that’s one of our primary responsibilities. There’s no question that we can’t accomplish the things we need to accomplish in the future through this tremendous transition that’s occurring in this industry without that kind of culture that’s in place.


How would you describe your leadership style?

I’m much more team oriented, I think. I believe in an open, collaborative environment. I believe that the employee at the front level of the organization has to be able to get up and go to work and feel like they can contribute and know exactly how they can contribute. I have regular meetings with a group of employees; we call it Nick’s Network. They’re employees at the front lines throughout our 11-state organization so that I can hear directly from them their concerns, their issues, the things that they’re dealing with.

I also meet on a quarterly basis with our employee resource groups so that I can understand what they’re running into from a cultural perspective. But it’s absolutely critical to have that kind of a culture and I’m very focused on that.

I believe that when the team is operating well, execution of the goals that we have in place are critical and accomplishable based upon that kind of environment. The team environment is critical and execution is key.


Have you had any mentors who shaped your career?

Certainly Mike Moore the previous CEO had a lot to do with my career, but there’ve been others along the way….Each step in your career, you have mentors that bring you along.


Is there any advice that has served you well that you would pass on to others?

I think the way you treat people is extremely important. Ethics, credibility, all those types of things that describe not only the character of a person in this job, but also the character of the company, are extremely important.

So I find, in Washington for example and in our interface with the commissions that we deal with and our customers, we have to deal in a way that we are credible, that we are factual, that we talk about the risks and the pitfalls as well as the benefits, that we do it in an open and collaborative manner. And that’s key for us.

Really, the AEP name’s been built over 106 years, and certainly this company will be around for a lot longer. And for the next hundred years, I’ve got to start it off right.