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Report criticizes utilities for not linking executive pay to decarbonization

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Report criticizes utilities for not linking executive pay to decarbonization

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Duke Energy's 60-MW Monroe Solar Facility in Union County, N.C. Duke Energy in September 2019 announced an updated goal to reduce carbon emissions by at least 50% compared to 2005 baseline levels in 2030 and attain net-zero emissions by 2050. The Energy and Policy Institute contends the company's executive compensation plan "does not incentivize decarbonization."
Source: S&P Global Market Intelligence

The Energy and Policy Institute, a utility watchdog organization, has released a report criticizing the nation's largest investor-owned electric utilities for not directly linking executive compensation to decarbonization goals while pursuing rate increases and disconnections instead of CEO pay cuts to offset overdue electricity bills during the COVID-19 pandemic.

"While most major investor-owned utilities have established goals to reduce their greenhouse gas emissions, those goals are not yet reflected in the companies' executive compensation policies," the report states. "Some utilities' executive compensation policies encourage renewable energy growth or discourage air and water pollution violations, but only [Xcel Energy Inc.] rewards its executives for the company's progress toward its decarbonization goals."

The report, titled "Pollution Payday," adds that some compensation policies actually conflict with utilities' decarbonization goals.

However, in the case of Xcel Energy, the Energy and Policy Institute pointed out that the Minneapolis-headquartered utility has a "carbon emissions reduction incentive program" that accounts for 30% of executives' long-term incentives.

"[T]he carbon emission reductions incentive program accounts for about 21% of the CEO's total compensation, and 16% of all other [named executive officers'] total compensation," the organization wrote.

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Xcel Energy in December 2018 announced a goal to slash carbon emissions 80% by 2030 from 2005 levels and to deliver 100% carbon-free electricity by 2050.

Xcel Energy has a 47% carbon emissions reduction target for the three-year period ending in 2021.

"If Xcel Energy were to reduce its emissions more than the target, executives would receive higher incentives, while a failure to reduce emissions beyond a threshold amount would mean that executives would not receive any incentive," the Energy and Policy Institute wrote.

Xcel Energy spokesperson Julie Borgen said the company's executive compensation plan is "results-based and directly tied to corporate goals and achievements."

"A portion of our executives' compensation has been tied to environmental performance since 2004 while metrics around employee and public safety have been part of our annual incentive plan for at least 20 years," Borgen said in a Sept. 23 email. "In short, when results-based goals are achieved, performance is rewarded."

The spokesperson added that "more than 85%" of Xcel Energy Chairman and CEO Benjamin Fowke's compensation in 2019 was "performance-based and tied to several significant achievements, including superior financial earnings per share, increase in common stock value and a record reduction in carbon emissions in a single year."

In contrast, the Energy and Policy Institute stated that Southern Co.'s executive compensation policy "is not tied to actual emissions reductions" but does provide incentives for the CEO "if the company adds zero-carbon resources or closes coal plants."

Southern Chairman, President and CEO Thomas Fanning in May announced the Atlanta utility's revamped carbon-reduction strategy and target of net-zero emissions by 2050.

The Energy and Policy Institute report noted Duke Energy Corp.'s 2020 proxy statement points to the use of a "nuclear reliability objective and a renewables availability metric" in its short-term incentive plan.

"Unlike compensation policies that focus on [greenhouse gas] reductions, incentivizing renewables availability does not encourage executives to move the utility toward a cleaner power supply or reduce emissions," the report stated.

Duke Energy spokesman Neil Nissan called the analysis "a biased report put out by an anti-utility group."

"Under Lynn Good's leadership in 2019, Duke Energy had a strong year delivering value to customers and shareholders, including announcing new, aggressive targets to reduce carbon emissions by at least 50% from 2005 levels by 2030 — and reach net-zero carbon emissions by 2050," Nissan said. "Approximately 90% of Lynn Good's total direct compensation is 'at risk' — meaning the actual amount earned will depend on the company's future performance."

For Columbus, Ohio-headquartered American Electric Power Co. Inc., the report noted the company added a third performance measure to its three-year incentive plan for 2020-2022 based on "non-emitting generating capacity." But while the proxy states the measure was "chosen to align with the company's strategy to commit substantial investments that reduce greenhouse gas emissions," the Energy and Policy Institute said AEP still plans to add "1,607 MW of new gas power plants to its generation mix over the next [10] years."

The report added that executive compensation plans for other companies with net-zero or carbon-neutral goals, such as Dominion Energy Inc., Alliant Energy Corp., CMS Energy Corp., Eversource Energy and WEC Energy Group Inc., also do not incentivize decarbonization. The Energy and Policy Institute contended the executive compensation policies for Pinnacle West Capital Corp. subsidiary Arizona Public Service Co. and DTE Energy Co. actually conflict with their clean energy targets.

Bad debt

The Energy and Policy Institute also argued utilities could use a portion of their "excessive" executive compensation to help alleviate overdue customer bills and avoid rate increases during the COVID-19 pandemic.

The organization said the compensation at 19 of the largest investor-owned electric utilities in the U.S. "totaled over $764 million between 2017 and 2019."

The Energy and Policy Institute report noted NextEra Energy Inc. Chairman, President and CEO James Robo was the highest-paid utility CEO during the 2017-2019 time frame with "more than $62 million in total compensation." Robo was the highest-paid chief executive in the U.S. utilities industry in 2018 and 2019, while Duke Energy's Good led the group in 2017 with an adjusted compensation package of $21.1 million.

The group contends a 50% cut to Robo's 2019 executive compensation package would still allow the NextEra CEO to take home about $10 million, while "the company could use that money to wipe out the debt of 43,581 [Florida Power & Light Co.] customers who were in arrears as of the end of June 2020."

The watchdog contends Good could take a 50% cut from her 2019 compensation and still earn more than $7.5 million, while at the same time allowing the company to "wipe out the debt of over 28,163 residential Duke Energy customers in the Carolinas that were considered past due on their bills as of July 31, 2020."

"Lynn Good has been focused on mitigating the pandemic's economic impact on Duke Energy's customers," Nissan said. "The company halted disconnections in March, waived late-payment fees and other customer fees and donated millions to help families facing economic hardship. We're proud of our response to the pandemic and our support for customers continues."