AEP: The Good, The Bad, Or The Dirty?

| About: American Electric (AEP)

American Electric Power (NYSE:AEP) owns and operates around 80 power stations with a capacity of nearly 38,000MW. The company supplies electricity to more than five million customers in 11 states and owns the largest electricity transmission system in the country. Its generation mix is roughly 68% coal, 23% natural gas, 6% nuclear and 3% hydro, wind and pumped storage. Since the company is such a large consumer of coal, it is in the cross-hairs of environmental regulators and those wishing to find solutions to global warming. AEP appears to be addressing these issues by deploying "clean coal".

AEP's CEO Nick Akins was recently interviewed on Jim Cramer's Mad Money. You can watch the video here.

As I was watching the video, AEP's CEO Nick Akins looked very familiar to me. Could this be the same Nick Akins who was in many of my EE classes at Louisiana Tech? Nawww...couldn't be. But I Googled him and sure enough, this was the same Nick Akins that attended many of my electrical engineering classes in good ol' Nethken Hall.

I remember Nick as a smart and handsome young lad. He was well liked by his fellow students and his professors too. If memory serves, he was a drummer and big into RUSH in those days. It did not surprise me to discover Nick had risen to the top of the corporate world. As CEO of AEP, he has certainly arrived. Congratulations Nick! It's great to see a fellow Louisiana Tech alum achieve such a high level of success!

That said, the interview was a bit disappointing to me. Jim Cramer can't seem to make up his mind with respect to natural gas. One day he says that all coal fired plants should be shut down and switched over to natural "gazz" (as Cramer pronounces it), the next day he interviews the CEO of one of America's biggest coal burners and he says the EPA is "moving too fast". Well Jim, you were right the first time! I wish Mr. Cramer would stick to his guns instead of bowing down to whoever he happens to interview. A man without the strength of his convictions should not be so adamant about pushing them onto others....

As I have written many times before, there is no such thing as "clean coal". It is a myth and an oxymoron. It's hard to pick which is the dirtiest aspect of coal. Is it the CO2 it releases and subsequently warms the planet, the destruction of the environment it takes to mine it, or the toxic heavy metal particulates and remnants ("fly-ash") left over after burning the stuff? After witnessing the TVA disaster in Kingston, TN - I would vote for the later. All I can say is I am glad my drinking water doesn't come from the Tennessee River downstream of Kingston.

A few years ago when I was writing and blogging so much about America's biggest economic problem (its addiction to foreign oil), and suggesting that natural gas transportation was the solution to this problem, quite a few people told me, oh no Mike, it's electric cars fueled by coal that will save us. Wrong.

I had a dream years ago about the "clean coal" CO2 sequestration problem. I dreamed I was in my backyard with a straw in my mouth and was trying to blow smoke into the ground. My cheeks hurt, my face turned beat red, and I woke up gasping for breath! AEP's adventures into storing CO2 in the Earth remind me of that (bad) dream. It simply doesn't pass my "common sense" engineering test. But even if CO2 sequestration did work and was economical (it doesn't and it isn't), coal is still not "clean" because you've still got all those heavy metals particulates and remnants to deal with. You know nice things like mercury, lead, cadmium etc. etc. Nice stuff to have in your water or in your lungs. I do however agree that coal will create jobs...not only in the mining industry, but in the health care industry to deal with all those folks unfortunate enough to find these heavy metals toxins in large quantities their bodies.

So one can legitimately ask: how will AEP succeed for investors when their main strategy in dealing with environmental and regulatory agencies is based on the flawed strategy and myth of "clean coal"?

Things are no better on the electric car front. In the 4/26/2012 edition of the Wall Street Journal there was an article titled Engineers Cast Wary Eye on Role of Electric Cars in which the skepticism I have often expressed about EVs was realized by the engineers working most closely with them. Here are some of the most significant quotes and conclusions from that article based on presentations of the Society of Automotive Engineers World Congress:

Barring an unforeseen breakthrough that significantly drops the cost of automotive batteries, fully electric cars and plug-in hybrid vehicles are likely to remain confined to a niche of under 10% of the market through 2025 and beyond.

By 2025, we see battery electric vehicles still with too long a payback, and inadequate range. - Joseph Bakaj, VP for powertrain engineering at Ford Motor Co (NYSE:F).

....batteries for the electric Ford Focus costs $12,000 to $15,000 for a car that is priced at $39.200, about $15,000 more than a petroleum fueled Focus. - Alan Mulally, CEO Ford. 2025, a customer who buys a plug-in hybrid could wait 10 years to recover the added upfront costs, compared with a 2025 car outfitted with a more efficient gasoline engine. - Robert Bienefeld, Honda Motor Co. (NYSE:HMC).

And this article doesn't even touch on the lack of a cross country electric refueling infrastructure, recharging times, or the lack of real life reliability data.

In addition, I've recently read several articles on battery makers' inability to overcome the design, engineering, and economic hurdles facing them after billions of dollars in research.

What took the auto industry so long to come to these conclusions? Why are we banging our head against the wall with respect to EVs when we have a superior, economic, and proven solution that requires no huge research investments, is based on proven technology, and is already economic today? I am talking of course about the natural gas electric hybrid architecture ala the Toyota Prius (i.e. swap out the gasoline for natural gas). Not only is this auto architecture affordable to average Americans, but it is also a superior environmental solution.

The Toyota Natural Gas / Electric Hybrid Camry

A Superior Solution To All Electric Cars Or The Volt

Taken together, it is clear the promise of coal fired power generation powering EVs is not an intelligent solution to the American oil crisis. It's also clear that coal is a dirty 20th century fuel that should be phased out as quickly as possible. There were many articles in the Knoxville newspapers after the coal fly-ash disaster at Kingston. They were focusing on how this could happen, how to store fly-ash safer, and on-and-on. I wrote a letter to the editor and I was very surprised they printed it considering we are in TVA "coal country". Anyhow, I said the real question is:

"Why isn't the TVA shutting down all their coal plants and replacing them with cheap, clean, and abundant natural gas power generators?" The question equally applies to AEP.

It just seems to me that if I was in charge of a large utility company, and I wanted to "sequester" CO2, I'd probably start by generating less of it to begin with and everyone knows natural gas generates 50% less CO2 than does coal. So half the problem is solved before we even generate a micro-watt by making an intelligent choice of which fuel to burn. But the real good news is that natural gas emits 100% less (that is, ZERO) of the heavy metal toxic particulates of coal. So, there are no more ticking time bombs (i.e. fly-ash "containment" piles...) to manage, hide, and feel bad about making.

Let's face it - burning coal to generate electricity - and the whole "clean coal" fantasy, isn't about good energy, economic or environmental policy. No sir. It's about being tethered to the past. It's about being bullied and pushed into a stale ideology whereby the wealth of the past is trying to control the future. And AEP is stuck in the past. What we need are people with integrity, vision, and backbone to move past the failed energy & environmental policies of the 20th century and usher in a new, bright, and clean 21st century.

I doubt Nick Akins would remember me. I was a slow student and sat in the back of the classroom. But, if I had a beer with Nick today, I would ask the CEO - is AEP good, bad, or dirty?

Considering AEP's stock hasn't gone anywhere in the last 10 years, and is down for the last 5 years, I wouldn't say it's "good". I also wouldn't say it's "bad" because AEP has a decent dividend and its operational dependence on coal is simply a result of bad energy policy by U.S. regulators dating back to the Carter administration. However, I would definitely say AEP is "dirty". The company is simply burning too much coal. As long as it does so, the stock will underperform and our environment will continue to suffer.

So Nick, if you are reading this, I would like to introduce you to the preeminent energy and environmental policymaker (and also a helluva driller!) of our time: Robert Hefner III. Hefner wrote a magnificent book titled The Grand Energy Transition (The GET). Hefner makes a compelling argument that solid and liquid fuels are expensive, dirty, and increasingly scarce. They belong to the 20th century. The 21st century will begin the transition to cheaper, cleaner, and abundant gaseous fuels - like natural gas. It is an excellent book. Hefner also has a free DVD you can order online. Nick - you should read the book and watch the video. Afterwards, you should call Mr. Hefner and jump on the company jet to meet him at the Aspen Institute for a sit down. Hefner has a marvelous mind and will be a great advisor to you as you transition AEP over to the new gaseous fuels century.

Many utility executives worry natural gas prices will skyrocket once a large number of coals plants switch over to natural gas. It won't happen - and for the same reasons gas prices have come down so low: the top 5 natural gas producers (ExxonMobil (NYSE:XOM), Chesapeake (NYSE:CHK), and ConocoPhilips (NYSE:COP) for instance) are responsible for way less than 50% of total U.S. natural gas production. Why is this important? Because they cannot corner the market. There are too many independent natural gas producers in America and they dominate production and therefore price setting. As soon as natural gas prices rise to be economical to produce, the gas will come online. And this will be true for the next 100 years.

So be bold Nick! Save yourself from the troubles and cost of transporting and burning coal. Push the EPA regulation worries off your desk. Shut down your dirty and complicated coal plants and replace them with simple electric generators connected to a natural gas line! Produce your electricity with cheap, clean, and abundant natural gas! Five years from now you (and I) will be glad very glad you did. Perhaps then my Mom will get something more for her AEP stock than just the dividend yield.

A company like Consolidated Edison (NYSE:ED) has delivered both dividend yields and capital gains and has outperformed AEP over the last 5 and 10 year periods. ED doesn't burn near the coal that AEP does and is actively reducing its coal consumption. Investors can expect ED will continue to outperform AEP if AEP doesn't make a more concerted effort to switch from coal to natural gas.

Good luck making the transition Nick! Uncle Milty would be proud!!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.