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EPISODE 268

Southern Company CEO Tom Fanning: Girding the Country’s Fortified Grid

65 minutes · November 8, 2021

From climate change to cyber threats, the energy grid faces many threats — keeping the electrons flowing requires exhaustive planning and excellent execution. For decades, the energy industry has turned to Tom Fanning, Chairman & CEO of Southern Company (NYSE: SO), for his leadership to ensure we get our power from a reliable, safe, and secure grid. Tom discusses how his career path gave him the tools to protect key infrastructure, while transitioning Southern Company to a greener future.

Announcer:

From the library of the New York Stock Exchange at the corner of Wall and Broad Streets in New York City, you're inside the ICE House, our podcast from Intercontinental Exchange on markets, leadership, and vision in global business, the dream drivers that have made the NYSE an indispensable institution of global growth for over 225 years. Each week we feature stories of those who hatch plans, create jobs, and harness the engine of capitalism, right here, right now at the NYSE and at ICE's exchanges and clearinghouses around the world. And now welcome inside the ICE House. Here's your host, Josh King of Intercontinental Exchange.

Josh King:

"Pipeline diplomacy: how gas became a geostrategic bargaining chip in the energy crisis." That's a recent headline from The Independent in the UK, and here's how the subhead reads: "From Russia's confrontation with Europe to the East Med and Lebanon's energy crunch, gas is a diplomatic weapon." ICE's energy markets and benchmarks have had a front row seat to this fascinating story playing out before our eyes right now across Europe. The Continent's growing demand for energy has been met by rising costs in LNG and Brent Crude, as well as some supply issues, real or artificially created, out of Russia.

Josh King:

Some people see a 1970s-style energy crisis in its infancy while others chalk this up to the expected growing pains of an energy industry in the midst of a conversion to greener production. What exactly is happening is still taking shape and may not be clear for weeks or months or perhaps years, but in any case, we're going to be seeing a lot more of it as world leaders gather in Glasgow for the UN Climate Change Conference, colloquially known as COP26. As the jets get ready to go wheels up for Scotland, economists, environmentalists, and governments are busy dissecting the data to see what this portends for renewables and cheap energy, not that those two are mutually exclusive of course.

Josh King:

In the global economy, regional markets can no longer operate separately from one another, even if they are separated by large expanses of ocean, so the impact is already being felt right here in the States. Our guest today, Tom Fanning, CEO of Southern Company, has been one of the nation's leading voices on planning for a sustainable, safe, and inclusive future for energy and finance. He joins us from near ICE's headquarters in Atlanta, Georgia to talk about all things energy. Our conversation with Tom on protecting our key infrastructure from cyber attacks, transitioning our energy needs for a greener future, and leading a utility company that produces more power than all of the utilities in Australia, that's all coming up right after this.

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Josh King:

Our guest today, Tom Fanning, is the Chairman, President and CEO of Southern Company. That's NYSE ticker symbol SO, one of the largest energy providers in the United States, supporting nine million customers and businesses nationwide with electric utilities in three states and natural gas distribution utilities in four, and providing wholesale energy, customized distributed energy solutions, and fiber optics and wireless communications all across the country. Tom's worked for Southern Company for more than four decades, holding 15 different positions of leadership across eight of the company's business units, including numerous roles in Southern Company's subsidiaries in its strategy, international business development, and technology departments. Tom serves on a number of regional and national boards and commissions, including as a Senate-appointed member of the Cyberspace Solarium Commission. Welcome, Tom, inside the ICE House.

Tom Fanning:

Josh, so good to be with you.

Josh King:

Tom, for many years, I worked in a similar role as I do now at First Data, which is now Fiserv, another great Atlantic company. One of my favorite times of the year was September, when the Tour Championship came to Eastlake Golf Club, home of the great Bobby Jones. Always, every year, Southern Company one of the most visible names along the fairway. This year you presented Game Changers Pavilion to help empower young people to become game changers in their communities. We know that Patrick Cantlay won the $15 million purse this year by holding off Jon Rahm with a clutch birdie on 18, but were kids the real winners this year through what Southern Company was doing with the PGA's First Tee Program?

Tom Fanning:

Well, we were one of the first supporters of First Tee. Chris Womack, the President of Georgia Power Company, I want to say he is on the First Tee board. But broadly, we take this notion, and this goes back now over a hundred years ago. I know ESG as a theme is kind of big right now, but go back over a hundred years, one of the CEOs of our company said that we must be good citizens wherever we serve, that the communities must be better off. We've taken that to heart. I know ESG is the latest flavor, but we've been doing that stuff forever. And going back to the Tour Championship, now for over 20 years, we have been the sponsor of the Payne Stewart Award, which is given not to the best golfer necessarily, they're all great, but really the best ambassador, character, charity, sportsmanship.

Tom Fanning:

And so this idea of making sure the community's better off because we're there is really central to what we do. Two data points. One, the amount of money we contribute outside the lines, if you will, is approaching something like half a billion dollars. One of the things you've seen lately is that Southern and Apple teamed up to create something called the Propel Center. That is a critical mass of technology and innovation development, directed, located at an HBCU here in Atlanta, but available nationally to everybody. That is a big deal.

Tom Fanning:

But I think bigger than the money, bigger than the "whats" of what we do are the "hows," and among the "hows," Southern Company has an expectation of its employees that you will work outside the four corners of making, moving, and selling energy. Man, I think we average somewhere around a quarter of a million volunteer hours every year. We are everywhere in the community, and we are dedicated to those principles. As you mentioned, the kids that were involved in First Tee and around that great effort, good for them, but I can tell you, that is not a limited circumstance.

Josh King:

Before we get into some of the big issues that I teed up in the intro, Tom, you take a spin through the Southern Company website and you get to this very, very long page on company accolades, awards for leadership, industry recognition, customer satisfaction, environment, workplace. I mean, you got 30,000-plus employees, you got nine million customers. How important are those metrics to the people you serve?

Tom Fanning:

Well, they absolutely are. You know, it's funny. If all a company is about, and I know there's lots of flavors on this and in business, kind of philosophy, but our view really aligns with the idea of sustainability. If all you stand for is earnings per share growth... I love to use this little story about there's three kinds of companies in the world. There's birds of prey, moving prey, and roadkill. It really is determined which category you find yourself in by your perspective on how you measure success. Those companies that are able to balance both long-term success, and that in fact becomes their primary objective, and then make short-term success work, those are truly the birds of prey. I think that's why we try to run our company the way we do.

Tom Fanning:

It's very easy to see the other side too: Enron. If you lose your corporate dogma, going over to the dark side, you'll cease to exist in a very short amount of time. But the other one that's very interesting is moving prey. These are companies that use rhetoric, not results. They maximize short-term planning and sometimes imperil their long-term existence. And you see them over and over and over again. Those are the ones that I think would be ones that would focus more on defining their viability by some rhetoric in a short-term kind of environment, earnings per share growth or something like that. Hey, look, the answer is, it's not an "or," it's an "and," and we have to stand for something bigger than our bottom line.

Josh King:

Let's dive in then to sustainability a little bit, Tom. I watched your recent appearance on CNBC, where you mentioned that under your leadership Southern Company had transitioned from getting 70% of its energy from coal, down to 17%, but that you've seen this 20% increase in recent weeks. Are we seeing a retrenchment of coal, or is this just part of a blip on the path toward more clean energy?

Tom Fanning:

It's absolutely a blip. In fact, we just filed some documents in our states that speak to further advancements in reducing our coal capacity over time. And there'll be some more. We file what's called Integrated Resource Plans here in the Southeast that speak to not only generation, but also transmission and a whole variety of other things. There will be more to say early next year about that.

Tom Fanning:

We were one of the first companies to commit to net zero by 2050. We set an intermediate goal at 2030. We beat that by a decade. And we did all this without the normal sticks of regulation. And so my view is, there is really a way for our industry to transition to this net zero future and at the same time maintain the kind of birds of prey balance to maintain long-term clean, safe, reliable, and affordable energy resources for the benefit of all Americans.

Josh King:

Talking about the benefit of all Americans, you are a domestic company operating in about 18 states, but you're also impacted by what's going on in the rest of the world. I mentioned some of that in the introduction. Do issues in Europe impact your business, and what takeaways from their situation can a US-based energy company use in their own practice?

Tom Fanning:

Electricity, energy development, and good policy is so central to our economy. And when you think about clean, safe, reliable, affordable, these are concepts that will underpin our ability to be a globally competitive economy relative to China, Europe, and others. I can remember when Fukushima happened, and here we're the only company still developing new nuclear. Europe started shutting down nuclear like crazy. That is a short-term reaction to conceivably long-term problems. I can remember saying in kind of this glib way, "Well look, yeah, you asked me about Europe. Europe is a very good case study about what America should do. And that means if Europe takes a certain tack, perhaps we should take the opposite." I think they've been instructive to us by a bunch of short-term experiments that have worked not to serve either the environment or their economies very well. I think the things that we have espoused have done that.

Josh King:

It's hard to be glib sometimes about what's going on in Washington, Tom. Over the past year, we've seen the Biden administration really go away from many of the policies that were pursued by the Trump administration. How do policies from Washington affect your strategy in the boardroom for Southern Company and the future of our energy markets?

Tom Fanning:

At the end of the day, I think everybody understands how important the energy complex is and how important electricity is relative to the American economy. While you may see different thrusts in terms of committing to net zero carbon emissions, everyone would agree that it can't be too expensive, that it can't be disruptive to, oh, not just reliability, but resilience, given all the fat tail experiences we're seeing in the United States, either from weather or the economy or attacks by countries that don't have our interest at heart.

Tom Fanning:

I think I've been able to work effectively on an energy policy standpoint with administrations as different as Trump and Biden. From a national security standpoint, I have led the electric utility industry on all the cyber and physical challenges we face, and now I'm the only CEO on the Cyberspace Solarium Commission, and I've been working with Anne Neuberger at the National Security Council and Jen Easterly at CISA and Chris Inglis now inside the White House.

Tom Fanning:

I look at all of that and I go, okay, we can do this. We have common interests. And then you look back at my history with the economy. For six years, I was on the Atlanta Fed, three years Chairman of the Atlanta Federal Reserve Bank, one year I was Chairman of the Advisory Board to the big Fed. And that occurred during the time of transition between Janet Yellen and Jay Powell. And so this idea of finance and the economy, with national security as it must be reimagined for America, thinking about how the private industry of America must now lean in and have a central role, along with DOD and the intelligence community and our sector-specific agencies.

Tom Fanning:

And then the third Venn diagram piece of sound energy policy going forward. I think we all can get swayed by in the short run the idea that, oh, it's all got to be about carbon. I think when you take a step back and express yourself clearly, we must make it all work. We don't have the luxury to be single issue politics. We got to make it all work. That's this "and." And in fact, when I've been working with the Biden administration, Jennifer Granholm, all these folks on what should we do to get to net zero, we use the concept of the phrase "Yes and." Can we move from 2050 to 2030? Yes, and along the way, you'll have to adopt some pretty stringent policy positions to make sure you don't disrupt the economy, to make sure you continue to have a reliable supply of electricity during crazy extreme events that are going on, and really help at the end of the day people along the way that have to pay the bill. That's a big deal.

Josh King:

To that I would say, yes and. Biden and Trump may be sort of your more recent history, but during your time with Southern, there have been eight different presidents in the White House and the world of energy has been transformed several times over. I'm curious for our listeners, how did your career and the company evolve? Let's just go back to 1980, when you joined as a financial analyst, to that time in 2010 when you were named CEO.

Tom Fanning:

When I joined, Southern was in a little bit of trouble. In fact, we had just finished up building a nuclear plant, Plant Vogtle Units One and Two, and we were under financial duress. If you remember the times back then, there were gasoline shortages, skyrocketing interest rates. I can remember we had a 10-year bond, a first mortgage bond, at Alabama Power that was 17-3/8 coupon. The role of even just being viable during this challenge environment was enormous. And we went through periods that frankly were kind of dumb. The Fuel Use Act came on, where we couldn't use natural gas to generate electricity, and it really pushed us away from very clear, brilliant solutions to things that didn't make good sense. So you always had to find your way.

Tom Fanning:

I can remember Southern at that time was always, as a matter of our reason for being, trying to define coal as the most resilient, reliable energy resource, and it did serve us well for a very long period of time. But unfortunately for Southern at that time, and for many companies in our industry, it made us parochial and narrow in our viewpoint. I tried to coin the phrase, and it later got moved to something else, I always said, "We got to use all the arrows in the quiver." It moved into "all the above."

Tom Fanning:

The right policy is to be rather agnostic with respect to energy choices, and rather focus yourself on the goal: clean, safe, reliable, affordable. Those kind of long-term principles or energy policy dogma persist and survive over decades. And that is where I think if you look back to my time when I started to my time now, as my primary career may be coming to an end, just because I'm getting that old, that's the way you got to run the business. You can't afford to let yourself get chased into short-term objectives at the peril of keeping long-term benefits for this nation alive.

Josh King:

Has this breadth of experience across the company over that period of time, has that allowed you to lead through this very transformative period over the last 10 years?

Tom Fanning:

Yeah. You know what? It's funny. I was originally going to play, I got appointed to West Point, and I was going to try to play football at West Point. And I get hurt five days before I'm supposed to report to Beast Barracks, and I couldn't go. I had turned down stuff at Yale and Georgetown and Virginia, and I had nowhere to go. Georgia Tech was nice enough to allow me to come for a year. I doubled up in Russian, because I had to take that at West Point, and I was at Georgia Tech for a year. Sure enough, I'm working out in the weight room and I get hurt again, and I say the heck with it. I end up at Georgia Tech, undergraduate and then graduate. Coming out of undergraduate school, I was going to go work in the Moscow Olympics in 1980. I took four years of Russian ultimately.

Josh King:

Boycotted.

Tom Fanning:

Yeah, boycotted. Left turn again. And so, okay, I go to graduate school and then I'm going to go work in a Saudi Arabian company. And then the hostage crisis hits and I go, oh man, this isn't the right environment. What I would say is this. If you go back to a little bit of your intro, before I became Chairman of Southern, I had 15 different jobs, eight different business units, an international assignment, and a variety of other things. The very first major I had at Georgia Tech was math, and one of the things I learned in this idea of chaos theory, that's a body of math, is that the variance in nature is always bigger than what we measure. And that's been true in my career. It's been true in all the external inputs into my career.

Tom Fanning:

I've kind of grown up with the idea that chaos theory is real and impacts everything we do. Life isn't linear, both business-wise and personal. What you've got to do is have enough optionality in the way you apply what talents you have and how you build teams. You've got to have optionality in order to take advantage of the changes that occur and the changes that frankly are ahead of you. Sometimes you have vision with respect to those challenges. Sometimes you can kind of predict it, but the other thing you better have for the changes that you can't see is a good deal of courage. I think that's been hallmarks of my career at Southern and what I've tried to do along the way.

Josh King:

Now, I don't know if chaos theory plays into this, Tom, but in the past, you've described yourself as fuel agnostic, and instead said you were focused on creating a portfolio, much like a stock portfolio-

Tom Fanning:

100%.

Josh King:

... of energy sources for Southern. What does the portfolio look like now, and how do you think it's going to evolve over time from here?

Tom Fanning:

Before I became chairman, we were about 70% energy from coal. Today it's 17%, you pointed that out. Natural gas has grown immensely over this time to where it's now about 50%. Nuclear, we are growing, but at the same time as a share of total energy keeping it kind of constant, maybe in the high teens, something like that. And then below that we've grown renewables. We're now up around 12%, mostly solar, some wind. So when I think about the portfolio that will help us achieve net zero, I think what you're going to see is about 50% penetration of renewables. By far, that will be solar. I'm a fan of wind, but here's the deal with wind. Where the great wind resources in America exist, there are no people, and so therefore you're going to have to build gigantic cross-state transmission lines to get the wind resource and the energy from where it exists to where the people are. That is inherently a bad design for America. Cover that later if you want.

Tom Fanning:

So it's going to be solar. Below that, I think you're going to see a big slug of nuclear, so let's say 20%. Below that is going to be gas, 25%. And you say, well, wait a minute, gas is a hydrocarbon and it's going to emit CO2. We're by far, I mean, by far the leader in research and development in our industry. We're the only company in our industry that has robust proprietary research and development. We're one of the biggest investors in EPRI, the Electric Power Research Institute. Former CEO of EPRI is on, well just left, my board. He was lead director. So we believe in research and development, and we believe in finding solutions to problems, not espousing just a bunch of garbage rhetoric.

Tom Fanning:

One of the things that we've been a leader on is carbon capture and sequestration. So yes, we will have gas. Yes, it will be significant. We will put in place carbon capture sequestration to capture most of the carbon emissions to that generating resource. There will be a little cats and dogs beyond that, maybe some hydrogen over this timeframe, storage, variety of other things.

Tom Fanning:

Here's the other thing we must do. One of the great friendships I've built over my career is a with a guy named Dr. Ernie Moniz. He was Energy Secretary.

Josh King:

Ernie Moniz, Secretary of Energy.

Tom Fanning:

Oh, he's fabulous. Guy's so smart and such a good guy.

Josh King:

Eight years under Obama, right?

Tom Fanning:

I think his approval out of the Senate was something like 98 and zero. Two people just weren't there and didn't vote. I mean, this guy transcends politics. He came out in response to the AOC thing of the Green New Deal with a very now, I think, famous article among environmentalists called The Green Real Deal. And what he talks about is the practicality of moving from A to B over a timeframe that allows us to maintain the balance of clean, safe, reliable, affordable. And he espoused the idea of net negative carbon capture strategies. We're doing that in an R&D sense, capturing it directly out of the atmosphere. We're putting in place bio ideas. We're putting in place hybrid bio ideas where we'll capture carbon on the back end of consuming trees and a variety of other things, for energy capture. Look, man, there is a way to do this, but we can't be dogmatic about moving from A to B.

Tom Fanning:

Now here's the other interesting challenge. We've already committed to 2050. We've put in place an intermediate goal, 2030, that we achieved a decade early. Okay, that's good. How do we move from where we are to where we are then? One of the things that I would love for us to do is buy enough time to let technology development and innovation manifest itself in the answer. The sooner we move, the less able we are to use technology development and innovation to be a central part of the answer. I get we need to get the carbon out quickly. I get it, I get it. But if we could push it into the forties, maybe we make this transition, which is going to be really expensive, it's going to require a lot of skilled laborers that don't exist today.

Tom Fanning:

Oh, and by the way, the supply chains, which today is a big story, the supply chains need to be redeveloped inside domestic US, where we have the manufacturing capability to supply the stuff necessary to make the transition. 75% of solar panels are located in China right now. Lithium ion batteries, where's the lithium coming from? These are big questions, and so we've got to figure out the right way to get there. There's got to be a rational pathway that is not just the federal government dictating to private industry or the states.

Tom Fanning:

One of the things I keep saying to people, and have gotten, I think, really good response, is in order to make this big a change, this dramatic timeframe, you got to be in the boat with us. We have to do this together. We can't have dogma from the federal government that said somehow private industry is evil. We've got to work together to make this happen.

Josh King:

As you say, there's a way to do this if you're not dogmatic about it. Southern has been working on the Plant Vogtle Electric Generating Facility for over a decade, with Units Three and Four being the first new nuclear units built in the US in the last three decades. What's the state of that project, and how does nuclear fit into the future plans?

Tom Fanning:

Let me tell you, Vogtle has been a challenge along the way. In fact, right in the middle of the project, the major E&C, engineering and construction, contractor we had was Westinghouse. It's a Westinghouse technology. And son of a gun, they went bankrupt. Westinghouse was owned by Toshiba. Toshiba was teetering on the edge of bankruptcy. And we got the aid of the federal government to work through geopolitical issues between Toshiba, the Japanese government, and our ability to get that project done. We are right now at the final stages of making it happen.

Tom Fanning:

In fact, in my earnings call in, I guess it was July, we were able to announce that we were able to operate Unit Three, and it actually had water vapor coming out of the stack. The plant worked, except we didn't use nuclear fuel. We used another heat source to run the plant. That was an enormous demonstration that, hey guys, in fact, it will work. It took a lot of risk off the table. We expect that Unit Three will be in operation next year, and that Unit Four will be in operation probably '23, something like that. So we're getting there.

Tom Fanning:

The good news is, when you add up all of the cost impacts and all the time and the cost overages and everything else, we've been able to insulate our customers from these price pressures. And as a result, I think we're going to bring this plant in, cost to customer, cheaper than what was originally thought when we were given the order by the commission to go forward.

Josh King:

Just do a quick digression, because I know before we started recording, you and my colleague, Pete Ash, were talking about some of those stock certificates on the wall behind you. But tell us a little bit about Alvin Vogtle, for whom the plant is named, a former CEO and Chairman of Southern. A much younger Lieutenant Vogtle was a prisoner of the Nazis during World War II and made six attempts to escape, eventually being immortalized by Steve McQueen.

Tom Fanning:

And it's probably because the legend internally is bigger than the reality. I don't know. I always used 10 times. The truth is, that movie was made largely about his life. He was an American pilot flying with the RAF. That's kind of James Garner, but it's also Steve McQueen. He was an avid motorcyclist, and during his time trying to break out of all these prisoner of war camps, he was the scrounger. If you remember the movie, he was the guy that would get stuff. And what a fascinating guy.

Tom Fanning:

I have a big picture of him in his airman's outfit here in my office. He's so cool. And when you think about somebody that's been through that crisis, and finally, he has persistence. This guy has courage. This guy has some level of vision. And he really started, I think, the modern transformation of Southern Company from a company that had existed under the old days and the Public Utility Holding Company Act and the days of FDR, where we had a big fight with them. He started the modern age of Southern Company.

Josh King:

Fast forwarding to the very present future, Tom, that you mentioned a little bit earlier, in a podcast from 2016, you talked about your own little research project of having solar panels, onsite energy storage, and a smart thermostat installed in your house. How has creating your own little microgrid gone, and did that inspire Southern's decision to acquire PowerSecure and become the industry leader in microgrids with, as you said, I think a 75% market share?

Tom Fanning:

Well, I did, and it worked great. I had the cheapest energy bills in the history of the planet, and the little Powerwall things from Tesla work great. And listen, it was really good. And in fact, it's funny, I sold that house, but that was a major feature. People loved that idea. It was super efficient, super cool. Here's the thing on PowerSecure. One of the books I love in business is Barbarians at the Gate, and if you remember that story, it was RJR Nabisco, and they had gotten kind of fat and happy in this bucolic existence and the stock price hadn't changed. And somebody came down to Ross Johnson and whispered in his ear, "Ross, we can make you rich beyond your wildest dreams."

Tom Fanning:

And so he went to the board and tried to take it private. The board said, "The hell you say," and they put the company up for bid. That's the barbarians. Ultimately, Kohlberg Kravis Roberts bought RJR. They broke it up, and they paid this enormous price. I want to say the numbers were something like this, that RJR was in the 50s maybe, and they bought it for $110 equivalent value, including PIK securities and a variety of other things. And yet, KKR made money. So the story I love to tell to people at Southern is, if you get comfortable, then somebody is out there. And if you don't run your business as well as you can, somebody else will.

Tom Fanning:

That's the big learning from that. I look at Southern Company, and for all the challenges of building nuclear and everything else, this franchise has persisted in just an outstanding manner. But sometimes the greatest lesson here is that the greatest harbinger of failure in the future can be past success. You don't have this fire in your belly to change what has been so successful for so long. The original idea on PowerSecure was to essentially operationalize an idea that would attack our own conventional wisdom.

Tom Fanning:

And it's funny, if I did a pie chart of people at Southern, I would say 95% of the pie chart is people that make, move, and sell, and provide reliability and low prices and customer service and the best of the industry. And then there's this small slice in there of what I call the revolutionaries. The revolutionaries are always these people, typically younger, that always ask why and why not. I always laugh and say that the people in the 95% slice want to assassinate the people in the 5% slice. You don't understand. Look at how good we are. We're not doing that.

Tom Fanning:

And yet I wanted to orchestrate an ongoing attack on this hundred-year-old, century-year-old model of central station make, move, and sell. And we have grown that now to where it's a reasonably sized business. 75% of the microgrids in America are done out of PowerSecure. It is a model that takes this monolithic make, move, and sell, miniaturizes it, and puts it on the customer premises.

Tom Fanning:

As you were suggesting, I had a microgrid at my house, but what if we just did a deal like we just did with Target, where Winter Storm Uri completely disrupted their ability to operate? What if they became self-sufficient, and what if all these server farms that the high tech companies are putting in place could now have reliability even during hurricanes, winter storms, tornadoes, you name it, where their reliability is 99%, even in spite of those disasters? Wouldn't that have a tremendous amount of value?

Tom Fanning:

Now today, Southern Company is this enormous company. Our market cap is nearly, I don't know, $70 billion. PowerSecure remains really small, but the way I express its importance to our existence is that it is perhaps a window on the world of the future. And if we can help influence the evolution of this industry, not just take it, but influence it, then that allows people, it allows us to play offense, not defense, in what could otherwise be a very threatening circumstance.

Tom Fanning:

Look, I don't know when it's going to happen, but I am convicted that via technology changes, changing customer requirements, there's enough chemicals on the sea that something will crawl up on the beach, and it better be our stuff. And so take those learnings now, incorporate them in this wonderful franchise we have, and then play offense every time we can.

Josh King:

The greatest harbinger of failure in the future can be past success. After the break, Tom Fanning, CEO of Southern Company, and I are going to open that window on the world of the future, discussing cybersecurity and the larger vision he has for the role of energy utility in American life. That conversation is going to continue right after this.

IBA Spokesperson:

The gold auction and also the LBMA gold price, it is the world's price for gold, particularly gold which is delivered in London. Before, banks would travel to a room next to the Bank of England twice a day in order to run an auction verbally. And it worked like that for about a hundred years. When some of these firms moved out to Canary Wharf, they decided that actually it was too much to be sending people to the room, so they moved it to a phone call to buy and sell and establishing a price.

IBA Spokesperson:

IBA took over the auction in 2015, and we moved it to an electronic auction on the webICE platform, so it's fully audited to proper electronic liquidity window and market. Buyers and sellers can come together. It's still run as an auction in rounds of 30 seconds, and the final price we use is the benchmark for the entire gold market. It's been extremely successful since we took over. Volumes have increased. They've pretty much more than doubled, and we've actually nearly tripled the number of participants that we have as well.

IBA Spokesperson:

We publish the data transparently on our website, so anyone can come and see what actually happened in the auction. We introduced a centrally-cleared model with ICE as the central counterparty, because that makes it much easier for new firms to join. It's up to 79% of the volume has gone cleared. This is the pattern that ICE has seen through how different markets have developed, but normally that takes 10 years, whereas actually it's taken 10 weeks in the auction.

Josh King:

Welcome back. Before the break, Tom Fanning, CEO of Southern Company, and I were discussing his career and the evolution of Southern Company under his leadership. I'm not sure if this data is still accurate, Tom, but for a long time, you were the only CEO of an energy company with a CIO background.

Tom Fanning:

Yeah, I think that's right.

Josh King:

How did that unique background key you in on the importance of cyber in operating large utilities?

Tom Fanning:

Southern Company moves us around as an intentional effort of developing leaders. We're a big system, lots of companies, and they move you not only across companies, so you don't get parochial, but you don't get stuck in a skillset. You don't get stuck in a functional silo, if you will. I had been in Australia leading an effort. I came back to the US, and I came back as VP of Finance and Investor Relations. I commuted back and forth. We had an office on One Wall Street. I guess I had done that 11 weeks, and along the way, we had a really unfortunate circumstance where a guy was brought over as CIO of Southern, it stands for chief information officer, and then he left and had some terrible personal difficulties. And I was kind of up to bat.

Tom Fanning:

They had looked at me as a finance person, but they also said, based on what I did in Australia, being kind of head of external affairs and PR and leading the program broadly, that they said this guy might could be a CEO. Let's test him in something he knows very little about. I went into the CIO role, and I got to tell you, most days I thought "CIO" stood for career is over. Oh, man, it was a great, great job, broadening experience, greater number of people. We had people all over the world doing this stuff. So it was really a growing experience.

Tom Fanning:

Now let's dial into the future. I guess I had been leading the investor-owned utility and certainly co-ops and meetings I'd been helping lead, in this, they call it an electricity sub-sector coordinating council, but it's one of the segments. Electricity is one of the segments, as deemed by Homeland Security. I've been helping lead that now for eight years. And I guess it was my background as CIO, where I got drawn into that.

Tom Fanning:

This deals with cyber. It emerged later into physical security. I think if the bad guys come after us, it'll be both an attack on cyber and some kinetic and some other things. We also picked up in scope, managing national response events to weather, hurricanes, snowstorms. Where you see all those thousands of trucks move into Texas or Louisiana, I help organize that. Wildfires. The pandemic, when it broke out, that came under my umbrella. And so I developed a reputation, I think, of having a pretty broad portfolio inside the industry. And very quickly I learned, and this is probably true in every business, where you have intersections of responsibility, generally, if they go outside your responsibility, in other words, telecom is not under electricity necessarily, those end up being your points of weakness.

Tom Fanning:

I learned very quickly that in order to be good at cyber and electricity, we for sure needed to make sure we understood our intersections of interest with telecom and with finance. That's how it started out. I created something called the Tri-Sector group, which were those people, telecom, finance, and electricity. Started working with folks like Paul Nakasone at the NSA US Cyber Command, just topnotch people. I really had this vision early on that it's fire in my belly here that I got to make today better than yesterday, tomorrow better than today.

Tom Fanning:

This idea that national defense is no longer just the purview of the United States government. I guess we had this idea that we'd fight wars on other people's beaches and forestall them from being visited on us. I got named to the Cyberspace Solarium Commission. The original Solarium Commission was put in place under President Eisenhower, and the Solarium Commission back then was told to reimagine national defense with the vision of here's the Soviet Union on your right and here's NATO, or what became NATO, on your left. And in the middle, the imagination of conflict was a tank battle on the plains of Poland.

Tom Fanning:

It was very clear to me that those battles of cyberspace have no geographic boundary. We are not protected by the oceans, and so therefore we've got to think about how to imagine understanding what the critical infrastructure of America will be, because that is where the conflict will emerge. It's not Poland, it's our telecom networks, it's our electricity grid, it's our financial systems. What we've got to do is unify and reimagine how the critical infrastructure is going to be protected.

Tom Fanning:

We did a very interesting exercise with the government where Tom Bossert, worked in the National Security Council in the White House, brilliant guy. In the exercise, the electricity system gets attacked. And I said to Bossert, "Who you going to call?" It was a very crystallizing question. Greater than 85% of the critical infrastructure in America is owned by the private sector. We can't rely on the federal government to protect us. And in fact, one of the most important aspects we can have is to view the landscape in real terms.

Tom Fanning:

Therefore, I've been really pushing hard, and I think it has manifested itself in the final report of the Cyberspace Solarium Commission, is that we've got to join the federal government, whether it's the intelligence community, whether it's our sector-specific agencies, the private sector broadly, the guys that will hold the bad guys accountable, Department of Defense, FBI, Secret Service, US Cyber Command. We must join with them in real time, in a way to reimagine, basically turn national security on its head, and have the private sector in many respects leading, but at least joining.

Tom Fanning:

And man, oh man, that's been an exciting vision to have. I got to tell you, Josh, when I started down this road, I'm a member of the Business Roundtable and I'm active in the Chamber and all that, I can tell you, a lot of the private sector participants thought I had three sixes on my forehead. It was just, if you look at the way we're structured as a society, there are laws and regulations and protections of too much alignment between the government and the private sector. In my view, in the future, we must reimagine that. And so it's been a lot of fun to work on this issue.

Josh King:

We're so honored to have you on the program with us, Tom. A couple weeks ago, we also had IronNet co-founder Keith Alexander, the first head of the National Security Agency, on with us to talk about private-public partnerships that are needed to combat all these cyber crime issues. We've talked about your working with Presidents Biden and President Trump, Tom Bossert, those administrations, but I'm just looking at my webpage right now, Tom, of secretaries of defense, going back to Mattis. Mattis, Shanahan, Esper, Miller, Norquist, and now Austin. You've been in your role for 11 years. What about the continuity of people that you need to work with in Washington and the ability to see this long arc of history and not just the two years that they're going to be in their seat?

Tom Fanning:

Yeah, I think below them, there's plenty of people that are more career-oriented and will be in there for periods of time. And I got to tell you, if you go back and look at the Cyberspace Solarium Commission report, a lot of these reports just end up being dusty binders. This one right out of the gate in the first year had about 50% of its recommendations put into place in legislation. I can tell you, as I walk the halls of Congress, and you ask anybody probably in America, is cybersecurity a big issue? They go, "Oh yeah, absolutely."

Tom Fanning:

What do you do about it? Nobody knows. And, and I think it's because it's such an esoteric thing. I remember I was on Maria Bartiromo's show, and I said, "Maria, it's a little bit like this in the public consciousness. I could invite you out to a beach, and I'm going to show you as we stand on the beach submarine warfare. And I wave my hands out at the ocean. And in fact, you can't see a thing. All you see is the ocean." And I said, "But you know, there's ongoing lethal activity out there, and the only time you ever see it manifest itself is when there's an explosion, something cataclysmic happens."

Tom Fanning:

That's kind of the way cyber is, and because in the past, before the Solarium Commission, there has been no real understanding of what acceptable behavior was, I would argue cyber warfare has been going on for years. The bad guys have tried to do bad things to us for years, that in some other contexts would be considered an act of war. And so one of the things we have to do is to illuminate accepted behaviors. We have to understand what it means to join with government and harden the private sector, and therefore our critical infrastructure. And therefore, we also must have an understanding that the United States government, particularly US Cyber Command and others, has an absolute role to play in defending this nation when these bad things occur.

Tom Fanning:

This is something that I think people have adopted, and they go, "Oh, man." And so the Solarium Commission became a blueprint for them to adopt. I would say first year we got 50% of its recommendations adopted, and now we're following through, I'm going to say 25%, in subsequent legislation. Going back to your original question about DOD, the big vehicle for the 50% was the National Defense Authorization Act. It became part of law and funding for national defense.

Josh King:

I've heard you talk in the past about the spare tire and MacGyver strategies. How do those come into play?

Tom Fanning:

Well, let me start with just dumb data, and this is dumb data. On the average, a company like Southern gets attacked about three million times a day. Now, attacked. This would be like, Josh, you sitting at home and there's a guy outside the boundary of your home looking to see how to get in. He'll be charting when you leave, when you come home, how many windows you have, how many doors do you lock? Do you have an alarm system? Do you have cameras? That's what's going on. So a lot of these attacks, per se, are nefarious attempts to get in. And when I talk about this also, I am not talking about punks, thugs, and criminals. Look, I understand your social security number is important and all that, but I'm really talking about the existential threat, the ability of somebody to come in and really shut down our American way of life as a primary objective, not just bribery.

Tom Fanning:

So here's here it is. It's Iran, it's Russia, it's North Korea, it's China. Oh, and with James Bond movies, you know about Spectre. It is a derivative of statecraft from people that don't have our interest at heart, that will now use that in an organized way to intervene in a very potentially significant negative way to America. Okay, got it.

Tom Fanning:

Now, electricity. What do we do? Here is the examples you were laying out. We know that there are certain assets in our structure, and I'll be a little elliptical here, but there are certain elements of our infrastructure that are critically important to America. And of course you would say, oh, nuclear plants or oh, this or oh, that. One would be the power management system. There's several of them around the United States. Southern Company generally controls the flow of electrons in the Southeast. I mean, we're that big. That would be the crown jewels I would go for.

Tom Fanning:

Remember, when I think about defense, I do it both in a physical and cyber manner. The first thing we do is we have a power management system. It's underground, it's protected, blah, blah, blah. We have another one in another location, undisclosed, in the United States, so if that one got nuked, we would be able to keep the power flowing. Okay, got it. And what are these electromagnetic pulse attacks? It's protected against that and all that sort of thing.

Tom Fanning:

We also have a set of strategies we call spare tire. Now, it's just like what you think. It's that ugly thing you stick on your car when you have a blowout, and it will get you from the blowout to a gas station. That's about what it's good for. You wouldn't want to run a power market on it, and the voltage may swing, but I think we'll be able to keep America moving from the accident to a repair situation. So that's spare tire.

Tom Fanning:

The last one is kind of fascinating, and it is MacGyver. If you remember, well, you're too young, in the '50s, now you see, I was born in the '50s, in the '50s we ran the electricity system without the internet. We had virtually no digital anything. And so is there a way to unplug from the digital age? If we can't trust wireless communications, if we can't trust the internet, let's unplug, run the system as it was run in the '50s. That's the ultimate defense. Now, when you think about it, all the people that did that in our industry are dead now, so we've got to retrain. We've got to think about what we need from a communication standpoint.

Tom Fanning:

I can tell, well, not me, I wouldn't do it, but somebody smarter than me, would tell somebody to go to a transmission substation and open or close the switch. How do we do that without a cell phone? Or how do we do that? So there are a bunch of tin cans and strings inherent in MacGyver that allow us to pull away from the digital age. It's a fascinating kind of concept. If the battlefield is here, let's leave the battlefield. That's one of the ideas. Anyway, all kinds of stuff here, but that's a reasonable explanation of the way you can think about digital defense and physical defense working together.

Josh King:

It's basically the premise that Jim Stavridis put forth in his book this year, 2034, when we're facing off against the Chinese 10 years from now. The grid goes down, EMP takes out our advanced F-22 fighters, so you go way back to an F-14 or an F-15, which deals with 1985-style mechanical flying capability. Given all this at the macro level, let's connect the dots if we can, as we wrap up here, to this transition to green energy. Do green and smart energy and microgrids provide additional security risks to the industry, especially since every connection point is a potential point of failure or access?

Tom Fanning:

It's a little bit of both. Let's go to the good stuff. In the 1950s, and we talked about microgrids already, you had thousands of energy islands in the United States. The fact that you can island off from the big grid critical sectors of the economy allows you a great deal of resilience when you're under attack. I can withdraw. When I think about the design criteria for assets, when I evaluate it, it's funny. In the Solarium Commission report, these critical assets are called SICI. That's kind of an unfortunate acronym, right? Strategically important critical infrastructure. We got to fix that somehow. But when I think about identifying SICI assets, one of the designs that I will put in place is in a resilience mode, I can pull them away from the grid. Boom.

Tom Fanning:

The fact that you have the emergence of distributed infrastructure as we are deploying it at PowerSecure, whether it is distributed infrastructure, oh, it's a solar plant. I could put it on my rooftop. I can have storage facilities. I can have batteries. I can have a microgrid that I can pull away from dependence on the big grid. These are things we can do. There's a whole lot about the new economy that really serves us well from a cyber standpoint.

Tom Fanning:

The negative would be, a lot of that infrastructure is digitally controlled. What we have to do is think about ways to reduce the dependence on digital infrastructure and keep the benefit of distributed infrastructure in place, so that you have survivability better than anybody can currently imagine.

Josh King:

Southern Company recently announced the election of Christine Svinicki as an independent director, part of your commitment to diversity in corporate governance. She's one of our nation's foremost nuclear engineers. What does Christine bring to the board, and how has transparency and disclosure been integrated into your operations?

Tom Fanning:

Yeah. Listen, Christine is fabulous. What a get. I mean, she's just terrific. Here's the thing. Nuclear is obviously important to us as we finish Plant Vogtle Three and Four, but nuclear will be important to an ascendant position to net zero. You can't do it without nuclear. This idea of shutting down nuclear plants right now because of these dumb market structures that exist is just stupid. Christine will be somebody that can help us give the judgements necessary to complete the plant and also preserve nuclear for the future in the Southeast, and therefore for America.

Tom Fanning:

She is one of the most critical thinkers. She's one of the longest serving director is on the NRC. Look, she has definitely a portfolio of expertise in nuclear. I get that, I love it, it's great. That's way, though, underselling her talent. I mean, she's a terrific engineer, as you say. She's so smart. She's grown up working with companies, so she understands the equation that value is a function of risk and return. And she really has. We had her at our first meeting here in October, just this last weekend, and I guess we finished up Tuesday, just this week. She right away contributed to the ideas that I talked about before of non-linearity.

Tom Fanning:

She uses her experience and her intelligence and her judgment to help us in ways that I think we never would've thought about. And that's really, when I go to the idea of diversity and inclusion, if we just describe it as determinants, that is, I got so many African Americans and I got so many women, well, it's much deeper than that. Oh, okay. Am I going to measure how many Buddhists I have relative to Christians? What about the gay population? What about old versus young? What about... There's so many different ways we think about how we are different as human beings.

Tom Fanning:

The point that I'm really looking for that those determinants will get us is what I call broader cultural bandwidth. If you're allowed to create an environment where you bring your whole self to work, everybody brings a set of skill, experience, and context that helps us. I talked about earlier, have the vision and courage to see around the corners of the future. And that's where I think somebody like Christine will really help us. She is a unique person with unique skillsets and context, and boy, she's going to help our board for decades to come.

Josh King:

You told us the story earlier about how your injury prevented you from playing ball at West Point and ended up at Georgia Tech. I listened to a conversation between Georgia Power CEO, Chris Womack, and Morehouse College President, Dr. Harold Thomas, about this $50 million grant to Historically Black Colleges and Universities. Thinking about the future, how does investing in places like Morehouse drive a more diverse workforce of tomorrow, and why is that so important to Southern?

Tom Fanning:

You know, sometimes all people need is a helping hand, and it's not just, what do they all say, don't give me a fish, teach me how to fish. Our view is that the HBCUs have been a little underfunded over the years, so we're happy to help that out, but it isn't just giving a check. What we're doing is in the sense of teaching people to fish, creating along with Apple, us creating with them, a center of innovation, a center of technology development, where we are hitting an untapped resource. And we're creating that critical mass here in Atlanta, which will be available to all the HBCUs.

Tom Fanning:

Oh, and by the way, you know what, Josh? Other universities are now asking, can we take advantage of that as well? This is an idea where we're actually building skills, capabilities, power of the mind to make America better in the future. And that is really the idea. It isn't just that we're going to give people money. We're going to teach them how to fish, and we're going to make them better for years to come. And I think the payback from that is going to be immense.

Josh King:

In a recent episode of this show, we spoke to one of our guests, Lincoln Financial CEO, Dennis Glass. They do a partnership with the Philadelphia Eagles at Lincoln Financial Stadium. But I understand you've got your own personal experience in the field, actually coaching youth football. What are some of the lessons that you stress on the field, and how do they carry over into your legacy leading Southern?

Tom Fanning:

Yeah. Yeah, I've loved that. In fact, it's the Northside Youth Organization. It's at Chastain Park in Atlanta, really beautiful place to have your kids hang out. I'm the longest serving coach there. When I got hurt and I didn't go to West Point, they called me up and said it was in the papers a little bit. And I went over there. That was in 1975. Now I forget what season it is, my 42nd season, and man, I love it. The three big lessons I say is, to all the teams I said, "Don't let winning and losing define who you are and how successful you are. What you have to do in big guy terms is self-actualize. You want to be the best you can be. And in order to do that, I want to work with you to understand what's the best way to do things?" Do the right things, number one.

Tom Fanning:

The second thing is, do them to the very best of your ability. I used the phraseology before, I wanted everybody to get up. And we all have our problems where you get up in the morning and you say, "Those guys are so stupid" or "This is so dumb and I'd rather go play golf today." If you're able to recognize that in yourself and check back in and play today as hard as you can to make today better the yesterday, tomorrow better than today, boy, that's good for those kids to understand. And especially I love football, but I've done baseball and basketball, the whole thing. Things go wrong from time to time. Don't be discouraged by failure. Come back hard, play hard.

Tom Fanning:

So do the right things, do them to the best of your ability. And the last thing, have a spirit of fun. We all love that. We love to yell and scream and have fun with each other and celebrate success, and when things go wrong, support each other. But this idea of a positive culture gets lost on America sometimes. Especially where we are in politics and everything else, gosh, we got to find a way to be constructive. We got to find a way to be optimistic. We got to find a way to fight through the barriers with a spirit of joy. And that's what I try to tell those kids, do the right things, best of your ability, have fun.

Josh King:

And on those three notes, do the right things, do them to the best of your ability, and have a spirit of fun, coach, I can't keep you off the sideline any longer. You've been great to spend a little time with us inside the ICE House. Thanks so much for joining us today.

Tom Fanning:

Josh, thank you. It's been a pleasure.

Josh King:

And that's our conversation for this week. Our guest was Tom Fanning. He's the Chairman, President and CEO of Southern Company. That's NYSE ticker symbol SO. If you like what you heard, please rate us on iTunes so other folks know where to find us. And if you've got a comment or question you'd like one of our experts to tackle on a future show, email us at [email protected] or tweet at us, @ICEHousePodcast. Our show is produced by Pete Ash with production assistance from [Stefan Caprille 01:04:38] and Ian [Wolf 01:04:39]. I'm Josh King, your host, signing off from the library of the New York Stock Exchange. Thanks for listening. We'll talk to you next week.

Announcer:

Information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE nor its affiliates make any representations or warranties, express or implied, as to the accuracy or completeness of the information, and do not sponsor, approve, or endorse any of the content herein, all of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell, a solicitation of an offer to buy any security, or a recommendation of any security or trading practice. Some portions of the preceding conversation may have been edited for the purpose of length or clarity.

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Information contained in this podcast was obtained in part from publicly available sources, and not independently verified. Neither ICE nor its affiliates make any representations or warranties, express or implied, as to the accuracy or completeness of the information and do not sponsor, approve, or endorse any of the content herein, all of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell, a solicitation of an offer to buy any security, or a recommendation of any security or trading practice.