ENERGY STAR Award Winners: Energy Efficiency is Good Business, Podcast Transcript

June 5, 2008

Fortune: What are the misconceptions here that consumers and/or clients — corporate clients — might have about this?

MARK BREUKER: I would say, this is Mark, I have heard customers be reluctant to participate in ENERGY STAR for fear that it would turn into something that would be regulated on them, we sort of stress to them that it is a voluntary program and that these tools are really in place to help you run your business better and do the right things, but occasionally there will be misconceptions that well once I label my building as an ENERGY STAR building or at least get a label, am I now going to be required to make investments to move it up to a certain level? So that's something I think can hurt it, certainly the time involved in collecting the information and making sure the companies understand the value of then using that information to make their portfolio more efficient, you know, I think the time to get it all certainly can be a constraint as well, and I think finally, just in general about energy-efficient products and services, rather than just ENERGY STAR, I think a lot of companies have had a hard time tracing the savings back from the initial investment that they put in because measuring savings is truly a very difficult thing to do, you're measuring something that didn't happen, in the case of energy, energy you didn't use, so managing the data and managing the information especially so you can truly prove the benefit of doing the project or doing a program that helps save energy is a conception that is very difficult to prove out your investment and I'd say that's a big part.

MICHAEL WINKA: Mike Winka, New Jersey BPU, Just to add to that, we've been in this in business in energy efficiency since the mid-80s so that sort of proving it, we now do savings and calculate those and have those protocols, so it is a lot easier today to trace those savings and those environmental savings that we're going to get with a product today than anything and the really misconception they are hold-overs from older times that it's inconvenient to that you have to somehow sacrifice you have to shut the lights off, sit in the dark and put on a sweater and sit in the cold, that's a carry over from the days of we're just going to do "conservation". The ENERGY STAR products are to a degree even better performing than some of the products that are on the shelf today so they provide more features, they provide more performance than ever before and that homeowners can see the comfort levels improve, the air quality improve, so it's trying to get over those old concepts that it's inconvenient and that you somehow aren't getting the right performance, and ENERGY STAR helps to do that, it simplifies that process of making that decisions in the marketplace all the way from the manufacturer even though ENERGY STAR homes, Home Performance with ENERGY STAR, or on individual products, so it's an easier way and a way of coming over those misperceptions that have sort of languished over the marketplace.

Fortune: Kathleen, does the issue of, at least, and I guess it would apply to the corporate side as well, but for consumers, is there still this lingering idea that it is going to simply cost them more, they may save money but up front they are going to pay a lot more for an ENERGY STAR rated product or service?

KATHLEEN HOGAN: Yeah, I think cost can be an issue and it is one of the issues that ENERGY STAR tries to address head on, first by how we establish a specification, you know the rules by which a product gets to earn the ENERGY STAR, we make sure that when ENERGY STAR is on a product that the payback is going to be very attractive to the consumer if indeed there is some additional first cost, but I think it's also interesting when you look across the suite of ENERGY STAR products that are out there, about 2/3 of them have no incremental first cost at all so it's as easy for the consumer as going out and just picking the one that has the ENERGY STAR on it and going home and just realizing the savings on their energy bill.

Fortune: So if we're talking just to take a product, to name one specific product, if it's an air conditioning unit, there are going to be instances where that unit, the cost that the consumer will pay at the store at the retailer where they're buying it, it's not going to be appreciably more than a non-ENERGY STAR rated product.

KATHLEEN HOGAN: Yeah, an air conditioner probably will cost a little bit more, but the idea is that the efficiency level is set so that when you buy the more efficient one, the incremental cost, you will get your money back within a few short years, so it's not like it's a ten year payback, the longer the payback, people get "am I going to be in this home" and other issues that come up, so we design ENERGY STAR to have a very short payback as it identifies the more efficient, superior products for folks. Then the other thing we do is a lot of education around the importance of that second price tag. Because that's the other thing that people don't necessarily have in their consciousness when they're in the store to buy that air conditioner. You are very aware of the money that you have, but you sometimes forget about that monthly energy bill that you're going to pay, so we try to get them a lot of information on that second price tag the first one's the price in the store, but the second one is the price you're going to keep paying to use this product day in and day out.

Fortune: Right, right, that's the one that doesn't go away.

MICHAEL WINKA: And overall, in the life cycle of the product, that's more of the cost than the initial capital cost and as Kathleen said, that's part of the ongoing, and this is Mike Winka again, that's part of that outreach and education to link those two things together and we do that in a lot of creative ways and state programs and all the states do that in terms of the outreach and as Kathleen said, there is a menu of products that are out there now with a range of prices so people can pick their energy efficiency within that range of prices with their payback period, so it's not just simply I'm going to buy this ENERGY STAR product or not there's a range or a portfolio of products within a certain air conditioner will have a range of ENERGY STAR products with different costs and people can calculate what they want to save over time and what their capital cost outlays and what they want to do with their capital outlays so it's a lot of improved program from when it was first initiated.

Fortune: Okay, so you give them sort of price points at which they can get into the program?

MICHAEL WINKA: Right, there's a whole menu of price points along the line where people can enter into this energy efficiency process.

Fortune: Okay, so we've talked about sort of the efficiency, the reliability of a product or service, Mark, I'd ask you from your perspective and the clients you deal with, are there other barriers to, or what do you see as maybe some of the barriers to a more widespread adoption of energy-efficient services, products? I mean, when we were talking this morning you talked about bringing these consulting services to the existing clients you have, what are you seeing as some of the more common barriers that are there in getting this out there to more of your existing clients?

MARK BREUKER: I think certainly one of the main things is the fact of competing business priorities. So, for example, in making investments in energy efficient equipment for many companies, the capital required to do that is also competing against other projects they could find that might have to do with marketing or a new plant for more revenue and those kinds of things, so just from running a business, giving energy the proper amount of attention sometimes has some issues, I think, and if you think about energy-efficient products from a standpoint of a commercial building, one of the barriers to having more efficient commercial buildings out there, is unlike a consumer who is maybe making a purchase and they are going to pay the lifecycle energy bill for that quite often for the commercial space you have landlords or developers who develop the properties but may not be the ones actually paying the bill long term, they would pass that off to tenants or whoever would rent from them so there is a decoupling of making a decision on putting in a more efficient air conditioner or lighting system from actually having to be responsible for paying for that, so whatever we can do and whatever agencies can do to help landlords see the value of ultimately having an overall more efficient building which will ultimately provide their tenants with a lower price in total operation is something that's important. Quite often you'll see developers that will buy the least expensive equipment because that's the quickest and cheapest to get something done.

Fortune: It helps their profit margins even though in the long run it may cost their tenant money but at that point they may be out of the project anyway.

MARK BREUKER: Exactly, so I think things like incentives that can be put in place through states to help fund the difference between a less efficient and a more efficient technology can certainly help make that attractive, educating developers on ways to do that is very important, but yes, from just an operations perspective, ultimately there is a lot that can be done just through education and more efficient operations as a company to better manage energy and really the main barrier to that is just attention and not wanting, we may go to a company and say we want to help you put in place an energy management program based on ENERGY STAR fundamentals that will help teach you as a company to be more efficient, but they may also be trying to roll out three other initiatives to help them sell more and do other things and so trying to get that and the right amount of bandwidth is important.

Fortune: Michael, does this hold true for corporations that you deal with in the state of New Jersey in terms of trying to make the link and get the connection between developers and corporate partners?

MICHAEL WINKA: Well there are different market segments and there are different barriers for each market segment so the lease tenant sort of barrier is something we recognize and how to put that together, and eliminate or reduce that barrier with incentives and different education programs and then there are just different market segments within the commercial and industrial sectors, the small business sector, you know that person doesn't have an energy specialist on staff as opposed to the large industrial customer who is going to have somebody who is buying energy and is more familiar with the programs that we have. So we develop programs again around an energy-efficient and ENERGY STAR process to deliver different programs to those different market segments. A direct install to the smaller customer where you're coming out and saying we'll do the audit, we'll do an audit based on the ENERGY STAR portfolio manager, right here and we'll show you what those energy savings are and you can sign a contract and here's the cost and you deliver it to the small business and here's the incentives right there on the location so you're doing the energy service contracting directly. For the larger customer, you're developing a pay for performance and allowing the ESCOs, the energy service contracts to deliver that. So the program has to be developed around the market segment that you're looking at and to tie that back into the ENERGY STAR system, ENERGY STAR program and products allow us to do that. Again, people recognize that in the marketplace and that helps us, it gives us a leg up in the marketplace to say that these are the types of programs we want to deliver and we don't have to spend time marketing that program or as much time in terms of marketing that program. But dividing that up into the market segments becomes important. The other aspect of that is, and we talked about not making this regulatory to the homeowner or business, but somebody has to be, at this point in time, responsible for delivering energy efficiency. We've made it goals and programs and goals for utilities, goals for the state, and there hasn't been anybody that's been actually responsible for delivering energy efficiency, and that is something that has to change, and partnership with the utilities we have to make them responsible for not only delivering safe and reliable electricity, but efficient programs and that's the change that's happening in the marketplace.

Fortune: But why is it in their interest to do that though?

MICHAEL WINKA: Because in terms of safe and reliable service, you're seeing energy demands increasing, we're having more plug systems, more computers, more larger TVs, so you're seeing more increasing housing and business development, so you're seeing that increase in energy usage even though it's a small increase, a 1.5% in New Jersey, but it's a steady increase, so you're either building infrastructure, you're building more power plants, larger transmission lines, more distribution systems and upgrading it and that's a cost and that goes into rates, or you can spend those same dollars with energy efficiency. You're either going to spend that money on that energy infrastructure or you're going to spend it on energy efficiency and in terms of state dollars, those are jobs that happen within the state of New Jersey so we have a goal to reach energy efficiency of 20% energy reduction by 2020 that means our programs have to double, triple in size from what we're currently doing, you can say that's an daunting task, or you can look at it in the reverse that that provides us with a job growth opportunity, and an economic opportunity to deliver jobs in the state of New Jersey, energy efficiency jobs in partnership with the utilities, once they have that responsibility to deliver that energy efficiency and again around that, you're tying that around that ENERGY STAR logo, that ENERGY STAR product, their Home Performance with ENERGY STAR, their portfolio manager for commercial buildings, that sort of links things together.

Fortune: Okay, I got you, okay, you know this kind of feeds directly into the issue of making the business case for the environmental component of all of this, Kathleen, I know I've spoken to developers whether it's in the Southeast of the US or the Northeast, because we talked about developers earlier, who develop their buildings and promote the sale of units in those buildings saying they are quote on quote the greenest building of their kind and they will give a laundry list of the sort of green functions, the energy efficient attributes of a particular property. Beyond going out and doing it that way, how do you make the business case for the environmental part of this?

KATHLEEN HOGAN: Well, I think they do go hand in hand, sort of the energy saving piece and the environmental piece. When you're talking about energy efficiency which is what I think makes energy efficiency so powerful. What you are seeing across society right now is a growing interest in those things that are beneficial to the environment, you know this growing green movement and energy efficiency is a big piece of it. So you're absolutely right, you are seeing interest in green buildings because it has a lower impact on the environment, but also because of very important public health issues, less off-gassing from the materials inside the building and people are very interested in that aspect as well and so as you see all of that, you have a very robust response from business right now, being able to demonstrate to their customers, but as well as to their employees, that they are doing those things that make sense in that context, so they're doing things that are going to protect the environment to help improve their corporate reputations, there's a strong business angle there. And they are also doing things we hear over and over, so they can demonstrate to their employees that they are doing the right things on a lot of these issues both to entice new young employees, as well as to retain the ones that they already have, so there do seem to be a number of very important business angles for companies to take as they are doing these green things, which typically do begin with energy efficiency.

Fortune: I have yet to do an interview over the last I would even say 18 months, where regardless of what I'm going in to talk to the CEO about, if we don't get around to talking about the efforts they have in place to reduce their footprint, if you will, this is everyone from retailers to chemical companies, the last people on earth you would think would be talking to me about it and candidly as they do. Ten years ago, I never had these conversations, now, I can't do an interview without having this conversation, so it's clearly top of mind for not just young folks, but it seems for a lot of people.

KATHLEEN HOGAN: Exactly, and it touches on sort of another important issue that in our horizon, which is addressing global climate change and the link between energy, energy costs, and addressing the nation's carbon footprint which is of course related to each of our carbon footprint. Which I think is the other thing that everybody's trying to get their arms around and figure out what you can do now and that's where energy efficiency again comes to the top of the list as something that makes sense from a business investment to get your carbon reductions in the here and now — let's figure out what we can do, then let's figure out what it is we can do next.

MARK BREUKER: I agree with that, and this is Mark, you know from our perspective, helping customers break that carbon footprint down to a site level and down to what an employee can actually impact, we've found is very important so, to have the ability to couple an energy efficiency program and communicate to employees that they are helping to save the company money and energy is one tool, but then also tying that to a site level so that they understand if we save a certain amount of energy, what that relates to from their carbon footprint, and tying those two programs together when you're doing energy awareness programs and education and training, I've found that there are a lot of companies that there environmental angle of getting employees to do the right thing to reduce their energy consumption is actually more effective than the cost management side of it, they are related from that standpoint.

Fortune: But you do have to get it down to such a specific level because you're needing to battle this idea, at least on the employee level, of what difference is it going to make?

MICHAEL WINKA: Mike from New Jersey BPU, but just a second with what Mark and Kathleen said those things, they are important, showing that relationship, and the way you do that, everyone looks at those in void costs, but you have to monetize that somehow within a structure to get people's attention and the way we're trying to structure that is, whether it's a homeowner or it's a business, start with either the Home Performance with ENERGY STAR rating system or the portfolio manager that EPA has for their ENERGY STAR programs on the commercial and industrial side. You start with someone coming in and doing that rating, benchmarking that building, and saying here's the report and if you want to get to your energy savings and avoid the environmental impacts, then here's what you have to do, here are the things you can do and the payback period. And from our standpoint, here's the list of contractors within these utility service areas that can help deliver that, and then the next step in monetizing that, is being able to deliver the financing for that and that's how you tie those two things together with the utility on the bill financing, to say we're going to deliver that financing and that could be third party financing, or it could be through the utility financing, that monetizes that cost you get the immediate feedback on a monthly basis: here's what I'm saving, here's how I'm paying back this financing, the more I save the quicker I pay this financing back and here's what I'm not only saving in energy, but what I'm avoiding in those environmental impacts. And that starts to tie those two thing together about cost savings avoided in tax and the ability to see on a monthly basis, the results of your energy efficiency upgrades around this whole sort of branding of ENERGY STAR and ENERGY STAR Buildings and that gives customers their immediate feedback.

Fortune: Does this speak to the idea of good risk management on the corporate side when there is an energy efficient policy in place? Does it speak to that point or are we off in a different direction?

MARK BREUKER: I would say at a most basic level, it's a natural protection against higher fuel prices like we said before, so, you could call it a hedge but you can really just call it it's the right thing to do to help protect you against prices that are escalating that you really don't have control over. That's one piece of it. The other piece of it which I think remains to be fleshed out, but you said every CEO you've talked to has something to talk about its footprint and carbon management, there certainly will be large risks and opportunities available to companies who manage carbon and can understand their footprint and have programs in place to offset it and reduce it and we believe that companies who are leading today in developing those strategies will have a competitive advantage and therefore good risk management towards whichever legislation ends up coming out in the US towards carbon management.

Fortune: Michael, do you see this, and Kathleen as well, from your perspective of how this is viewed as a solid risk management strategy for a company?

MICHAEL WINKA: From a company's perspective, there's not a lot they can do in terms of the rate they are charged for electricity, you know a rate is a rate, but what they have a lot of control over is that energy cost and that's where energy efficiency comes in and helps them manage that risk and Mark talked about hedging that price, the rate is going to be what the rate is, and there's a complicated formula that develops that, but here's a way that you can control the cost of energy into the future by picking up the ENERGY STAR logo products and programs and being able to lower that risk. In terms of the carbon footprint and the issues around carbon and managing carbon, well there are only two ways to lower your carbon footprint. You're either going to make that energy cleaner or renewable, or you're going to use it more efficiently and every fossil fuel process is going to generate a CO2 and those are greenhouse gas emissions, you want to reduce your carbon footprint? You're going to be doing energy efficiency and that's how you're going to hedge the control against carbon and whatever system comes out for managing carbon into the future, the more efficiency you do, the lower cost for controlling carbon into the future and those two things, for companies, are direct risk control into the future.

Fortune: Kathleen, add to this, tell me from your perspective what is the value and how does this relate to risk management for a company?

KATHLEEN HOGAN: We see energy efficiency strategies as a very important risk management approach for companies to take. We actually brought together some corporate executives recently and had such a discussions, what are the risk factors facing you over the next 10 to 20 years and what is it that comes to the top of the list regardless of what those risk factors are, and it was energy efficiency every time in terms of what you can do within your own sort of fence line to improve operations. Look at the materials that you use and the embedded energy in those and then also looking at the products that you are making and putting out into society and the energy impact of those products which is when you look at all that together and figure out what you can do to reduce energy, it's a pretty powerful set of things you can do.

Fortune: Do you get the sense they are giving equal weight to the cost savings as well as the environmental aspect of this? Or does one outweigh the other at this point, where do you think they're sitting on that?

KATHLEEN HOGAN: I think it's both, because you are looking at the volatile energy market in which we are in, particularly if you look at natural gas prices and you look at the growing pressure on the natural gas supplies, people want to be ready for that. And then, carbon policy is coming and will have an impact on those issues as well, but sort of the world energy markets currently are big drivers on the energy front, somewhat separable from the carbon issue, so when the corporations look at these things, it's just energy efficiency addresses them both and it offers them significant savings. Some of the companies we work with through ENERGY STAR are seeing 10 percent savings, 20 percent savings, or more across their holding, so big savings they could be getting now.

Fortune: Kathleen I want you to take the next questions first and then Mark and Mike, I will get to you. The ENERGY STAR designation, what is the message you believe it says to investors whether it is a retailer using this, a manufacturer, a service provider, what does it say to investors? What do you think it says to investors?

KATHLEEN HOGAN: We think it says a credible mark for energy efficiency, maintaining performance, no sacrifice, and a way to protect the environment.

Fortune: Are those issues you feel are going to become of interest and greater concern to people looking whether it's a mutual fund manager or individual investors, do you think that's going to be something that becomes more important to them as the years go on?

KATHLEEN HOGAN: We do, I mean we already have a lot of interest from the investment community as they look at the buildings in their holdings and companies that they've invested in and how it is that they are managing their energy use and we see that this trend is only going to grow.

Fortune: Mark, with your clients, what do you think it's saying? I mean they want to be as attractive to investors as possible, what do you think it's saying to them?

MARK BREUKER: Real quickly, it says to me that they are a company that has made the effort to be the best in class in management of their assets and their portfolio as it relates to energy. So, companies that we've seen that have taken the trip to DC and that are involved in ENERGY STAR for Partner of the Year, for example, have a top level buy in, all the way up to the senior level of management, running their company in a way that is efficient so they're managing costs well, that culture that ENERGY STAR creates translates obviously into energy savings but can translate across the corporation in other areas as well if they're managing energy well. Also it says they are a company that is serious about their stewardship and their impact on the environment because as we said before, having a good energy efficient program in place helps them from an environmental perspective and that translates down to employees who are proud to work for a company like that who are dealing with your customers who are also in a position to see that overall resonate in their communications with them that this is a company that is best in class.

Fortune: Michael, does it speak to the idea of a certain discipline that exists? I would look at a company and say well, they have their act together in this arena, I would assume they would have it together in other parts of the company that would interest me as an investor.

MICHAEL WINKA: Again to link it back to ENERGY STAR, the way we look at it and the way we've talked to companies that do this, ENERGY STAR is the gold standard, it has the track record going for it, it's a well documented system and investors can see the difference between a paper thin program or something that has substantial documentation and participating in an ENERGY STAR program means that company, as Mark said, is invested and is committed to the best business practices and environmental stewardship is a strong corporate citizen and that translates into a comfort level for the investment company to invest in those businesses, they are dedicated to saving their shareholders with their cost and that translates into an ability for the investment community to have confidence in those companies.

Fortune: Yeah, I mean there are endless studies trying to link the bottom-line effects of all kinds of corporate social responsibility initiatives with profitability but even if you step away and can't make that solid line, anecdotally you look at it and you say there has to be a connection, there's no way one can exist without the other being affected and I think this is the same thing we're talking about here.

MICHAEL WINKA: I think if you were invested in saving dollars and saving the environment, you're going to be invested in protecting your shareholders going forward and I think those, like you said, are directly linked one to one, and that's a great analogy.

Fortune: You know we're talking all about the benefits of all of this, what it can bring to consumers, to corporate executives, to the environment, but how do you, there has to be a more effective way to promote this idea of energy efficiency both in the residential and in the commercial sector. If you could give a list of three things you wish you could see done or there could be improvements in these efforts, what would they be? Kathleen we will start with you, how could we have more effective ways to promote these issues of energy efficiency with consumers and businesses?

KATHLEEN HOGAN: I think Mike spoke to one of the avenues that we're starting to see pick up across the country and it is seeing more money flow to organize energy efficiency programs run at the state level by utilities and others to get energy efficiency information, tools, resources, partnerships with energy services companies into the hands of their customer base.

Fortune: Michael, how about from your perspective, how could we be more effective in the promotion of energy efficiency and by extension, conservation?

MICHAEL WINKA: Currently the programs are voluntary so the marketing, the outreach communication are always going to be important, what the message is and how you deliver it, but overall I think that process for doing this has to be simpler. The financing has to be simpler, energy efficiency mortgages are out there as a product, but people don't use them because they are very complicated. I think if you tie them back into the Home Performance with ENERGY STAR, rating the building, ENERGY STAR portfolio manager, you have a well-documented, simple system for providing that financing and delivery of those energy efficiency programs. The other idea is to get the utilities, and they are moving in this direction to be able to deliver these programs, not just in New Jersey but across the county. So, utilities are investing in energy efficiency because it's good for their shareholders and it's good for their profits and I think as a regulator, you have to tie that into increasing the utility shareholder profit. The more energy efficiency they do, the more they meet these goals, the more their shareholders should profit, if they don't meet them then their shareholders may not get their full profit. So you have to look at the utilities also as corporations and being able to deliver and do risk management for their shareholders in this overall process and that is what I think is happening today, that link between what's good for the utilities, good for the shareholders, and good for the customers in the state of New Jersey is all coming to a focal point. There's no difference between a utility delivering an energy efficiency product as well as a kilowatt hour, a therm of natural gas, to that same customer.

Fortune: Are there things that have to incent utilities to do this though?

MICHAEL WINKA: I think you have to do that, I think that's they are right now paid by the kilowatt hour delivered, how do you provide that as a requirement for the utilities to deliver that and what is the incentive for them to deliver that service and I think we're getting to the point where you're looking at energy efficiency, you hear this all the way from James Rogers at Duke to Ralph Izzo at PSENG that the utilities have to deliver this as a service to their consumers and I think that's the sea change that's happening, and it's happened because and I don't want to make light of this, but it's happened because ENERGY STAR and the logo and the programs that are out there can build confidence in the marketplace.

Fortune: Mark, what about from your perspective, are there more effective ways to promote this?

MARK BREUKER: I think, and I certainly agree with Michael that having a simpler, more uniform comprehensive program across the country for utilities to incent their customers, that helps a great deal on the equipment side, so when there are rebates available and incentives to take that next step in equipment efficiency, that does make a difference. Those programs are all different so there is a bit of complexity in managing those sometimes, so having something simpler and standards associated with it would help national companies identify those incentives and file for them and use them. I'd look at it a little different way, I think promoting energy efficiency has to do, especially in the commercial sector, to having companies believe that energy is a controllable cost center that has a strong return for them. At the end of the day it comes down to dollars, even from an environmental perspective, and having a strategy and communications initiative that helps move energy efficiency and energy programs from the energy department to being part of everybody's job, so having access to intelligence and what their building is using and what things they can be doing on an employee level, on a site level, to impact energy is really the best way to promote energy efficiency because it gets the entire organization operating towards looking at ways to be more energy efficient.

Fortune: It takes a lot of the mystery out of it too because I think that's probably one of the other barriers, Mark, as you point out it's a cost and oh gee wiz, we have no control over this so just pay that bill! And there is sort of a little disconnect between what it costs and what you can do to affect it even though you can't affect the rate you're charged.

MARK BREUKER: Exactly, some of the best companies we've worked with have actually, from an operations standpoint, removed the price of it and you give sites a usage budget so you're just responsible for the usage of energy in your facility and here's what I'm going to give you, and here's why I'm going to give you, and reward people for going below it because then you kind of remove the belief that hey I can't control it because prices went up. It makes people accountable for the usage, communicate usage, even the ability to adjust that usage like ENERGY STAR does for changes in weather, for changes in site type, that's one of the nice things about the ENERGY STAR rating system, it takes those things into account, gets sites focused on what they can do from a usage perspective and that again helps to get them to see that it is truly something that is controllable and allows them to really promote energy efficiency in the organization.

Fortune: That's a good point because the usage budget just shifts the perspective then and you're not just looking at the end result, the end price you're seeing okay I have some control over how I use this energy, how much I use on a given day, or the time of the day, across a week, during a shift or whatever the case may be.

MARK BREUKER: And it's just like managing the energy in your house. You can buy more efficient light bulbs or buy an ENERGY STAR refrigerator, but you can probably save just as much by making sure that you turn things off at night and when you leave, etc. It's common sense, common practices things that across an organization can make a huge difference.

Fortune: Well then I must be a good energy-efficient manager because I have a water bill in my home and almost fainted 6 months ago when I received it and then realized I had no control over the price I was being charged by my town, but I could impact whether or not my four kids were taking 45 minute showers each, so we kind of got on a program of how to be a little bit more efficient and watch the bill go down, so I was a happy energy manager in my own household.

MICHAEL WINKA: Right and that's the partnership between the states, the folks that are out there developing those programs on the private sector, and the utilities because you get that feedback or you can get that feedback into that utility bill saying you know, here's your usage, you're saving this, these are the savings that help you pay off these energy-efficient upgrades that you just made, you can pay them off quicker, you can get a better cash flow if you do that, and help to put you in a better economic situation on the long term.

Fortune: Earlier Michael, you mentioned this was voluntary, do any of you envision any environment where this needs to be or should be regulated?

MICHAEL WINKA: As a regulator I'll take that. Regulated not to the customer or the commercial or industrial business or the homeowner, I think regulated to who delivers that service. And you have to have an energy efficiency goal, but that goal just becomes a goal on a report unless you can turn it into some regulatory structure and say you as the utility have to deliver this and I think this is where Adam Smith meets FDR. The regulators have to develop good regulations and say here's the boundary conditions, here's what you're required to do, then step out of it and then let the marketplace deliver that and then let the utilities with the private sector deliver that program. So that's what I talk about the regulatory structure, that regulation for energy efficiency says that somebody has to be responsible for delivering energy efficiency if you're going to move to the next level, not responsible along the customer side but somebody has to be responsible for delivering that program, and that's what states are starting to look at and how you monetize that — developing these renewable energy efficiency portfolio standards and saying as a utility, within your portfolio you have to have x amount of energy efficiency that you deliver and that percentage goes up over time, and here's the programs that you can deliver and you link those to ENERGY STAR and Home Performance with ENERGY STAR and portfolio manager and the different ENERGY STAR products that are out there.

Fortune: Kathleen, do you agree?

KATHLEEN HOGAN: Absolutely, when you look at the portfolios of energy efficiency programs that are being run in place like New Jersey, what you see is that they are delivering energy savings at the cost of around 3 cents a kilowatt hour or less in some places and when you go out and do new generation, it's about double the cost. So I think what Mike's talking about is you're trying to put together the regulatory structure in which it's very important to go out and find those energy savings that cost less than sort of our business as usual path of just building all the time to meet that growing demand, so when you do that, the market can respond and you'll end up with a group of customers that indeed are better off a bunch of years down the road.

Fortune: Kathleen, I'll let you take this last question first. I'm curious where all of you believe the ENERGY STAR program, and even more importantly, its message is going to be in five or six or ten years. Where you do you think we're going to be, how much more of an impact do you think it will have?

KATHLEEN HOGAN: I really see the ENERGY STAR program really serving the same role that it's doing now, but doing it even more broadly across the country. Right now I think it's very well built to be the building blocks for programs like what's being run in New Jersey, for being behind the types of services that you hear Mark talking about and I think it's right where we want ENERGY STAR to be is providing this credible foundation for information tools and product selection that can help people make good choices. I think what we'll see is the pressures on the energy prices and the issues with climate are just going to enhance the uptake of all of these resources.

Fortune: I don't think anyone can envision an environment where it's going to go backwards. Mark, from your perspective, where do you think the message is going to be?

MARK BREUKER: I just see really an expansion off the base that's there right now, certainly energy efficiency, I think we all believe, will weigh more heavily in all decisions affecting companies and affecting us at a residential level as prices go up, as carbon cap and trade and different options like that come into place. So I think awareness of ENERGY STAR as being a best-in-class process for companies to use as a resource to help them in the light of higher energy prices and caps on carbon emissions will certainly expand. I can see it, and Kathleen, you'll have to help me with this if it's already somewhat available, but I think it will also help extend to things like water management. I think water is going to become a more important resource for us, and perhaps benchmarking water use by building as well would be a logical extension of it, and I could see moving into other critical resources from that standpoint.

Fortune: Is there anything else that has to change in terms of individuals and consumption of energy in the aggregate? I remember talking, before he retired from Exxon Mobil, Lee Raymond, the former CEO, his views were very controversial at the time, I'm sure those comments that he made to me two years ago would remain controversial today, but he was incredibly adamant in the interview that we did that the problem comes not from the price gouging by oil companies, but just the demand that we have in this country for energy and it goes beyond gasoline, it goes into the gadgets and the products that we use, how many computers are in a home, how many cell phones, how many video games, I mean everything. Is there some campaign that will eventually be underway that will address the idea of overall usage? Or is that just a losing battle?

MICHAEL WINKA: That's where states step up and say here's our goal for reducing energy use over the next 12 years. New Jersey has a goal to reduce energy use by 20% by 2020. We talk about energy use, as you said is always going up whether it's natural gas, electricity, or gasoline by increasing products that are on the market. That energy efficiency goal translates in NJ to about 20 million megawatt hours of electric energy use reduction. We currently do about 45,000 rebates. Each rebate is tied to an installation job either a more efficient furnace, a chiller, a hot water system, or more efficient lighting. To get to that number, we envision having to quadruple the number of programs that we currently do and you can look at that and say that's an undaunting task or that's not 45,000 but that's almost 200,000 annual jobs that we have to do and that can be an undaunting task, or you can turn around and say that's a unique opportunity we have to turn that energy efficiency into a service that we deliver and those services are going to be delivered by jobs within the state of New Jersey and those are jobs that are not going to be exported to another company and those are jobs we are not going to be competing with another state because another state can pick up that same energy efficiency goal and deliver those jobs within their state so we're not competing for a smaller and smaller manufacturing base, we're simply taking that infrastructure that we have in our existing homes and businesses and buildings, and building up that infrastructure from the ground up, with energy efficiency. And the core of that becomes the ENERGY STAR program that helps us sort of do the market transformation, I keep saying that ENERGY STAR is the gold standard and Home Performance with ENERGY STAR is a recognized program and portfolio manager is a recognized program and ENERGY STAR products are recognized and that gets us in the door to be able to deliver that service and create those jobs. We're either going to do that and change the way we do business, or you're going to pay for that in larger power plants and larger transmission lines and larger gas systems. We need to always improve our energy infrastructure and we need to continue to do that, but I think we can look at this as a job growth opportunity that is second to none in this country and turn around the economics that we have today.

Fortune: So it's not getting at the solution from the demand perspective but understanding that if the demand is what it is and will continue to grow, then the answer is to do it more efficiently.

MICHAEL WINKA: Well, and that lowers the demand because if you're doing it more efficiently then you're going to lower the demand and that has a benefit all across the board. We don't have control over the rates, but by reducing the demands, you're starting to reduce what goes into the calculation for that rate and that starts to lower the rate and the price for energy across the board.

Fortune: The only reason I bring that up is because I look from inside my own world and I look at where I live in northern New Jersey in the county I live in and I'm sure it's similar in all the areas where you live to some degree, there are houses being taken down and bigger houses being put on the same amount of land. And I look and say my goodness, even if you have the money to pay the developer to make the house, what is the monthly upkeep of the house? Other than the mortgage, what does it cost to heat and cool and light and run that house? And that's multiplied over and over again, block after block, county after county, neighborhood after neighborhood, and that doesn't just go on in one state, that goes on all over the county so that's what I talk about from the demand perspective; maybe our current housing market is putting a little crimp in that development but that's going to keep happening, so if you can't tackle this from the demand then how do you get at the solution here? And it seems, if I understand you correctly, when it's more energy efficient, the demand just naturally decreases.

MICHAEL WINKA: Yeah, and again that's where Home Performance with ENERGY STAR is taking us and you talked about where do you see yourself in five years, Home Performance with ENERGY STAR is taking us to net zero homes whether that's that big home, or the current existing average home in the state of New Jersey. The goal is to touch everyone of those homes in the next 12 years and upgrade their energy efficiency to get them on a pathway to a net zero energy home using Home Performance with ENERGY STAR. And on the other side, on the commercial and industrial side, using portfolio manager as a benchmarking tool to get us moving in that direction. In one sense you're right; we're building larger and larger homes, but if they were more and more energy efficiency and moving in the pathway of net zero homes, that size difference gets taken out of the equation and you can get there with Home Performance with ENERGY STAR.

Fortune: And Mark, this would apply, you can extend this out and you can make a similar statement on the client side. You may have more sophisticated retail spaces, banks, stores, supermarkets, but if they become more energy efficient then they cost less and they have less of an imprint on the environment.

MARK BREUKER: Exactly, and I think obviously you wouldn't think that you'd regulate that down to the business level, but as energy prices increase, obviously I think companies will start making decisions that would reduce their energy consumption either through more efficient technologies or a change in operating practice. Say, for example, customer expectations for a retailer is that when they walk into a space it's going to be lit to a certain degree and products are going to displayed in a certain degree and that all costs money, in terms of high-intensity lighting and all these other things, so unless customer expectations drop off for an entire sector, we're going to continue to see expectations, you know we were talking about banks and they leave their lights on all the time in order for customers to see what's going on and use that for advertising, so until that perception might change, and customers would no longer see that as a valuable thing, I think you'll keep seeing people do it and you'll just have to look at energy-efficient technologies as a way to offset it.

Fortune: Okay, well I want to thank all of you for speaking with me about this, it has been an incredibly enlightening, not to play on words, but an enlightening conversation and I learned a lot just in researching all of this and I think it will be a terrific addition to this ENERGY STAR section we are doing.