Remarks of
Thos. E. Capps
Chairman, President and CEO, Dominion
to the
National Association For Business Economics
March 27, 2001
Washington
Good afternoon. I’m honored and privileged to represent
my industry at this forum.
My job is to report on America’s energy situation. I
propose to do so only partly in my role as energy CEO.
I also plan to put on a doctor’s hat and gown and offer
up a diagnosis of three ailments now afflicting the energy sector. They’ve
been created by years of bad habits that have failed to recognize the most fundamental
laws of economics.
I'll also recommend a cure in the form of a national energy
policy that can boldly do what no other national energy policy has done before:
Succeed.
In most cases, finding the cure is the hard part. But in
the energy sector, that's not the case. Most rules and conventions taken
for granted in other businesses, and in the world of economics, haven’t
been applied to energy.
That’s why our patient looks to be in pretty bad shape.
We find a lot of clogged, congested arteries. Our transmission
pipes and wires are inadequate and overburdened.
Blood supply is low. Energy is our economic lifeblood. But
power is short out West, and natural gas is short and pricey almost everywhere.
Cardiac development is weak. Just as the heart powers the
body, electric generation powers modern society. But supply hasn’t kept
up with demand.
We find self-inflicted wounds – even strangulation marks
– most noticeably in half-hearted and ineffective reforms masquerading
as deregulation.
Conventional wisdom would place the outlook for our patient
somewhere between gloomy and terminal. Some would say our patient is in a state
of crisis. The crisis has not hit us yet.
But the energy industry’s early warning system is going
bonkers.
As a card-carrying optimist, I look for silver linings –
opportunities. We face plenty of opportunities if we take advantage of this
unique moment in the nation’s energy history.
It’s unique because an angered public is awakening to
the issue.
It’s unique because there’s a substantial pool
of investment capital waiting to enter the sector but only if certain persistent
barriers are removed.
It’s also unique because the fix is not complex. It’s
obvious, and it’s rooted in the most basic principles of the free-market.
And it’s unique by way of timing. With sensible action
now, we can create an efficient energy production, transportation and delivery
system at the dawn of the information age.
What I define as sensible, all of you would define as elementary:
For starters, we’ve got to get supply and demand in
balance. We’ve got to avoid government price controls and let price signals
be just that – price signals.
In its own odd, tortured way, California has done a public
service. It has focused attention on a vital sector that has remained off the
public radar screen for too long. And it has made a big case for a free market,
and all of the efficiencies which free markets provide.
It’s fitting that if any one state had to fail in a
big, bold way, it would be California – my industry’s very own "Forrest
Gump." The Golden State has treated us to as much high drama as any Hollywood
blockbuster. With a characteristic flair for fantasy, they’re serving up
a colorful script, but the rest of the country isn’t buying it:
Wholesale energy suppliers… "Barbarians at the
Gate."
Angry mom-and-pop consumers… "The Untouchables."
Deregulation… "Dead Again."
California flunked Economics 101. They deregulated only half-way
— freeing wholesale markets, but capping rates on the retail side…sort
of reminds me of an old Irish joke.
Ireland was considering changing from driving on the left,
like the Brits, to driving on the right, like the Continent. But, some politicians
decided that a complete changeover would be too much… better take it a
little slower.
So for the first six months, only trucks would drive on the
right. All other vehicles would continue to drive on the left.
Sort of sounds like California’s politicians, doesn’t
it?
Fortunately, beyond the Golden State, deregulation is not
dead again. Governor Ridge of Pennsylvania is on record stating that deregulation
is saving Pennsylvania consumers nearly 3-billion dollars and creating thousands
of jobs.
The operators that run our Mid-Atlantic region’s power
grid are producing precisely the results that economists say they should —
increased competition, lower prices, ample power.
The status of deregulation is only a distracting sideshow.
It’s diverting our attention from our nation’s persistent inability
to treat energy as a real business.
All players share varying degrees of responsibility –
politicians, regulators, consumers – and my own industry.
It was decided long ago that the economic principles governing
almost everything else in our free market economy need not apply to the business
of energy.
As a result energy consumers have been victimized by fear,
ego and complacency.
When I speak of fear, I refer to lack of political will –
the first of our patient’s three problems.
Government at all levels has been subject to intimidation
and manipulation, much of it irrational and emotional. Cowardice is a strong
word, but at times, it borders on that.
As a result, investors otherwise inclined to allocate capital
to the energy sector see business plans stifled by arbitrary red tape. Obstacles
abound. They are in place largely to appease small bands of noisy extremists,
or the economic and cultural elites.
A case in point was written in my own company’s blood,
here in Washington.
A few years ago, Georgetown University wanted to modernize
its aging coal-burning plant with a small, much cleaner gas-fired plant. Dominion
signed on as project developer. Environmentalists endorsed the plan.
It was a win-win situation for everyone, or so we thought.
But well-heeled activists in Georgetown, with the connivance
of local elected officials, killed this project.
They used a strategy of persistent study, delay, more study,
then more delay. They did not want construction going on in their neighborhood.
Ultimately, we pulled the plug to protect our shareholders.
As with all capital-intensive projects, time is money. So
if you can delay a project long enough, you can kill it.
In some areas, we’re still seeing delays of up to seven
years to site a new power plant, if you are able to site it at all. Construction
can take 2 to 5 years after the plant is sited.
As California has demonstrated, supply matters! The U.S.
Energy Information Administration estimates that we’ll need about 393-thousand
megawatts of new generation by 2020.
Red tape, delay and the failure of political will are alive
and well in oil and natural gas exploration and production, too.
I can’t think of another country that places such severe
limits on access to its natural resources – despite a growing dependence
on foreign resources.
Our preference for unreasonably restrictive environmental
protection runs deep. But the demand for gas and oil keeps growing. Industry
experts predict demand for gas rising above 30 trillion cubic feet by 2015,
an increase of more than 40 percent above our 1998 level.
According to the National Petroleum Council and the Gas Research
Institute — we have word that America’s natural resources are sufficient
to meet the challenge, but with a caveat: A large portion of these reserves
are "off limits."
Estimates of the total U.S. natural gas resource base, including
proven reserves, range from 1-thousand-200 to 1-thousand-700 trillion cubic
feet. That’s enough to last from 60 to 70 years at current consumption
levels. Alaska’s gas resources alone exceed 300-trillion cubic feet.
A large part of these reserves are on Bureau of Land Management
property in the Rocky Mountains, the Gulf of Mexico, and along the Atlantic
and Pacific Outer Continental shelves. Access is limited or non-existent. Resources
in the form of untouchable reserves are not really resources at all.
We can pick that fruit if we’re allowed to, and not
hurt the tree. Today's high prices may help create the broad public support
we need to do it. But -- right now -- we don’t have the political will
to do so.
And we don’t just need more supply, we need a diversity
of supply.
Natural gas is the fuel of choice for electricity generation.
If it had stayed colder, longer, last winter we could have had a real problem
in the Northeast.
The politicians would have had an interesting time trying
to decide whether to use a limited supply of gas in generating plants so the
citizens could have lights, but cold houses, or for heating so people could
have warm, but dark houses.
Gas is in short supply, therefore expensive. Things are going
to get worse unless the government opens more property for drilling and lets
generators build something besides gas-fired generating units. If we have a
real hot summer things could get a bit dicey in the West and in the North East.
Coal and nuclear have fallen victim to hostility by policymakers.
Our nation faces a dangerous fuel imbalance, with virtually no new coal units
– and absolutely no new nuclear units – on the drawing board.
Here again, my own industry shares the blame. We haven’t
done a good job countering hysteria with sound science.
But we’ve got to scratch up the political will to stop
bad-mouthing coal. It’s an abundant national resource.
Coal currently produces more than half of the power consumed
in the U.S., but a lot of these plants are more than 30 years old.
Emissions from coal-fired plants have dropped 20 percent
over the last several years. The record continues to steadily improve. With
today’s technology, we can build coal plants that protect the environment.
Let’s also restore nuclear power to the mix. Nuclear
energy supplies one-fifth of the nation’s electricity with no emissions
— zero. Nuclear plant performance is steadily improving.
In fact, industry improvements in capacity factor during
the last 10 years translate into the equivalent of 23-thousand megawatts of
additional generation. This has met 30 percent of our nation’s increased
demand.
But the expansion of the nuclear industry is comatose.
Our transmission wires and pipes are clogged and overburdened.
And the professionally outraged are making themselves heard
on this front, too.
Transmission lines proposed at the beginning of the last
decade are still not built.
Locally, we’ve been trying to site a new transmission
line in western Virginia for the last 11 years. In the meantime, the nation’s
transmission lines strain to accommodate a volume of traffic they were never
designed to handle.
The U.S. does not have a national transmission grid. Each
company built its transmission system to serve only its own customers. These
systems were not designed to move large blocks of power among companies.
Our transmission volume has quadrupled in the last four years.
By contrast, investment in transmission assets has declined by 15 percent over
the past decade. Right now, returns for investors are not much better than those
for CD’s. It takes nearly 20 years, on average, to recoup transmission
investments. Little wonder there’s a minuscule 3 percent growth in transmission
mileage between now and 2004.
Last month, I was surprised when I picked up The Washington
Post. The lead story was not about presidential pardons, or the first 100 days,
or Hillary, but about national transmission constraints.
Now there’s some needed profile – and more evidence
that we have a unique opportunity to fix the problem.
Our second industry problem is well rooted in ego and job
security.
I speak of turf. It comes in two strains:
Regulatory and political.
Our regulators have not exactly been marching in lock-step.
And despite its national scope, we’re still confronted with a federal-versus-state-versus-local
mentality.
At present, energy projects are subjected to a regulatory
bottleneck of multiple reviews by state, federal and local bodies.
Opponents use competing jurisdictions to their strategic
advantage.
Wear a gas mask at a public hearing and you’ll get your
picture in the morning newspaper and might even scare your local elected officials
into a short-sighted veto.
Transmission is a prime example of one function under multiple
layers of regulation.
The movement of electricity is a national business.
Current regulation is split between the Federal Energy Regulatory
Commission, and state commissions.
The industry’s third problem, is mainly a psychological
disorder. I’ll call it magic thinking.
Many in the consuming public still firmly believe that energy
is magic. You simply flip a switch and the lights go on or you turn up the thermostat
and your house gets warmer.
Immune from the actual costs of production and delivery,
consumers have come to view energy as an entitlement.
Under systems that shield consumers from real price signals,
there’s no incentive to conserve – or care.
I’m reminded of several cities in California that burned
their Christmas lights all day during a period under constant threat of rolling
blackouts. California’s problem will not be solved as long as its consumers
are shielded from the true cost of energy.
Policymakers have fostered the perception that energy is
and will always be cheap and abundant, even a birthright.
And as adaptable as the American public is, changing ingrained
attitudes and behaviors is no short-term proposition.
I’m encouraged by President Bush’s decision to
create a blue-ribbon task force under Vice President Cheney’s leadership
to focus on energy policy. Key Congressional leaders also have signaled they’re
ready to tackle a broad range of energy issues.
When they do, here’s some of the medicine they should
apply:
Let’s fix the failure of will with a dose of political
testosterone. Let’s commit to expanding our domestic supply of clean, reliable
energy.
Let’s require a cost-benefit analysis for environmental
regulations and make sure the same play book goes to the secretary of energy
and the EPA.
We don’t need them going in different directions, as
they were doing during the Clinton administration.
Let’s promote market-based approaches to compliance,
such as expanded emissions trading.
We need one-stop shopping, a siting board -- one place where
you can get all approvals to build power plants, and then have a short appeal
period. At present, you go to one body for zoning, another to get your site
permit, another for the water permit and yet another for the air permit. Then,
throw in the courts — remember that each permit can be appealed —
and you see the problem.
Federal legislation could require that each state create
a licensing board, or lose funds.
More Bureau of Land Management property should be opened
up for exploration.
Federal policy can help boost onshore production from so-called
"tight-sands" properties, and other sources that we call "non-conventional."
These resources, while vast in size and domestic in location,
are technologically challenging.
They require support for economic production.
Tax incentives in the form of credits to expand drilling
and production at such wells are needed. Congress should extend the Section
29 credit now.
If we are going to be able to meet the demand of 30 T-C-F
by 2015, "non-conventional" sources will need to produce 8 to 10 T-C-F.
Last week our nation’s new energy secretary told reporters
that tax incentives will not be part of the president’s energy strategy.
We certainly agree that tax incentives are not the only solution
to our energy shortage. But they’re essential if we are to grow the exploration
and production sector.
Remember that E-and-P is a high-risk, capital-intensive,
commodity business.
This isn’t an unusual position—we have a tax code
driven by incentives, and I was pleased to learn late last week that Senate
Democrats are including oil and gas production among areas to receive tax incentives.
Federal policy needs to include more R-and-D funding to promote
clean-coal technology – and tax incentives for modernizing existing coal
plants.
As for nuclear, we’ve got to come to grips with the
high-level waste issue. By law, the U.S. Department of Energy is required to
accept the waste and create a final repository.
The federal repository was supposed to be up and running
more than three years ago. Federal policy must require – in no uncertain
terms – that DOE fulfill its obligations by a date certain.
To date, the government has spent 6-point-8 billion dollars
— and no repository in sight. Our company’s contribution to DOE for
this project stands at 490-million dollars.
More research is needed in the nuclear area as well. I’m
pleased that the Nuclear Regulatory Commission has already approved three advanced
plant designs.
Renewable resources should not be forgotten. Research and
development is reducing the cost of wind and solar. A federal energy plan should
continue – and expand -- tax incentives for their use and development.
Today, more than 10 percent of our power comes from hydroelectric
projects.
Yet it takes seven years or better to license or re-license
these facilities. The process should be streamlined to ensure that hydro remains
a significant force in American energy.
On the energy transportation front, pipeline and storage
companies stand ready to build needed infrastructure.
But they’ll merely stand ready if regulators keep imposing
artificial price controls and don’t let the market work.
Today’s transmission projects – electric or gas
– won’t get built at yesterday’s cost of capital.
Let me turn to the medicine for our turf and ego problem.
In my opinion, FERC should be given sole authority over all
transmission siting and services – bundled and unbundled, public and private.
Federal eminent domain powers should be granted to both electric
and gas transmission projects.
Siting hearings should be conducted by FERC administrative
law judges with appeals only to the full Commission.
But, as FERC has been slow as molasses on occasion, it should
be required to act within 18 months, including the appeal period.
We also need uniform connection standards – to make
sure the nation’s competitive power suppliers can hook into the system
fairly, without local bias or interference.
And federal policy needs to promote the growth and voluntary
market-based development of Regional Transmission Organizations.
National reliability standards should be created.
Last, a proposed fix for the psychological malady of magic
thinking.
Create a new system –at the federal level – that
lets the laws of the free market go to work. It might be a shock – briefly.
After all, energy policy isn’t a miracle drug that’s going to bring
instant and total remission, and it might taste bad for a while.
But ultimately, it would balance supply and demand –
empower consumers with competitive choice – reward shareholders –
strengthen our economy – and work to hold down overall prices.
And we can do it cleanly and safely.
Environmental protection and safety are givens.
They’re non-issues, whether Hollywood darlings or large
landowners who live next to good new projects say so or not.
I’ll close with a story about crisis and opportunity.
Two medical interns were doing a rotation in the ER. All
at once, an ambulance crew rushed in with an elderly man on a stretcher.
After checking for vital signs and finding none, the first
intern turned to the supervising physician and said: "The patient’s
heart has stopped. There’s no hope."
The second intern said: "The patient’s heart has
stopped. Here’s a great opportunity to use those new shock paddles."
In a similar vein, we have a great opportunity to solve the
nation’s energy problems – thanks to an engaged, even angry public,
obvious and realistic fixes, and the availability of investment capital.
