Remarks of
Mark F. McGettrick
President & CEO
Dominion Generation
EEI Annual Finance Committee Meeting
May 19, 2005
Thank you… and good morning to my fellow
panelists and to members of the audience. I want to thank the folks at EEI for
inviting me to participate on this panel.
We could talk all day about spending money and
dealing with uncertainty. But since that’s not possible, I’ll use
the allotted time to offer an overview of Dominion’s perspective…
and then provide more details if necessary during our discussion.
As we all know, it’s easier to ride a horse
in the direction it’s already going… even if it doesn’t take
you where you want to go. But when the conventional wisdom doesn’t connect
with real-world experience, it’s time to pull in the reins, stop the horse
and put on the contrarian’s hat for awhile.
I’m talking about the notion of uncertainty,
which is one of those vague and relative terms we use all the time.
I do believe that big bucks are being spent in
the generation sector today… and I will offer some numbers to back that
up.
But I don’t think we’re up against
a level of uncertainty that is unmanageable or even equal to the fluid environment
we faced earlier in the decade.
In fact, I would argue that today’s climate
— at least in terms of regulation and capacity market signals —
is more predictable and less uncertain than at any time in recent memory.
Today’s capital isn’t flowing into
new construction like it was in the 1990s or even earlier this decade when gas-fired
turbines were popping up like weeds after a spring rain.
Generators today are spending money in ways that
leverage new and improved regulations to increase the level of certainty in
their operations.
Big bucks are being shelled out to give the
existing fleet a tune-up. Money is going into things like maintenance and reliability…
flexibility… environmental controls… and base load upgrades.
Allow me to take a few minutes to address these
points in greater detail.
First, maintenance and reliability.
With the kind of aging generation fleet we have
in this country, you would expect to see a rising forced outage rate. But that’s
not what the industry data shows.
On the contrary, outage rates are declining and
capacity factors are up — a clear indication that generators are maintaining
their units and investing in improved reliability.
As the "rules of the road" have clarified,
capacity markets have shown a growing willingness to reward generators whose
units are available when the value of the capacity is high — providing
generators with an incentive to make reliability a priority.
For example, at Dominion Generation:
11 large and six small coal units had runs in excess of
100 days last year;
our merchant coal units achieved a 73 percent capacity
factor — a company record;
our regulated utility coal units turned in their best numbers
since 2000, with a system capacity factor that topped 75 percent;
and our six nuclear units performed extremely well —
especially Millstone 2 in Connecticut, with a best-ever capacity factor just
under 98 percent.
A second area of focus in today’s marketplace
is improved flexibility. Flexibility helps optimize the value and competitiveness
of our generating assets. Resources are going into things like:
Automatic Generation Control — or AGC — which
helps regulate power output, minimize costs and improve regional economic
dispatch;
Secondary fuel backup systems, such as oil storage tanks;
And enhanced cycling capability that improves the operational
efficiency of the fleet.
A third area where big bucks are being spent:
Compliance with increasingly tough — but clearer — environmental
standards.
The Environmental Protection Agency’s new
Clean Air Interstate Rule and its new mercury rule rely on market mechanisms
to leverage emissions reductions from power stations. We support this approach
because it adds certainty and facilitates our business planning.
Even before these rules went into effect, Dominion
took a major step to gain certainty and flexibility in the way we upgrade the
environmental performance of our coal units.
In 2003 we signed an agreement with the EPA that
commits Dominion to invest more than one billion dollars on emissions controls
for our utility coal-fired units in Virginia and West Virginia. When these upgrades
are completed in 2012, our SO2 and NOX emissions will have been reduced by more
than 60 percent below 2000 levels.
In addition, we will spend about 125 million
dollars this year and next year on environmental improvements at three New England-area
fossil stations acquired last year from US Gen, totaling more than 2,600 megawatts.
Our capital expenditures in New England will
range on average from 70 to 95 million dollars a year for the next seven years
and will go toward two SCR systems, two baghouses and one scrubber.
To cite a few other industry examples, Cinergy,
Duke, Ameren and AEP have announced spending plans for emissions controls that
range anywhere from 21 million to 3.5 billion dollars through 2010.
I think you’ll agree, we’re talking
about some serious money here.
The fourth area where capital is being invested
is for capacity uprates to existing base load generation.
We hear a lot of talk about generation being
in a trough, and I’ll come back to that in a moment. Whether you agree
with that view or not, it’s clear that a number of base load units are
realizing decent margins, thanks largely to today’s high gas prices. These
units are making money by capturing the value of the spark spread between fuel
costs and market prices.
Upgrading these base load units is another way
for generators to reduce uncertainty. In the nuclear industry, for example,
the nation’s fleet has been upgraded annually by about 200 megawatts over
the past few years.
All this is not to say the generation sector
is totally quiet on the construction front. It’s not. Some 30,000 megawatts
of new coal-fired generation has been announced — of which about half
have obtained air permits, but only about one-tenth are actually under construction.
Unlike the 1990s, when merchant plants were coming
online left and right, today’s construction is largely rate-based —
or under long-term purchase agreements with load-serving entities — another
sign of just how much generators value a predictable and certain business climate.
A couple of examples: Wisconsin Public Service’s
Weston plant with rate recovery… and Long Island Power signing long-term
deals with developers to build new stations. In my home state of Virginia, construction
is being mandated.
Under provisions of the state’s electric
restructuring law, Dominion and others are evaluating the economics of a new
coal station that would be built in rural southwestern Virginia. The law is
designed, in part, to promote fuel diversity and economic development.
The point is, whether it’s through regulation,
contracting or legislation, cost recovery is far more certain than it would
be in a merchant environment.
As an aside, I recently read that total merchant
debt currently stands at 65 billion dollars, due by 2012. The final area where
we see dollars flowing is renewable energy — especially wind.
Renewable portfolio standards adopted by almost
20 states are helping to stimulate spending on green power — another example
of legislation adding certainty to the investment climate. All told, about 22,000
megawatts of wind projects have been announced.
Those, in a nutshell, are the key areas where
we see capital being spent in the generation sector.
As for the notion that the market is overbuilt
and in a trough — well, yes and no. It’s certainly true for new
gas-fired generators and for certain regions of the country.
I certainly wouldn’t say that California
is overbuilt… or Southwestern Connecticut, Northeastern Massachusetts
or the eastern region of PJM — the last three being regions where Dominion
has assets.
Those are load pockets where the import capacity
is constrained, and "overbuilt" is not a word I would use to characterize
them. As I mentioned earlier, a number of base load units have capitalized on
the high gas price environment and increased their spark spread value... at
the same time as newer gas-fired units have seen their margins shrink.
The bottom line is that each region is unique.
Those that are truly overbuilt will shed that label at different times. The
markets aren’t signaling "new build" yet, but generally speaking,
the sector should be back in the build mode by the end of the decade.
Much will depend on the level of demand…
the degree to which market signals compensate generators… the extent of
regional transmission upgrades… and the number of unit retirements that
take place.
Stay tuned for the next episode, it’s bound
to be interesting.
