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February 19, 2007
Potential Crisis in Capital Awaits Power Sector,
Dominion CEO Tells Regulators
Says Industry, Regulators and Legislators Must Work in Partnership
To Avoid Energy Train Wreck
RICHMOND, Va. – The electric power sector faces challenges
in attracting capital investment that will require innovative and collaborative
approaches in regulation and legislation, Dominion (NYSE: D) President and
Chief Executive Officer Tom Farrell said today.
Speaking at the winter conference of the National Association
of Regulatory Utility Commissioners (NARUC), Farrell said national economic
growth has created an urgent need for new investment in the sector that could
range from $400 billion to $650 billion over the next 25 years. The required
investment is roughly equal to the total market capitalization of all of the
nation’s investor-owned utilities.
Investment will be needed to expand generation, transmission
and distribution; comply with increasing environmental costs; and promote renewable
sources of energy and demand-side management initiatives, Farrell said. The
need is urgent, he said, with a growing imbalance between energy supply and
consumer demand, aging infrastructure and uncertain environmental compliance
costs all combining to create the potential for an "energy train wreck."
"What we are facing – potentially – is
a crisis in capital," Farrell said. "To ensure that a crisis
in capital does not ultimately lead to that energy train wreck, I believe the
key is a partnership among people in this room."
In fluid capital markets, he said, investors with global
opportunities will direct investment only at utilities that function under
state regulatory systems offering certainty that investments can be recovered
with a fair, competitive profit margin on a timely basis. "And the smart
money will flow to the smartly regulated," Farrell said.
Farrell told conferees that traditional cost-of-service regulation can continue
to work provided there are “some important modifications.” He offered
three suggestions to adjust the traditional model so that utilities will be
able to continue to meet their obligations to all stakeholders:
- Authorized returns on equity (ROE) should be set at levels that are fair
not only to the customer, but also allow utilities to compete with their
peers and other industries in the debt and equity capital markets.
- Recovery of investment in large-scale projects should be allowed to begin
as the work is done, rather than waiting until the projects are in service.
- Advance approval of projects, including regulatory treatment during construction
and commercial operation, should be considered to provide a sense of certainty
to potential investors and lenders.
Farrell said a number of states and the Federal Energy Regulatory
Commission have already implemented creative rate-making approaches aimed at
addressing these issues.
Dominion is one of the nation's largest producers of energy,
with an energy portfolio of about 28,000 megawatts of generation, about 6.5
trillion cubic feet equivalent of proved natural gas reserves and 7,800 miles
of natural gas transmission pipeline. Dominion also operates the nation's largest
underground natural gas storage systems with more than 960 billion cubic feet
of storage capacity and serves retail energy customers in 11 states. For more
information about Dominion, visit the company's Web site at www.dom.com.
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