MYA Sign In Register Manage Your Account Sign In Register

Executive Speech

 Remarks:  Thomas F. Farrell II
Chairman, President & CEO – Dominion
Darden School of Business
The University of Virginia
January 31, 2011

“Toward a Sustainable Energy Future:  Illuminating the Tradeoffs”

Good afternoon.  I am delighted to join you today.

I have some past affiliations with the university, as you may know, and Darden as well – I have had the chance to meet with Professor Colley’s class on Governance for the last few years.  So it is good to be back.

You will be happy – or disappointed maybe – to know that I did not bring a PowerPoint presentation or other visual aids.  I am going to try to keep this fairly brisk.

You can easily get caught in the weeds when discussing energy.  It is a complex, technical – and vital subject – one that the average American does not always pay enough attention to – even though our country is the largest energy consumer on the planet and one of its leading energy producers.

I thought I might give you a quick overview of Dominion and then move into a more general discussion of our current energy system and what it will take – realistically – to transform it in ways that are environmentally – and economically – sustainable.

There is no need for suspense.  I will give you the punch lines right up front. Do we need to keep the lights on?

Yes. There is almost universal agreement on that.  And we need to do so in a manner that is reliable and affordable in order to promote economic vitality.

Do we also need to protect the environment, reduce greenhouse gases and move toward a low-carbon society?

Yes, we do.  But we will need a coherent national energy policy, unprecedented international cooperation, global leadership and massive technological innovation to get us there – innovation that calls for more than $10 trillion in investment over the next 20 years, according to the International Energy Agency.

You heard me right.  That was trillion with a “T” – $10 trillion worth of investment in carbon-reducing technologies.

Can we actually reengineer the entire national – and global – energy system – to move it to a better, cleaner, more efficient place – without also improving public understanding of the trade-offs and costs involved?

No, we cannot.  Not a chance.

There is an old story about Virginia legislators during the era of Prohibition.  Someone pointed out that they tended to vote dry but drink wet. This led someone else to say that Virginia had produced the first amphibious politicians.

The public is a lot like that when it comes to energy. They like all things green. They want more energy efficiency. They believe in conservation. Then, after extracting a beverage from their second refrigerator – the one in the garage – they reach for the remote control of their 52-inch, wall-mounted, plasma high-def TV.

And do not assume they have just one of those monsters.  The typical American household now has about 25 different electronic devices – up from three in 1980.  If you do your own inventory – it will be a lot more than three.

What I am saying is this:  There are some fundamental contradictions in stated public desires and demonstrable public habits – the very human trait of saying one thing but doing another.  Those types of contradictions directly influence our national choices on energy.

The mere fact that we live in a democracy helps explain why we do not have a national energy policy. That is not a complaint, just a statement of fact.

Okay, let me back up and say a few things about Dominion, the company that I am privileged to lead. It is important to have a conceptual grasp of what we actually do as one of the nation’s largest energy concerns.

Dominion does not fit the classic model of free enterprise.  Our electric utility, Dominion Virginia Power, operates as a regulated monopoly, with extensive oversight by both state and federal regulatory agencies. It distributes power to our 2.4 million customers in Virginia and North Carolina. You may know all that because you pay us – at least I hope you do – every month.

That is a little less than half of the company.  We are organized as an investor-owned corporation, and there are other parts of our business. We own and operate a fleet of regulated and unregulated power stations – nuclear, fossil and renewable – located in the Midwest, mid-Atlantic and Northeast.  In fact, we are the single largest power producer in New England. 

Our existing renewable energy assets include wind, water and biomass.  We also are a partner – along with UVA’s Center for Electrochemical Science and Engineering, among others – in the state’s largest solar power and advanced energy storage project, to be located in Halifax County.

Power generation is a major part of our enterprise, but there is more – a lot more.  We are also in the natural gas transmission, gathering and storage business, with about 12,000 miles of pipelines in six Midwestern and mid-Atlantic states.  We operate the nation’s largest underground natural gas storage system and one of the largest liquefied natural gas import terminals, located on the Chesapeake Bay in Maryland.  And we distribute natural gas to 1.3 million customers in West Virginia and Ohio.

All told, Dominion does business in a potential market of 50 million homes and businesses, where about 40 percent of the nation’s energy is consumed.

Clearly, Dominion is not a start-up.  In fact, our corporate ancestors have been doing business in Virginia for about as long as there has been a Virginia.

Our deep roots tend to be reflected in our corporate mentality and our values.  For example, we are big believers in giving back to the communities that sustain our business.  Over the past decade, we returned more than $100 million to charitable organizations in the communities where we operate.  And our 17,000 employees typically donate about 125,000 hours of their time every year to a host of worthy causes.  That is the rough equivalent of $2.5 million worth of volunteer labor.

As I frequently like to say, community service is not a spectator sport at Dominion.  We believe, quite simply, that our business is stronger when the communities we serve are strong as well.

I myself did not start my career in this business.  I went to law school at the building just down the road, passed the bar and had every intention of ending my career as a barrister of sorts.

But somewhere along the way, the river of life took me into a new channel, and I am fine with that. There are worse things than being surrounded by a team of dedicated, talented people.

One should probably avoid getting sentimental about corporations, because they will never get sentimental about you.  The work they do is practical and results-oriented.

Even so, I like Dominion.  I admire the people who work there.

When you depart this great university, you will discover that businesses vary greatly in mindset and philosophy.  Corporations do have personalities. They are, after all, made up of human beings.

Not to digress or sound paternal, but keep that in mind.  Some due diligence on your part is always a good idea. You will want to seize opportunities as they appear, but look before you leap.  That seems like obvious advice, but you would be surprised how often people, as they push their careers forward, forget to focus on the fundamentals. A fundamental like – is this really worth it?

Thus spoke the voice of experience.

Now, the people at Dominion are a diverse lot with many assorted skill sets. They bring many different points of view to the table. We have plenty of engineers, accountants, scientists and computer specialists.  MBAs and law degrees hang on a lot of office walls. We even have some liberal arts graduates and other incurable romantics – but we keep a very close eye on them.

The type of work we do requires us to keep our feet on the ground.  We work with real things.  There are few abstractions to ponder, and our people understand that what we do actually matters a lot to our customers.

That puts us in a somewhat different category from many businesses. For instance, around the country and the globe, there are enormously successful businesses engaged in selling things that do not matter, things that qualify as wants, not needs.  The goal of their marketing departments is to make you think otherwise. 

Take Cheetos as an example. You know, those crunchy little orange things that stain your fingertips.  Cheetos happens to be a billion-dollar brand.  I am sure some late-night efforts here at Darden over the years have contributed to the brand’s success.

But if you accept Cheetos being at one end of the “need-it” versus “can-live-without-it” market spectrum, Dominion is at the opposite end.

We literally provide for life as we know it in 2011.  Most certainly economic life as we know it in 2011.
We keep the lights on and the gas flowing – all the time, under all conditions.

That makes our work very nearly organic. It is certainly indispensible, unless you want to live in a tent without access to the Internet or refrigeration or air-conditioning or television.  What a bleak existence that would be – at least for most of us.

The comfort, convenience and standard of living that we currently enjoy are based on an energy system dominated by fossil fuels – coal, oil and natural gas.  These three fuel sources account for about 70 percent of the energy we consume in our homes, power stations and factories – 70 percent – and they have gotten the job done reliably and inexpensively.  They have built the $14 trillion economy in which we live.

They also produce atmospheric emissions – sulfur dioxide, nitrogen oxides, mercury and carbon dioxide, to name the best known – and that is their downside.  Of the three hydrocarbons, coal produces the most carbon dioxide, which I am sure you know, is the leading greenhouse gas.

We rely heavily on these fuels – especially coal, our most abundant fuel source – not because we love them, but because they are efficient, affordable and available in the large quantities that civilization demands.

This may not be what you want to hear, but tomorrow’s energy system is going to look a lot like today’s energy system – at least for the foreseeable future.  And when I say foreseeable, I mean for decades.

There are three reasons for that:  Time, money and the scale of global supply and demand.

First of all, transitioning from one type of energy supply system to another – from fossil fuels to renewable energy sources in our case – takes a great deal of time and lots and lots of money. History teaches us that these transitions are best measured, not in years, but in decades – or in some cases, generations.

Humanity relied on wood, crop residue and animal waste as its primary fuel sources for five thousand years before fossil fuels – peat and coal mainly – began to make their mark during the early modern era and gained in importance during the Industrial Revolution.

Wood was the dominant energy source in America until the 1880s, when Thomas Edison introduced the first electric generating stations and coal began its 70-year reign as the nation’s primary energy source.

World War II marked another turning point.  By 1950, another hydrocarbon – oil – surpassed coal and became America’s top primary energy source, thanks largely to – of course – the automobile.  Sixty years later, oil remains the undisputed leader in the domestic energy market – at the same level it was back in 1950 – 38 percent of the total.

Why these hydrocarbons?  Because they store immense amounts of energy in a form that is relatively easy to extract and transport.

Bottom line, there is no precedent in history that would lead us to believe we can make the transition from fossil fuels to renewable energy sources quickly or inexpensively.

Besides time and money, there is the issue of scale.  The energy business is a $5-trillion-a-year industry.  It dwarfs all other sectors of the global economy.  It operates according to the principles of physics, math and engineering.  It depends on hard data and sound science, not wishful thinking and happy talk.

So regardless of how much we may want to abandon fossil fuels and move to a low-carbon, renewable-energy-based world, we must be realistic.  It will take decades and trillions of dollars of investment to get there.

Our best bet, in my view, is to focus on diversifying our energy sources; of making use of every resource at our disposal – coal, natural gas, oil, nuclear and renewable power – as well as smarter and more aggressive conservation and energy efficiency programs.

Obviously you are familiar with the concept of maintaining a diversified investment portfolio as a hedge against market risk; of not putting all of your eggs in one basket. Well, the same is true of energy.  We do not have the luxury of limiting ourselves to a few sources of energy and excluding others. 

When it comes to energy, there is no silver bullet, no perfect remedy waiting in the wings.  There are tough trade-offs that come with every method of generating electricity at commercial scale.  And the scale of energy demand is huge – and growing – here and around the world.

Consider electricity.  It is the most precise and flexible form of energy that we have.  It enables the global, real-time networks that societies depend on for communications, financial transactions and international trade. 

Most of the creature comforts we enjoy – the plasma TVs I mentioned earlier, our computers, coffee machines, video recorders, iPods, iPads and iPhones – all the stuff of modern life – depend on electricity to keep them charged and running.

In fact, for the first time in our nation’s history, Americans are spending more on electronics than durable goods – things like furniture and lawn mowers.

Our love affair with electricity-based gadgets is not likely to go away.  On the contrary, today’s increasingly digital economy will keep power consumption growing in the decades to come. That is especially true in the developing world.

According to the International Energy Agency, about 1.5 billion people around the world – 22 percent of the global population – still lack electricity.  But they aspire to get it.  They want to join the modern world and raise their standard of living.  Who can blame them?

Take Nigeria, for example.  Nigeria is a major international exporter of crude oil.  It is also one of the better-off countries in Africa.  But about half of the total population – 76 million people – have no electricity and must use wood or animal waste to cook their food.

In sub-Saharan Africa, home to 800 million people, the amount of electricity consumed is roughly equivalent to what the 19 million residents of New York state consume.

The disparity between rich and poor countries is striking, but over time, it is going to diminish.

Forecasters tell us the global demand for power will grow by about 50 percent during the next 20 years.  Here in the U.S. the growth rate will be slower but still significant – about 30 percent between now and the year 2030.

In short, we are going to need an “all hands on deck” approach in order to meet America’s – and the world’s – future energy needs.

To respond to this challenge – and to do it right – we must keep the proper perspective about our energy resources.

Our renewable energy options – including hydropower, solar, wind, ocean waves, fuel cells and biofuels – are growing in importance.  They have great promise for the future.  But for now, they are expensive and useful only in limited applications.

Take wind and solar power.  Their operating characteristics are less than ideal.  They are intermittent and unpredictable.  The wind does not always blow, and the sun does not always shine.  And because we have not found a way to store electricity efficiently on a large scale, they are unsuitable as 24/7 sources of energy.

It is also worth noting that renewables need large amounts of land and are usually located in remote areas.  In contrast to solid and liquid fuels, such as coal, uranium and oil, which are densely packed with high-quality energy, the energy content of renewable energy sources is diffuse.

A typical wind farm, for example, requires about 45 times as much real estate as a nuclear station to produce a comparable amount of power.

But the single greatest barrier to the growth of renewable energy is probably congestion on the power grid.  We will need to invest heavily in new transmission lines – which take years to site, permit and build – if we are going to bring more green energy to market.

We need more energy conservation and efficiency initiatives, too, and we should be emphasizing them more to reduce consumption.  The more kilowatt-hours our customers can save, the less power we have to produce in our power stations, and the fewer emissions released into the atmosphere.

But again, we must have realistic expectations about what can be accomplished.  Consumer acceptance and participation in these efforts will determine their success.  Dominion and other utilities can offer conservation programs to their customers – and we do – but we cannot force customers to adjust their thermostats or turn off their lights.

New smart meter technology using digital electronics is gradually gaining momentum around the country.  Smart meters promise to give consumers more options for getting the most bang for their energy buck.  But the stark truth is, we cannot conserve our way to greater energy security.

We must still build new power stations to meet growing electricity demand.

For the most part, that means more coal, more natural gas and more nuclear power.  They are the real workhorses of every utility’s generation fleet.

Coal, as I said, is by far our most abundant and economic domestic energy source.  About half of all the electricity we consume comes from coal.  What oil is to Saudi Arabia, coal is to the United States.

Coal is plagued by significant environmental challenges, as I mentioned earlier.  But here is an inconvenient truth that has to be acknowledged:  We cannot demonize coal and keep the lights on.  If we want to improve the nation’s energy security, we must maintain its use in the future.

So we must burn it more cleanly and minimize the emissions.  Technology is already available to control mercury, sulfur dioxide and nitrogen oxide emissions from our coal stations.  And significant reductions of these pollutants have led to improved air quality, with more improvements still to come.

To use Dominion as an example, we are in the midst of a multi-year, nearly $4 billion investment program to improve the environmental performance of our fossil stations. When completed in 2015, we will have cut sulfur dioxide and nitrogen oxide emissions at our Virginia coal stations by more than 80 percent, and mercury emissions by nearly 90 percent below what they were in 1998.

Other pending regulations from the U.S. Environmental Protection Agency could add another $2 billion in environmental spending over the next five years.  That is real money, I think you will agree.

As for carbon dioxide, research is under way to develop carbon capture and storage technologies that should continue to improve coal’s environmental performance.  Dominion is helping to fund some of that research in partnership with Virginia Tech.  But commercial-scale availability of carbon capture technologies is still at least a decade away.

For that reason, the Congressional efforts to impose carbon emissions limits via a cap-and-trade bill that failed last year – merit some discussion.  The goal of the legislation was to place a ceiling on carbon and other greenhouse gas emissions, and then reduce them gradually over time until reaching the desired emissions levels.  The cap-and-trade bill ultimately called for more than an 80 percent reduction in greenhouse gas emissions by the year 2050, using 2005 emissions levels as a baseline.

What would it take, practically speaking, to achieve those emissions targets?  Well, it would mean returning to the days of your grandparents and great-grandparents – the decade of the 1920s – when the likes of Warren Harding, Calvin Coolidge and Herbert Hoover were our presidents – to arrive at a time when the world last produced a comparable level of human-related carbon emissions.

In the 1920s, according to the U.S. Bureau of the Census, only about half of the non-farm homes in the United States even had electricity and less than 2 percent of our farm homes were electrified.

Who had air conditioning back then?  How about computers?  Who had flat-screen TVs or cell phones or BlackBerries?

No one did. So, we must not kid ourselves – or let others persuade us – that we can dramatically reduce carbon emissions and confront climate change easily, quickly, cheaply or without sacrificing jobs or economic growth. We cannot.

Moving on, you might wonder why I have not said much about oil, another fossil fuel.  That is because we do not use much of it to produce electricity.  In fact, oil – domestic or foreign – accounts for only 1 percent of our nation’s electricity.  It is the transportation industry – our cars and trucks and buses – that burn about 95 percent of the oil we consume.

That is a very important distinction.  I see and hear comments all the time about how windmills and other types of green energy will reduce our dependence on foreign oil.
 
Not true.  Not unless the auto industry can find a way to use wind to propel us around in our vehicles. I am a big believer in technological innovation, but my guess is, that one is still down the road a ways.

Probably the biggest story in the energy business right now is the rise of natural gas as a power source.  The U.S. currently gets about a quarter of its energy from natural gas – used in home heating, the generation of electricity and in our factories.

Just within the past few years, new drilling techniques have provided access to giant supplies of natural gas in shale rock formations in Texas, and more recently, in a large swath of West Virginia, Pennsylvania and New York known as the Marcellus Shale.

I have heard the Marcellus Shale gas fields referred to as the “Prudhoe Bay under Pittsburgh.”  If estimates by the Department of Energy are right, these previously inaccessible formations could contain more than 250 trillion cubic feet of gas – the equivalent of about 48 billion barrels of oil – valued at an awesome $2 trillion.

Many experts and policymakers had been convinced that the U.S. was running out of natural gas. Now, thanks to the Marcellus Shale, we could have recoverable resources that last a century or more.  And because natural gas has about half of the carbon content of coal, it has environmental advantages as well.

Nuclear power has even stronger credentials as a “pro-environmental” energy source.  It is the only major power source that is virtually emissions free.  If we as a nation are seriously anti-carbon, we had better be pro-nuclear if we want to keep the lights on.

Nuclear power’s many benefits simply cannot be ignored.  In addition to zero carbon emissions, nuclear also produces very little waste, requires little real estate to operate and produces large amounts of power around the clock. Its drawbacks include cost – new ones are expensive – and they take years to license and build.  But the fact of the matter is, nuclear power offers the only large-scale alternative to fossil fuel power generation.

Those are our main energy options.  How we combine them to meet society’s aspirations for economic prosperity on the one hand, and environmental quality on the other hand, is sure to be one of the great challenges of our time.

To succeed, we must think big.  We must have a plan that adds up – a plan that truly reflects how we live and work, a plan that takes into account our strong reliance on electricity and the fuel sources we need to keep the lights on.

As I said at the outset, our country does not have such a plan.  Our elected officials in Washington have not mustered the political will to rise above partisan politics, put the national interest first and get the job done.

The mid-term elections of last fall will make it even more difficult for Congress to pass any big energy or climate change legislation.  A piecemeal approach may be the best we can hope for, given the highly charged, partisan environment prevailing in our nation’s capital.

But an incremental, piecemeal approach is bound to fail.  It will not address the magnitude of our energy challenge. An “every little bit helps” mindset will not suffice when it comes to changing something as massive and as important as our national – and global – energy system.

We need a coherent energy strategy that serves as a reliable roadmap for achieving a secure and sustainable future for America. This strategy needs to be comprehensive, workable and understandable.  It needs to address both sides of the energy equation – the way industry supplies energy and the way consumers use it.

It needs to provide more funding for research and development and technological innovation to make our energy sources cleaner and more efficient.  It must ensure that we have an affordable, diverse and reliable supply of energy capable of sustaining economic growth while also addressing climate change and other environmental concerns.

It should encourage supportive regulation that provides the energy industry with appropriate financial incentives to invest in new infrastructure.  And it must make improved energy education a national priority – including enhanced instruction and career opportunities in science, technology, engineering and math.

Perhaps a good starting point would be the creation of an expert, blue-ribbon panel – appointed by the president or Congress – to map out a long-range energy strategy and make serious policy recommendations. Whatever form this panel would take, it must be open to all valid points of view and avoid the biases and misperceptions that have plagued the nation’s efforts to develop a functional energy policy for far too long.

As the world’s leading democracy, the debate about energy and the environment is one that we must embrace.  All of us.  And uncertainty about the outcome is no excuse for paralysis.

I believe the best we can do – for this and future generations – is to adopt the outlook of the late, great Englishman, Winston Churchill, who said, “A pessimist sees the difficulty in every opportunity.  An optimist sees the opportunity in every difficulty.”

We must seize the opportunity before us to build a national consensus for achieving a cleaner and more secure energy future.  We must ask the right questions.  Big questions.  With big implications for your lives and your careers.  Even more so for your children and grand-children.

A national energy policy could emerge with a renewed national conversation, and I am going to do what I can to advance that conversation. I hope you will, too.

I came here today to be a professor for a short while.  Mission accomplished.  Now, I want to learn a few things from you.

To that end, I will start by taking your questions.

###

NYSE : (April 17, 2014) D 70.67 -0.86

Subscribe