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Executive Speech

Remarks of Thomas F. Farrell II
Chairman, President & CEO – Dominion
School of Advanced International Studies
Johns Hopkins University
Washington, D. C.
February 13, 2012

"Renewing America’s Focus on a Secure, Sustainable Energy Future"

Dr. Jhirad, members of the faculty, students and other guests … I am delighted to join you today.

You will be happy – or possibly disappointed to know that I did not bring a PowerPoint presentation or other visual aids.

What I would like to do today is cut through some of the clutter on national energy policy. I want to walk you through a few things. I will not get a smarter audience than this one, and I feel especially unrestrained.

There are some stark facts we need to consider as a nation. We have choices to make. The next hundred years – in terms of how we power our country, support economic growth and protect the environment – will little resemble the past hundred years.

I think, as a general proposition, we need to start by avoiding taking too much for granted.

Which is, of course, exactly what we do. Americans have been very successful in avoiding a reasoned public conversation about energy policy.

But, we have a presidential campaign underway – and maybe we can do something about that.

After all, energy is vital to our national interests, which, in economic terms, is akin to saying we need air to breathe.

In his latest book – “The Quest,” which I recommend by the way – Dan Yergin, who heads Cambridge Energy Research Associates, asserts that “electricity underpins modern civilization.”

If you doubt that, check with me during hurricane season, and I will show you what “primitive” is. I am talking, of course, about the calls we get at our customer centers when the lights go out. 

Americans like electricity, pure and simple. They like it on. Without interruption. Forever and ever. We take it for granted.

All in all, we have, over the course of the past century, developed an enormously successful economic system based on safe, affordable and reliable energy sources – for lighting … for transportation … for manufacturing … for everything.

But things are changing.

Global competition for resources has undeniable implications for energy supplies and costs.

The interest around climate change remains unabated.

The security of the electric power grid receives insufficient attention.

So how do we develop a national – and rational – discussion of these matters?

How do we avoid the shouting matches and partisan attacks that so characterize politics in America?

Is there a middle ground that allows for forward movement?

Are there any radical centrists in the room?

We shall see.

After long thought, I have concluded that the challenge of energy – like other big questions, such as health care and national security – begins with the challenge of democracy.

A study out of the Baker Institute in December of last year concludes that, since November 2008, China has spent about $2 trillion to jump start the country’s economy – 60 percent of which was earmarked for refining, petrochemicals and pipelines.

Guess what? Public debate in China preceding that decision was, let us say, meager at best.

The Chinese government just did it.

By contrast, we have conspired against ourselves to get little or nothing done. Democracy, by its very nature, is messy and uncertain.

Do not misunderstand me, I like freedom. I like liberty. I love America. I am as patriotic as the next person.

But the fact is, we need to get a grip on how we get things done in this country. Political paralysis could deposit us prematurely into the dustbin of history.

In an essay written more than a quarter century ago, Arthur Schlesinger Jr. lamented the tendencies of newspaper op-ed pages – saying they would not hold up against the quality of the writing in the Federalist Papers.

It is a rather charming observation. Once upon a time, Americans read and thought – a lot more than they seem to now.

In 18th century America, Schlesinger wrote, “one can only marvel at the sophistication of an audience that consumed and relished pieces so closely reasoned, so thoughtful and analytical.”

Again, he was writing in the 1980s about American public discourse.

Flash forward to the present – and welcome to the Internet, cable TV, blogging, Twitter, Facebook, iPods, iPads, laptops and all the rest.

Reason, thought and analysis: It seems so “yesterday.

Yet, the American democratic system relies on our ability to reason and use our minds – individually and collectively.

Democracy is not self-executing. Schlesinger wrote that, too.

Thomas Jefferson thought it all came back to public enlightenment. Democracy fails without it.
Smart guy, Jefferson.

Energy is a complex, technical – and vital – subject, but the average American pays almost no attention to it.

Flip a switch and the lights come on. That is all that matters.

Well, that is not quite true. Because there are people who care about where their power comes from, and at what cost – often passionately.

But their interests tend to be highly focused and narrow. They crusade, with great fervor and absolute sincerity, over this piece or that piece.

Meanwhile, the big systemic questions go unaddressed – and unanswered.

Worse, we tend to fall prey to magical thinking. We imagine that an energy system that supplies more than 300 million people – one that was built over generations, at extraordinary cost and effort – can be neatly amended and even transformed quickly, with little fuss. Sort of like a new iPhone every few years.  I am afraid that is a dream that is not going to come true.

We completely lack perspective about energy – the economy’s single most capital-intensive sector.

A short history: My company got into the electricity business in order to power streetcars. It seemed like a good way to make money.

Then someone noticed a growing interest in electric lights.

Soon the big push was on, centered largely in urban areas.

Rural electrification came with a push from the New Deal in the 1930s. The complete electrification of America has been accomplished only within the last three generations.

Yet, today, any notion that we could do without electricity would be regarded as absurd.

Moreover, electricity is universally expected to be reliable and affordable and safe.

Not only safe to produce, but also clean and safe for the environment.

So do we really need to protect the environment, reduce greenhouse gases and move toward a low-carbon society?

Yes, of course we do.

But we will never get there without having a coherent national energy policy, unprecedented international cooperation, global leadership and massive technological innovation – innovation that, according to the International Energy Agency, calls for more than $10 trillion in investment over the next two decades.

If you missed that, it was trillion with a “T” – $10 trillion worth of investment in carbon-reducing technologies. Even in Washington, D.C. that is a big number.

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, I do not think we can. To think otherwise is to succumb to a siren’s song.
 
The typical American household now has on average about 25 different electronic devices. As recently as 1980, it had about three.

So there are some fundamental contradictions in stated public desires and demonstrable public habits – the very human trait of saying one thing but doing another.

Let me take you through a few basic facts.

The global energy business is a $5-trillion-a-year industry. It dwarfs all other sectors of the global economy.

Here in the U.S., the electric power industry employs about a half million people and represents about 3 percent of real GDP.

About 70 percent of U.S. electricity customers are served by shareholder-owned electric companies, such as Dominion. We have to rely on the private sector for investment capital to finance our operations.

In the early days, some electric companies actually gave away light bulbs in order to build the business.
 
We do not have to do that anymore – although we have been giving discounts on CFL bulbs for the past few years.

And we must not forget the automobile industry.

Electric cars were front and center during January’s auto shows in Detroit and Washington. Secretary Chu said that plug-in electric vehicles will become a major force in the automotive industry by 2020.

By the way, that means having sufficient electricity moving over the grid to cover that new demand, while still producing enough to satisfy everything else.

So, how do we go about producing power to meet society’s needs and expectations?

By a combination of means.

The fossil fuels – coal, oil and natural gas – account for about 80 percent of the energy we consume in our homes, power stations and factories – 80 percent – and they get the job done reliably and at a reasonable cost. Oil accounts for only about 1% of our total electricity supply. So forget about getting off of foreign oil by building windmills.
 
But fossil fuels also produce atmospheric emissions – sulfur dioxide, nitrogen oxides, mercury and carbon dioxide, to name the best known ones – and that is their significant downside. 

Of these three hydrocarbons, coal produces the most carbon dioxide, which, as you know, is the leading greenhouse gas.

We rely heavily on these hydrocarbon fuels – especially coal, our most abundant domestic fuel source – not because we love them, or because we are troglodytes in the electric utility industry – but because they are efficient, affordable and available in the large quantities that society demands.

Not everyone wants to hear this – but it is going to stay that way 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 energy 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 – will take a great deal of time, effort and lots and lots of money. 

History teaches us that these transitions are best measured, not in years, but in decades – or even in generations.

Humanity relied on wood, crop residue and animal waste as its primary fuel sources for 5,000 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 station, and coal began its reign as the nation’s primary energy source.

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.

So regardless of how much we may want to abandon fossil fuels and move to a low-carbon, renewable-energy-based world, a realistic assessment – grounded in science, engineering and simple arithmetic – says 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.

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 for energy. We do not have the luxury of limiting ourselves to a few sources of energy and excluding others. 

There is no silver bullet, there is 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.

Forecasters tell us the global demand for all forms of energy will grow by about 50 percent over the next 25 years.  Here in the U.S. the growth rate will be slower but still significant – about 20 percent between now and the year 2035.

A significant amount of that demand growth will take place right here in the Capital region.  Just across the Potomac River in Northern Virginia, for example, data centers manage about half of all the Internet traffic that flows through the entire United States.

These data centers – and there are more than 40 of them operating right now, with another 20 or so on the drawing board – are among Dominion’s largest customers in terms of power demand.  In that regard, they are similar to large manufacturing plants – the main difference being they run day and night, 365 days a year at full capacity.

Each one of them consumes roughly the same amount of power as 9,000 typical homes.  And we expect the electricity demand from these data centers to more than double by the end of next year.

That is one example – drawn from our own backyard – illustrating why America is going to need an “all hands on deck” approach to meet the nation’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 hold significant 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.  After more than a century of trying, we still have not found an economical way to store electricity on a large scale. Until we do, these renewable options will remain 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, like 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 400 times as much real estate as a nuclear station to produce a comparable amount of power. Four hundred times. That is a lot of land.

If you go a step further and factor in the percentage of time that a nuclear station typically runs at full capacity – more than 90 percent of the time – compared to a wind farm – about a third of the time – the actual disparity in land use rises to a factor of 1,200 to 1.

In other words, a typical wind farm requires 1,200 times more land to generate one megawatt-hour of electricity than does a nuclear power station.

As striking as that discrepancy is, 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.

Our nation’s interconnected power grid was stitched together in the 1930s and was originally designed to move electricity relatively short distances. Today, it is not uncommon to see power transactions occur in regional markets covering hundreds of miles. The system is under a huge strain – especially when electric demand soars during periods of extreme heat or cold. 

We also need more energy conservation and efficiency initiatives, 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 determines 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 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 – and replace retiring capacity. 

For the most part, that means more coal, more natural gas and more nuclear power.   

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.  But it is plagued by significant environmental challenges and happens to be a four-letter word in some quarters.  But – we demonize coal at our peril – if we want to keep the lights on. 

We are told by some academic researchers, government officials and energy experts that carbon capture and storage, or CCS, is the technological fix that could will assure coal’s continued use a leading fuel source in the 21st century.

The problem is, even if CCS is technically feasible on a large scale – and we are told that it is – no one in the real world has shown that carbon dioxide can be captured and injected forever into a geologic formation … economically and at commercial scale. There are a host of technical, legal and economic reasons that make its deployment a daunting challenge.

Any engineers listening today ought to consider renting a garage and figure out a way to capture massive quantities of carbon dioxide molecules or convert them to their component parts in a way that is cost-effective. You would be doing society a great favor – and you would definitely become the next Steve Jobs.

Coal has other obstacles in its path besides carbon dioxide. Net U.S. coal capacity is currently in decline, and going forward, coal will be challenged by new EPA regulations that will tighten existing emission limits and force many smaller, older and less efficient coal stations to close.

Technology is already available to control mercury, sulfur dioxide and nitrogen oxide emissions from our coal stations.  And significant reductions of these pollutants already 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 environmental investment program to improve the 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.

Most companies in our industry accept the fact that new environmental costs are an unavoidable part of the business. And Dominion is prepared to invest hundreds of millions of dollars more in new environmental spending over the next five years to comply with EPA’s proposed rules regulating all six major air pollutants, in addition to coal ash and cooling water intake.

Whatever shape the final rules end up taking, the key thing to remember is this:  The compliance costs associated with these new environmental standards will ultimately be borne by the homes, churches, schools, small businesses and large industries that make up our economy.  To suggest otherwise is plain and simple happy talk.

Utility customers will experience higher energy costs, which will have the effect of weakening business expansion, job creation and economic growth – at a time when our country can least afford it. 

The American public wants and deserves a clean environment. But I do not know of one industrial company fighting for competitive advantage … one small business trying to make payroll … or one elderly homeowner on a fixed income who will be glad to see a higher electric bill arrive in the mailbox every month.

According to the polling I see, the public wants, first and foremost, affordable and reliable energy.

And mind you, I have yet to say much about the biggest environmental challenge of all: global warming, or climate change, if you prefer.

Congress began debating climate change in earnest about five years ago and has never succeeded in passing a bill to reduce greenhouse gases. The EPA has stepped into this vacuum and is poised to issue a rule limiting gas emissions – possibly before the presidential election this fall.

Dominion has supported comprehensive, economy-wide legislation to cap greenhouse gas emissions and create a market for trading emission allowances. We believe that a legislative solution is the most practical, cost-effective way to achieve carbon reductions while controlling the costs.

But as I said, Congress has been unable to pass a climate change bill. The last cap-and-trade proposal under consideration – the so-called “80 by 50” target, which was endorsed by President Obama – would have cut carbon and other greenhouse gas emissions in stages, leading to an 83 percent overall reduction by the year 2050 – using 2005 emissions levels as the baseline.
 
We need to pause here to consider what achieving those reductions actually means – in the real world.

It would mean going back to the decade of the 1920s – when our country was led by the likes of Warren Harding, Calvin Coolidge and Herbert Hoover – that is when the world last produced a comparable level of human-related carbon emissions.  Almost a century ago.

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

How many of them had air conditioning, do you think?  How about computers, flat-screen TVs, microwave ovens, iPhones, iPads or Blackberries?  Who tweeted or provided discount coupons over the Internet?

None of them, of course.

So – am I a climate change denier?  No – not at all; but I do believe that we should face facts as they are – not how we would like them to be.  As John Adams reminded us, “Facts are stubborn things.”

We must stop kidding ourselves – or let others persuade us – that we can confront climate change easily, quickly, cheaply or without sacrificing jobs and economic prosperity.

Because we cannot.  And realistically, we cannot expect developing countries, such as China, India and Brazil, to agree to policies that will curtail their rapidly growing economies and rising standards of living. They all want to live like we do in the United States.

Neither is it realistic to think that the Congress – after years of debate – is going to pass any major energy or climate change legislation, particularly in light of the highly charged, partisan environment that prevails here in our nation’s capital.

So we are left asking, “Are there alternatives to placing limits on carbon emissions as a strategy for moving toward a new, cleaner energy economy?”

This is a broad question that we do not have time to address today in any detail. But in general, we need to take a closer look at adaptation strategies that could help us cope better with extreme weather events and climate fluctuations. And approaches that focus on innovation and technology investment rather than command-and-control regulation have merit as well.

As important as the climate change issue is, the biggest story in the energy business right now is, without a doubt, the rise of natural gas as a fuel source for electric generation.

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, North Dakota, and more recently, in a large swath of West Virginia, Pennsylvania, Ohio and New York known as the Marcellus Shale and the Utica 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.

Many experts and policymakers had been convinced that the U.S. was running out of natural gas. Now, thanks to the Marcellus and Utica shale formations, we could have recoverable resources that last a century. 

These domestic gas resources should reduce our dependence on countries such as Russia and Iran – to the tune of $100 billion a year – money that U.S. companies will not have to spend to import liquefied natural gas.

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 seriously pro-nuclear – if we want to keep the lights on.

Of course, at one time it was believed nuclear power would provide nearly half of all U.S. electricity.

Obviously, it did not work out that way.

Still, 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, reliably and around the clock.

In other words, it is the most efficient source of clean electricity with the smallest environmental footprint.

Its drawbacks include cost – new ones are expensive – and they take years to license and build.  Long-term nuclear waste disposal continues to be mired in partisan politics. But the fact of the matter is, nuclear power offers the only proven, large-scale alternative to fossil fuel power generation.

The U.S. nuclear power industry has a strong track record of providing safe, clean, economic and reliable energy, and I have complete confidence in our nation’s 104 nuclear reactors – despite the seriousness of the accident at the Fukushima station in Japan last year.

Those are our main energy options – hydrocarbons, uranium and renewable sources. 

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

To succeed, we must think big. 

To think big, we must engage in a national dialogue about energy – and make some hard choices.

Consent requires persuasion and an institutional capacity for overcoming division.

Our elected officials in Congress have not mustered the political will to rise above partisan politics, put the national interest first and get the job done.

It looks a little bleak right now. We do not have an energy plan one way or the other. We have inertia – political inertia.

A piecemeal approach may be the best we can hope for, given the fragmented and disorganized state of our political process.

But an incremental, piecemeal approach is bound to fail.  It will not address the magnitude of the energy challenge.

An “every little bit helps” mindset will not cut it. It 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, just as importantly, 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 promote economic development.

And it must make improved energy education a national priority – including enhanced instruction and career opportunities in science, technology, engineering and math.

Any number of frameworks could be considered. The word “commission” – like “task-force” usually has people running for cover or slumped over from boredom.

But we need some sort of process that will make decision-avoidance less attractive.

Perhaps a good starting point would be the creation of an expert, blue-ribbon panel or commission – appointed by the president – 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.

We must ask the right questions.  Big questions.  With big implications for your lives and your careers. 

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 would be delighted to take some questions.

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