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Executive Speech

Remarks – Thomas F. Farrell II
Chairman, President & CEO
Dominion

Clean Energy Task Force
National Governors Association
Washington, D.C.
February 23, 2008

Governor Pawlenty, Governor Sebelius, and members of the Task Force, thank you for inviting me to be here.

Thomas F. Farrell II

I want to applaud the Clean Energy Task Force and the NGA for recognizing energy’s underlying importance to the economy and the environment.  And I welcome the opportunity to join Dan Yergin and Mike Morris in today’s discussion.

As we approach the end of the first decade of the 21st Century, our nation finds itself entering “a period of consequences,” to borrow a phrase from Winston Churchill.  These consequences will follow from the choices we make – or do not make – about the way our nation develops, obtains and uses energy in a carbon-constrained world.

The decisions we make will directly affect the cost and reliability of energy.  They will play a major role in our country’s job and income growth, our standard of living, our foreign policy, and our ability to compete in global markets.

I am not an alarmist by nature.  I do believe, however – as I have stated before – that our nation is headed for an energy train wreck if we do not create a national energy policy grounded in economic realism, common sense and market principles.

Climate change concerns, in particular, presents an unprecedented long-term challenge.  We need a policy framework designed for the long term.

We also need to level with the American people about the true costs of energy production and use – and the price tag that goes with a cleaner environment.

Above all, the public – your constituents – need to understand that there is no quick fix and no free lunch when it comes to complex energy issues.

We all want a clean, healthy environment.  But I urge you to beware of those who say we can have it for free – or relatively so.

They are, quite simply, singing a Siren’s song.  Ask them, as I know Governor Blunt of Missouri would, to show you the place where a clean environment can be had free of charge.  Ask them to show you the place where carbon is being sequestered in any significant way – or any place on earth where a nation’s energy needs are being met entirely by renewable energy and conservation.

Other than perhaps Iceland, they cannot.  It is a myth.

The scale of the energy business is immense, and immensely capital-intensive.  Siting, designing, permitting, engineering and building pipelines, power stations and transmission lines requires a time horizon measured in decades, not years.

To give you a better idea, Dan Yergin and his folks at CERA estimate that U.S. utilities must invest $900 billion in new energy infrastructure over the next 15 years to meet the nation’s growing energy needs.  That does not include any costs related to potential carbon regulation.

Realistically, it will take decades to change America’s thinking about energy.

We need an integrated strategy – now – a strategy that works both sides of the energy equation – supply and demand, production and consumption – if our goal is to achieve sustainable and cost-effective reductions in emissions and lay the foundation for a more secure energy future.

The linchpin of this strategy is diversification.

Diversification offers the most viable approach to greater energy security.  As any good financial advisor will tell you, the best hedge against a market is a diversified portfolio.  The same is true for energy.

That means we cannot limit ourselves to a few sources of energy and exclude others.  We need to draw on every resource at our disposal – coal, nuclear, oil, natural gas, renewable power and much more aggressive and smarter conservation and efficiency programs.

Dominion has a diversified and integrated plan to meet our customers’ future energy needs and reduce or offset our carbon emissions at the same time.

On average, we are adding about 50,000 electric customers to our Virginia regulated system every year.  In terms of power generation, we will require more than 4,000 megawatts of new capacity just to keep pace with rising demand over the next decade.  That’s the equivalent of adding more than one million new homes to our customer base.

The integrated strategy we have adopted in our home state is called Powering Virginia.  Three principal themes underlie our plan:  energy management… energy production… and energy delivery.

Energy management refers to conservation and efficiency.  It requires active and meaningful participation by consumers.  Our goal is to put more information and technology in their hands.  We want to give our customers the tools they need to manage their energy use and cut consumption – especially at times when power use is highest – and most expensive.

Last year, we rolled out a compact fluorescent light bulb (CFL) discount program in partnership with Home Depot.  CFLs use about 75 percent less energy than traditional bulbs and can last up to 10 times longer.  The initial results have exceeded our sales expectations by a wide margin.  We have already distributed nearly one million bulbs.

We now estimate we will sell around five million CFL bulbs before the end of 2009.  That translates into more than $280 million in savings for Dominion customers and nearly 1.5 million tons of reduced carbon dioxide emissions – the equivalent of removing about 270,000 vehicles from the road for one year.

We are also testing nine conservation programs that complement existing load-reduction initiatives for commercial and industrial customers.  These new programs will gather data and evaluate consumer acceptance of technology-based energy management techniques.

If successful, these efforts will provide a foundation for even larger conservation initiatives down the road.  They also support Governor Kaine’s 10-Year Energy Plan, one goal of which is to achieve a 10 percent reduction in electricity demand by 2022.

Keep in mind that consumer acceptance and participation will ultimately determine how much of an impact our demand-side programs will have.   We cannot conserve energy – only our customers can.

Even with effective customer conservation, we must build new power stations – baseload, intermediate and peaking – to produce the amount of electricity our customers will need.

Slightly more than half of our current electric production is fossil-fired.  The rest is emissions-free nuclear and renewable, mostly hydropower and biomass, with a significant amount of wind energy under development.  This diversity of supply helps balance our customers’ need for reliable and affordable electric service with sound environmental stewardship.

In our Virginia system alone, we will spend more than $2.5 billion to reduce air emissions at our existing facilities by more than 80 percent on average.  These projects are all but completed.  Dominion was the first major utility to agree on a remediation plan with the EPA almost 10 years ago.

We are also in the process of expanding our renewable energy portfolio to help Virginia reach its 12 percent renewable energy target by 2022.  Dominion is currently a partner in two major wind energy developments, one in West Virginia and one in Indiana.  The Indiana project will be one of the largest wind developments in the United States.

Wind and other alternative energy sources – as important as they are – should only be viewed as supplemental power sources.  For various reasons, they are simply not ready to replace coal, oil, natural gas and nuclear power as the real workhorses of our power fleet.

As promising as renewable sources may be, they are not a panacea.  Nor can we realistically rely on conservation alone as our path to greater energy security.

For that, we need more baseload generation.

That is why Dominion is pursuing construction of an advanced clean-coal facility in the coalfields of southwestern Virginia… and why we have filed an application to build and operate a possible third nuclear reactor at our North Anna Power Station in central Virginia.

Coal is by far our most abundant and economic domestic energy source.  If we are serious about improving the nation’s energy security and independence, we must maintain its use while protecting the environment.

The clean-coal facility in rural southwestern Virginia would use a proven, flexible clean-coal technology that can burn waste coal and as much as 20 percent renewable biomass.  This station will accommodate carbon capture and storage technology when the technology becomes commercially available.

To move this R&D effort forward, we have partnered with a research center at Virginia Tech to demonstrate large-scale carbon storage in the nearby coal seams of central Appalachia, including some promising sites less than ten miles from the proposed project.

We are also hosting a pilot carbon storage program at our Brayton Point merchant fossil station in Massachusetts.  There, we are testing a new technology that converts coal into pipeline-quality natural gas, with the potential to separate and capture the carbon emissions.

Nuclear power is the only major power source that is virtually emissions free.  If we as a nation are serious about confronting global warming, new nuclear stations must be part of the solution.

Dominion has not yet committed to build a new nuclear reactor.  But if we receive all federal and state approvals and decide to proceed, a new, advanced-design reactor could be in service at North Anna by 2015.  The new unit would generate enough clean energy to serve 375,000 households.

The last piece of our Powering Virginia strategy involves new transmission construction.

An important fact about transmission – one that does not get much attention – is its role in the growth and viability of renewable power.  Many renewable resources, such as wind and solar, require large amounts of land and are located in remote areas.  Having enough transmission available to move renewable generation to market is crucial.

Dominion currently has more than a dozen transmission projects under development around Virginia, especially in the nearby Northern Virginia suburbs of Washington, D. C., where growth and power demand are the strongest in our system.

We are prepared to invest more than $4 billion to enhance these critical energy systems.

The capital dollars we have included in the Powering Virginia initiative are part of a $12 billion investment and building program that is the largest in the company’s history.

The last subject I want to discuss is carbon regulation.

We at Dominion are not climatologists, but we follow the debate closely.  We expect to see Congressional action – if not during this election year then most likely in 2009 or 2010.

Dominion supports an economy-wide cap-and-trade system that includes a meaningful cost containment mechanism that achieves the desired environmental results at a pace American consumers can afford.  Other provisions that should be in a federal bill include:

  • An allocation of emissions credits to the sectors of the economy that need them most;
  • A realistic baseline year and compliance schedule that first slows the growth of greenhouse gases in the near term, stops them, and then reduces them over the long term;
  • Investment incentives for the development of carbon capture and storage and other emerging technologies;
  • And a safety valve, or cost containment mechanism, to protect consumers – and the economy – from drastic rate increases while reducing emissions.

We believe the 2007 Low Carbon Economy Act – otherwise known as the Bingaman-Specter Bill – best embodies these principles, especially in regard to consumer protections and financial assistance to low-income households.

Time does not permit a point-by-point comparison with Senate Bill 2191, the Lieberman-Warner Bill, except to say that the two approaches get us roughly to the same place at the same time – that is, a 60 to 70 percent reduction in carbon by 2050 – but they do so in very different ways.

The EPA and EIA will both release cost estimates of Lieberman-Warner in March and April, respectively.  So this is not a done deal.  But preliminary estimates indicate Lieberman-Warner would be far more costly to consumers and the economy than Bingaman-Specter.

This is true for two basic reasons:  Lieberman-Warner calls for more reductions sooner – before effective technology is ready – and it lacks adequate “safety valves” to contain the cost of allowances.

I have seen estimates that show the total cost of the Lieberman-Warner proposal anywhere from three-to-eight times higher than its Bingaman-Specter counterpart.

Preliminary estimates released last fall by CRA International indicated that the Lieberman-Warner Bill could reduce our Gross Domestic Product by $1 trillion dollars in 2050 – and cost every American household on average about $2,400.  Those who can least afford this added expense would be hardest hit.

Those findings applied to the bill as it was originally introduced.  They are certainly even higher now with the amendments added in committee.

In short, both of these bills contain meaningful proposals.  We should take the best of both approaches in crafting a reasonable, affordable bill.  This is a long-term issue with long-term consequences.

The Energy Information Administration forecasts – conservatively I think – that U.S. utilities will have to invest $400 billion in new generation by 2030 to address climate change regulations.  And that does not include the industry’s other substantial capital outlays for new infrastructure I discussed earlier.

Four-hundred billion dollars is almost as much as the current market cap of the entire investor-owned utility sector.

As always, our industry – every industry – seeks consistent, predictable regulations and appropriate financial incentives.  And technology must be front and center in confronting the carbon regulations challenge and creating a cleaner, greener America.

Here, government plays a key role.

To achieve the range of emission reductions being considered, the federal government must significantly ramp up its R&D investments, especially with respect to renewables and carbon sequestration.  More investment in new technologies to improve the efficiency of our buildings and appliances is also needed.

The bottom line is this:  it will take a “one-two punch” to achieve the low-carbon future these new proposals would require:  environmental regulation and technological innovation.

We can have a cleaner, more secure energy future.  It can be done.  It will be done.  But it is going to take time, a great deal of money and close cooperation between government, industry and the consuming public to see ourselves through this “period of consequences.”

I believe we have the talent, the creativity and the means.  But at the end of the day, the deciding factor will be whether or not we have the political will to avoid a Siren’s song of quick fixes and adopt a balanced, long-term solution that makes sense for our customers – and your constituents.

NYSE : (April 24, 2014) D 71.52 0.46

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