MYA Sign In Register Manage Your Account Sign In Register

Executive Speech

Remarks of
Mark F. McGettrick
President & CEO
Dominion Generation
EEI Annual Finance Committee Meeting

May 19, 2005

Big Bucks in the Face of Uncertainty

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.

I look forward to our discussion.

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