Remarks -- Thomas F. Farrell II
Chairman, President & CEO - Dominion
Virginia Economic Development Association
June 14, 2007
“Energy and its Impact on Economic Development”
Good afternoon. I want to thank VEDA for the opportunity to share some thoughts with you about a topic near and dear to my heart – the importance of energy in economic development.
Before I do that, let me say congratulations on your 25th anniversary. VEDA has made a tremendous contribution to the Commonwealth’s economy. It is no exaggeration to say that the economic activity that VEDA and its members have helped create would surpass the Gross National Product of many nations.
Virginia’s economic boom is the product of a winning combination. Our economic development community and elected leaders deserve tremendous credit. Sound fiscal and tax policies have always been a hallmark of Virginia state government.
No wonder that Forbes recognizes Virginia as the best state in the nation in which to do business.
Dominion also has been an active partner in economic development for many years. Our economic development team, including Kent Hill and his staff, are ready, willing and able to help you continue your important economic activity and spread the good news about the Commonwealth.
Undoubtedly, one of the most important factors in economic development is reliable and reasonably priced energy. It has given Virginia a very strong competitive edge.
For example, a recent study by a respected consulting firm – Brubaker & Associates – found the average industrial rate in Virginia to be the lowest of any state on the East Coast.
And the latest statistics from the U.S. Department of Energy show that Virginia’s industrial rates are less than half of what they are in New England and almost a third below the national average.
Energy is more important today than ever to business operations and profitability. Who would have ever imagined 20 years ago that integrated circuits and semiconductors would be Virginia’s leading export, surpassing tobacco?
The growth in information technology has been truly spectacular. No fewer than 23 data centers are on the drawing board for Northern Virginia alone. A single data center can use as much electricity as 6,000 homes. If all the centers are built as planned, we will be adding the electrical demand of a mid-sized city.
Northern Virginia has captured most of the data center market so far, but other areas of the state have experienced some notable growth as well. Low operating costs and readily available electric and telecom infrastructure provide attractive locations for these investments throughout the Commonwealth.
Invariably, rapid economic growth leads to a rapid increase in energy demand. Clear evidence of that phenomenon came in January in a study released by PJM, the organization that manages the electric grid in the Mid-Atlantic region.
PJM reported that the demand for electricity was growing faster in Dominion’s service area than anywhere else in the PJM footprint – an area that extends from Chicago to the Outer Banks and north to New Jersey.
In just five years, demand in the Dominion service area will go up almost 1,800 megawatts. PJM likens that to adding more than a million houses to our system.
Providing the megawatts is only part of the solution. If Virginia is to retain its competitive edge, the power must be reasonably priced. Jarring price hikes would send many businesses elsewhere.
Fortunately, I believe the Commonwealth now has a plan to meet the twin challenges of reliable electric service and affordable electric service.
The plan is incorporated in legislation commonly known as the “re-regulation” bills. They were the identical House Bill 3068, sponsored by Delegate Clarke Hogan from South Boston, and Senate Bill 1416, sponsored by Senator Tommy Norment of James City County. Senator Norment heads the legislative panel that monitors utility regulation.
The bills were designed to end Virginia’s experiment with retail electric competition and market-based prices. The General Assembly approved the legislation in April by comfortable margins. The final version included valuable amendments submitted by Governor Kaine. The bills become law July 1.
Much has been said or written about these bills…almost all of it inaccurate. Before delving into the details, allow me to clear up a few misconceptions.
The bills have been described as products of a legislative “rush to judgment,” lacking adequate forethought or analysis. They have been criticized as overly complex. None of that is accurate.
In truth, they were developed through extensive discussions that involved a broad array of stakeholders – consumer groups, utilities, government agencies, industrial customers, and others. The Office of the Attorney General, which is charged by state law with representing consumer interests, played a key role in bringing these groups together and forging agreement.
The bills were subjected to numerous revisions, almost 100 hours of hearings and meetings, continuous negotiations, frequent amendments and several complete rewrites.
Round-the-clock discussions are normal during the General Assembly.
But that should not detract from the long hours of study and discussion devoted to the bills.
In reality, the bills reflect a broad legislative consensus that emerged in late 2006 after a year of debate and discussion. The consensus formed around three major points.
First, the Commonwealth should not implement market-based electric rates.
Market pricing was a hallmark of the deregulation movement, which came to Virginia largely through the efforts of major industrial customers. Electric rates based on market prices were scheduled to begin here in 2011, after a long period where base rates were capped.
However, in other deregulated states where rate caps and freezes had already ended, market-based rates proved to be unpredictable, volatile and explosive. Retail competition – which was supposed to put the brakes on such price increases – never developed.
Maryland is a perfect example. In the Baltimore area, residential rates have gone up more than 80 percent since the beginning of 2006.
Understandably, Virginia legislators were concerned. They knew rate increases of that magnitude would weaken our economy and threaten our continued growth. That was an unacceptable outcome.
Second, under deregulation Virginia could not provide the certainty needed to financially support the construction of much needed new generation projects. This was especially true of new base load projects, such as clean coal and nuclear units that run 24/7 and are the backbone of the generating fleet. Indeed, they are the backbone of the economy.
Adequate base-load generation is the best way, over the long term, to ensure stable and economical electric rates. Electricity produced by these facilities has a very low unit cost compared with other options. For example, power from gas-fired combustion turbines costs three to four times more than that produced by modern clean-coal or nuclear units.
Today, the Commonwealth is already a net importer of power. Without building more base-load facilities, Virginia would become increasingly dependent on high-priced electricity produced elsewhere in order to keep up with the state’s tremendous economic growth.
Third and finally, Virginia should return to some form of electric rate regulation by the State Corporation Commission – while preserving the efficiency gains made during the era of deregulation.
The consensus recognized that Virginia needed the stability of rate regulation by the SCC. But it also recognized that deregulation and capped rates did encourage utilities to work harder and smarter. Although deregulation – which was often called restructuring -- did not meet all of its goals, the operating efficiencies it promoted needed to be maintained.
Dominion agreed with those assessments. Late last year, we endorsed the concept of re-regulation. We supported a return to cost-of-service regulation – modified to retain the efficiencies made during restructuring – and also to support construction of critical new power stations.
This approach has been called a “hybrid” regulatory model since it incorporates the best elements of traditional regulation and the experiment with deregulation.
I like that description.
We circulated some ideas. Many were rejected. Most were modified. In the end, we believe the General Assembly produced a workable product – one that will be a model for the 21st Century.
The bills achieve the goals of the legislative consensus in a number of ways:
First, the bills fulfill the Assembly’s objective of returning electric utilities to comprehensive SCC regulation. The Commission will exercise powers similar to those it had under the traditional cost-of-service methodology.
This sets up a mechanism for reviewing utility rates and returns, guards against market volatility, and allows complete SCC review of a utility’s books and earnings.
Next, the bills take major steps to help Virginia’s utilities obtain the billions of dollars of capital needed to build new base load generating units. The Commonwealth’s growth simply cannot be sustained without these investments. The globalization of capital markets has made obtaining the necessary funds much more difficult.
The utilities’ authorized returns will be benchmarked against peer companies in the Southeast – including some of the most respected names in the business – Duke, Progress Energy, and the Southern Company, to name a few. On average, the Southeast has some of the lowest power prices of any region in the country.
The bills also help attract capital by providing the opportunity for an enhanced rate of return on major new generation projects, particularly base-load units powered by nuclear and clean coal-technologies. They ensure construction costs are recovered in a timely manner.
From an economic development standpoint, these facilities represent billions of dollars in investment. They will bring significant tax revenues, jobs and other economic benefits to the Commonwealth. The re-regulation legislation helps to ensure that these generation projects will be built in Virginia – and not in other states. That will help keep costs down.
With the new law in place, Dominion believes we have a solid basis to move forward on some major energy infrastructure projects. Here are a few details.
First, the Southwest Virginia coal station.
Dominion is the lead member of a consortium moving forward with plans for this facility. Last year we selected a Wise County site for final evaluation. Assuming the review proceeds smoothly, we plan to file for a construction certificate with the SCC later this year.
As you may recall, the Assembly passed legislation paving the way for this station three years ago. Sen. William Wampler and the entire Southwest Virginia delegation have been tremendously supportive. And we are very grateful for the strong backing of the Virginia Coalfield Economic Development Association, local governments and the coalfield region’s economic development community.
The station will have two major benefits for the Commonwealth …and especially for Southwest Virginia.
First, it will generate between 500 and 600 megawatts of electricity by early in the next decade to serve Virginia customers. And it will protect the environment by using proven clean-coal technology.
Next, it will be a significant boost for the regional economy. The station will create new opportunities for Virginia’s mining industry by consuming up to 2 million tons of coal per year from local mines. This will produce as many as 250 new mining jobs.
Once in service, the facility will employ about 75 plant operators, with an annual payroll of more than $4 million. It will also produce significant new tax revenues for Southwest Virginia.
The second major project is new nuclear generation at our North Anna Power Station in Louisa County.
The industry is now in the midst of what has been called a “nuclear spring” by the Chicago Tribune.
After years of inactivity, policy makers and utilities across the country are taking a new look at nuclear power. Concerns about possible climate change, air emissions, depleted reserves of fossil fuels, and dependence on foreign energy sources are all driving this renewed interest.
Even some environmentalists, long in the vanguard of nuclear bashing, are changing their minds. They have finally recognized that nuclear power produces zero atmospheric emissions. Greenpeace founder Patrick Moore recently termed it “environmentally sound and safe.”
At Dominion, we never lost confidence in the nuclear option. Our North Anna and Surry stations produce more than a third of the electricity generated in Virginia. Their role in maintaining a reliable, clean and reasonably priced supply of power cannot be overstated.
Dominion is working to keep the nuclear option open for the future. We are evaluating the addition of a third nuclear unit at North Anna. Although no final decision has been made, I am pleased to report that the licensing process for North Anna 3 is moving forward…smoothly so far.
We expect the Nuclear Regulatory Commission to approve an Early Site Permit for North Anna by the first quarter of 2008. The permit would resolve safety, environmental and emergency preparedness issues. It would also allow us to bank the site for possible new construction for 20 years. Approval of this permit would be a major step forward.
We are also developing our application for a Combined Operating License – or COL – for a new reactor at North Anna. The COL unites the approvals for both construction and operation into one step – a tremendous advance in streamlining a very cumbersome permitting system. We plan to file our application for the license with the NRC late this year.
In addition, we recently signed a contract with GE Energy to secure components for a possible new North Anna reactor. With so many other utilities considering nuclear construction, we had to move quickly to secure parts.
I want to emphasize that we have made no final decisions on North Anna 3. But if we decide to proceed, the re-regulation bills will help us obtain the capital we need for this 1,500-megawatt facility. And the competition for that capital will be fierce. At last report, about 15 other U.S. utilities had plans for about 30 nuclear units.
One last project deserves mention: The proposed 500-kilovolt transmission line in Northern Virginia.
This is one of the most controversial projects Dominion has ever undertaken. It has drawn heated criticism and opposition.
When you cut through all the noise, one fact remains: The line is absolutely necessary for Virginia and absolutely necessary to avoid serious reliability problems by 2011 – problems that would affect a host of critical national security installations – not to mention technology companies, hospitals, businesses and residential customers throughout Northern Virginia.
Dominion is required by federal law to take steps to ensure the reliability of the electric grid. If we fail to take necessary measures, we face severe financial penalties of one million dollars a day under the federal Energy Policy Act of 2005. We also have an ethical obligation to keep the lights on for our customers.
Conservation will play a role in meeting future energy needs in Northern Virginia and elsewhere. But conservation alone cannot eliminate the need for the line. A report we commissioned from KEMA, a respected international energy consultant, came to that very conclusion. KEMA’s findings are part of our application for the line, which we submitted to the SCC in April.
Dominion’s preferred route is located within or next to existing power line rights of way where power lines are already located. That helps to minimize the impact on communities and property along its path.
We expect the Commission to conduct public hearings later this year, and we hope for a ruling by next spring. We believe this new line will help avoid serious problems in Northern Virginia – the driver of the Commonwealth’s economic engine.
All this adds up to some very busy times for Dominion. Here is a timeline of some of the major developments.
Coming up first is our fuel factor adjustment, scheduled for July 1. The fuel factor allows a utility to recover from customers, on a dollar-for-dollar basis, the cost of the fuel used to produce electricity. The company makes no profit through the fuel factor.
This is the first adjustment in Dominion’s fuel rate in three-and-a-half years. The rate has been frozen by state law since January 1, 2004. Since the freeze has expired, we will now return to the traditional system of annual fuel rate adjustments – a system in place for decades before the freeze.
Two things to keep in mind about this year’s adjustment:
The good news is that even with this year’s fuel factor increase, Dominion’s rates will remain very competitive – in fact, well below those of many other utilities in the mid-Atlantic region. We are now awaiting SCC final action on our fuel request, and the Commission will conduct hearings beginning June 19.
Next on the timeline is the Southwest Virginia coal-fired power station. In late summer or early fall of this year, Dominion plans to apply with the SCC for a certificate allowing construction of the facility.
Also, as I stated, there are two upcoming milestones for our nuclear program.
Finally, the first comprehensive rate case under the re-regulation bills will take place in 2009 for Dominion and other Virginia utilities. The law calls for the SCC to initiate these cases during the first half of the year. This will be a thorough, top-to-bottom review of base rates and utility costs.
To sum up, a growing economy demands more energy at a reasonable cost. Fortunately, the Commonwealth is prepared to move forward. The re-regulation bills I have discussed will go a long way toward ensuring a reliable, secure and affordable energy future for Virginia.
Dominion is prepared to do its part. We will continue to make sound, sensible investments to produce electricity economically and in an environmentally sound manner – and deliver it where it is needed.
Thank you again for the opportunity to share my thoughts on Virginia’s energy future.
And thank you for your partnership over the last 25 years. Congratulations and keep up the good work.
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