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Executive Speech

Remarks: Thomas F. Farrell II
Chairman, President & CEO – Dominion
Mid-Atlantic Conference of Regulated Utilities Commissioners
Hershey, Pennsylvania
June 27, 2011

Good morning.

I thought it might help if you knew a little something about Dominion before you hear what I see happening today and in the near future.

Dominion operates as something of a hybrid enterprise.

In our headquarters state of Virginia, we operate as Virginia’s principal regulated electric utility – Dominion Virginia Power.

About two-thirds of our 28,000-megawatt generating portfolio is regulated. The remaining third – located in the Midwest and Northeast regions of the country – is merchant. Most folks are unaware that we are the largest provider of electricity in New England, serving about 25 percent of that unregulated market.

We actively pursue fuel diversity and balance in our generation portfolio. Last year, for example, the generation capacity mix of our regulated fleet was 30 percent coal; 27 percent natural gas; 18 percent nuclear; 13 percent hydro and other renewable power; and 12 percent oil. Actual production was 42 percent coal, 40 percent nuclear, and about 15 percent natural gas.

On the gas side of the business, we own and operate 11,000 miles of natural gas transmission, gathering and storage pipelines, and we serve as the local gas company for Cleveland, Toledo, the rest of northeastern Ohio, and most of West Virginia.

We operate the nation’s largest natural gas storage system with almost 950 billion cubic feet of storage capacity. A part of that system is the East Coast’s largest LNG facility, located on the Chesapeake Bay at Cove Point, Maryland.

Dominion also serves close to 6 million utility and retail energy customers in 15 states, from Texas to Maine. Those customers range from low-income households struggling to pay their monthly electric bills to global high-tech companies that demand the highest possible level of electric reliability.

Our regulated businesses are in the midst of a five-year, $10 billion infrastructure build-out program that includes new generation, electric transmission and distribution, gas pipelines, as well as gathering and processing systems in the Marcellus Shale region – which, of course, is just down the road.

Expected demand growth in our Virginia and North Carolina electric service area over the coming decade will largely drive this investment program.

PJM forecasts that Dominion will need to add about 4,500 megawatts of new capacity to our system by 2020 – the highest demand growth in PJM’s 13-state and the District of Columbia region – enough new capacity to serve an additional 1.1 million new households.

The power generation projects we currently have in development or under construction – all in Virginia – include a 585-megawatt hybrid coal and biomass station; a 1,300-megawatt gas combined-cycle plant, and a small solar demonstration project. A 580-megawatt gas-fired combined-cycle facility recently went into service.

We are also pursuing a federal license to construct and operate a third reactor at our North Anna Nuclear Station in central Virginia, but we have not yet committed to actually building the facility.

And finally, we are planning to increase our renewable energy portfolio by about 600 megawatts, expected to come from new onshore wind farms and coal-to-biomass conversions. We are also evaluating potential investments in offshore wind along the coast of Virginia.

So – that is who we are at Dominion.

Now I am supposed to tell you what I see happening in the country and in our industry. I will focus disproportionately on Washington because, for better or worse, everyone in this room to varying degrees must dance to the tune – or, more accurately, tunes – that emanate from Washington.

First, I see a sputtering economic recovery – a “two-steps-forward, one-and-a-half-steps backward” kind of recovery. But at the same time, we are starting to see the first signs of inflation, most notably in gasoline and food prices. So this is the reality that we all face as we chart a course for regulated utilities.

I also see the same dysfunctional political scene in Washington that you all see.

Do not get me wrong – I am normally a fan of gridlock in Washington because, all too often, the only thing the warring factions can agree on is spending more money that they do not have. But in the energy world, gridlock means that we do not have – and will not have – a comprehensive, long-term energy policy that is so essential to our industry.

Instead, what suffices for a national energy policy these days are disconnected speeches or pronouncements, such as "drill baby drill," or on the other hand, the goal of reducing our carbon emissions by 14 percent below 2005 levels by 2020 and – by 85 percent by 2050. You, of all folks, certainly understand just what a challenge that goal represents.

The last time our carbon emissions were 85 percent below what they were in 2005 was the 1920s – nearly 100 years ago. Our population was roughly one-third of what it is today, only about half of the nation’s non-farm homes even had electricity, and fewer than 2 percent of farm homes were electrified.

No one had air conditioning, ice makers, computers, televisions (much less flat screen TVs), Blu-ray players, game consoles, cell phones, BlackBerries or iPads. 

Industrial usage of electricity was a fraction of what it is today, and no one even dreamed of the Internet or the energy-intensive data centers that manage its traffic.  So when someone announces a goal of rolling the clock back to emissions levels of the 1920s, it is better characterized – in my mind at least – as an aspirational goal rather than a serious energy policy.

Instead of a national energy policy, enacted by Congress, we have a series of new regulations – that in large part are dictating how our industry will spend our customers’ money. 

I think I am right in saying that this is the first time the EPA has ever attempted to tighten the rules for all six major traditional pollutants at the same time – in addition to coal ash and cooling water intake.

And just a couple of months ago, the EPA staff recommended a significant tightening of current standards governing air toxics – a move that is raising already high anxiety levels in the industry.

And these rules are coming on top of NRC rules on nuclear safety and NERC rules on grid reliability and cyber security, not to mention new and anticipated regulations on the gas side governing pipeline safety and shale gas drilling.

So, rather than expanding upon existing capacity that could power the economic rebound that will occur at some point, many in our industry are spending precious dollars to bring yesterday’s generation into compliance with changing environmental requirements or to build new plants just to replace the ones that must be retired because of those requirements. 

I understand and respect the EPA’s mission to protect human health and the environment.  I recognize that many of the rules are subject to court-ordered deadlines and settlements.  And I know that the public wants and deserves a clean environment.  The EPA is doing their job – which is to protect public health.  I am not quarrelling with their goals or their methods.

But – I also know that the public wants and deserves affordable and reliable energy.  And it will be the homes, churches, schools, small businesses, and large employers that will bear the cost of complying with these regulations.

Utilities have to respond to changing public policy priorities.  We can do so – and we will – but it will not be without cost. 

There is a balance to be struck between these competing interests – and utilities are often caught in the middle – and since we are, so are our state regulators.

So what do I see for the future?  I am afraid it will be more of the same.

Let me start with what I do not see.  I do not see a coherent and serious national energy policy emerging from Washington.  Every president in recent memory has talked about a national energy policy, and none has produced one – even presidents from both parties who had friendly majorities in Congress.  So I have given up – we are not going to have one now or in the near future.

What does that mean for a company like Dominion? 

New power plants, major transmission lines, gas pipelines and storage facilities take many, many years to plan, design, site, permit, and construct.  We make educated judgments about such things as to what the demand for the infrastructure will be and what commodities may cost in the future to power our plants. 

Absent a national energy policy, we will have to make our decisions without a clear picture about even more things, including – what will be taxed, what will be encouraged or subsidized, and what might be penalized or prohibited in five,10, or 20 years. 

Yet Washington continues to get bogged down debating whether incandescent light bulbs are bad or benign, whether renewables are the silver bullet, whether Yucca Mountain is canceled or back in business, and what we need to do to keep up with China – a nation whose primary edge in the “green” economy is manufacturing at hourly wage levels that have not been seen in this country in a century. 

Instead of a national energy policy or comprehensive energy legislation, I predict that we will see increased regulatory activity in Washington, which will inevitably be followed by both popular and political reaction – perhaps even over-reaction – resulting ultimately in a reversal of some or even many of the regulations. 

Of course, it does not do any of us – especially utilities – any good to predict this kind of political process, because we will not know which regulations might survive until it all plays out.  We have a lot of people on the ground in Washington and elsewhere to help us read the tea leaves, but inevitably, we are going to guess wrong – at least some of the time.

I can, however, readily envision – over time – the states taking the leadership role from Washington in crafting a sensible energy policy.  In a sense, it would be a “back to the future” progression.  Because of course – it was through state legislation and regulation that the bulk of our electric and gas utility infrastructure came to exist in the first place. 

More recently, states took the lead with restructuring and retail choice, as well as with renewable generation and energy efficiency policies more closely tailored to the unique characteristics of individual states and their energy consumers.  What works well in Pennsylvania or New Jersey may not work nearly as well in Virginia or Kentucky, and vice versa.

In my own state of Virginia, the General Assembly, with subsequent interpretations of the law by the State Corporation Commission, has helped to replace a restructuring plan that was not working for the Commonwealth.  They replaced it with an innovative, though by no means unique, regulatory system that addresses the need for significant new generation to serve our customers.  Many other states have similar programs.   

So I see more of that effort at the state level – crafting and administering comprehensive and long-term energy policies that address the unique needs and capabilities of the state’s citizens and its public utilities.

It will be up to the states – and state regulators – to provide the consistent and predictable decision-making and long-term vision that is so lacking in Washington.  It will be the states that provide the stable regulatory climate that will allow regulated companies like Dominion to embark on the long-range planning and capital investment programs that are critical to our customers and to the vitality of our states’ economies. 

It is consistency and predictability that gives confidence to the capital markets. Confidence in the regulatory environment facilitates investment, which lowers capital costs and keeps customers’ rates stable and reasonable.  That is the only energy policy I see that will work to keep energy abundant, reliable and affordable.

Thank you.

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