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Executive Speech

Thomas F. Farrell II
Chairman, President and CEO
Old Dominion Electric Cooperative Energy Conference
Hot Springs, Va.
July 27, 2009

Thank you, and good afternoon.

When I learned that you wanted me to address the state of the industry, my first thought was to mail in a two-word response: "In flux."

Or perhaps an expanded answer: "In the hands of Congress and the Obama Administration."

But any three-day meeting on energy that begins on the Lower Cascades with clubs in hand, in the splendor of a high-summer day, surely provides an opportunity to develop and expand these answers in person.  Having the opportunity to do so in the company of some great industry thinkers, and to have some fun along the way, was too much to resist.  So I chunked the postcards and am delighted to be here.

We are fortunate to live in and do business in the world's greatest economy, which also happens to be the world's greatest republic.  Now it is trying to reconcile itself over fuel sources.

Newsweek compares the creation of new energy policy that can win a majority to a process as complex as nuclear fusion.

I disagree. By comparison, nuclear fusion is a piece of cake.

Many industry leaders, including me, have long beseeched the federal government to move forward, take action and develop a rational, national energy policy. Let us have a great public debate over the future, we said, and make the necessary choices.

The prospect, otherwise, was the very real potential for an energy train wreck.  
Well, the debate is under way.

And we appear to have taken some important, first steps toward establishing a national energy policy.
I am keeping my fingers crossed on the rational part in hopes of avoiding the wreck. The Washington Post reported that the climate bill "started out as an idea — fight global warming — and wound up looking like an unabridged dictionary."

At 1,400 pages, I am afraid that is about right.

The chief focus is not necessarily the availability and cost of fuel, though that would seem to be a critical issue in a growing, technology-driven economy. Rather, the number one issue is carbon and the means by which we, as a nation, may limit its effects in the atmosphere.

The legislation is a showcase of unabashed American optimism. Nothing in this bill will affect the rate of climate change short of an equivalent effort by China and India. Rather, it is hoped that by this action we will send a message and set an example.

Still, I think we are steadily broadening and improving the national discussion about America's energy future. As John Adams memorably put it, "facts are stubborn things."

Slowly, but steadily, realism has muscled its way to the conference table.  This is a cause for cautious optimism.

In effect, this debate began two years ago, in the last Congress, when members of the U.S. Senate proposed legislation that would create a cap-and-trade system for limiting carbon emissions.

At the time, it was not always clear how well, if at all, official Washington appreciated the complexities and implications of cap and trade. To get this done, we have to be prepared to answer many questions, none easy. And, indeed, last year's legislation failed to gather sufficient support.

But it marked an important point on the learning curve. It set the stage for the present effort.

Just as important, we have seen the emergence of some important and valuable leadership, especially in the person of Rick Boucher, Virginia's Ninth District Congressman. He and his staff tirelessly listened to those most affected by the legislation.  They labored diligently to find common ground.

Now, with the new legislation having narrowly passed the House of Representatives, the discussion has quickly moved beyond the halls of government, out into the by-ways and air waves of America, as it must.

As with anything complex and multi-faceted — this bill has many moving parts — it soon becomes a political challenge. You get clarity one minute and fog the next. People, in accordance with their preferred agenda, tend to simplify or exaggerate. It becomes hard to keep track of what is happening.

If you remember your European history, it is a little like the Schleswig-Holstein question, a source of contention in the 19th century that managed to produce a war between Prussia and Denmark, though no one could quite say why.

Britain's Lord Palmerston remarked that only three people really understood the situation: The Crown Prince, who was dead; a German professor, who had gone mad; and Palmerston himself, but he had had forgotten.

I thought of that while going through some of the reactions to cap and trade, after it emerged from the House.
Mother Jones magazine — not exactly a bastion of conservatism — reported that the bill has … quote … "environmentalists teetering at the edge of [an] existential crisis."  End quote.

At the other end of the spectrum, conservative punditry flooded the cable talk shows with dire warnings of hidden taxes and impending economic catastrophe.

And those were some of the more moderate reactions.

At last I came upon an answer, out of self-preservation: Stop reading the news clips.

Frankly, this very important legislation still has a mighty long march down the aisle.  The Senate has already begun to put its stamp on the bill, and a vote could come as early as this fall.

As I say, there are many moving parts — and many moving parts makes for a moving target. Senate Majority Leader Harry Reid says, "everything's negotiable."

Still, we must — as a nation — have this discussion and move toward a genuine strategy that bridges the gap between energy sufficiency and carbon reduction. As it stands, this marks the first time that legislation has emerged from one of the houses of Congress that intends to curb the heat-trapping gases linked to climate change.

This legislation openly and specifically challenges the existing order — which, by the way, got us this far — in the cause of a better future. It has already divided Democrats and Republicans and is deserving of robust debate. It will dramatically affect many sectors of the economy, including electric power generation.

Dominion, along with its industry representative, the Edison Electric Institute, supports provisions of this bill, including cap and trade, as long as specific provisions intended to protect consumers remain a part of the bill.
The treatment of fossil fuels — coal, especially — is vitally important.

The Los Angeles Times summed it up well: "The focus on coal in climate legislation is directly linked to its abundance. Coal has been burned for heat since the time of cavemen. It stoked the smokestacks of the Industrial Revolution and powered the first steam engines. It remains the source of half of the electric power in the United States and is the nation's most abundant fossil fuel."

Now we are going to try something else.

As you know, the goal of the "cap and trade" legislation, which creates a system for buying and selling emission permits, is to reduce greenhouse gas emissions to 17 percent below 2005 levels by 2020… and more than 80 percent below 2005 levels by 2050.

The bill also sets a national standard for the production of renewable electricity by 2020 — 20 percent, although you can get there in a number of different ways. A fourth of that goal may be met through efficiencies, as opposed to renewable energy sources.

The bill also dedicates billions of dollars to new energy projects. And it provides subsidies for low-carbon agricultural practices, and research on cleaner coal and electric vehicle development.

Of course, there is much more to it than that quick summary. Much, much more.

We were still discovering things in the bill even after it passed. The last hours of the House debate involved a notable amount of horse trading - and some of those horses you would not want to bring home to mother, so to speak.

We have some serious concerns, primarily cost. Who pays the bill? What protects the consumer?

This measure could break in many different directions, all expensive. EEI has worked diligently to get lawmakers to focus on the legislation's cost implications.

And, if you look where the bill was early on and where it is today, we have made progress. The bill has acquired a more realistic view of our choices. Indeed, the allure of wishful thinking becomes less alluring as you examine the facts.

The single greatest threat in this exercise, in my opinion, comes naturally to all democracies, and that is the desire for the path of least resistance, preferably to a safe, political harbor.

I do not believe such a place exists. Any direction you turn, all the choices are tough. Take, for instance, wind power, a source of energy that has achieved a notable amount of public support and has, in fact, steadily improved its potential.

Last year, the U.S. broke all records. The industry installed more than 8,400 megawatts of new wind generating capacity — enough to supply two million homes. In fact, the projects completed last year amount to more than 40 percent of the total capacity added in the country.

Also impressive: The actual technology of wind power generation — the turbines themselves — continues to advance. Turbines are coming on line around the world that are bigger, more powerful, and more efficient than ever before.

Dominion, either on its own or in partnership, has developed or is in the process of developing wind farms in Illinois, Indiana, West Virginia and Virginia. Earlier this year, we announced that Dominion and BP Wind Energy North America had several Virginia sites under evaluation for projects.

No question, there has been progress, and there is the potential for more.

But there are serious qualifications, too. We cannot just flip a switch and put this power on the grid. Early sailors understood this part: Mother Nature decides when the wind blows. And it does not always blow when you need it.

And the bigger the turbines become, the more problematic siting them becomes. Few communities readily embrace a 40-story turbine, much less a couple hundred of them.

The costs are likewise a major hurdle. Asset financing in the U.S. during the second quarter of 2008 totaled $1.6 billion. That is down 66 percent from the year before. That will improve in time, we think, but financing will still represent a serious challenge.

Financing represents a major obstacle for the expansion of nuclear power, as well. Last month, Exelon called off plans to build two new nuclear reactors in Texas. John Rowe, my counterpart at Exelon, cited "the limited availability of federal loan guarantees."

As The Wall Street Journal pointed out, quote … "(T)his all underscores a critical issue in the fast-changing energy economy — and it seems to be as true for nuclear power as it is for advanced biofuels or even wind and solar: the role of governments is critical today, more critical than at any time, perhaps, in decades."  End quote.

Which takes me right back to my original point. If the question is: "What is the state of the energy industry?" the answer is "In play."

The stakes are enormous, and the dangers of getting it wrong, substantial.

On that score, I would draw your attention to California. The old adage used to be that as California goes, so goes the nation… that events in the Golden State often worked as a precursor to events nationwide.

I hope that is not true.

And it is not the state's budget problems to which I refer. I refer instead to recent reports questioning the sufficiency of electrical power in California. The state has had problems before, as you know, and not so long ago.

It could get much worse. There is, as you know, a position within the energy debate that fervently embraces renewable sources of power and conservation in a way that effectively denies reality.

I do not doubt the sincerity of this point of view. I have seen it first-hand. I believe they believe what they say.

But they are wrong and California offers an example of why. California has done two things:

First, it has established aggressive state mandates for renewable sources of power to be achieved in a relatively short period of time.

Secondly, the state has been, simultaneously, disinclined to build new conventional power generation.

Obviously, if you get the first one wrong — if you are too far in front of what is achievable from renewables — and you fail to make headway on the second one, meaning traditional generation, then you have a conflict that portends disaster.

The state auditor's office warns that the electricity sector poses a "high risk" to the state economy.  Quoting directly from the report, "California has adopted targets to increase the use of renewable sources of electricity. However, the state is at risk of failing to meet these targets because various obstacles are preventing the construction of the infrastructure needed to generate and transmit electricity from such renewable sources as wind and solar."

Few analysts believe that the state will meet its renewable targets. And state agencies estimate that it could cost California upward of $114 billion or more to meet its 33 percent renewable mandate.
It is hard to say how exactly all that comports with the overall financial situation — how the pieces come together in California.

A cynic might say that it is actually quite easy to say:  The pieces do not fit together at all.

And therein lies the greater concern. The challenge before us goes beyond the provision of energy, by whatever means. The challenge rests at the heart of democratic governance.

California is caught between conflicting public positions, some bordering on the absolute. A situation unique to California? Hardly.

Some argue that California permits an unusual level of democratic participation — through plebiscites, ballot issues — that constantly invite gridlock over difficult public questions. Contradictions become institutionalized. Chaos ensues.

But the American system as a whole, in case you have not noticed, has never been a quick source of resolution. Things tend to drag out, particularly when competing points of view become dogmatic.

That is the danger we… you… us… face as an industry. You can look at that legislation up in Washington now and see an abundance of opportunities for things to go sideways.

I believe we all have a duty, to do all we can and prevent that from happening. It will not be easy. I came across an article a couple of years ago — an article essentially promoting a strong environmental viewpoint — which conceded the problem of what the author described as "the idol of the tribe."

He took the phrase from Francis Bacon, the 17th century philosopher who was counsel to the queen of England.  He described it as a "truth based on insufficient evidence but maintained by constant affirmation within a tribe of believers."

"Idols," he wrote, "do not fall easily or often."

That is an interesting and pertinent point… so much so that I "Googled" Sir Francis to read what he actually said. He wrote that tribes can and do exert will based on principles.  But only with great difficulty can they will the destruction of their own principles.

A 21st century version of the same point would be: "We tend to believe what we want to believe."

And it is that very tendency… expressed through democratic institutions… that has tied this nation in knots and prevented us from achieving an energy policy that actually makes sense. 

We can discourage this trend with the power of reason. That is what Jefferson thought, anyway, and I do not take issue with Jefferson very often.

Reason favors our industry. Facts favor our industry.

Objective analysis, combined with an unblinking understanding of our nation's long-term economic interests, favors our industry.

So I would take our stand on that ground — and I would urge you to do so, as well. We do not have the luxury of casual but interested observation, rooting for one side or the other from the sidelines. We must be fully engaged, up to our necks in the details, the complexities, the nuances and, inevitably, the compromises.

The state of our industry?

The fall of 2009 will mark a turning point. Let us see what the U.S. Senate does and then we will have a better idea. For my part, I am going to leave as little to chance as possible.  You may want to do the same. 

Thank you very much.

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