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Executive Speech

Thomas F. Farrell II
President & CEO - Dominion
West Virginia Chamber of Commerce
White Sulphur Springs, WV
August 31, 2006

Thank you for that very kind introduction, Bob. I am certain your gracious words have more to do with our deep mutual affection for our alma mater, the University of Virginia, than they do with the substantial legal fees that Dominion has paid your law firm over the years. In any case, we Wahoos have to stick together when we are in Mountaineer and Thundering Herd country.

I am honored to address the Chamber’s 70th annual meeting. I have been looking forward to joining you and appreciate the invitation.

David Flannery deserves special recognition for his foresight in creating the Chamber’s energy committee. David and many others have worked hard to create a timely opportunity in which I am able to discuss my favorite subject — the energy industry and energy policy.

To be able to do so in front of an audience of business and opinion leaders in West Virginia – one of America’s most significant energy states – is a special privilege.

There is no better place, and no state more appropriate, in which to discuss energy policy.

West Virginia is not only rich in its history, but obviously in its natural resources. This state is a valuable national asset, especially in the critical arenas of coal supply, natural gas production and college football. Being from the state just to the east, I applaud our university’s wisdom in dropping the Mountaineers from our schedule. I wish you had kept Virginia Tech.

Besides Wyoming, West Virginia mines more coal than any other state, about 99 percent of which goes to generate electricity.

More than 260 West Virginia mines produce around 148 million tons a year. The state’s recoverable coal reserves top 1 billion tons.

Dominion has had the good fortune of doing business in West Virginia for more than a century. We have more than 1,500 employees on a payroll that tops 100 million dollars. We pay more than 50 million dollars in taxes in the Mountain State. Forty-one of the state’s 55 counties are home, in some fashion, to various Dominion facilities, personnel and offices.

They range from coal and gas-fired generating stations to natural gas wells, pipelines and storage reserves. Taken together, we have invested more than 3 billion dollars in West Virginia.

We also have a keen interest in the quality of community life and environmental stewardship. Dominion employees spend countless hours giving their time and talent to a wide range of worthy civic causes.

The Dominion Foundation, our philanthropic arm, supports the West Virginia Education Alliance and other partnership initiatives that target math and science education in the public schools. And we actively partner with organizations such as Trout Unlimited and The Nature Conservancy to help preserve the diversity of the natural world.

Some of you may be familiar with Dominion Exploration & Production’s annual golf tournament in Clarksburg. We have hosted the tournament for 11 years now.

Over that time, we have raised more than one million dollars for organizations and agencies that support multiple charitable causes.

You may recall hearing a couple of years ago about Dominion’s donation of Bear Rocks, a nearly 500-acre tract of remarkable land adjacent to the Dolly Sods Wilderness and Scenic Areas in the Canaan Valley region. Bear Rocks was a major environmental milestone for both Dominion and The Nature Conservancy.

It is a good example of a major corporation and a leading environmental organization working together to protect a vital ecosystem.

So Dominion – and all of us here today – have a shared interest in West Virginia. We are also united by an even broader interest: the nation’s energy policy. It touches virtually every aspect of the economic, political and environmental realms.

The sages like to say that all human effort can be reduced to three questions:

Where are we? How did we get here? And what can we do about it?

These are good organizing principles around which to consider national energy policy. The first two are closely linked and will be my focus for the next few minutes.

So exactly where are we, and how did we get here?

To fully appreciate how we got here and the challenges we face, two key points should be made up front:

  • First, the energy business is a long lead-time, capital-intensive industry. We cannot snap our fingers and magically add capacity, infrastructure or flexibility.
  • Second, our industry cannot function effectively without a constructive relationship with government – at the federal, state and local levels.

The second point merits additional explanation. I come from a military family, so I tell the story of the commander who stood to the side as his troops rushed into battle. “What are you doing back there?” he was asked. The commander replied, “I am waiting to see which way they go so I can lead them.”

In the national energy policy arena, it takes only a little imagination to see consumers and special interest groups fanning out in all directions as the hard-charging troops.

And it takes no imagination whatsoever to see some of our national policy makers in the role of commander – watching and waiting to see which way the troops go so they can lead.

For too long unfortunately, the troops have been shielded from the true costs of energy. They have not been given enough incentive to conserve or care about the energy they use. They have been living under the illusion that energy is an entitlement; that abundant, cheap gasoline and electricity are a birthright.

They have done what consumers do: They have consumed, often with abandon.

Environmentalists have been hard at their work, too, in many instances promoting quality environmental initiatives and useful advocacy, but all too often indulging in obstructionist legal delays to block needed development of additional domestic energy supplies.

But no one remotely familiar with the energy business could argue that our commanders have completed the job. I recognize that it is difficult to focus only on energy with all the other urgent national issues facing us today.

Nevertheless, we must concentrate on the right agenda — conservation, but also promoting additional domestic supplies of oil, natural gas, coal, electric power and the infrastructure that carries energy where it is needed.

In short, the job remains undone. The issues now stand urgently before us. If we do not step up and take action in the political arena, if we do not immediately begin work on projects that will take years to finance and complete, our nation is heading toward a train wreck.

As anyone who suffered through Economics 101 can tell you, bad things — such as shortages and high prices — happen when demand outstrips supply.

That is precisely what is happening now in the nation’s energy markets as homes, factories and businesses crave more electricity, gas and oil. Here are a few federal statistics:

  • Electricity demand will leap by 50 percent from 2004 to 2030, with the commercial sector leading the way. Propelled by the proliferation of big-box stores, longer hours and energy-intensive equipment, commercial business usage will grow by 75 percent.
  • Natural gas consumption is expected to rise by 20 percent over the next two decades. Gas is now the "fuel of choice" for electric generation. With rising demand comes rising prices: The wellhead price for gas more than doubled from October 2003 to October 2005.
  • Our hunger for oil continues, and the U.S. appetite for crude has gone global. Domestic consumption is rising by about 1 percent annually. By 2030, it will likely top 27 million barrels a day.

And we are now competing for supplies on the world oil market with a force unheard of only a few years ago — what our government calls "emerging Asia."

China now consumes 6.4 million barrels daily, India 2.3. Both are intent on becoming world economic powers, and their consumption will only climb. That is not good news on the cost front, since international trading sets the price of oil, where the U.S. is “a price taker, not a price maker.”

These are sobering statistics. The picture is made even worse by a convergence of problems hampering energy supply. They include an aging infrastructure, environmental uncertainties, and widespread energy transportation bottlenecks.

Let me begin with transportation.

As exemplified earlier this month by BP’s problems in Prudhoe Bay, the pipes and wires that form our nation’s energy highways cannot always provide their product when and where it is most needed.

We need more long-haul, interstate pipelines. At Dominion, we have several on the drawing board. But the most critical need is in the nation’s overworked network of high-voltage electric transmission lines. In a report issued last month, the Department of Energy said the power grid – virtually coast to coast – faces unparalleled problems delivering electricity during periods of peak demand. The worst situations occur during extreme heat waves, such as the one that we suffered through in late July and early August.

Our most recent wake-up call on this score came in the form of the Northeast blackout just three years ago this month. That blackout left 50 million Americans without power and cost billions of dollars. It also revealed glaring weaknesses in the nation’s power grid.

This problem is not confined to large urban areas, such as New York, Southern California, or the Washington, D.C., suburbs. DOE predicts serious congestion in unlikely places like Montana, Wyoming and the Dakotas – and also in the upper Appalachian region. New coal-burning facilities planned for the area could overtax the grid.

Environmental regulation is a second major concern.

Protecting the environment is and should be a top priority for our government and for the energy industry. I am proud to say we have a solid record of accomplishment in this area.

At Dominion we have committed 3.3 billion dollars to reduce emissions at our coal-fired units. For example, more than 400 million dollars worth of environmental controls installed since 1999 at the Mt. Storm Power Station in Grant County are helping bring cleaner air to the Shenandoah National Park and other regional wilderness areas. Because of Dominion’s and others’ efforts, the nation’s air quality has improved significantly in the last two decades, and it is still improving.

But progress comes with a price. A recent study performed for the industry’s trade association, the Edison Electric Institute, estimates that utilities will face 43 billion dollars in new environmental capital costs over the next dozen years. These upgrades are needed to meet increasingly strict federal air quality standards.

The industry’s yearly capital expenditures on environmental equipment have more than doubled in just six years.

New environmental costs are unavoidable. We can and will deal with them. But the situation is made worse by the complexity and confusion of environmental regulations – and by the many unresolved questions that surround climate change and carbon dioxide emissions.

The controversy over global warming has intensified dramatically over the past few years. While the debate continues and scientific viewpoints vary, everyone agrees this is an issue that needs careful and logical analysis.

Good policy flows from good science. But let us keep this in mind: Regulating carbon dioxide would be enormously expensive. It would completely reshape the way energy is produced and used in the U.S. – and around the world. And as an Edison Electric Institute-commissioned report recently noted, “…there currently are no economic technologies for CO2 removal from fossil-fuel fired plants.” As in not any. As in none.

A stark – but true – statement.

My third key point addresses our most abundant and economical energy source: coal.

Coal plays a central role in the history and economy of West Virginia. About one-third of the nation’s electric generating capacity is fueled by coal. The complex environmental regulations that I mentioned earlier, plus costly emissions control equipment, have made utilities and other developers think twice before building any new coal-fired units.

Worse still, many of the stations are old. By 2015, almost one-fourth of the coal units in the eastern and central U.S. will be at least 50 years old. Aging plants are being retired almost as fast as new units can be put in service.

Inadequate transportation networks, costly environmental regulations, aging power stations: If we do not address these issues adequately today, the train will surely derail somewhere down the line. Jobs, tax revenue, income growth, energy reliability and even national security would be tangled in the wreckage. Getting the energy train back on track would entail a long and costly commitment.

Fortunately, we still have some time to keep things on track. Here are a few suggestions.

First, we should recognize that renewable energy, combined with conservation and greater energy efficiency, will play a growing role in the future. In recent years, we have seen the efficiency of renewable resources improve dramatically – especially wind-powered generation. We need look no farther than the wind farms being built on the West Virginia ridge lines. Fuels such as ethanol and biodiesel are re-emerging as viable energy sources.

Impressive advances are being made in the world of conservation. As the Energy Information Administration recently noted, the nation’s energy “intensity” – the use of energy per dollar of gross domestic product – is steadily declining at a rate of 1.8 percent a year. Higher energy prices have led a wide variety of customers – from homes to shops to factories – to look more closely at their energy usage and install more energy-efficient equipment. Industry and federal standards, such as the EPA’s EnergyStar program, have also been very successful.

But we frankly should not expect too much from either renewable power or conservation. Solar and wind power are too dependent on the weather. When the wind fails to blow or the sun does not shine, kilowatts are not produced. Utilities, on the other hand, must provide power precisely when customers need it. We cannot store electricity on a large scale.

I also would caution against relying too heavily on governmental mandates or utility programs designed to promote conservation. Utilities tried it in the 1980s and 1990s. Numerous companies had “energy efficiency” departments. Unfortunately, they were not very successful. Unregulated energy service companies do a much better job – another example that confirms my faith in the market.

What else can we do to avoid the train wreck? Open up more offshore waters to energy exploration and production.

Talk about a meaningful impact on natural gas availability and prices. Federal estimates project that more than 630 trillion cubic feet of gas could be recovered from the Outer Continental Shelf. That is enough to support the United States’ natural gas needs for more than 30 years.

OCS gas would certainly help moderate prices. Natural gas is traded primarily in a “local” market – most of it used in this country is produced either here or in Canada. Opening the Outer Continental Shelf could have a dramatic impact.

Environmental fears drove the federal moratorium on OCS drilling -- in place since the early 1980s. Those fears are no longer justified. They are not even reasonable. Technological advances, plus a sound industry track record, should calm concerns that drilling poses any kind of a threat. As The Washington Post editorialized on June 28, “The prohibition on offshore extraction cannot be justified.” Remember also that despite the tremendous one-two blow our industry’s offshore properties took from hurricanes Katrina and Rita, no major oil spills occurred.

Congress should let the states opt out of the moratorium on the exploration and production of natural gas and oil. The House of Representatives deserves praise for its courageous June 29 vote to do just that. I hope the Senate will concur.

Government and industry also should do everything in their power to promote the continued growth of onshore gas resources, such as those here in West Virginia. Last year’s federal energy bill took several steps toward making drilling easier. That progress hopefully will continue.

And natural gas in liquid form – known as LNG – can play an increasingly important role in promoting reliable, affordable energy.

We need more terminals to import the gas from areas such as South America and North Africa, process it and send it to market. Dominion has had great success with its Cove Point LNG facility on the Chesapeake Bay. Federal regulators recently approved a significant expansion at Cove Point which will increase natural gas supplies for the Mid-Atlantic and Northeast markets at a time when their adequacy is in question.

Nuclear power is another important part of the fix. There is no reason the U.S. should not streamline and simplify the process for building new nuclear power stations.

Several leading environmentalists now share this view, especially since nuclear power produces no greenhouse gas emissions.

But to put nuclear energy to work again, the U.S. needs some new policies. These should include:

  • Strong financial incentives for nuclear construction.
  • Favorable rate-of-return treatment, and recovery of in-progress construction costs.
  • Serious progress — after decades of delay — with waste disposal at the Yucca Mountain site in Nevada.
  • And a sharpened focus on new, standardized reactor designs with even lower risks than the safe and reliable reactors now operating.

Better use of coal is another obvious solution. It is an abundant, domestic fuel supply. Its price is less volatile than many other commodities. Its role in electric generation is indispensable. Steps have to be taken to sustain and increase its use.

One way to do that is to utilize new clean-coal technologies. In large measure, they eliminate the outdated environmental concerns about coal.

Clean-coal technologies are the prime reason why investors in this decade have built or proposed more than 150 coal-fired power stations – potentially worth 136 billion dollars. This includes five proposals in West Virginia worth 3 billion dollars.

To sustain this renewed interest in coal, several things need to happen:

  • First, regulators should assign appropriate risk premiums for coal-fired generation. The projects involve large capital expenditures and considerable uncertainty, especially with the prospect of carbon regulation in the future.
  • Second, government and industry should join forces and proclaim – loudly and often – that these projects are environmentally sound.
  • Third, more federal R&D money for advanced clean-coal technology development would be helpful. The 2005 Energy Policy Act contains such provisions, and they should be fully funded.

Finally, allow me to make this point: Increased energy supplies will not be worth much unless we can move the energy efficiently through terminals, pipes and wires.

There are some glimmers of hope in this regard. The electrical grid is now viewed – rightly so – as an interstate, regional network, not a patchwork administered by different companies and local authorities.

I will close by reminding you what I said earlier: Change does not happen overnight in the capital-intensive, heavily regulated energy business. If we could wave a magic wand and adopt every policy I have discussed by unanimous consent, there would still be years between the go-ahead vote and on-line operations.

We need to remember the old English proverb: “One of these days is none of these days.” Time is fleeting. It is a scarce – and therefore precious – commodity.

Thank you for your time today, and thank you again for inviting me to your annual meeting.

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