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Executive Speech

Remarks of Thomas F. Farrell II
President & CEO - Dominion
World Affairs Council
Richmond, Va.
September 14, 2006

"Energy Policy:
A Train Wreck Waiting to Happen?"

Ambassador Bell, ladies and gentlemen. Thank you for the warm welcome. It is a pleasure to be here tonight… and a real honor to join the ranks of the distinguished guests who have preceded me at this lectern.

I want to begin by congratulating Ambassador Bell and the World Affairs Council for 10 years of outstanding service to central Virginia.

Dominion has been a corporate sponsor of this Council since 1999. We value and support your efforts to promote global literacy and a deeper understanding of international affairs.

Energy literacy is — or should be — an important aspect of that understanding and a top priority in today’s complex world. The U.S. is, after all, the world’s largest energy consumer and one of its leading producers.

Unfortunately, too many Americans remain in the dark about energy. Much of what they know — or think they know — comes from the media, typically in 30-second sound bites or video clips sandwiched between TV commercials.

Average citizens are not the only ones who are uninformed. The gap between what is real knowledge and imagined knowledge of energy issues is sizeable. We see it most clearly in the often disjointed, confused and polarized Congressional debate about energy policy.

This low level of literacy stems in part from some longstanding myths and misperceptions. The media perpetuates them, some politicians reinforce them, the public frequently buys them, and the energy industry has not done an adequate job of refuting them — largely because of poor credibility with the public.

I will offer just a few for your consideration:

  • Myth No. 1: cheap and abundant energy is an American birthright, along with life, liberty and the pursuit of happiness.

    Fact: Nowhere in the Constitution or the Declaration of Independence does it say that energy is an entitlement.
  • Myth No. 2: Multi-national oil companies control the flow of oil and are responsible for today’s high prices at the gas pump.

    Fact: oil prices fluctuate according to global supply and demand. Almost 80 percent of the world’s oil reserves are controlled by national oil companies in Saudi Arabia, Russia, Venezuela and elsewhere. The ExxonMobil’s of the world control only six percent of the worldwide reserves.
  • Myth No. 3: America can and should achieve total energy independence.

    Fact: We live in a global economy, and many energy markets are interconnected, especially oil, and increasingly natural gas. International energy trade is one of the few forces capable of bringing nations together. Of course, the expansion of our domestic energy supply base makes good sense. But complete independence from the world market is simply not possible. Energy interdependence is a more realistic and compelling goal.

Myths and misperceptions like those are widespread. They are deeply embedded in the American psyche. Their effect is to distort the way we think about energy. They underlie the gridlock that has prevented us from developing a rational, coherent national energy strategy with economic, environmental and political integrity.

There are no quick fixes or silver bullets to remedy this problem. Changing America’s notions about energy will take a huge commitment of time, money and cooperation among government, industry and the educational community. It could take decades to accomplish.

Obviously, we do not have that kind of time. We need realistic, balanced public policy now if we want to prevent an energy "train wreck" from occurring.

I am not by nature a purveyor of gloom and doom. And my intent is not to alarm you unnecessarily. On the other hand, I am not here to deliver a "don’t worry, be happy" message. I am simply convinced that if we do not take steps to shift our nation’s energy policy in a meaningful way, the hypothetical "train wreck" I speak of will come to pass. And the wreckage could include jobs, tax revenues, income growth, energy reliability, national security and global competitiveness.

So what do we need to do to stay on track and lay the foundation for a more secure energy future?

First, allow me to state what we do not need: more of the same old energy politics. Congressional lawmakers typically do not pay much attention to energy — at least until supplies get tight, prices rise, and public outrage boils over. At that point, policymakers feel the heat, and their response is predictably too little, too late. It is a regrettable and all-to-familiar pattern. It puts political expediency ahead of economic sense and free market principles — and our nation suffers for it.

The Energy Policy Act passed by Congress last year was a step in the right direction, but it was only one step. Here in Virginia, the 2006 General Assembly passed a comprehensive energy bill that contains forward-looking provisions about offshore gas exploration, clean-coal technology, energy efficiency and the creation of a statewide energy plan. That is good news for the Commonwealth and its citizens and should be an example for Washington, D.C.

But on a national level, we still need an energy policy with real bite — one that effectively addresses our most pressing energy challenges.

So what are those challenges? There are four I want to discuss tonight:

  • First, the serious and growing imbalance between energy supplies and consumer demand;
  • Second, our congested and inadequate energy transportation network;
  • Third, rising environmental costs and uncertainties;
  • And fourth, the nation’s aging fleet of electric generating stations.

I will start with supply and demand.

As anyone who suffered through Economics 101 knows, bad things — such as shortages and high prices — result when demand outstrips supply. That is precisely what is happening in today’s energy markets. Homes, factories and businesses are hungry for more electricity, gas and oil – here and around the world.

Some statistics from the experts at the U.S. Energy Information Administration are enlightening.

Over the next 25 years, the overall demand for electric power in the U.S. is expected to jump by 50 percent. The commercial sector will lead the way, propelled by the growth of big-box stores, longer hours and more energy-intensive equipment.

The global appetite for power is even greater. Worldwide electricity consumption will double over the same period.

Natural gas has become the fuel of choice for electricity generation — in addition to its more traditional uses for home heating and industrial applications. Gas has environmental advantages over oil and coal. Its use is projected to rise by 20 percent here in the U.S. over the next twenty years.

As demand rises, so do prices. The wellhead price of natural gas more than doubled from 2003 to 2005, and prices are expected to remain high by historical standards. On a worldwide basis, natural gas consumption is forecast to grow by over 90 percent between now and 2030.

Then there is oil. Our "addiction" — and that is the appropriate word to describe it — is strong and growing. Domestic oil consumption is rising about one percent a year, with imports accounting for more than 60 percent of the total. By 2030, the United States will consume more than 27 million barrels a day.

We are not alone in our thirst for "black gold." Global demand for oil will increase by nearly 50 percent by 2030. The emergence of China and India as world-class economic powers is a leading cause of that growth. Their mushrooming demand for oil and other forms of energy is reshaping global markets and creating new geopolitical alliances and security concerns along the way.

The second major challenge is energy transportation.

As we saw earlier this summer with BP’s problems in Prudhoe Bay, the pipes and wires that form our nation’s energy highways cannot always deliver their product when and where it is needed most.

Simply put, we are short of long-haul, interstate gas and oil pipelines. At Dominion, we have several on the drawing board. As a nation, the longer we delay in addressing this shortage, the more consumers and the economy will feel the pain in terms of sustained high energy prices.

Our pipeline system is clearly in need of upgrading. But the nation’s overtaxed network of high-voltage electric lines is in even worse condition.

The interconnected power grid was quilted together in the 1930s and was designed to move power relatively short distances. It is now common to see transactions occur in regional markets that cover hundreds of miles.

The U.S. Department of Energy confirms that the system is under a huge strain. According to a recent government study, the grid faces unprecedented problems delivering power, especially when demand soars during periods of extreme heat or cold.

This problem is not confined to large urban areas, such as Southern California, New York or the Washington, D.C. area. It is virtually coast to coast. Government analysts even predict serious congestion in unlikely places like Montana, Wyoming and the Dakotas.

A third major challenge is environmental regulation.

Environmental values are solidly embedded in American society. Environmental quality is and should be a top priority for our government — and for the energy industry, too.

I am proud of Dominion’s accomplishments in this area. We have committed more than three billion dollars to reduce emissions at our fossil-fueled stations.

Because of our efforts and those of others, the nation’s air quality has shown dramatic improvement in the last two decades. And it is still getting better.

But progress comes with a price. The Edison Electric Institute, an industry trade group, estimates that utilities will have to spend 43 billion dollars between 2005 and 2018 to meet increasingly strict federal air quality standards. The industry’s annual capital expenditures on environmental equipment has almost tripled in just six years.

New environmental costs are an unavoidable part of our business. But the sheer complexity and piecemeal nature of environmental regulations make the situation tremendously challenging — and expensive. The current regulatory maze provides a daunting prospect for any developer who might be thinking about building a new electric generating station.

In the forefront of today’s environmental concerns are global climate change and carbon dioxide emissions.

There is now widespread agreement that the climate is changing. But many questions remain unresolved about the precise cause and effect relationship. The 64,000-dollar question is, To what extent does human activity and the use of fossil fuels contribute to the globe’s current warming cycle?

Whatever the scientific community ultimately decides about greenhouse gases, we need to keep a couple of things in mind:

  • First, the expense of regulating carbon dioxide will be enormous. There are currently no viable CO2 control technologies on the market, and it could take decades and huge R&D investments to develop them. The question, "Who is going to pay?" looms large. The answer: all of us will pay as these enormous costs are reflected in the price of the product.
  • Second, climate change is a global issue that calls for global cooperation. At the very least, the U.S. needs a policy that is national in scope — one that does not single out the power industry, which accounts for only about one-third of the nation’s CO2 emissions. The remaining two-thirds come from the transportation sector — cars and trucks — and other parts of the economy.

The fourth issue on my list is the nation’s aging power fleet. Coal is the real workhorse in this regard. It is our most abundant domestic fuel source. Few people realize that the U.S. has a greater share of the world’s coal than Saudi Arabia does of the world’s oil. At current usage levels, our coal supplies could last some 300 years.

Coal accounts for about one-third of our nation’s total electric generating capacity and more than 50 percent of the electricity actually produced. That percentage has been dropping recently due to the rising environmental costs I have already discussed.

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.

For example, about 500 megawatts of new coal-fired generating capacity — enough to serve about 150,000 homes — was placed into service in 2004. But that new capacity was almost totally offset by the retirement of older units.

Alone, any one of the issues I have discussed will require a major commitment of resources. Together, they present a truly formidable public policy challenge. But if we fail to come to grips with them, the energy train we are riding today is sure to derail somewhere down the line.

Here are my suggestions to prevent that from happening.

Diversification is the linchpin. We must utilize all of our energy sources — coal, nuclear, oil, gas, hydro, and renewable sources — together with much more aggressive conservation and energy efficiency efforts.

We do not have the luxury of limiting ourselves to a few sources of energy and excluding others.

We also must keep the proper perspective about our energy supplies. So-called "alternative sources," including wind, solar, fuel cells, ethanol and bio-diesel fuels, hold great promise for the future. But they are expensive and currently useful only in small-scale applications.

Wind and solar power, for example, are intermittent and unpredictable. Because electricity cannot be stored on a large scale, wind and solar are unsuitable as 24-hour-a-day sources of energy.

Even though government forecasts show more than a 50 percent increase in renewable energy use by 2030, the renewable share of the total energy pie will only rise from six percent to seven percent during that period.

At this stage, it would be more accurate to call these "supplemental" rather than alternative energy sources. They are simply not ready to replace the fossil fuels — coal, oil and natural gas — which currently account for about 80 percent of the world’s energy supply.

We also must have realistic expectations about conservation and energy efficiency — despite our recent success in reducing the energy intensity of the economy — which is the amount of energy used per dollar of gross domestic product. A wide range of utility programs and government mandates were introduced in the 1980s and ‘90s to promote conservation — with mixed results.

History has taught us that market forces in the form of higher energy prices have been the most effective means of controlling consumer demand. That is not to say we should bypass efforts to conserve and get more bang for our energy buck. We must use every option at our disposal to meet America’s future energy needs. As I noted earlier, complete energy independence for the U.S. is an unrealistic goal. The price of oil, for example, is set by international markets. Nothing we do is going to change that.

I am not saying we should ignore opportunities to use our abundant domestic resources. On the contrary, we need to produce more oil and natural gas in our own backyard.

Current U.S. energy policy restricts development of our domestic oil and gas resource base, including the Atlantic and Pacific outer continental shelves and federal lands in Alaska and the Rocky Mountain Basin.

This, in my view, is the Achilles heel of America’s energy dilemma. The value we Americans place in self-sufficiency is oddly absent when it comes to energy. We are a nation rich in natural resources, yet we restrict access to large tracts of it. I know of no other country with similar limitations.

For example, the Outer Continental Shelf alone contains more than 480 trillion cubic feet of recoverable natural gas, according to federal estimates. That is enough to supply the nation’s natural gas needs for more than 20 years.

Virginia’s energy policy supports federal efforts to determine the extent of natural gas resources located 50 miles or more off the Atlantic shoreline.

Opening the OCS could have a dramatic impact on gas supplies and prices. Natural gas markets, unlike oil, are primarily local instead of global. All but a small fraction of the gas used in the U.S. is produced in North America. OCS drilling could greatly expand the gas supplies available to this market — and help keep prices down.

Environmental concerns first prompted the federal ban on OCS drilling in the 1980s. Those fears are no longer justified or even reasonable. Advances in extraction technology, plus a sound industry track record, should put those concerns to rest. Even The Washington Post agrees.

Congress is currently working on legislation to let individual states opt out of the drilling ban. Passage of such a bill would be a welcome step forward.

Natural gas in liquid form — known as LNG — is going to 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 — especially on the West Coast and in the Northeast where the need is greatest.

Dominion has had strong success with its Cove Point facility on the Chesapeake Bay. From that strategic location, we can receive LNG tankers, store the liquid gas onshore, convert it back to gas, and send it to growing Mid-Atlantic and Northeast markets.

Federal regulators recently approved our plans to nearly double the amount of gas we can send out from Cove Point — enough to serve the needs of six million homes. We hope to complete that expansion project in 2008.

Numerous other new LNG projects have been proposed nationwide in recent years. Very few of them will get built. Building new energy infrastructure is expensive, and the permitting process is lengthy and cumbersome. Community acceptance has been an issue as well.

Federal authorities will have to act decisively and assert their jurisdiction over LNG siting if our nation is to continue developing this important energy source.

Coal and nuclear power must be part of the solution, too.

Coal, as I have mentioned, is our most abundant domestic fuel source. Its price is less volatile than many other commodities. Its role in electric generation is indispensable. Steps have to be taken to maintain and increase its use.

One way to do that is to promote the use of new clean-coal technologies. In large measure, they will address environmental concerns about coal’s greenhouse gas emissions.

Clean-coal technologies are the prime reason why investors have built or proposed more than 150 coal-fired power stations during the next decade.

Along with several other utilities, Dominion is currently exploring construction of a new clean-coal station in southwestern Virginia. Congress should do its part by channeling more federal research funds into the commercialization of these advanced, low-carbon technologies.

There is currently renewed interest in nuclear power, as well there should be. It is a safe and clean energy source.

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

We need additional policies that provide financial incentives to build new standardized reactor designs with even lower risks than the safe and reliable units in operation now. And we must make serious progress — after decades of delay — with waste disposal at the Yucca Mountain site in Nevada.

New nuclear plants will solve many of the nation’s energy problems.

Developing new energy supplies is critically important. But it won’t be worth much if we ignore how that energy will get to the consumer.

Utilities and their investors need adequate financial rewards to bring the electric grid into the 21st Century and support our high-tech economy. That means higher rates of return on invested capital, accelerated depreciation, shorter recovery periods and other innovative pricing schemes.

Recent federal reforms have made it easier to site and build new transmission facilities. A sound energy policy would build on this momentum to further enhance reliability and security.

This and the other measures I have discussed could form the basis of a constructive strategy for averting a train wreck and meeting our nation’s energy challenges in the 21st Century.

We are where we are today because of our past energy policies and practices. Punitive taxes, price controls and finger pointing have all been tried before. They did not get the job done. This time can be different.

Our elected officials in Washington owe it to the American people to understand markets and industries that are vital to the nation’s economic and security interests. And the public deserves straight talk about what is at stake.

Energy is one of our most vital industries. It is also a capital-intensive business whose time horizon for construction and start-up operation is often measured in decades. All the more reason to begin now to better understand the true nature and enormous scale of energy markets.

In sum, we need an effective national policy that supercedes the existing patchwork of different state laws and regulations; one that allows us to tap all of our energy supply options, promotes greater reliance on conservation and efficiency, and fosters a business environment conducive to market competition and timely investment in new energy infrastructure.

Industry is ready and able to do its part in providing the energy our country needs. Government’s job is to provide reasonable, predictable regulations, financial incentives to stimulate investment, and laws that reflect the realities of today’s energy world — not yesterday’s.

Consumers must get on board, too. They need to know where energy comes from… how much it costs… how it is used… and how it affects the economy, the environment and national security. How else can consumers make smart energy decisions – and also contribute to the important debate about our nation’s energy future?

America needs to leave behind the misunderstandings about energy that have only served to perpetuate the status quo and the stalemate that has dogged the national debate on energy policy for far too long. Ignorance is our greatest long-term enemy.

I leave you with this final thought: the energy train wreck that is lurking around the bend is not inevitable. We have the technology, the resources and the talent to meet our energy challenges. The key question is, Do we have the will?

I again want to thank Ambassador Bell for giving me the opportunity to address the World Affairs Council. If we have time, I would be glad to answer any questions.

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