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Executive Speech

REMARKS:  THOMAS F. FARRELL II
CHAIRMAN, PRESIDENT & CEO – DOMINION
SECOND GOVERNOR’S CONFERENCE ON ENERGY
RICHMOND, VIRGINIA
OCTOBER 17, 2011

“CONFRONTING THE INCONVENIENT TRUTHS ABOUT ENERGY”

Good afternoon. I am delighted to be with you today.

I was a practicing attorney before joining Dominion. Friends might say that, in considering the jump to an electric utility, I took Dick the Butcher’s words from Shakespeare’s Henry VI very seriously. For those non-English majors out there, it was Dick who famously said, “The first thing we do, let’s kill all the lawyers.”

As you can see from my presence today, I survived my years of lawyering. I am alive and well, and have spent the past 16 years in various positions at Dominion. For some, that is a lifetime. When it comes to the utility business, I can tell you that I am still learning.

You cannot believe how many meetings I have attended at Dominion over the years where I heard myself saying – usually in response to an engineer’s presentation – “Oh, really?”

Despite what you may think, keeping the lights on and the gas flowing is not a simple thing. It manages to be both straight-forward – and very complicated.  There are a lot of moving parts – figuratively and literally.

The management of an energy company at the very least assumes the opportunity for rationality – assumes that we will find ways to reason through the facts – what we need, what it takes to get there.

Reason is our only hope for keeping the lights on.

Because of the power industry’s scale and reach, because of the stakes involved for the economy and our national resources, because of the enormous costs involved, the opportunity for reasoning through to a useful place involves something of a challenge.

Let’s begin by setting out what it takes to keep the lights on in Virginia – and the rest of the country, for that matter.  But first a little background.

Dominion probably is very familiar to most of you – the electric utility company for most of the Commonwealth of Virginia and northeastern North Carolina.  We serve just about 2.5 million customers at that company.  We have been in the electric delivery business in Virginia for more than a century. But our corporate antecedents actually reach back to Colonial times. 

Virginia’s commercial enterprise and the development of electric power – including its reliability, safety and sufficiency – are closely tied together.

In the early days, it was about making power for transportation. Street cars.

Today, Dominion operates as something of a hybrid enterprise. The Dominion you know in Virginia is less than half of our company.

For example, we are also the largest provider of electricity in New England with about 25 percent of that market.

All told, Dominion has a portfolio of almost 30,000 megawatts of electric generation in the Midwest, mid-Atlantic and Northeast regions of the country;  more than 63,000 miles of electric transmission and distribution lines; and 11,000 miles of natural gas transmission, gathering and storage pipelines.  We are the local gas company for Cleveland, Toledo and the rest of Eastern Ohio and for most of West Virginia.

And we operate the nation’s largest natural gas storage system with almost 1 trillion cubic feet of storage capacity. A part of that system is the East Coast’s largest LNG facility – where we import natural gas that has been liquefied at temperatures of 250 degrees below zero.  We also serve almost 2 million retail energy customers in 15 states, from Texas to Maine. 

Our market capitalization is about $29 billion, making us the second largest utility company in the United States. 

Our strategy at Dominion is to be a leading provider of electricity, natural gas and related services to customers in the energy-intensive Midwest, mid-Atlantic and Northeast regions of the U.S. This is a potential market of 60 million homes and businesses where 40 percent of the nation’s energy is consumed.

The touchstones of our integrated business model are balance and diversity – qualities that help us deliver dependable financial results over time and better manage the price risks inherent in a volatile industry.

So why do I tell you all this?  It is to form a basis for the discussion that follows around our nation’s energy paradox.

A couple of other basics to remember:  Dominion does not make cars. Or trucks either. 

I mention this because many people confuse our business with the transportation sector.  The truth is, oil – diesel and unleaded gasoline, for instance – has very little influence on the power industry.  As a fuel source, oil-fired power generation accounts for only one percent of our nation’s electricity production.  One percent.

So those who claim that we should use windmills to reduce our oil imports are confusing cars and trucks, which run on liquid fuels, with power stations that produce electricity – principally from solid and gaseous fuels.

Energy independence and electricity production are unrelated to each other – unless we move away from gasoline to electric cars.  Which would be fine with us – but of course, that means we have to produce a lot more power.

That is an important distinction to keep in mind. Lumping together transportation and power generation muddles the energy debate – a debate that is already muddled enough to begin with.   We must have less happy talk and have a serious conversation about how we produce and use energy – of all kinds.

Too often, this country’s habit on energy issues has been to talk past each other, to fall back on time-honored slogans and to reach for illusory remedies.

Such has been the way of things for a long time in this country, and it contributes mightily to the policy failure.

That is, if we had a coherent policy – a national energy policy – which we do not have right now.

Instead, we react. We adjust. We hyperventilate. But it all occurs within the framework of the immediate.

Still, like Virginia’s own Thomas Jefferson, I am an optimist. Even when there was ample evidence to the contrary, Jefferson always believed that reason could rule. And so do I.

Reason tells us that there are many inconvenient truths about the way we generate electricity and use power in the U.S. 

Here are three right off the top – three big ones:

  1. We like the lights on.
  2. Folks really do not know or understand what keeps the lights on.
  3. What little we do know, we do not like.

I will start with the first inconvenient truth: We like the lights on.

We like the lights on so much that every time the barometer drops my pulse increases.

Service interruptions are not incidental to our customers; they are often traumatic. Ask nearly anyone who was affected by Hurricane Irene. I am sure there are a number of you in this room.

This describes a simple and elemental truth:  We like what electricity does for us – and we want more of it. And we do not like it when it is unavailable.

And, by the way, the rest of the world feels exactly the same way.  Many countries are working very hard to catch up with us.

Today, for the first time in our national history, Americans are spending more on electronics than they are on durable goods.

They are spending more on iPads and flat-screen TVs – and less on furniture and lawn mowers.

In 1980, for example, the average U.S. household had just three consumer electronic products – three. Today, the average is about 25.

Americans do like the power, comfort and convenience – of electricity.

They want their power safe, cheap, abundant and – most important – ON – all the time. 

And, in order to comply – to make it reliable – utilities have made massive investments in generation and transmission infrastructure.   Utilities have done exactly what our customers have asked us to do.  It has taken us about 100 years to do so.

A mere three generations ago utilities and the government were still working on rural electrification – especially in the South.

Much of this has been forgotten, but it was not that long ago that the South remained economically isolated and underdeveloped, with large sections of rural areas still without power.

Only when the South had abundant and affordable electricity was it able to attract large-scale manufacturing and the jobs that went with it.   Think of the profound political and demographic changes that have resulted from that investment.

So, given the economic transformation made possible by electricity, the essential force that it represents in our lives, you would think that we would want to be careful and thoughtful about how we use it and provide for it, right?

Yet, we know for a fact – and this is inconvenient truth No. 2 – that our customers have only a vague understanding of what it takes to generate, transmit and deliver electric power.

The answer is … water, mostly. The pressure created by vaporized water turns power turbines – which then turn magnets around a coil, just as we learned in high school physics.

The trick is to generate the great amounts of heat necessary to vaporize the water.   It takes heat on a vast scale, and the fuel to generate the heat.

And at a cost that people – and their enterprises – can live with.

Generally, the easiest, cheapest way to do that is with fossil fuels – coal, oil and natural gas – though at present, uranium is the least expensive fuel of all.

Let me be clear about something …

This is not about any particular love of fossil fuels or some emotional attachment to the past.  It is about availability, results and cost. With fossil fuels you get sufficient heat, at the scale required, inexpensively.

But do Americans really care one way or another? 

Yes, they do. Increasingly so, and certainly a lot more today than they did 10 years ago.

I for one am thankful for that.

But there is still considerable evidence that most consumers view electricity simply as a commodity.  Indeed an unseen and un-thought about commodity.

In fact, they almost never think about it at all.  How it is generated is of little interest to most Americans.  

The facts of generation – largely removed from public consciousness – make it possible for the next inconvenient truth to flourish and prosper.

Namely, a ready willingness to turn our backs casually on what keeps us going.

Inconvenient truth No. 3: What keeps the lights on – we do not like.

Try these six words: “Fossil fuels, bad; renewable energy, good.”

Sounds a little simple, but those six words frequently dominate America’s current thinking about energy.

The American public loves the idea of renewable energy.

But a disconnect remains between the objects of our affection and what we get in return. 

There is a physics professor at Cambridge University by the name of David MacKay.  A year ago he was appointed chief scientific adviser to the U.K. Department of Energy and Climate Change. He has written a book focused on the United Kingdom called Sustainable Energy: Without the Hot Air.

I highly recommend the book. It is grounded in reality.

He argues that we need “numbers, not adjectives,” and I agree. 

MacKay is strong on renewable power. He assumes people want a future that is cleaner and less reliant on fossil fuels.

But alternative energy sources have to add up against consumption – and he insists on tracking how people actually behave and react.

On that score, he has a clever little list.

Here are his words:

Geothermal: Too immature!

Wave energy: Too expensive!

Deep offshore wind: Not near my radar!

Shallow offshore wind: Not near my birds!

Biomass (foodstuffs, biofuels, wood, etc.): Not in my countryside!

Solar photovoltaic farms: Too expensive!

Wind power: Not in my back yard!

Professor MacKay specifically refers to British attitudes, and he actually does not mean to be discouraging.

He is simply pointing out that “green ambitions” and “social reality” often run into each other.

That has been Virginia’s experience with the development of wind farms. Go over to the Appalachian ridges, and I will introduce you to the folks there. 

We have at least achieved one notable result: On the subject of large wind turbines, Virginians in the Appalachian Mountains seem to agree with the people of Nantucket.

They don’t want them. 

Of course, broad change of any kind – in the United Kingdom, in Massachusetts, or in Virginia – invariably will inspire resistance. That is in the natural order of things.

Factor in the natural order of democracy – which bars us from ignoring public opinion – at least for an extended period – and you see that we are not merely troubling ourselves with picky details.

There are any number of other inconvenient truths. Here is No. 4 on my list – the potential for renewable energy sources to fill the gaps created by less reliance on fossil fuels.

Case in point – a front page article in September of last year, in The New York Times.  The headline reads, “Ancient Italian Town Now Has Wind at Its Back.”

The setting is a graceful, familiar landscape. A small town framed against green hillside. Olive groves. And four giant wind turbines.

And, true to Italy, tons of romance. The little village becomes energy independent. A renewable revolution. The very old meets the very new.

But only when you get to page 4 of the article do you get a picture of the necessary economics: namely, high electricity costs melded to big government subsidies.

And not until the last column do you discover that this energy-independent town is not actually using its own wind-generated power. Instead, it is selling the electricity it makes into the national grid.

The town’s residents, the story says, “do not use the electricity it produces directly because relying entirely on local wind energy could leave the town vulnerable to blackouts during periods of calm.”

That happens to be not a small, inconsequential detail. 

Italy is no exception. But, as I said earlier, a disconnect remains between the objects of our affection and what we get in return. 

In fact, in nearly all instances, renewable sources of energy are “in addition to” not “in place of ” fossil fuels. 

According to Cambridge Energy Research Associates, nearly every country that installs wind turbines backs them up with natural gas-fired generators. They have to – for reasons of reliability. The wind blows according to the whims of Mother Nature – not human demand.

I am sure you saw the announcement that Google intends to partner with some other companies to lay a transmission cable in the Atlantic from New Jersey to Virginia.  Over a 20-year period, the line is estimated to support up to 6,000 megawatts of electricity.  That sounds like a lot, does it not?  A potential game changer, right?  Those savvy internet guys solving the problem, cracking the code.

Not exactly.  Renewable energy sources have a fundamental problem with scale.  Not accounting for 20 years of expected growth – today – our nation has about 1.1 million megawatts of installed generating capacity.  So 6,000 megawatts of new renewable capacity would represent only about one-half of one percent of the total. 

If you include the U.S. government’s estimate for capacity additions by 2035 – which is 223,000 new megawatts – you can see that 6,000 megawatts of capacity is less than a drop in the ocean.

So, does that mean we should not build them? 

No, of course not.  It means only that we need to be realistic when we talk about what renewable energy can actually accomplish.

Take one crucial energy quality:  reliability, or the continuity of supply.  A 2-megawatt wind turbine is rated to produce more than 17,500 megawatt-hours of electricity during a year, yet it might produce a third of that – but only if you are lucky. And the sun is guaranteed to be unavailable as a power source at least half of the time.

In contrast, fossil stations and nuclear plants operate anywhere from 75 to more than 90 percent of the time.

Most folks do not realize that our business is the ultimate “just in time” business.  Electricity must – must – be used as it is created.  It cannot be stored on a large scale.  Many have tried to break this code for more than 100 years, and we are not even close to devising a storage method.
 
It is also worth noting that renewables feed on land.

These are rough estimates, but a wind farm requires about 400 times as much land per installed megawatt of capacity as a nuclear station – 40 acres per installed megawatt for wind, as compared with a tenth of an acre for nuclear. For what it is worth, a megawatt of coal-fired capacity requires a quarter of an acre. And a gas-fired combined cycle station? Only three-hundredths of an acre.

Some estimates on the transmission requirements for wind-generated power alone run up to 40,000 miles of giant, new lines that – some say – mar the horizon.

These are physical facts.  You can’t argue around the simple arithmetic because you wish it was different.  Not all sources of electric generation are equal, and they never will be.

This is not to say that our relative capacity for producing power is locked in. You look at the advancements in renewable energy technology and you cannot help but be impressed.

But still, the actual contribution to what we need to fulfill our prime directive – keeping the lights on – remains small. Very small.

Now, there is another response to this, and it usually arrives in a one-word package: “conservation.”  Stop using so much power.

It is a laudable goal. You can always turn things off.

But as a practical matter, for most consumers, electricity is too cheap to save.

No doubt that will change. The emergence of smart meters and smart grid technology has that potential.

It puts eyeballs into the equation.  It allows people to see what they are using, as they use it.

And that, in theory, will inspire consumers to be more prudent about consumption.  In theory.

Here is another inconvenient truth – No. 5, if you are keeping track – the futility of pursuing energy independence in a world that is increasingly interdependent.

Energy markets are becoming ever more competitive and global in their scope.   So the notion that America can – and should – achieve energy independence and liberate itself from foreign sources of energy amounts to magical thinking.

Total independence is an unattainable goal.  It contradicts the reality of today’s global economy and a $5-trillion-a-year global energy industry in which the U.S. is the largest consumer and the third largest producer.

If anything, we can expect energy markets to integrate further as the global demand for energy grows and new energy supplies become more difficult to find and more expensive to produce. 

Professor MacKay points to another inconvenient truth – No. 6 – and that is “little counts for little.”

Again, he is talking about the U.K., but it applies to the developed world generally. It certainly applies to the U.S.

He says, “Have no illusions. To achieve our goal of getting off fossil fuels … reductions in demand and increases in supply must be big. Don’t be distracted by the myth that ‘every little bit helps.’ If everyone does a little, we’ll achieve only a little. We must do a lot. What’s required are big changes in demand and in supply.”

That is about right. He says little adjustments here and there tend to miss the larger reality of what has to be changed.

Such as when we set carbon emissions goals.

For instance, in 2009, the White House announced its goal to slash U.S. greenhouse gas emissions by the year 2020 by 14 percent below 2005 levels, and then by 83 percent below 2005 levels by the year 2050. That is about the same as the Kyoto goals.  Have you ever wondered why folks never state an actual amount of carbon emissions – but use a convoluted reduction formula instead?

We need to put these proposed carbon reductions into historical perspective to understand what they would mean.  What they would mean is – returning to the days of Warren Harding, Calvin Coolidge and Herbert Hoover – which is when the world last produced those levels of human-related carbon emissions. 

We are talking about the decade of the 1920s – nearly 100 years ago – when, according to the U.S. Bureau of the Census, only about half of the nation’s non-farm homes had electricity and fewer than 2 percent of farm homes were electrified.   The world’s population was about 40 percent less than it is today – meaning billions fewer people.

Who had air conditioning in the 1920’s?

No one.

Who had a computer?

No one.

Who had a second refrigerator in the garage, a flat-screen TV and a Blu-Ray player? 

No one.

Who had a cell phone, or a BlackBerry, or an iPod, or an iPad?

Talk about an inconvenient truth.

So does this make me a climate change denier? Not at all.  What it means is – we need to be honest with ourselves and not get lured down a dead-end street with simplistic, unworkable remedies.

We have to have a plan that truly reflects how we live and work, a plan that takes into account our heavy reliance on electricity and the fuel sources we need to keep the lights on.

Ultimately, I believe, we must center our energy policy on the concept of security – the most meaningful principle, as it recognizes the interdependencies, scale and complexity of the energy supply system.

Energy security is rooted in a number of different things:

  • Supportive legislation and regulation that provide access to and responsible development of our domestic resource base: natural gas and oil, both onshore and offshore, as well as coal and uranium;
  • A modernized, smart power grid – empowering consumers and moving electricity reliably and efficiently to population centers where it is needed most. Here is where conservation may yet have a chance to promote reduced energy demand, lower costs and protect environmental quality;
  • Robust international relations and trade that help maintain stability and long-term economic growth;
  • And perhaps most important of all, reliance on the full range of energy sources at our disposal.

Energy diversity is really the key to America’s energy security.  As any decent financial adviser will tell you, the best hedge against a market is a diversified portfolio. The same is true for energy.

As a nation, we are in no position to pick a few favorite sources of energy and exclude others.  We need to draw on every resource at our disposal – coal, nuclear, oil, natural gas, renewable energy and also more aggressive conservation.

Renewable energy sources will certainly be an increasingly important part of our energy future. 

And, yes, nuclear, too – even in the wake of the earthquake and tsunami in Japan; even after the 5.8 magnitude quake that rocked Central Virginia and tripped our North Anna Power Station in Louisa County.

Regarding the latter, Virginia’s biggest earthquake in the past century caused only cosmetic damage at the North Anna station, and the safety systems worked as designed. I continue to believe that nuclear power is the safest, cleanest, most reliable large-scale power source at our disposal.  It is an essential component of our energy future.

In sum, I believe we can achieve a balanced and well-designed national energy policy and have a cleaner and more secure energy future. 

But it will not come quickly or cheaply or without a higher degree of candor with the American people.

Thank you.

NYSE : (April 15, 2014) D 70.57 0.34

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