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Executive Speech

Remarks -- Thomas F. Farrell II
Chairman, President & CEO

PowerGen Conference
Orlando, FL
December 2, 2008

"Realistic View of National Energy Challenge is Needed"

Good morning. I am delighted to be with you.

Thomas F. Farrell III am sure you have heard that often quoted Chinese line… "May you live in interesting times"… These days most of us are thinking, "How about a little less interesting?"

We are still in the grips of a financial tsunami that has changed the economic landscape. The banking industry has taught our entire nation…indeed the entire world … fresh lessons in the dangers of hubris.

We will work our way through this. We have no choice. And it is not my purpose today to dwell on it, other than to observe that within our own challenged precinct of the economic world… where energy is made, transported and sold… there are more than a few parallels to the conditions that precipitated the situation we currently face.

If banking is the plumbing of our economic system, the energy sector is its wiring. That wiring has been assembled – piecemeal – over the course of a century. The demands imposed upon that wiring have continuously grown greater. How we make it work has grown vastly more complex.

We have seen problems in the past. We have fixed some, ignored others. At times, we have often lacked the political will to act.

And, now, in response to the public’s rising interest in climate change, even the tough physical truths and fundamentals of the business… how we make and move electricity… have been infused with a quality of thinking that is, at best, less than realistic – even naive.

You know New York Times columnist Tom Friedman’s new book - Hot, Flat and Crowded – it is getting lots of circulation and sales.

While I disagree with some of his conclusions, he asks very good questions, fairly examines the alternatives and gets one big thing absolutely right:

He says that people declare "we’re having a green revolution."

But then asks, "Have you ever seen a revolution where no one gets hurt … where there are no losers?"

"That’s not a revolution," he says. "That’s a party."

A party mentality, translated into national policy-making on energy, opens the door to failure. What Friedman suggests… and I would agree… is that we are living as if there are no limits, no choices, even as the limits pile up and the choices become more apparent by the day.

There is something in this as old as our American Republic. You could see it during the election … in both campaigns. From the beginning we have always believed… and we have passed this belief on to every subsequent generation of Americans… that we can shape the future for the better.

Americans are optimists to their core. We say to ourselves that we are not prisoners. Not prisoners to the past … to events … nor to circumstances. What we break, we fix; what we lose, we renew. For every problem there is an answer … and if we have not found that answer yet, well, we just have not looked hard enough.

I like that sentiment. I feel it myself. I am optimistic by nature.

But in this business… as in the banking business… we create great peril when we dispense with proven truths in favor of unexamined optimism.

The public debate on energy this past summer lost the small amount of steam remaining in it when the $200-a-barrel oil prices we thought we were facing went in the other direction – now $50 a barrel.

Lower fuel prices, though welcome, inspire public complacency… another great danger.

The incoming administration is faced with many pressing challenges and its attention is naturally focused on Wall Street and related issues. But, even when they say that it is "all about the economy," we know where that will eventually take us… to energy.

The new administration would be well advised to approach our industry’s challenges pragmatically, undertaking a level-headed appraisal of the present situation. Such an assessment argues strenuously in favor of action.

I hope it will reach that conclusion, sooner rather than later. I think most of us know what needs to happen.

There is a speech I have been giving for several years… a speech with a central, core message… and I am not going to give that speech again today.

But I said several years ago that we were headed for a train wreck in energy supply if we did not get our act together. What has happened since? – absolutely nothing.

The train wreck analogy honestly reflects my fears about where we may be headed, failing any concerted effort to prevent it. There are too many contradictions, too many conflicts, too many uncertainties – simply to extend the status quo any longer.

When the debate over energy policy begins again, we have to do more than react to proposals. We have to get out in front of it, or at least try.

In some respects, we helped set the table for the current quality of discussion. Not intentionally.

What I mean is that we in the energy business simply allow too much to be taken for granted. We know what we do. We know what we face. We know what it takes to meet what we face.

But I worry that we share too little company in that respect.

Our challenge is to better explain the realities of electricity. How we make it. How we transmit it. How we satisfy demand. As a lawyer in an earlier life, I think of this as defending electricity.

Far too many people are issuing pronouncements about what absolutely, positively must be done. These good folks appear to harbor, let us say, an imperfect understanding of the way electricity works in this country or anywhere else in the world.

But this failure to understand the realities of our business exists. It often explains a willingness, by large numbers of our countrymen, to embrace fantastic proposals about how to do things differently. A Midwestern utility colleague said earlier this year that his customers would be happy to have 90 percent of their electricity produced by solar power… and the other 10 percent could be beamed in from the moon.

I suppose he was only half-kidding.

The contradictions are never-ending. Even ironic.

For a hundred years, our industry’s credo has been built around "reliability," and justly so. As public-service enterprises, we said that electricity would be reliable. And we demonstrated to our customers, that despite all that Mother Nature throws at us, it is reliable.

Brownouts … blackouts … when they happen…are the rare exception and are, almost always, a source of public shock. They are so unexpected.

Why? Because our industry has done its job so well that many people have never felt the need to understand what reliability requires. Folks know that if they flip the switch, power will be there.

Now we are faced with rising public demand – not just for reliable power, but for clean power, alternative sources of power, renewable sources of power. Just throw another switch … a different kind of switch … a better, cleaner switch … and, while you are at it, make sure it doesn’t cost me any more money.

I understand. I live on this planet. My family lives on this planet. We all worry about the environment.

But in order to avoid present dangers it does us no good to manufacture new illusions… illusions that, if believed and accepted, will lead only to public frustration and cynicism – even anger … not to mention, a lost opportunity to move forward as a nation.

End our dependency on foreign oil in 10 years?

One hundred percent clean energy within 10 years?

Failing an extraordinary and unexpected breakthrough in technology, these are impossible goals. These proposals seriously harm the debate because they distract people from the reality of where we find ourselves.

We are going to have to defend electricity by dispelling such illusions, not by flinching when we are confronted by them.

Confrontation is not something we do well – nor welcome. But some level of stern, unyielding engagement over basic facts is obligatory.

Starting with coal.

We know that coal makes electricity in this country. It makes half of it. It is efficient, and it is here – it is ours – an American resource.

Massive investments in coal-fired stations have been made by generations of Americans. About 600 such facilities around the country do the job quietly and cheaply. They help keep the lights on.

And we are effectively being asked, by some, to walk away from these investments.
Dominion relies on coal, not as much as many utilities in the U.S. But it is an important fuel for us. Last summer, we broke ground on the new Virginia City Hybrid Energy Center, a 585-megawatt, $1.8 billion facility that we expect to be completed in four years.

It will help us meet growth in customer demand in Virginia anticipated to exceed 4,000 new megawatts within the next few years, or the rough equivalent of serving 1 million new homes. Looking beyond the current slowdown, Virginia has several unique characteristics worth mentioning:

As host to the ever-growing Washington suburbs, it is home to much of the world’s Internet traffic. One typical data center for example, consumes as much electricity as 6,000 homes. Northern Virginia currently has about two dozen of these centers – with another dozen under construction or development.

Virginia is also the nation’s second largest importer of power behind California. Dominion’s Virginia City station will employ some of the most advanced environmental controls in the nation and, in addition to coal, will burn up to 20 percent renewable biomass. But some people condemn this project in no uncertain terms.

What troubles me is that a substantial number of those alarmed people simply do not know what it takes to keep the power flowing – and we share some responsibility for that. We should have spent more time telling them.

We might take a lesson from our great national pastime, politics. You may have noticed that, during the just completed presidential race, the term "narrative" became popular political parlance… often used to describe a campaign necessity. You have to have a story to tell. You have to tell it consistently. You have to tell it well.

I believe we need to do just that. We certainly have all the components of a compelling narrative.

Take, for example, the South, where we are gathered today. Do young people really understand that until the Second World War, this region remained economically isolated and undeveloped?

Do they know that large sections of the rural South had no access to electricity at all – that the entire Southern economy was hampered by inadequate power resources?

Do they know that only when the South had abundant and affordable electricity was it able to attract large-scale manufacturing and the jobs that went with it?

I expect not. We have to tell that story. We have to tell it nationally. We have to defend electricity.

We dug up a few more numbers … these are on the South, too.

Even in an era of higher prices, the demand for electric power in the South is not going to let up. From 2005 to 2030, DOE predicts consumption in this region will grow by more than 35 percent.

Growth will be across the board, ranging from 22 percent in the South Central region – Kentucky, Tennessee, Alabama and Mississippi… to 45 percent in the South Atlantic region – which includes the Virginias, the Carolinas, Georgia and Florida.

Growth in the residential sector will be especially significant… 35 percent.

The South Atlantic region… including Orlando… will lead the way in this sector – with usage growing by 45 percent.

Commercial sector growth will be even more robust, more than 60 percent.

To meet that demand, we will need significant new base load investment, including power plants using fossil fuels. Base load generation is still the best way to ensure reliable supplies of energy and affordable prices.

And that includes coal.

Those who insist that "clean coal is an oxymoron" overlook how far we have come in removing air pollutants such as sulfur dioxides, nitrogen oxides, mercury and other particulates. Much more can and should be done.

The electricity industry has invested more than $50 billion in emission-reducing technology since the early 1980s, resulting in a 70 percent drop in pollutants per unit of energy produced.

Promising research is now underway on methods to capture and store carbon emissions. Dominion, for example, supports an effort at Virginia Tech to store carbon dioxide in un-mineable coal seams in central Appalachia.

Can a new generation of clean-coal technologies produce further advances?

We believe that the value of coal as a fuel source and the rising demand for electricity compel us to try.

We all anticipate that Congress will renew its efforts to enact new carbon regulations. One widely discussed approach would assign a price to carbon emissions.

If this approach – so called "cap-and-trade" – were to be enacted, a new carbon market would emerge in tradable credits and establish a means for private equity to play a key role in pollution control.

This would be a step forward, with one qualification: All revenue created by trading carbon… all of it… must serve the purpose that inspired it in the first place: research on carbon reduction and the development of new technologies to facilitate those reductions.

I understand we are talking about a lot of money. But to mitigate the effects of fossil fuels with better technology, we will need nothing less than a sustained, serious national commitment to get it done. Some have called for a new "Manhattan Project." That example does not capture what needs to be accomplished. We need a program more like the "Lend-Lease Program" – a sustained effort over many years affecting many industries and many nations.

Two months ago, the Union of Concerned Scientists… no enthusiast for fossil fuels… published a report acknowledging the role that coal plays in the large-scale generation of electricity.

In other words, the group ran the numbers… a process that almost always leads to the same conclusion: The demand is real. The options for meeting that demand… at the scale required… are limited.

The report also suggests a place where American energy policy and the use of coal come together.

The report says… quote… "For [carbon capture and storage] to play a major role in reducing carbon dioxide emissions, an enormous new infrastructure must be constructed to capture, process, and transport large quantities of [carbon]." It further says:

"And although [carbon capture and storage] has been the subject of considerable research and analysis, it has yet to be demonstrated in the form of commercial-scale, fully integrated projects at coal-fired power plants. Such demonstration projects are needed to determine the relative cost-effectiveness … compared with other carbon-reducing strategies, and to assess its environmental safety… particularly at the very large scale."

I agree. A lot of things have to happen at once.

We will try harder to make conservation work. It will not give us the scale we need. The numbers tell us so. But we can reduce carbon emissions by reducing consumption.

We can realize operating efficiencies through improved facility and asset management, including demand response. Advanced metering and the emerging smart grid will yield significant benefits.

We can benefit from diverse portfolios of generation. That has been Dominion’s approach for a long time. We keep an open mind on everything.

Still – too much of all this is defensive and short-term thinking.

We have to get scale. We have to get the numbers to match up.

Nuclear power is the green alternative to fossil fuels and provides about 75 percent of the nation’s emission-free electricity generation today. It potentially complements renewable energy by compensating for its limitations.

Of course, this involves numbers that are downright scary. The financing of nuclear power has the potential to put more power company CEOs into forced retirement than any other single subject.

Another costly issue is waste storage. The public must have confidence in our ability to safely store high-level nuclear waste. Vast sums have already poured into Yucca Mountain.

But with the political powers staked against that facility, I question whether we should spend any more.

Yucca Mountain has not been a complete loss. Our industry has gained technological and management insight during the effort to establish the site.

At the same time, however, we have found that nuclear fuel can be stored safely on-site in dry casks for long periods… long enough, in fact, to allow time for the development of other storage answers.

Two professors at Vanderbilt University, for example, recently came forward with a new type of interim storage proposal. It would involve four regional storage facilities to act as transfer stations where spent fuel could be stored for up to 90 years before reprocessing or permanent disposal. Their ideas certainly merit close study.

Whether the question is cost or storage, the U.S. government has to be part of the answer.

We can get green at scale via nuclear, but not without a national commitment to do so.

Yet a white paper published last week by a coalition of environmental groups calls for abandoning nuclear power. This kind of fanciful thinking does not help the debate.
A "nuclear renaissance" continues to be broadly discussed, but first we have to get it launched. The rising expense of design, materials and expertise all complicate the picture. Current realities make market financing doubtful.

At least, we have this going for us: No one has proposed turning out the lights – at least not yet.

To the contrary, demand is unrelenting.

It is almost a cliché to characterize the present situation as transformational, but if there is another way to say it, the term eludes me.

Contradictions notwithstanding, our industry must respond to public preferences.
But as we do so, we are obliged to clarify the consequences of our choices, whatever they may be.

We have to hold up the numbers. We have to be aggressive as an industry, about what we know to be true. We have to defend electricity.

Let me conclude with a reference to the past, perhaps an illustration of how we may yet marry our innate national optimism to a need for pragmatic energy policies.

Electricity, in the early days, was little more than a parlor amusement… something for Ben Franklin to play with. The practical uses were not known.

Yet people sensed and celebrated electricity’s potential to revolutionize the world.
In time, it did just that. We got the technological breakthroughs we sought, and none was more significant than the achievements gained by Samuel Insull.

Insull has been described as the "Henry Ford of electricity," the man who made electric power… in the words of one historian… "affordable for the average person and permanently changed the American economy."

It was Thomas Edison who put Insull in charge of what became General Electric. But Insull had a problem. We had lights – but the costs were often beyond what the average worker could afford.

Insull realized that you could never change that until you changed the scale of generation. You could not do big things with little things.

So he built the world’s largest generating plant on Harrison Street in Chicago. It was efficient, too. It used only half as much coal. That helped. It got Insull closer to the scale he needed.

But it was not enough. The reciprocating engines that produced the power were inefficient and subject to frequent breakdowns.

In England, Insull encountered a steam turbine running a speedboat. A light bulb, so to speak, went off.

But GE’s board balked at the cost of what Insull wanted. He did not want a little turbine. He wanted a big one. He finally guaranteed the cost himself, and stood behind the machine when it was first cranked up.

It worked. America saw the cost of electric power dramatically decrease and its availability to the public dramatically increase. The lives of Americans were fundamentally changed forever.

It is a remarkable story. It is a story of American optimism … but optimism grounded in pragmatism. It is a story of risk-taking … not on the basis of mythology, but on the basis of serious, systematic innovation and the development of new technology.

It is the story of an industry and a nation coming to grips with what it needs and pragmatically finding solutions.

Personally, I do not think we have lost the knack. We can still reach for the stars, just so long as we have our feet on the ground. And there is no time like the present to get started.

Thank you very much.

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