by Thomas F. Farrell II
Chairman, President and CEO
Dominion

There is an old Chinese saying: “May you live in interesting times.” These days most of us are thinking, “How about a little less interesting?”

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

We will work our way through this. We have no choice. 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 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 less than realistic and even naive.

New York Times columnist Thomas L. Friedman’s recent book, Hot, Flat and Crowded: Why We Need a Green Revolution – and How It Can Renew America, is getting a lot of circulation and sales. While I disagree with some of his conclusions, I find that he asks very good questions, fairly examines the alternatives and gets one big thing absolutely right: He says that people have declared that “we’re having a green revolution.” He 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 policymaking 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 or 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. It could be seen in both presidential candidates during the campaign. From the beginning, Americans have believed that we can shape the future for the better. This belief has been passed along from generation to generation.

Americans are optimists to our core. We say to ourselves that we are not prisoners – not prisoners to the past, to events or to circumstances. What we break, we fix; what we lose, we renew. For every problem there is an answer; if we have not found the answer yet, we 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, down to $50 a barrel.

Lower fuel prices, although welcome, inspire public complacency – another great danger.

The Barack Obama administration is faced with many pressing challenges, and its attention is naturally focused on Wall Street and related issues. Even when Washington says it is “all about the economy,” however, we know where that will eventually take us: to energy.

The new administration would be well advised to approach the energy industry’s challenges pragmatically, undertaking a level-headed appraisal of the present situation. Such an assessment argues strenuously in favor of action. I hope President Obama will reach that conclusion and that he will do so sooner rather than later. I think most of us know what needs to happen.

Inaction Has Been Long Term

Several years ago I believed we were headed for a train wreck in energy supply if we did not get our act together. What has happened since? Absolutely nothing. This analogy honestly reflects my fears about where we may be heading, failing any concerted effort to prevent the train wreck. There are too many contradictions, too many conflicts and too many uncertainties to simply extend the status quo any longer. When the debate over energy policy begins again, we will have to do more than react to proposals. We must get out in front of it – or at least try.

In some respects, we helped set the table for the current quality of discussion, though not intentionally. The energy industry simply allows 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.

The Electricity Defense

Our challenge is to better explain the realities of electricity: How we make it. How we transmit it. How we satisfy demand. We must – to borrow a legal term – defend electricity.

Far too many people are issuing definitive pronouncements about what must be done. These good folks appear to harbor an imperfect understanding of the way electricity works in this country or anywhere else in the world. This unclear – or failed – understanding often explains a willingness by large numbers of citizens to embrace fantastic proposals about how to do things differently. For instance, a Midwestern utility colleague said last 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! Perhaps he was only half-kidding. But 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.

When brownouts and blackouts happen, they 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 does not cost me any more money.

I understand. My family lives on this planet. We all worry about the environment. But in the effort to avoid present dangers, it does us no good to manufacture new illusions – illusions that, if they are believed and accepted, will lead only to public frustration, cynicism and anger, not to mention a lost opportunity to move forward as a nation.

Can we end our dependency on foreign oil in 10 years? Can we have 100 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 seeing 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 something we neither do well nor welcome. But some level of stern, unyielding engagement over basic facts is essential.

Importance of Coal

Let’s begin with coal. Coal makes half of the electricity in this country. It is efficient, and it is here. It is an American resource.

Generations of Americans have made massive investments in coal-fired stations. About 600 such facilities around the country do the job quietly and cheaply. They help keep the lights on. But some would effectively have us walk away from these investments.

Dominion relies on coal, though not as much as many utilities in the United States. But it is an important fuel for us. Last year 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 a couple of unique characteristics worth mentioning.

As host to the ever-growing suburbs of Washington, D.C., Virginia 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, plus another dozen under construction or in development.

Virginia is 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 the Virginia City project in no uncertain terms. What troubles me is that a substantial number of these alarmists simply do not know what it takes to keep the power flowing. To be fair, we share some responsibility for that. We should have spent more time telling them. The recent presidential campaign pointed out how important it is to have a story to tell, to tell it consistently and to tell it well. I believe we need to do just that. Our industry certainly has all the components of a compelling narrative.

Take, for example, the South. Do young people really understand that until World War II, the South 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 they do not understand that. We have to tell that story. We have to tell it nationally. We have to defend electricity.

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, the Department of Energy 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, consisting of 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 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 that use 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. 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. But much more can and should be done.

Promising research is now under way 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.

Sustained Commitment Needed

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 so-called cap-and-trade approach were 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 must serve the purpose that inspired it in the first place; it must fund research on carbon reduction and the development of new technologies to facilitate those reductions.

I understand this is 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.

In the fall of 2008, the Union of Concerned Scientists (UCS) – no enthusiast for fossil fuels – published a report acknowledging the role that coal plays in the large-scale generation of electricity. The group ran the numbers and deduced that the demand is real. The options for meeting that demand, however – at the scale required – are limited.

The UCS report also suggests a place where American energy policy and coal use might come together. It says 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. Furthermore, states the report, 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 with UCS. A lot of things have to happen at once. We will try harder to make conservation work, though 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 this is defensive and short-term thinking. We have to get scale. We have to get the numbers to match up.

The Nuclear Solution

Nuclear power is the green alternative to fossil fuels and provides about 75 percent of the nation’s emissions-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 store safely high-level nuclear waste. Vast sums have already been poured into Yucca Mountain in Nevada, 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. We have also 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 proposed a new type of interim storage. Their plan would involve four regional storage facilities acting 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.

U.S. Government Must Get Involved

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 power, but not without a national commitment to do so. And the kind of thinking seen in a white paper published late last year by a coalition of environmental groups calling for abandoning nuclear power does not help the debate.

A “nuclear renaissance” continues to be discussed broadly, but first we have to get it launched. The rising expense of design, materials and expertise all complicate the picture. Current economic 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. 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.

Optimism Grounded in Pragmatism

Perhaps an illustration of how we may yet marry our innate national optimism to a need for pragmatic energy policies would be helpful.

In the early days, electricity was little more than a parlor amusement – something for Ben Franklin to play with. The practical uses were not yet known. But 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. There were lights, but the cost of keeping the light switch on was 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 Insull 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. While in England, Insull encountered a steam turbine running a speedboat. A light bulb, so to speak, lit up in Insull’s head.

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

The turbine 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 – optimism grounded in pragmatism. It is a story of risk-taking based on 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 needed 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.

Thomas F. Farrell II is chairman, president and chief executive officer of Dominion. He was named to this position effective April 27, 2007. He formerly was president and CEO of Dominion. Mr. Farrell previously served as chief executive officer of Dominion Generation upon its formation May 1, 1999, and as president and chief executive officer of Dominion Energy.

After being named executive vice president of Virginia Power in September 1997, Mr. Farrell coordinated all deregulation matters at Virginia Power/North Carolina Power, overseeing state and federal regulatory and legislative initiatives. He was also responsible for external relations, legal matters and government affairs at Dominion and its subsidiaries.

Mr. Farrell went to Virginia Power from its parent company, Dominion Resources, where he served as senior vice president of corporate affairs and general counsel. He previously held the post of vice president and general counsel at Dominion.

Mr. Farrell serves on the board of directors of Dominion Resources and Virginia Commonwealth University’s School of Engineering Foundation and is rector of the University of Virginia. He also serves on the boards of the Institute of Nuclear Power Operations and Bon Secours Richmond Health System.

Mr. Farrell has a bachelor’s degree and a law degree from the University of Virginia.

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