Interview with Thomas F. Farrell II (full transcript)

(A shorter, edited version of the interview appears in the February issue)

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Virginia Business: A couple of years ago you said America was headed for a train wreck in energy supply if we didn’t get our act together. Have we gotten our act together?
Farrell: I do not think we have gotten our act together.  I think we got a reprieve for a few years because of the recession.  It slowed down economic growth significantly. And I don’t know how long it will take — I have a degree in economics, but I’m not a professional economist —  if it’s going to be three years, five years, 10 years before we’re back to where everybody in 2006 and 2007 thought we were heading. Virginia will be there ahead of probably everybody else … at least in the United States. 

But we’ve made very little progress nationally.  I think Virginia made very important progress in 2007 when it adopted the re-regulation law and authorized the governor to develop a Virginia Energy Plan, which is up for review before July 1 of this year … So the new governor obviously will have input into that and the new members of the General Assembly.

Nationally I think we’ve made very little progress.  I don’t know how you can really move forward significantly without a much more robust nuclear program than we have in the United States.  There is something like 440 nuclear plants in the world — 104 of those are in the United States.  There are probably 50 under construction in the rest of the world; none in the United States. 

So we need to do more nuclear.  We need to do more energy efficiency.  We need to do more renewables.  But energy is a very complicated issue.  It takes a long time to see your policies bear fruit.  It’s a difficult political issue because it doesn’t fit the time horizon that our public policy makers are used to dealing with.  I’m not being derogatory by any stretch of the imagination. It’s just they are used to dealing in time periods that are a little bit shorter than 30 years.  And that makes it very difficult.

VB: You’ve said that the U.S. government has to be part of the answer. What would it take for us to get serious about nuclear?
Farrell: We need to build uranium recycling plants in the United States.  They call them breeder reactors. They have them in Europe.  They have them in Japan … Prior to Three Mile Island, we were on a path to build breeder reactors in the United States.  President Carter, in his administration after Three Mile Island and the Chernobyl incident, ended the breeder reactor program, and we went in the direction of storage.  You don’t have to do both.  Permanent storage.  That was Yucca Mountain.  Well, Yucca Mountain is not going anywhere now.  President Obama does not support Yucca Mountain.  The majority leader in the Senate doesn’t support Yucca Mountain. You either have to be able to store the waste indefinitely, and by indefinitely like tens of thousands of years, or you have to do these breeder reactors. I think those should be owned by the Federal Government.  I don’t think that should be private enterprise.

VB: Why should the government own them?
Farrell: Because as a citizen, I would feel more comfortable if I knew the government was taking the uranium, putting it in the facility, recycling it, and putting it back out into the plants.  That’s what they call a closed loop system.  Once the uranium enters the loop, it stays in there.  You have security issues, all that. 

So I think we need to build breeder reactors.  And I think we need to make a national commitment through tax incentives and a variety of other financial mechanisms to help kick start nuclear. I’m sure you’ve heard a hundred times at least that France gets 80 percent of its power from nuclear; Scandinavia 50 percent.  And they got there because they just made a national commitment.  In France’s case, it was President de Gaulle who said, “We’re going to have it.  We’re going to go nuclear.”  And people said, “Well wait a second.  What about all these other options?”  And he said, “No, you didn’t hear me.  We’re going nuclear.”  And they went nuclear.  And now they’re bearing all the benefits of that.

I think we should go in that direction.  People talk about replacing nuclear gas-fired power plants … Natural gas is a fossil fuel.  It produces half as much carbon as coal.  So over 30 or 40 years, if you shut down every coal plant in the United States and replaced it with natural gas, and you have growth in the economy, you’re going to be in the same place with carbon emissions as you are today, if you took everything and replaced it with natural gas.

The other thing, just to replace the nuclear plants that are going to retire by 2040, just to replace those, the existing 104 with natural gas, you’d have to produce 25 percent more natural gas than we produce today.

VB: If you replaced all 104?
Farrell: Yes.  No growth.  No new plants.  Not doing anything other than replacing what we have today, you’d have to replace another 5 trillion cubic feet of natural gas.  Right now we produce about 20 in the United States.

VB: Which takes us to North Anna. What is the status of adding a third nuclear reactor to your North Anna Power Station in Virginia?  Did you award the competitive bid for the reactor design?
Farrell: We have not awarded the bid.  A little background.  We started working on this in 2003.
We, like all the other utilities in the United States, went down a path of where we picked a preferred vendor, preferred design, preferred contract … it’s sort of design and build plant contract … The three largest operators of nuclear units in the country are Exelon, Entergy and Dominion.  All three of us picked General Electric Hitachi as our partner. As we were winding through 2008, we said to GE, “We need to get a contract that we’re comfortable with, shares the risk appropriately between GE, Dominion’s customers, and Dominion shareholders.”  We never got comfortable with where they were willing to go.  So we terminated that relationship, and we started a bidding process in the beginning of this year, which no other utility has done.

VB: How many bids have been received?
Farrell: We received multiple bids.

VB: And was GE one of them? 
Farrell: We haven’t said who was involved in the process.

We have narrowed it down to a handful, and we are negotiating for the small groups to come up with what we think is the best possible achievable contract that we would then be in a position to take to the State Corporation Commission staff and working with the staff say, “Here’s where we are.  Here’s how we got here,” and see what they think. 

This is a big investment, whichever one we pick would be a big investment, and we need to make sure that everybody is comfortable that this is the right direction for Virginia.
If we don’t go down that path, we’ll have to build gas-fired power plants.

VB: And a new reactor would provide 1,600 megawatts?
Farrell: There are a variety of technologies that you could pick, as big as 1,600 or small as 1,000.  We need to build 4,500 more megawatts in Virginia over the next 10 years.  If you picked a 1,500 megawatt nuclear plant — most combined cycle plants are 600 megawatts like the one we’re building here in Buckingham County — you’d have to build three combined cycles just to match one. If you did the small, you’d still have to build two … 

If you look out over a 60-year horizon, which is how long these plants all have to last, the nuclear plant costs you more to build upfront. But the fuel — the single highest cost variable to the production of electricity is the fuel — uranium is relatively cheap compared to natural gas or even coal.  You just go back in time and look at what happens to the price of natural gas.  It just goes up and down, up and down.  And all that is passed to the customers.  So when you’re looking at what’s best for the customers over the long term, you can’t just focus on the cost of building a plant. You have to focus on the cost of running a plant over 60 years. 

That’s why we like diversity of fuel in everything.  We like having nuclear.  We like having coal.  We like having natural gas.  We like having wind.  We like having hydro.

VB: What is your time frame to decide on the bids?
Farrell: I think we will be in a green light/red light decision by the middle of 2010. 

VB: Is there any chance Dominion will lose some federal money for the project if it doesn’t go with GE?  And is that going to influence your decision in the bids?
Farrell: The licensing process, if we did not choose the GE reactor that we filed with the COL (combined operating license) that would slow down the licensing process, but not enough to change the economics of the transaction for the customers or for our shareholders.

VB: Are there estimates at this point on what it would take to build the third reactor should the company decide to go forward?
Farrell: There are a lot of estimates.  All of the ones I’ve seen are wrong.

VB: So none that would you share publicly at this point?
Farrell: No.

VB: So we’ll just have to wait and see what happens?
Farrell: Yes.  It would be great for economic development for the state.  It’s a lot of jobs in building it, and it’s a lot of jobs in running it.  And they’re very good jobs, high-paying jobs.  Virginia has been very supportive — the local government in Louisa County, local citizens in Louisa County, the Virginia General Assembly, the governor, both parties, very supportive.

VB: Switching to the topic of climate change, it appears that the Obama administration wants to move forward to limit greenhouse gases.  How would Dominion limit emissions, especially at older coal-fired plants? 
Farrell: Well, when you say Dominion, there are two answers.  Dominion Virginia Power is our utility operation in Virginia, in which we have about 18,000, almost 19,000 megawatts of power plant production capacity.  Now that’s a mix of coal, and nuclear, and pump storage, which the largest pump storage facility in the world is in the Virginia mountains. We have some oil units, but they almost never run.  They’re there for sort of the last thing we turn on when we really need power. There’s very, very little oil usage anywhere in the United States anymore. 

So some people say we need to do climate change because it will break our dependence on foreign oil. That’s a total disconnect in the production of electricity.  Gasoline and automobiles, yes.  Production of electricity, there’s no connection whatsoever anymore.  There hasn’t been in 30 years.

In Virginia, there’s very little under existing technology you could do to cut carbon emissions if you’re burning a fossil fuel, whether it’s coal or natural gas.  People are working on a technology called carbon capture.  It’s storage.  It can work.  It has been proven on a small scale.  No one has proved it at a very large scale.  So that needs to be worked on. But I don’t have any doubt that the technology will work. The issue really is “Is it worth the cost of the technology to install it?  Or is it better to retire the facilities over time and replace them with some other type of electricity production?”

Carbon capture and storage, we are working very diligently on that, particularly in the plant we’re building in Southwest Virginia right now.

VB: Tell us about the efforts at the new Wise County coal plant. 
Farrell: We’re using a new technology there. It’s known and proven, but it’s not widely used.  It’s called a fluidized bed.  And it burns the coal at a lower temperature so the emissions from it are lower just in its natural course of the sulphur dioxides and the nitrogen oxides, mercury. What we traditionally have thought of as pollutants are emitted at a much lower pace … The air permit associated with that plant — very low levels are allowed.  And we’re highly confident that we’ll meet those levels.

That said, it still emits carbon.  So we’re working with Virginia Tech on some pilot programs there to see if we can figure out a way at that site to store the carbon.  Capture it first and then store it. Advances are being made on this around the country, and people are working on it around the world.  So that would be an answer. (Editor’s note: The federal Department of Energy denied a request for federal stimulus funds to pay for half of this $580 million, Wise County carbon capture and storage project. Dominion says it is seeking federal funds from other sources but that the project will not be able to move forward without government support.)

VB: The Obama Administration said it has allotted $10 billion in Recovery Act Funds plus another $4 billion in private money. They’re going to throw $14 billion at this and within five or six years, they hope to have five commercial carbon capture facilities.  Does that sound reasonable?
Farrell: Not a chance.  Maybe by 2020.

VB: What about at Wise? Will Dominion have this technology in place?
Farrell: Not in 2012 we won’t. The plant is designed and being constructed to be compatible with a carbon capture and storage system … Since our customers have to pay for these things, we don’t like to be first movers in new technologies that turn out often times not to work.  So we’re watching it very closely.  We’re working with scientists at Virginia Tech.  We’re watching what’s going on in other pilot projects to make sure that we can make an informed judgment about which is the right way to go, because there are different ways to do it. You can try to reduce the carbon before the coal is burned.  Or you can try to capture it after the coal is burned.  And they are two totally different approaches, and they both well may work.

[Currently]You can clean up everything but carbon. At our plants, we’ve reduced mercury, nitrogen oxide, and sulphur dioxide by almost 90 percent by putting on new technologies.

VB: 90 percent?
Farrell: It’s almost 90.  It’s like 88 percent.  We have one last scrubber we’re putting on here in Chesterfield County right now.  Once that one is finished, we will have achieved that level that I’m talking about.  But carbon is the issue.

VB: When do you think carbon capture technology will be commercially available?
Farrell: It’s very easy to say, “We’re going to go in this direction, and we’re going to draw it up on a board, and put it into a piece of legislation.”  Actually having people who understand how to weld the steel together, make the chemicals work right — nobody knows that part yet, and we’re still experimenting with that. Then to actually have it built and have it done at a cost that people can swallow is not going to be done in five years.  It’s going to take a decade in my opinion.
So we need renewables.  We need to increase the amount of renewables we have.  Our company is almost at 4 percent now.

VB: Four percent of all of Dominion Resource’s power is generated through a renewable source?
Farrell: Yes.  If you include the wind farms that we have in West Virginia and Indiana, all of that together is 4 percent. 

VB: Besides wind, what other renewable is Dominion investing in?
Farrell: Hydro, bio mass.  We have one of the largest bio mass plants in the United States in Virginia (in Pittsylvania County). But here’s a perfect example for you, Paula.  It’s 82 megawatts … One of the reactors at North Anna, one is 980 megawatts.  So we’re looking at building maybe a 1,600 megawatt reactor. And the largest bio mass or second largest bio mass plant in the United States is 82 or 83 megawatts.  The scale, we’ve never broken the code on the scale, and we’ve been working on it for 100 years.

VB: But is it all doable?  You’ve got the public and environmental groups saying, “We’ve got to have clean air, and we have to clean up the planet and save the planet.” But we also have to have power for our jobs and our businesses. So it seems to be a really complex and difficult conundrum.  How does the country get out of it?
Farrell: This is the train wreck that I spoke about four years ago now.

It takes very long horizons. When we make an investment in a power plant, it’s going to run for 60 years … They’re very, very expensive to build.  We spend over $4 billion in capital in this company.  Now that’s not all Virginia.  That’s also in our pipeline business, and our oil and gas business. We’re the largest producers of electricity in our New England business.  We have a big fleet of power plants in the Midwest.  But a lot of it we’re spending in Virginia right now – new electric transmission lines, the Southwest Virginia plant, the plant in Buckingham County, new sub stations.  We’re trying to put in smart meters.  All of this costs a lot of money and takes a very long time to do.  And fortunately it spreads out across all of our customers. We have among the lowest rates on the Atlantic Seaboard.

VB: Do you support the concept of the cap and trade as a workable way of lowering carbon emissions?
Farrell:  Yes.  As I said in that testimony at the congressional hearing, there are changes that need to be made to what passed in the Waxman-Markey bill. That includes a safety valve to make sure that if the cost of the credits gets too high, there’s a stop valve to make sure the customers’ bills don’t start going up. 

There are people who take the position that carbon regulation in transforming our energy fleet will be done at little or not cost.  I could not disagree with that more.  It’s going to be enormously expensive.  And what Edison Electric Institute/Dominion supports is that if that policy choice is made, you need to do it in a way that allows you to transition over a period of years to keep the costs reasonable.  A properly run cap and trade system with a safety valve or a collar — price collar is a more accurate way of saying it — so that there’s a minimum price as well as a top, maximum price.  That’s a better way to do it. And enough allowances are made available to utilities because the allowance for utility is going to get passed through, dollar for dollar, to customers. 

Done properly, you can run a cap and trade program that will work.  We have a cap and trade program that has reduced acid rain. Acid rain is almost gone. It was through a trade program put in place in the Clean Air Act in the early ‘90s.  It has worked.  The difference there is everybody knew what technology would work – scrubbers work …  Nobody is exactly sure how to make the carbon capture work.  We think we do, but we have a long way to go.

VB: Looking to the future in Virginia, what do you think Dominion needs in terms of financial incentives to invest in new, clean energy generation?  There’s an important rate case coming up on January 20th. How important is the outcome of that case in terms of your company’s ability to prepare for the future? 
Farrell:  The return on equity calculation that’s done by the State Corporation Commission will be a very important data point for us and the investment community as to what direction Virginia is going to go.  So there’s testimony on that … It would probably be better for me to just refer you to that about what our position is. The commission has a very … it’s a big job they have.  They’ve got a lot of competing interests. (Editor’s note: Dominion is seeking a $246 million rate hike based on a 14 percent rate of return on average common equity.  The commission last set the company’s rate of return in 1992 at 11.4 percent. At press time, the SCC staff was urging that the company’s electric rates be cut by of $365 million annually, based on 10.2 percent rate of return ..It said during 2008, a test year for Dominion’s rate case, that the company earned nearly $524 million more than was necessary to cover costs, with earnings producing a 19.1 percent return on average equity for combined generation and distribution functions.) 

VB: At one point, Dominion proposed a settlement agreement that several major parties signed off on that would have frozen rates at the old level and set the return on equity at 11.9 percent.  But some people objected to that saying the SCC should continue with its audit of Dominion’s revenues and expenses and put forward recommendations.
Farrell: Right.

VB: So, that’s where everything stands at this point?
Farrell: Yes.

VB: As a member of Gov. Bob McDonnell’s Transition Committee, what role did you play?  Did you advise on energy issues?
Farrell: I was a co-chair of his Transition Committee.  And that group has been working on lots of topics, more than just energy.  I also worked on the energy issue with the Lieutenant Governor, and I worked with a sub committee of economic development that’s working on energy issues … We’ll forward our recommendations to the governor’s Policy Team, and the governor will accept them, reject them, modify them, however he sees fit.

I recused myself from having any role with regard to any agency that has any potential regulatory oversight of Virginia Power.  So the Secretary of Natural Resources, I’ve barred off from ….  DEQ (Department of Environmental Quality), all the things that would have oversight over Dominion, I have no idea what’s going on because the governor and I agreed that that would not be something I should be involved in.

VB: That was the second part of the question. Do you anticipate any potential conflicts of interest since you head a public energy company whose business activities are affected by the state’s energy policy and the regulations of the State Corporation Commission? 
Farrell: Well the SCC, of course, has nothing to do with the governor-elect or the Governor for that matter.  But we’re very careful about that.  I have nothing to do with giving advice on anything that would have any regulatory oversight of Dominion or any of its operations.

VB: Is there anything we didn’t discuss that you think is important?
Farrell: I think it’s important for people to understand that utilities, electric utilities, don’t set public policy – we respond to public policy as to how people want their energy produced. 
For example, before the oil embargo [in 1973] a lot of Virginia Power’s power was generated by oil because it was cheap, it was abundant, and it was domestic. And then the oil embargo happened, and the price of oil shot up.  People said, public policy makers in this country said, “We don’t want you to use that foreign source of energy.  We want you to use an abundant, domestic, cheap form of energy to produce your power.  We want you to go to coal.”

So we converted.  Many of these plants that we have today used to burn oil, and we converted them to burning pulverized coal.  Now people don’t want us to burn coal.  They say, “Okay, we want you to clean it up.”  We cleaned it up.

Now people want nuclear.  We strongly urge people to go forward with nuclear.  If people want us to stop burning coal, we can do that, but the price of electricity will be higher.  And people will just have to make that decision as a nation, that it’s a tradeoff between the environment and cost in this case, we’re going to go for higher costs.  But the idea that you’re going to be able to have all of it and have it inexpensively is a myth.

VB: So what’s the biggest challenge in your job today? 
Farrell: We have a duty, public duty to provide sufficient electricity to meet our customers’ needs at a reasonable price.  That is our statutory duty.  That’s the compact we have with Virginia.  Trying to meet those energy needs, it means we have to build power plants.  Virginia has one of the best economies in the country now.  Our unemployment rate is at a very unfortunate level, but it’s a heck of a lot better level than anywhere else in the country.  We have Fort Lee expanding. We have Fort Belvoir expanding.  Few people probably realize that half of the internet traffic in the United States runs through Northern Virginia.  So you have all these server farms being built in Northern Virginia.  They use a lot of energy.

So while people may not be seeing it, there is a lot of growth in the electric infrastructure necessary in this state.  Getting that built in a way that has diverse fuel sources, so you don’t put all your eggs in one basket, and keeping peoples’ costs reasonable is what our, that’s what our daily challenge is – daily, monthly, yearly challenge.  And plus keeping the lights on in snowstorms, hurricanes.

VB: And, finally, have you gotten much of a buy in since Dominion offered a choice to its Virginia customers in terms of green energy?
Farrell: Well we have not had a surge of customers switch to an exclusively green tariff.  We make it available.  We advertise it.  We’re happy to accommodate it.  We have every intention of meeting Virginia’s renewable standard, which is 15 percent by 2025. 

VB:  So 15 percent of the power that’s used in Virginia will be provided by renewables by 2025?
Farrell: Yes.  In accordance with the Virginia act.  There are some definitions that you have to look at. All renewable is not the same.  The renewable portfolio standard in Florida is not the same.  It may look in the top headlines like it’s apples to apples, but you really have to look at what’s included, what’s not included, and it’s all different, every state.

So we will meet Virginia’s renewable portfolio standard.  We have every confidence.

Unfortunately, you can’t tell electrons where to go.  Once you put them up on the grid, they go — we all learned in high school physics — they take the path of least resistance.  And we make this clear to everybody.  If they buy the green tariff, we will make sure that a renewable source can tag to the dollar.  But the electron that goes into your house is not necessarily going to be produced from a renewable source. But we will make sure that a credit or an allowance is purchased with that dollar you give us to cover your usage, which is good because that promotes the building of more renewable resources.  So it’s a very good program.

VB: I guess with the recession that not as many people have bought into it as might have otherwise?
Farrell: You’re probably right.  Now we have other programs. We have a CFL (compact fluorescent light bulb) program that we help fund. Four million bulbs have sold under our program, just in Virginia. It has been a great program. People have really bought into it.  The bulbs last a lot longer, and they use a lot less electricity.  That’s a program we did voluntarily. 
We’re trying to put smart meters in.  We have a project in Charlottesville and in Midlothian where we’re testing these meters … If you have smart meters across our system, all 2.5 million customers, the information we get out of that meter will allow us to know exactly how much power is being used every moment. Right now we’re pretty close, but we don’t know for sure.  That’s why we have a band of voltage to make sure there’s enough there.
If we knew exactly what these meters tell us, we will be able to reduce the size of the band, which means we will produce less power.

We chose Charlottesville for the big pilot for several reasons.  One, the geography.  It’s very hilly, because these meters have to talk to each other.  Lots of trees, lots of hills, lots of valleys, so broken terrain that could interfere with a signal.  You have the students coming in and out, with disconnections, connects, disconnects.  Right now we have to send a meter reader out to disconnect an apartment, and we have to send a meter reader out to connect an apartment.  We’ll be able to do that remotely … So we’re trying it out to make sure it works.

We have to demonstrate that to the commission … That’s a big investment. That will be a $600 million investment that we would make over four or five years depending upon how fast you’re putting them out there.  We think it will save Virginia customers $1.5 billion over 10 years, if it all works like it’s supposed to.

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