Stung by radical swings in fuel expenses, interest rates, construction costs, regulatory decisions and consumer demand, the electric utility industry finds itself at a crossroads, embracing new, untried technologies or clinging to old solutions and resources.
Several industry experts, including the president and chief executive officer of Virginia's Dominion Resources Inc., concluded some time ago that electric utilities are entering a new era. The industry's basic structure, along with its image, is undergoing a dramatic change brought on by a substantial decline in power demand, a sweeping slowdown in construction of huge generating plants and serious doubts about nuclear power as a viable low-cost energy source.
Dominion Resources (formerly Virginia Electric and Power Co., and formerly one of the most traditional utility companies) three years ago elected to adapt to those changes by restructuring its business with an eye toward diversification and by pursuing high-technology energy alternatives.
The formal transition began at Dominion last year with a corporate name change and formation of a holding company for Vepco, now the principal subsidiary. Vepco will operate as Virginia Power, North Carolina Power and West Virginia Power in the three states it serves.
According to Dominion Resources Chairman and Chief Executive Officer William W. Berry, the new era for the industry will be marked by the relative absence of new generating capacity. In fact, the new era has already arrived, he noted in a recent interview in Richmond. The current trend in utility construction indicates a sharp drop in massive construction programs to virtually none by the end of the decade.
"We'll make that transition next year. Some companies have already made it, but all of them are going to make it within the next couple of years," Berry predicted. "And from being the biggest construction industry in the country, we'll drop to zero major projects within the next two years."
The industry, he asserted, is locked into increasing costs, given today's technology. Any generating plant built today will "cost more than what we've already got. The incentive to grow is not there. I think it's important, therefore, to pursue new technologies or you don't face a very promising future."
New technology, Berry added, will enable the industry to increase generating capacity with short construction lead times in relatively small increments and at a competitive cost.
"If you take the position in which we find ourselves -- which is the forecasting of demand for electricity 10 years from now -- it is very difficult. We're forecasting a growth in consumer demand of 2 to 3 percent a year but there's a lot of uncertainty in both directions around that projection."
In the past, Berry said, the utility company suffered from the financial strains of "massive, long lead-time construction programs." The cost of raising new capital to build huge generating plants, he continued, is "higher than what we are now earning on the capital we have invested."
Thus, Dominion has launched an ambitious research and development program that it is counting on to produce six high-technology projects as alternative energy sources. It plans to:
* Construct a 50-kilowatt solar photovoltaic project in central Virginia.
* Install a 40-kilowatt electrochemical fuel cell in the Tidewater region.
* Conduct tests preparatory to building wind turbines.
* Participate in a joint-venture demonstration of atmospheric fluidized bed combustion of coal.
* Produce a coal-water fuel as part of another joint venture.
* Participate in a demonstration project of a coal gasification combined cycle system.
The projects, which were announced at the end of October, culminated a comprehensive three-year study of several potential alternative energy sources. Data collected in the $2.5 million study (Dominion actually budgeted $4 million for the preliminary work phase) provided the basis for Dominion's selection of the six projects.
The six, at this point, appear to be the most feasible and economical nonconventional energy sources for meeting future demand.
Dominion's goal in each case is to develop small units that can be installed quickly with limited capital requirements. "That's the kind of technology we are really looking for," said Berry. "All these meet those criteria."
The company will spend about $2.5 million next year in the first phase of its high-technology program, but total costs involved have not yet been determined.
"As the years go along, we would project to spend additional dollars to plug into these technologies," said Samuel Brown Jr., senior vice president for technical assessment.
Development of the new technology will, in any event, have a "negligible" impact on Dominion's earnings and the rates paid by consumers during the next five years, officials said. Dominion's new $1.7 billion Bath County pump storage hydroelectric power project -- the world's largest -- is scheduled to begin operating next year, and the company has signed long-term contracts to purchase power from Midwestern utilities at "very attractive prices." Those two energy sources, combined with current generating capacity, are expected to take care of Dominion's electricity requirements until 1993.
If one of the new technologies with a short construction period can be made operational by 1989, Dominion can meet the additional need for capacity it expects in 1993, Berry calculated.
But in the next five years, the new technologies should have virtually no impact on consumer costs or savings, or on the company's earnings, he said.
The decision to seek high-tech alternative energy sources comes, ironically, during a period in which fuel prices paid by Dominion have been declining steadily. In 1980, the utility spent just over $1 billion for fuel; currently, it is spending less than $750,000 a year.
In its latest request for a rate increase, in fact, Dominion projected a drop in fuel expenses next year, even though it is seeking a 6.2 percent rate hike in Virginia.
Fuel expenses are expected to remain low next year largely because of the Bath County project, the conversion of another existing generating unit from oil to coal and some power purchases. Two more oil-to-coal conversions are planned for 1986 and 1987 and should produce additional fuel savings.
But around 1987, "We start running out of tricks," Berry said.
"This reduction of $250 million a year was done not because the price of coal or oil or uranium went down. It was done by improved efficiency and change in the mix of power generation . . . but the curve is beginning to flatten out in what you can do in terms of efficiency and improving the mix."
Dominion pulled one more trick from its corporate sleeve shortly after Berry made that statement.
In a move that could save customers millions of dollars annually in fuel costs, Dominion signed an agreement in principle with Norfolk Southern Corp. to deliver coal by a more direct rail route to Vepco's Chesapeake Energy Center.
About 70 percent of the coal used by Vepco is transported over rail by the CSX Corp., while the remaining 30 percent is hauled by Norfolk Southern.
Both rail systems serve the coalfields of Kentucky and West Virginia, but the coalfields of southwestern Virginia are served primarily by Norfolk Southern.
The five-year pact, subject to a definitive agreement and approval of the Interstate Commerce Commission, would allow Vepco's power stations to use more coal from southwestern Virginia's coalfields, which are served primarily by Norfolk Southern.
From the Chesapeake rail terminus, Dominion plans to move the coal by barge to its coal-fired generating stations, most of which are accessible by water. An estimated $50 million will be invested in a new barge system as part of a broad diversification program.
Having partially achieved its goal of lowering coal transportation costs, Dominion said it no longer will lobby for approval of a constroversial coal-slurry pipeline. It will continue financial support of efforts to win approval for the pipeline, however.
Proponents of the pipeline, which would carry a mixture of water and pulverized coal under pressure from the coalfields, contend that it would substantially reduce fuel costs for utilities and consumers.
Although there is general agreement that coal is an abundant and affordable source of energy in the United States, the high cost of transporting it by rail is a serious problem, say electric utility officials.
Indeed, railroad transportation is one of the "two most pressing issues involving coal use," said William McCollam Jr., president of the Edison Electric Institute.
Environmental issues and skyrocketing costs also have prompted a retreat from major construction programs.
"The technology today for building coal-fired units under the current environmental laws would require that we build a generating plant and build a chemical plant behind it that removes the sulphur dioxide," Berry said. "If you built that kind of plant with a scrubber required by law to reduce emissions , you might be talking about a cost of $1,200 a kilowatt-hour.
"Wind turbines today are about $2,800, but we think there's a potential for that wind-turbine cost to come down to maybe $1,000. Fuel cells are $5,600 a kilowatt today with a potential to come down to $1,150, in which case it would beat the coal-fired unit. And solar photovoltaics are $9,000 a kilowatt but with the potential to come down to $2,500. There's $2,500 with a free fuel source, so that also would be competitive."
Dominion currently maintains a fuel mix of coal, 41 percent; nuclear, 41 percent; oil, 3 percent; power purchased from midwestern utilities, 12 percent; and hydroelectric and gas, 3 percent.
In 1971, when oil was a much cheaper source of energy, its percentage of Dominion's fuel mix was 50 percent, compared to 49 percent in power purchases and coal, and 1 percent nuclear.
The dramatic shift to coal and nuclear power from oil as the primary energy source in the 1970s played a major role in lowering fuel expenses.
But the appeal of nuclear power, which had been hailed as the safe, clean and cheap energy source of the future, is fading as an option for utilities, notwithstanding the relatively inexpensive cost of operating reactors already in place.
"The failed promise of nuclear power further complicates efforts to plan electricity's future," writes Christopher Flavin, senior researcher at Worldwatch Institute, in a recent report entitled "Electricity's Future: The Shift to Efficiency and Small-Scale Power."
In 1970, Flavin recalled, nuclear plants were expected to provide most of the world's new generating capacity in the 1990s. But while there were 125 U.S. nuclear plants under construction in 1979, Flavin notes, cancellations and completions reduced the total to 40 in 1984.
Vepco, which made the plunge into nuclear power early, has since canceled four units but continues to operate four.
"What's in operation, is going to continue in operation and I think it's going to be a valuable resource," Berry said of nuclear power plants. "It certainly is for us.
"The ones under construction are a difficult problem for the companies that are building them. My guess is that some of them will be built and some of them will be canceled. The economic consequences of either of those is pretty dire. Nobody has ordered one since 1978, and I don't think anybody is going to order one before 1995."
Berry maintains that the regulatory process and public opinion will have to change before a utility places an order for a new nuclear plant. While public opinion and environmentalists have had a sobering effect on nuclear power plant construction in the United States, soaring costs and the time -- 10 to 15 years -- required to bring a plant from the drawing board to full operational status after approval have brought plans for further construction to a screeching halt.
The near disaster at Three Mile Island and problems forcing temporary shutdowns at other plants, including Vepco's, haven't helped. Although Dominion canceled construction of four units and took a $600 million writeoff, Berry is completely sold on nuclear power. Nonetheless, he pointed out, "We don't have any of them under construction and no consideration of building any in the future. That's not one of our options."
Responding to criticism that Vepco might have committed too heavily and too soon to nuclear power, Berry replied wryly: "Well, there's absolutely no question that we're guilty as charged of failing to predict the OPEC oil embargo and of failing to predict the Iranian revolution. . . . You may find a few other people who were also guilty of that offense."
Berry added that at the time, however, Vepco officials were very optimistic that they could build all of their planned nuclear units at a much lower cost and in less time than proved to be the case.
Now that Dominion has limited its involvement with nuclear power in favor of new technologies and a restructuring of the organization, it is exploring opportunities for diversification. Part of the process will focus on an examination of nonutility activities, including barge operations.
Other areas under consideration include gas exploration and a possible joint venture in fiber-optics communications. "I don't think we'll get in the communications business, but we have a unique asset -- and that's our right-of-ways," which could be utilized in the same way railroad right-of-ways are for fiber-optics systems, Berry said.
None of this should be interpreted as a signal that Dominion will stray too far from its basic business, Berry said.
"We expect to be principally an electric utility and a natural gas utility. Our diversification efforts are going to be modest. They are designed to enhance our financial performance."