THE ENVIRONMEN 1. URING the four years that 1 have been serving as the President's Science Adviser and head of the Of?ce of Science and Technology, the problems and opportunities of the electric power industry have come to my attention with increasing frequency. A Vital Role As a person who has been deeply concerned with the maintenance of this country?s leadership in science and technology, I am very much aware of the vital role of the electric power industry in furthering this objective. Technological pioneering has been a key to the growth of the electric power industry from its inception only eight short decades ago to its present status as the na- tion?s largest industry in terms of capital investmentyour future as well. The nation has a strong interest in your future because an abundant supply of reasonably priced electric power has become the lifeblood of our energy-oriented society. In a very real way, it is the success of the electric power industry in sustaining a rate of growth far in excess of the economy generally that is creating some of the problems which I want to discuss. In the next 10 to 15 years the electric power industry faces the task of building new electric power plants, and transmission and distribution systems, with a capacity as large as all the systems that have been built over the past 80 years. These new facilities must utilize existing land, water and air resources that will not be increasing in size; they must compete with the growing use of these same land and environmental resources for recreation, industry and homes as the nation?s population and its economy grow. Just ?nding room for the electric sys- tems of tomorrow without impairing the quality of the environment presents a staggering challenge to the technical and management skills of the electric power industry. The problems and opportunities of the electric power industry came to my attention very soon after I was sworn in as the President?s science adviser. I found that I was chairman of a comprehensive interagency study then under way to evaluate the research and de- velopment opportunities in the energy ?eld and to at- An address before the 36th Annual Convention. of the Edison Electric Institute, Philadelphia. Pa., June 4, 1968. 206 tempt to determine the most effective allocation of the Federal research and development resources. This re_ port, entitled ?Energy and National Program" was published in 1966. A primary focus of the study I was to shape the broad direction of the Federal I'esem-ch program for nuclear ?ssion, and to look again at the Federal role in the technological development of basil fuels, notably coal and shale oil. The basic (Join-lush? of the report, which I believe has been followed, is that the further evolution of the present generation of nu. clear reactors can be left to private industry and its traditional incentives, but that on the breeder- reactor and long-term research on fusion justify Fed; eral support. impressed with the variety of electric power industry problems for which research and development were the. key and the new opportunities they could make avail; able. For example, the report concluded that govern ment effort should also be concerned with the: development of more ef?cient power grids, underground. transmission systems, and new methods of. generation; - such as MHD. the current status of the research effort to perfect! magnetohydrodynamic generator, if for no other FER-3911 than to be sure that the electric power industry llnde?f stands that nuclear power is not the only tiona path available for more efficient and lower- . central station power generation. The inherent stiff? tiveness of an MHD generator is that it holds Frame: of a major increase in thermal efficiencye~ff0m present maximum of some 40 percent to the range 9 percent. An MHD generator combines in a single the functions of the turbine and generator portions a conventional turbo generator system. Sinrc moving parts exposed to high temperatures. it. creased efficiency, combined with the pa reduced capital costs, makes the MHD I promising prospect for achieving apprer tions in power generating costs. I-Imvever. velocities and high temperatures present FUTURE In the course of this comprehensive review, I was: Status of MHD Generator It might be to dwell just for a moment on ml 111135" I can higher lluid temperatures than a 1311.113.? . with an attendant gain in thermal ef?cienc??'. if?! Issiliilltl" in?ll? re 1, the high a ll EDISON ELECTRIC INSTITUTE "mllr'e . .. I .mblenis for achieving a reliable generator because . ems ?nds in the stream. An MHD generator will plainly inn of the walls will surely occur if there are any require large?scale, long-term research and develop? ment effort, although it would not in any way approach the scale of the nuclear research program. Advantages of MHD The development of an MHD generator would assure that fossil fuels would continue to provide lively compe- tition to nuclear power for many decades to come. And, of course, in the future a closed cycle MHD generator could be used in combination with a nuclear reactor. In addition to conservation of our fuel supply, the major increase in conversion ef?ciency which MHD would afford would help to alleviate the problems of air and water pollution associated with the large power plants today by achieving a 15 percent reduction in the amount of effluent and waste heat associated with a kilowatt hou of electricity. In the Unite-d States the current research effort in MHD appears to be tapering off and there is very little :Work now in progress to perfect an MHD generator for the electric utility industry. By contrast, a substantial 'elfort directed toward central station MHD power is under way in the Soviet Union, the United Kingdom and Japan, with an experimental plant now under construction by the Russians. This nation is the world?s largest consumer of electric and even the most optimistic projections for 11!] - . . tleaI energy leave room for an increaSmg demand for 1'Ilssil fuels for electric power production in the decades chi-?0111c. MHD o?iers the prospect for a 15 percent in? ?8 1n efficiency in the use of fuels, which could mean rd- ?lms? In power costs of over one-half billion dollars ?null?? by 1985 at even the lower range of projections. therefore, seem to be prudent to pursue an on research and development program even 3 It Will no doubt be an expensive long-term effort. 1:533? be that such a program will require continued h; Dart1c1pat10n, but it is not clear why public I 3 Should be required for a commercial develop- Sureb? the electric power industry itself has an ?guy's interest and could well justify ?nancial squ? SuCh an effort. To bring this into better focus, an 1968 By Dr. Donald F. Hornig Special AssisicinlL to the PresideniL for Science and Technology I am convening a panel of experts to review the status and prospects of MHD technology in this country and to recommend what action is called for. We will, of course, make the results available to the electric power industry. Perhaps my most dramatic encounter with the elec? tric power industry was on the evening of Nov. 9, 1965, when the President asked me to ?nd out why the lights were out throughout most of the Northeast United States. I am sure that that evening is one that many of you remember as vividly as I. The reliability prob? lem has not yet been resolved, although I know that much progress has been made. It is evident that to meet widely ?uctuating loads, and to protect itself against equipment failures or other emergencies, any utility is strengthened by interties to its neighbors. That is why regional power nets have been established. But interties not only provide protection, they project the problems of one comp-any into the whole system, as the events in the Northeast and elsewhere have so vividly demonstrated. In a dynamically interconnected network, every company is at the mercy of the weakest link in the chain. In short, if a regional network is to be reliable it must be engineered as a system. Its behavior in re? sponse to every conceivable mode of failure must be understood and anticipated. It is a very dif?cult kind of system to engineer for a great variety of changing de? mands must be satis?ed which are not under the control of the system designers. Moreover, unlike an airplane or an automobile, it is never a ?nished product; it is constantly expanding and changing. For Reliable Service The provision of reliable service therefore requires comprehensive joint engineering and joint planning of all of the interconnected utilities in the system, and this demands the very best engineering talent, new methods of controlling large regional nets, and a continuing effort to do even better. In the ?nal analysis, the responsibility for reliable service must rest on the shoulders of electric power ex? ecutives. For that reason, I agree with Mr. Sibley, speaking on behalf of the industry, when he said that 207 ?Reliability Is Our Business.? But it is also true that the nation has an interest and concern in the question of reliability. Its safety and the health of its industrial economy depend on the complete reliability of its elec- tric power supply. It is so important to the nation?s wel- fare that a responsible government must take whatever steps are necessary to assure its reliability. It must be assured that the joint effort is adequate and that it will do the job. Constructive Role for the Government I am ?rmly convinced that the Administration?s Elec? tric Power Reliability Act is the vehicle that would en- able the Federal government to play a constructive role in facilitating joint efforts by the various elements of the industry to work together to perfect a reliable elec- tric power system for all Americans. Reliability of service is not the only electric power problem in which I have become personally involved at the request of the President. The interest of the general public is how EHV lines affect the landscape and whether they can be placed underground have also come to my attention. The problem is, of course, nationwide, but my own involvement began in connection with the construction of transmission lines to serve an Atomic Energy Commission facility near Woodside, Calif. The compromise agreement resulted in an exceedingly at- tractive overhead transmission line which blends well With the surrounding terrain. Two years ago the President requested funds from the Congress to proceed with a program of accelerated research and development for placing high voltage transmission lines underground. These funds were not approved by the Congress, at least in part because of representations made by the electric power industry that they would go forward with the necessary research program. I am grati?ed that the electric power industry has organized a task force which includes all segments of the electric power industry and has laid out a $17 million research program over a ?ve-year period which is now under way. I am well aware that placing EHV transmission line-s underground is extremely expensive. I am also aware that the technology that would reduce costs to the point where we could expect transmission lines to be placed underground as a general rule, at least outside of urban areas, is not in sight. But these facts only highlight the urgency of the research problem because placing trans- mission lines underground will be required more and more in the future whether costs are reduced or not. Let me explain my reasoning. You know better than I that access to our urban centers via overhead trans- mission lines is becoming more and more difficult to obtain. As population density increases and public re- sistance to overhead lines becomes more intense even our expensive present-day technology for underground- ing will be utilized because there is just no other way to bring the power to the ultimate consumer. The industry is thus faced with a real-life problem in the coming years. Metropolitan siting for nuclear plants is apparently still in the future and air pollution 208 technology that would permit us to locate new {tiggi fueled plants in our major cities has yet to be perfecte We must, therefore, continue to build transmission ?n . through densely populated areas. The interest of th general public in preserving the natural beauty of th: landscape is combining with the increase in land wings to make an intensive research program for redutgn the cost of undergrounding transmission lines a matte? of economic necessity for the electric power industr In my judgment, public tolerance of overhead EHV: lines in the future will be greatly in?uenced by whether the public feels that the electric power industry is mak_ ing an all-out effort that Will permit undeJ-gl-mmd_ ing EHV lines in the future. Undergrounding may always carry an extra cost, but it is important to try to minimize the difference, In more and more areas underground lines will have to be built at very great expense, even if the hardware has not been developed to do so at more reasonable costs, therefore, urge you to reexamine your program in this area to make certain that it is broadly based and that the industry is moving swiftly enough to meet thi? problem. My most recent assignment for the President that?, affects the electric power industry is the task of co. ordinating energy policy on a government-wide basis. To carry out that responsibility, we have established a small energy policy staff in the Office of Science and Technology. The President?s decision to establish a staff group in the Executive Office to coordinate energy pol. icy grew out of a recognition that various forms of energy are now highly competitive and interchangeable, and that they involve many agencies, the national secu- rity and our foreign relations. Decisions by one agency on research and development, tax, regulatory and im- port policy, or even public health, can have serious repercussions on the various forms of __energy which may not be directly involved in the decision. A staff in the Executive Office of the President was considered the best means of providing the over-all framework assure that the impact on the total energy industry is considered in major policy decisions. 1. Competition, Benefits I am sure that you are experiencing intense comp?? tion in the market place from natural gas and oil, 35 well as bene?ting from the competition between nuclear power and fossil fuels for electric power pro-dunno": would agree that the various forms of energy are be' coming so competitive and interchange-able that the? are, in e?ect, part of a single energy industry. Ind many of the companies formerly engaged in oil and 33?. production are now branching out into Coal and "fa nium and becoming energy companies. We are am? experiencing rapid changes in the technology 0f energy production and in the pattern of energy mansul? as well. .- In these circumstances. it is understandable I:le ma. government, itself. should begin to examine Its ?ref Policies from an over-all point of The, {:1le if evaluating government energy policy tn 35511113 1311? ption. EDISON ELECTRIC INSTITUTE BUL .E responsive to the future needs of the nation will not be easy and will not be done in a day, or even a year. fact, it is a continuing task, and for that reason a swan, permanent staff has been established. No Dramatic Change in Policy My guess is that the primary impact of our work will at be in any dramatic overhaul of government policy in any major policy declaration, but rather in mak- ing a contribution to the real life day-by?day problems facing the energy policymakers to assure that the rever- hal-ations across the energy scene are considered before and not after major decisions are made. We, of course, will not be involved in the decisions of the independent regulatory agencies. Our purpose is rather to provide information and analyses that will provide guidance the President, and indeed for the who-1e Executive Branch of the government. We will, of course, work Elogely with all the agencies involved in energy policy in formulating new Administration programs. We are engaged in a pioneering e?ort in attempting [a provide an over-all perspective to government policy regarding the energy industry, and, we are, therefore, feeling our way. We would welcome the advice and assistance of the electric power industry in carrying out this formidable task. One of the major functions which we hope to serve in coordinating energy policy is to achieve greater har- mony between the various long-standing programs that have stressed only the economic cost of energy and the recently enacted legislation to control air and water pollution. The twin goal of low-cost power and improv- ing the quality of our environment is a real challenge to all concerned when you c0nsider that the United States will be consuming more energy in the next 20 years than the total national energy consumption thus far in this century. So long as man was forced to rely on his personal strength. or later, on the harnessed energy of domesti- tatcd beasts, his effects on his environment were rela- lively insigni?cant. Now our world is more densely Milled, and at the same time we are able to convert 311d use enormous blocks of energy. Many of the problems we now face in managing our futilnnment are a simple consequence of the ever- m?l?easing scale of man?s activities. We threaten to Wen-whelm nature?not just our streams and the air Wetour cities, but possibly even on a global scale. The resident?s Science Advisory Committee, in its report ?Wins the Quality of Our Environment,? estimated ma: 3; ?the anticipated levels of fuel consumption by the m0 000, the carbon dioxide level in the entire earth?s ?Sphere be 1ncreased 25 percent, and carbon ml) 9 an absolutely unavoidable product of the ustiun of fossil fuels. al'bcn dioxide is not toxic, but it is the chief heat? component of the atmosphere. Such a change 0: carbon dioxide level might, therefore, produce ingconsequences on the climate?possibly even trig- g- effects such as have occurred from 0 tlme in the past. We are looking further into ?9 1968 i this question, but the scienti?c base for sound predic? tion is still very weak. A basic problem is that our social systems have not taken account of these changes?our economic decisions have been based on cos-t of manufacture and delivery to the customer, and have left the additional costs, such as the costs of pollution, to the public. We have not yet devised a wholly satisfactory mechanism for properly allocating cost of pollution prevention?or waste man- agement or management of the environment?as part of the cost of production. But, of course, this is where the costs belong. This elementary and obvious fact only gradually is beginning to sink in. Previously you used public water for cooling, and it was practically free, but now with more of you creating more waste heat, you are ?nding it necessary to spend more on cooling, and the costs will be borne by the consumer. So, too, sulfur in fossil fuels was not a great problem, but now you produce 46 per- cent of the 29 million tons of sulfur oxides reaching the air of the United States this year. You will need to reduce this amount, and to do so may well be costly. How will the cost be borne? In the past few years the President has proposed, and the Congress has enacted, legislation which I believe will test the American genius for technological innova- tion to the utmost if we are to achieve the twin goal of low-cost energy and a high-quality environment. The Water Quality Act of 1965, and the Clean Air Act of 1967 in particular, will require that unless the oil and coal industries ?nd economical ways to get sulfur out of fuels, the electric power industry must do so and also direct its elforts to ?nding economical means of elimi- nating the discharge of excess heat into the nation?s waterways. Economical solutions must be perfected as a matter of necessity because, if they are not, the standards that will surely be imposed pursuant to existing law will add an appreciable element to the cost of electricity which the nation can ill afford. The problem of the damage to the ecology of our nation?s waterways due to the discharge of waste heat from large steam power plants has been the subject of much concern and attention in recent months. Over half of the states already have adopted standards limiting the increase in temperature permitted in their water- ways, which have been approved by the Secretary of the Interior pursuant to the Water Quality Act of 1965. Standards in the remaining states will undoubtedly be approved shortly. Disposal of Waste Heat Disposal of waste heat is already a problem for the utilities industry, and it will be more of a problem in the future. I would urge Edison Electric Institute, as the representative of utilities which own over 80 per- cent of the power plants that will be creating the prob- lem of thermal pollution, to take the lead in devising means for alleviating the problem. In your efforts you should keep in close touch with the newly formed a- tional Headquarters for Thermal Pollution Research at 209 Corvallis, Ore., a part of the Department of the In? terior?s Federal Water Pollution Control Administra- tion. Government?s Air Pollution Programs 1 wish to turn now to the governmental programs for air pollution control because I think a clear understand- ing of where we stand in the battle for clean air may be helpful to the electric power industry in carrying out its responsibilities toward that end. The most important fact is that the debate has ended. The question whether a national air pollution control program is needed has been answered. Such a program was enacted into law last year and that law is in the process of being im- plemented. The statutory scheme provides for the Federal gov- ernment to for air quality control regions, develop air quality criteria and information on control techniques. The states will then ?x standards which will be re- viewed and approved by the Department of Health, Education and Welfare. This work has begun and it is now only a matter of time until there are air pollution control standards that cover all of the areas where there are concentrations of population. In the meantime, the states in many parts of the nation are proceeding under pro-existing law and many utilities are facing early deadlines for limitations on oxides of sulfur and par- ticulate matter that can be emitted from their power plants. I believe it is of interest to note that one of the key provisions in the Clean Air Act of 1967 is that the control standards to be established shall be based on criteria to be determined by HEW. These criteria will be determined from the impact of various concentrate tions of pollutants on people and plants, based on the best available scienti?c evidence. I do not mean to sug- gest that all scientists will agree with the criteria established by HEW. On the contrary, our base of data and our knowledge of the effects on humans are not su?'lcient to expect irrefutable ?ndings. However. the law requires HEW to proceed at once with establishing criteria on the basis of what is known today. The more signi?cant point is that scienti?c knowledge is the touchstone for establishing air pollution controls; as our knowledge becomes more complete in the future there will be opportunities for adjustment. The statutory pattern of basing air pollution controls on scienti?c evidence is really a sharp departure from past practice. in prior years, air pollution abatement programs were designed to eliminate the forms of pollution that we could see or smell, mainly smog and smoke, utilising abatement procedures that were read- ily available. The Clean Air Act of 196'? is designed to eliminate all types of pollution which may have an adverse impact on health. even though the form of pollution may be odorless and invisible and the impact a long-range one. On the other hand, the Act suggests that control techniques be available before these stand- ards are implemented. The gap between the standards based upon scienti?c evidence and the technology to achieve those standards at minimum costs is the one 210 that must be ?lled with a combined governmentin dustry research effort. There is an element of flexibility in the tlnletahle f0 adopting the standards to be ?ned under the Clean Air Act of 1967, but without going into the legal [illegtinnr involved, it seems to me that this flexibility to a la? a measure hinge-s on whether the utility industry is mak ing an all?out effort to perfect control technology. 0b:- viously, the goal of the air pollution control program is to beccme effective at the earliest possible date, and as: far as the responsible government cificials and the; general public are concerned, the burden for justify; ing a delay in making standards effective rests squarely on the shoulders of the industry. The general public, of course, has an interest as an energy consumer in an optimum timetable that will I permit minimum disruption of existing fuel marketing 1 patterns and the maximum utilization of all types of low-cost fossil fuels. But if we must choose between clean air and an increase in the cost of electricity, 1 . believe it has already been decided that we will pay the I price for clean air. The big challenge that is before the electric power industry and energy coordinators like I me is the opportunity to minimize and hopefully even . eliminate that price by perfecting economical solutions swiftly enough to meet the timetable for implement-a- tion of the Clean Air Act. I am aware that there are many promising contra] techniques being tested in pilot plants at several power stations in this country and abroad. National Center for Air Pollution Control is ?nancing much of this effort. The question I raise for your consideration is whether the industry is attaching this problem with the speed and urgency that it deserves. The lead time for the design of new steam power plants is now a four- to-?ve year period and to that must be added the time to incorporate the results from the laligratory and pilot plant into the design of new stations. I believe that if the research and development e?o-rt is reexamined on the basis of the cost of alternatives, which in 1113.111i cases will be to burn a much more expensive fuel, You may ?nd a very high bene?t?to?cO-St ratio from acceler- ating the good work now under way for perfecting techniques for removing sulfur oxides from stack gases- or from fuel. What I have said about the sulfur oxides Program can be generalized, but I have keyed my to I efiiuent because it is the form of air pollutium for Wl?. I the electric power industry is primarily and it is the one for which standards will undoub ?rst be enforced. A Common Thread There is a. common thread which links man}r 9f environmental problems facing the electric 1? dustry that I have discussed. Public umlersiandi?g'all patience to await economical abatement techniques i be expected only if the industry is mounting a? a mi?; effort to achieve economic solutions. The general through its representatives in the Executive 311 (Continued on. page 225 EDISON ELECTRIC INSTITUTE 5? h, onnufoL top honors in the Reddy Kilowott Annual Report Competi- . airman I iowoit, presents the award to Donald C. PreSIdeni, and Harold R. Johnson, AEP Vice President. The presentation was mode at the recent in Philadelphia. 1968 EEI Convention Issue of the EEI BULLETIN A Few Copies Still Available $l.50 per Copy Order from: Editor: EEI BULLETIN Edison Electric Institute 750 Third Ave. New York, N. Y. 10017 . 1953 2H in earnings and dividends on utility stocks, institutional portfolio managers are tending to shy away from such stocks in the belief that the politicians and regulatory authorities will not adjust rates quickly enough to the changing economic facts of life. Witness the demagogic attack of Mayor Lindsay on the rates of Consolidated Edison in his attempt to coerce the utility commission to rescind an urgently needed rate increase. The mayor would see this if he cared to look at their ?gures. Last year the company earned $97 million for its stockhold- ers, paid out million in dividends on common stock and at the same time paid New York City the gigantic sum of $153 million in taxes. Sophisticated investors believe, or wrongly, in the absence of substantial rate increases, that the factors which brought about past growth in earnings per share?trends in invested capital, the rate base, the rate of return, and capital costs?are no longer so fa- vol'ahly balanced as they were. Whether the regulators like it or not, the name of the game to the portfolio managers in today?s market for common stock is in- creasing earnings per share and so growth of earnings per share is imperative to attract buying of utility com- mon stocks on a scale large enough to maintain an ade- quate base to permit the marketing of the huge amount of bond and preferred stocks which you will have to sell in the years ahead. During the past 10 years total net utility plant and total capitalization, the usual measures of investment rate base, have increased at an annual rate of 6.2 per- cent and percent, respectively. Total electric reve- nues increased at approximately 6.1 percent per year, despite many rate reductions, producing a favorable balance between investment and revenues. In addition, unit costs were relatively reduced through improved ef?ciencies of new, large generating units, power pool- ing and widespread use of computers with only moder- ate rises in labor and material cost and. as a conse- quence, the operating ratio improved. The end result. as shown in Fig. 5, was a rising rate of return on invest ment. Capital costs, too, although rising. were not in- creasing rapidly, as can be seen in Fig. 6, which shows that embedded interest charges increased only from percent to 3.76 percent, and the embedded rate on pre- ferred stocks remained substantially unchanged. As a result, the growth in earnings per share in the past decade averaged a satisfactory 7 percent a year. Why Investor Doubts Trend Why does the investor doubt the continuation of this trend? He sees that thouin total net utility plant will in? crease at a percent-plus rate as contrasted with the 6.2 percent for the last decade. revenues probably will not rise proportionately because a substantial amount. of the increased capital expenditures will not be reve- nueaproducing. He sees new non-revenue producing outlays arising from longer lead times from the greater percent of reserve capacity, more and heavier extra- high-voltage transmission and interconnections to 224 RETURN DH AND NET luvtsrentwatn Eitcmc v.5. use-ice: Figure Figure6 maintain reliability, increased capital requirements for air and water pollution control, beauti?cation programs, and subterranean distribution systems. Investor?s Doubts He doubts that savings from nuclear generation, from pumped storage, power pools, and from other economies will fully offset increased costs. He takes into consideration the unfortunate fact that industrial corporations have much more maneuverability than do regulated industries in adapting to thee?ects of accel- erating in?ation. It is axiomatic that the increased wages you have to pay are contributing to your higher cost of capital. 0111? economist advises us that for every dollar of weekly take-home pay the average wage earner 1d- spend about $2.50 by borrowing $1.50. Thus mand is greatly stimulated for installment loans .1 . compete with the utilities for funds in the money m? ket, both short? and long-term, increasing the ?lter cost of money. . Though increasing money costs are only one of 113311?; increasing costs, the pay them a great deal um I attention. The present 6.8 percent rate of returno -- capitalization appears antiquated to them' 3'0- AA rated bonds selling on a 7 percent ba51s and - common stocks selling on an earnings price 1'3? more than percent. Simple mathematics will prove that you tlennDFig.: vive on the traditional percent rate of relul??- - .I shows that even with the rate on your hands allretu ferred stocks declining to 6 percent in 1380. ?163 9 on culliti? will decline from 12.4 percent in 1? w?pi . percent by 1980. With a percent cost of sen-It?ll "t - the return on equity would fall below 9 limbo" t? EDISON ELECTRIC INSTITUTE 3 WITH RETURN ON hill-ml and Frill-Hid Shari Eilvrdin?l. nn H.- lug? HI.- lo i? 5' Im i-I' HUI It?ll.? II tum? ll!- Jul-'1' "pull; anal . .nf Figure 7 IIGNET WITH RETURN 0N EQUITY - Em1113 m0 Figure 8 with an 8 percent money cost the return on equity would drop below 8 percent by 1980. If the present rate of return of 12.4 percent on equity is to be maintained, Fig. 8 indicates that the return on capitalization, now 6.8 percent, will have to be in- creased to 7.8 percent by 1980, assuming costs on senior capital decline to 6 percent. If such costs increase to 7 percent the return on capitalization must rise to 8.1 percent and if the rate rises to 8 percent on senior cap? ital raised during the period, the return on capitaliza? tion will have to be 8.5 percent to maintain 12.4 per- t?nt return on equity. However, even maintaining a 12.4 percent return on equity, your bond coverage will decline, so you must look to even higher rates of return. With the resultant decline in earnings per share from lab any of these calculations, the sale of your common stocks would be exceedingly dif?cult. To normalize the situ- ation you will need substantial and repeated rate relief. New approaches to regulation and the rate of return are needed to provide the growth characteristics for utility equities necessary to compete successfully for funds with the equities of non-regulated companies. Theodore Vail, President of the American Telephone Telegraph 00., near the turn of the century said simply that ?the rate of return must be adequate to attract capital.? To these words we should add that the rate of return should be ?exible and based on the future rather than the past. Rates of return su??iciently high to attract equity cap- ital must be ?exible enough to absorb all increases in the embedded cost of capital, and to provide for a con- tinuing growth in earnings. It is incomprehensible to me that ascertainable fu- ture cost increases beyond a year are not taken into consideration by commissions. With the lead time on nuclear plants and even some conventional units run- ning from four to seven years, a period of one year is not enough. And we know that the investor looks be- yond one year for earnings and debt coverage. And you must urge your Congressmen to study the implications of the proposed Reliability Bill and the Kennedy-Aiken Bill. It is curious that, while at a time when countries such as Czechoslovakia and Rumania, which have had 100 percent centralized control, are turning toward greater freedom, we are turning to centralized government planning, even though we are aware of the gigantic strides that the electric utility industry has made in Japan since it was taken out of government ownership and put in the hands of a multi- tude of stockholders. Perhaps I may ?ttingly close my talk in the words of W. Somerset Maugham: ?If a nation values anything more than freedom, it will lose its freedom; and the irony of it is that if it is comfort or money that it values more, it will lose that too.? Future 'Energy Needs vs the Environment (Continued from page 210) We bra?Ches of the Federal government, have al? I expressed an impatience with the present pace of q?mgress. Their incessant demands for improving . slit-3' of our environment have taken priority over 951% for the lowest possible cost of energy. I sass We believe it is in the long-term interest of the nation that we achieve both our goals of a low-cost energy base and a clean and wholesome environment. To a large extent whether we do so lies in the hands of utility leaders such as those assembled here today. 225