The Virginian-Pilot
                             THE VIRGINIAN-PILOT 
              Copyright (c) 1994, Landmark Communications, Inc.

DATE: Saturday, July 30, 1994                TAG: 9407300248
SECTION: BUSINESS                 PAGE: D2   EDITION: FINAL 
SOURCE: By TOM SHEAN, STAFF WRITER 
DATELINE: NORFOLK                            LENGTH: Medium:   85 lines

DOMINION CEO BACKS COST CUTS AT VA. POWER THEY IMPROVE THE COMPANY'S STANDING AGAINST COMPETITORS - AND MORE WORK IS TO BE DONE, HE SAYS.

Dominion Resources Inc.'s chairman and chief executive Friday defended his drive for more aggressive cost-cutting at electric utility Virginia Power.

The Dominion subsidiary has been preparing for changes in the energy industry and is in excellent financial shape, Thomas E. Capps, the head of Richmond-based Dominion Resources, said in an interview in Norfolk.

But Virginia Power, he insisted, has to respond more quickly to the slower growth in electricity demand and the prospect of greater competition.

Meanwhile, Dominion must look beyond Virginia Power for other sources of earnings if it hopes to increase its dividends, Capps said.

The pace of cost-cutting at Virginia Power and Capps' emphasis on diversification have become sore points in an increasingly ugly battle among members of the Dominion board of directors. Dominion ousted three Virginia Power directors this week.

The dispute among Dominion's board members began as a clash of personalities, Capps said, but ``it has gotten beyond that.''

The differences among directors prompted the State Corporation Commission to launch an investigation in mid-June into relationships between Dominion and its regulated subsidiary, Virginia Power. In its order for the investigation, the SCC expressed concern that the dispute might threaten the reliability of Virginia Power's service to customers.

Virginia Power, the largest utility in the state, serves almost 1.9 million households and businesses in Virginia and northeastern North Carolina.

Capps insisted that state regulators do not have jurisdiction in the dispute.

The idea that Virginia Power and its board of directors can act independently of Dominion, he said, ``is not a valid issue. A subsidiary always owes a duty to its owners.''

Capps said ``it is a possibility'' that Dominion could argue against the SCC in the Virginia Supreme Court. He declined to elaborate on Dominion's legal strategy.

In documents submitted to state regulators, a group of Dominion directors have described complaints made by Virginia Power president James T. Rhodes about his difficulty working with Capps.

After Rhodes' threatened to take early retirement, a group of directors last spring responded with a plan to have Capps serve as CEO for 18 months, then step down at age 60. Rhodes would continue as president of Virginia Power.

Capps, a utility lawyer who joined Virginia Power in 1984 and became CEO of its parent company in 1990, said Friday that the arrangement crafted by directors William W. Berry, James F. Betts, and others had been dictated to him and was not a compromise. The directors' agreement over executive responsibilities eventually fell apart.

Since then, some Virginia Power officers have complained that Capps interfered in the utility's routine operations, including its negotiations with the rail holding company CSX Corp. over rates for hauling coal. Capps, according to some utility officers, also failed to keep them informed of other matters, including merger discussions.

Capps denied that he interfered in Virginia Power's talks with CSX. He said key persons at the utility were fully informed about Dominion's merger considerations.

In any event, Dominion's two merger prospects failed to develop. Capps said talks faltered with the utility holding company Allegheny Power.

``They were a reluctant bride,'' he said. ``We didn't try to force the issue.''

Later, Capps met with executives of the Charlotte-based utility Duke Power Co., which serves central and western parts of North Carolina.

When Dominion and Duke exchanged information about their electric systems, a projection of their combined operations suggested that the two would not fit well together, Capps recalled.

The projected savings from a Dominion-Duke merger, he said, ``were not that great, and we decided it did not make sense to get into a serious discussion.''

Dominion will continue its diversification into such areas as natural-gas drilling and non-utility power generation, Capps said. Those activities have performed well for the utility and will continue to grow, Capps said.

Today, Dominion's non-utility assets amount to $1.9 billion, or about 15 percent of total assets.

``At some point, our diversification program is going to get big, with $5 billion to $6 billion of assets,'' Capps predicted. by CNB