The Cooperatives' Comments to the Stranded Cost Task Force

The Cooperatives' Comments to the
Stranded Cost Task Force
of the
SJR 91 Joint Subcommittee on Restructuring the
Electric Utility Industry

July 23, 1998

Proposed Statutory Language Defining Stranded Costs and Describing a Stranded Cost Recovery Methodology

The Virginia, Maryland & Delaware Association of Electric Cooperatives ("VMD Association" representing, in Virginia, A&N Electric Cooperative, BARC Electric Cooperative, Community Electric Cooperative, Craig-Botetourt Electric Cooperative, Mecklenburg Electric Cooperative, Northern Neck Electric Cooperative, Inc., Northern Virginia Electric Cooperative, Powell Valley Electric Cooperative, Prince George Electric Cooperative, Rappahannock Electric Cooperative, Shenandoah Valley Electric Cooperative and Southside Electric Cooperative, Inc.) and Old Dominion Electric Cooperative ("Old Dominion") (collectively, the "Cooperatives") join in submitting these comments and proposed statutory language to the Stranded Cost Task Force of the SJR 91 Joint Subcommittee on Restructuring the Electric Utility Industry.

The members of the Task Force are aware that cooperatives are structured and operated differently than are investor-owned utilities and other for-profit businesses. Accordingly, as the Cooperatives have consistently asserted, cooperatives must be treated differently in certain aspects of restructuring for retail competition. Stranded cost recovery is one of those aspects.

Owned by their member/consumers and operated for the benefit of those members, cooperatives look to only one source for operating revenues - the members. There are no stockholders from whom stranded costs and transition expenses may be recovered, even on a temporary basis. The Task Force should understand that in order to survive in a competitive retail market, the Cooperatives must be able to offer competitive rates upon the commencement of full competition. Delayed recovery of stranded costs would likely prove fatal for many of the Cooperatives.

The Task Force also should recognize that the principles of cooperative operation discussed above similarly apply to Old Dominion Electric Cooperative in its relationship to its member/consumer distribution cooperatives - including, in Virginia, A&N Electric Cooperative, BARC Electric Cooperative, Community Electric Cooperative, Mecklenburg Electric Cooperative, Northern Neck Electric Cooperative, Inc., Northern Virginia Electric Cooperative, Prince George Electric Cooperative, Rappahannock Electric Cooperative, Shenandoah Valley Electric Cooperative and Southside Electric Cooperative, Inc. Old Dominion is owned by and is operated for the benefit of its member distribution cooperatives, and its only source of operating revenue and for the recovery of stranded costs is those members. In addition, as a power supply cooperative under the current Code of Virginia (§§56-231.1 et seq.), Old Dominion may have only cooperatives as members, and its tax circumstances dictate that it make sales only to its members.

Owing in part to their unique character, cooperatives are created and operate under separate provisions of the Code of Virginia (§§56-209 et seq.). Accordingly, the Cooperatives are proposing that their stranded costs, which they hope to minimize through mitigation efforts, be addressed separately, through amendment of the portion of the Code directed to them. The Cooperatives' proposed stranded cost provisions make specific reference to the need to recover power supply cooperative stranded costs through distribution cooperative members and seek recognition of a recovery methodology that will permit cooperatives to collect sufficient cash to enable them to offer competitive retail market rates when full retail competition goes into effect.

Based on the structure of cooperatives, the proposed methodology will best meet the Cooperatives' needs without unfairly punishing their retail generation customers. It is a cost-based methodology that will balance the burden of stranded costs against achieving the benefits of competitive retail market rates. The Cooperatives would like to see the general stranded cost definitions and methodology they propose included in restructuring legislation, with the details and specific amounts to be decided in proceedings before the State Corporation Commission.

The following is the Cooperatives' proposed statutory language to address the stranded cost definitions and recovery methodology appropriate for cooperatives.

§ 56-209. Definitions.

(o) "Stranded costs" shall mean a distribution cooperative's electric generation-related costs, reasonably and prudently incurred in meeting its public service obligations, whether incurred directly by the distribution cooperative or indirectly through a power supply cooperative of which the distribution electric cooperative is or was a member, that would be recoverable under traditional cost-of-service regulation but which may not be recoverable in a competitive electric generation market, as determined consistent with the principles described in section 56-230.1.

(p) "Transition costs" shall mean the costs a distribution cooperative reasonably incurs during the course of the transition from cost-of-service regulation to a competitive retail electric market, whether incurred directly by the distribution cooperative or indirectly through a power supply cooperative of which the distribution cooperative is or was a member, that would be recoverable under traditional cost-of-service regulation but which may not be recoverable in a competitive retail electric market, as determined consistent with the principles described in section 56-230.1.

(q) "Competitive transition charge" shall mean the nonbypassable charge applied to the bill of every customer receiving electric generation through the distribution or transmission network of the distribution cooperative, which charge is designed to recover the distribution cooperative's transition costs and stranded costs as determined by the Commission pursuant to section 56-230.1.

§ 56-230.1. Determination and Recovery of Stranded Costs and Transition Costs.

A. Each distribution cooperative shall be permitted to recover all of its stranded costs and transition costs following the Commission's determination of such costs under subsection B, below. Such costs shall be recovered through a competitive transition charge, as defined in § 56-209(q). Each customer receiving electric generation through the cooperative's transmission and distribution network shall pay a competitive transition charge to the distribution cooperative in whose service territory that customer is located for recovery of those costs. The costs to be recovered shall be allocated in a manner that avoids, to the extent reasonably possible, inter-class or intra-class cross-subsidization.

B. The Commission shall apply the following principals in determining the level of stranded costs and transition costs a distribution cooperative shall recover through the competitive transition charge:

1. The Commission shall permit the recovery of all stranded costs, as that term is defined in § 56-209(o), including, but not limited to, the following:

(a) net generation plant investments and costs directly or indirectly attributable to the distribution cooperatives investment in generation plants and related facilities, including facilities necessary to interconnect such generation plants to the interstate transmission grid, and other related costs;

(b) projected nuclear generating plant decommissioning costs, costs related to the disposal of spent nuclear fuel, and the projected retirement costs attributable to other existing generation plants, and related costs;

(d) any other similar or related costs that the Commission determines may be recovered.

2. In determining total stranded costs, the Commission shall use a methodology that ensures that the distribution cooperative and any power supply cooperative of which the distribution electric cooperative is or was a member will be able to continue to meet required their financial obligations, commitments and covenants. For cooperatives, stranded costs will be measured by the amount of cash necessary to reduce the average cost of wholesale power to the distribution cooperative to the cost the competitive market would charge for equivalent service in the first year that retail customers are permitted to choose their electricity supplier (i.e., the beginning of the transition period). For distribution cooperatives that are members of a power supply cooperative, the average cost of wholesale power shall be determined by taking the total expense for delivered kilowatt-hours, adding indenture or mortgage net margin requirements, and dividing that amount by the total kilowatt-hour sales.

3. The Commission shall permit the recovery of all transition costs, as that term is defined in § 56-209(p), including, but not limited to, the following:

(a) the cost of developing and implementing new transmission, generation sale or exchange, or other instrumentalities, entities or organizations, including but not limited to independent transmission system operators and power exchanges, designed to foster a genuinely competitive generation market, and related costs;

(b) the costs of employee severance, retraining, early retirement, outplacement and related expenses, at reasonable levels, for employees affected by changes that occur as a result of the restructuring of the electric industry;

(c) the costs of purchasing, replacing, modifying or updating metering or billing systems, software, or equipment that the distribution cooperative was required to incur to provide service for customers of competitive generation suppliers, if such costs have not been fully recovered and the distribution cooperative is no longer required to provide such services;

(d) the costs of any physical plant rendered no longer used or useful because of the transition to retail competition, and related costs; and

(e) any other similar or related costs that the Commission determines may be recovered.

4. The Commission shall determine what, if any, additional stranded costs, transition costs, or other costs may be recovered through the competitive transition charge.

5. In determining stranded costs, the Commission shall consider the extent to which the distribution cooperative, either on its own or through a power supply cooperative of which it is or was a member, has undertaken efforts to mitigate stranded costs by appropriate means in a manner that is reasonable under all of the circumstances, including consideration of whether the mitigation has been commensurate with the magnitude of the distribution cooperative's stranded costs or transition costs. During the transition period, distribution cooperatives shall have the duty to mitigate stranded costs and transition costs to the extent practicable. Mitigation efforts may include, but shall not be limited to, the following:

(a) acceleration of depreciation and amortization of existing rate-based generation assets;

(b) minimization of new capital spending for existing rate-based generation assets;

(d) reduction of book assets by application of new proceeds of any sale of idle or underutilized existing rate-base generation assets;

(e) maximization of market revenues from existing rate-base generation assets.

In evaluating mitigation efforts, the Commission shall consider efforts undertaken over time, prior to the enactment of this section, to reduce or moderate customer rate levels while maintaining and safe and efficient operations.

6. Upon application by a distribution cooperative, the Commission may, in its discretion, reconsider its determination of stranded costs and transition costs in order to take into consideration the following:

(a) significant increases in the rates of federal or state taxes or other significant changes in law or regulations that would affect these costs;

(b) the distribution cooperative having been directed by the Commission or a transmission system operator to make expenditures to repair or upgrade its transmission or distribution system;

(c) any increase in the allowance for nuclear decommissioning costs based on information not available at the time the distribution cooperative's stranded costs were determined, if such costs are not recoverable in a competitive generation market and are not currently covered in the competitive transition charge.

C. The competitive transition charge may be collected as follows:

1. For distribution cooperatives, the competitive transition charge shall be included on bills to distribution customers for a period to be proposed by the distribution cooperative and filed with the Commission for approval. The Commission shall consider the impact of the distribution cooperative's competitive transition charge on customer rates and on the financial health of the distribution cooperative, as well as other relevant factors.

2. If, after the effective date of this section but before the competitive transition charge collection period is complete, a customer installs or operates onsite generation that reduces that customer's purchase of electricity through the distribution cooperative's transmission and distribution system to a level below the level of purchases prior to the effective date of this section, that customer's fully allocated share of stranded costs and transition costs may be recovered from the customer through continuing the competitive transition charge or by an exit fee approved by the Commission.

D. As part of its overall restructuring plan, each distribution cooperative shall file with the Commission a plan for recovery of stranded costs and transition costs, including a proposed competitive transition charge and supporting documentation. In evaluating the recovery plan in any proposed competitive transition charge, the Commission may schedule such evidentiary hearings, with proper notice and the opportunity for all parties to cross-examine witnesses and be heard, as are necessary.

E. The Commission shall establish procedures for periodic review and reconciliation of the costs recovered through the competitive transition charge, with the first such review to occur not less than two years nor more than five years after commencement of the transition to a competitive retail market. The review shall reconcile revenues received from the charge with the then-current amortization of stranded costs and transition costs as approved by the Commission. The Commission may adjust the competitive transition charge collection period to assure the recovery of the proper amortization amount.