These comments provide the perspective of the Apartment and Office Building Association regarding future structure of the electric industry in Virginia. As requested, these comments are organized in accordance with the Outline of Senate Bill 688 that the Staff provided to interested parties.

§56-578. Applicability; municipalities

Basic Issue: The treatment of municipally-owned and operated electric utilities under a comprehensive restructuring act.

AOBA Position:

Municipally-owned utilities should be encouraged to remove themselves from the electric generation and power sales business, unless it can be demonstrated that the municipal utility can provide generation service at rates clearly below market price levels. Customers of municipal utilities should be provided the same opportunities for retail choice as customers of investor-owned utilities. Generating units owned by municipal utilities should be sold through an open public auction process. Existing power purchase agreements between municipal utilities and other utilities or non-utility generators (NUGs) should be either phased-out or sold through public auctions. Default service and Last Resort Service should be provided through competitive bidding processes.

§56-579. Schedule for transition to retail competition; Commission authority.

Basic Issue: The timeline and structure of transition to retail competition, including timelines, SCC oversight, rate cases, linkages to ISO/RPX formation.

AOBA Position:

The SCC should be given ultimate responsibility for determining the timing of retail competition, including the extent to which phased implementation of retail competition should be employed. The legislature should provide guidelines for the timing of retail competition, but it should not dictate a fixed time schedule for full retail competition.

Implementation of retail competition will require substantial adjustment to utility billing and customer information systems. Utilities will need time to develop policies, procedures and information systems for the provision of unbundled services and for tracking necessary interactions with power marketers. The required adjustments to existing procedures and systems can best be accommodated through a phased implementation of retail competition which provides for the development and testing of new systems for limited numbers of customers. In this manner, utilities are provided opportunities to work out bugs in those procedures and systems before they are required to offer retail competition for their entire customer base.

Large scale pilot programs should be key elements of any plan for phased implementation of retail competition. Such programs should be open to customers from all class of service and rate schedules and should be free of market distorting participation incentives. Pilot programs should also be large enough in scope to minimize the use of short-run pricing tactics by marketers that are aimed primarily at obtaining market share. In addition, the implementation of pilot programs should be looked upon as tools to stimulate the early formation of ISOs or RPXs. Thus, pilot program implementation need not be delayed until ISOs and RPXs are in place.

Implementation of retail competition need not be dependent upon the actions of other jurisdictions with regard to retail competition. Rate cases before the SCC will be required to develop unbundled rates for retail electric services, but the need for base line rate cases should be left to the discretion of the SCC. Arbitrary rate freezes for charges for T&D services are generally unnecessary and should be avoidable if the SCC takes appropriate steps to block cost shifting between generation and distribution functions. Freezes in rates for generation services are also likely to be unnecessary if the costs of generation for "default" customers and "supplier of last resort" customers are determined through competitive bidding. Only customers who are eligible for retail competition should be subject to charges for stranded cost recovery, if any such charges are found to be necessary and appropriate.

Preliminary wholesale competition should be conditioned on: (1) the development of non-discriminatory qualification criteria for determining who is eligible to participate in such wholesale competition; and (2) the adoption of rate provisions to ensure that customers eligible for preliminary wholesale competition do not escape responsibility for stranded costs.

§56-580. Non-discriminatory access to transmission and distribution systems.

Basic Issue: Access by electricity suppliers to transmission and distribution systems currently owned and operated by incumbent electric utilities.

AOBA Position:

Non-discriminatory access to the transmission and distribution facilities currently owned by incumbent electric utilities is a necessary component of any plan for effective competition in retail generation markets. FERC will assume primary responsibility for implementation of open access transmission service policies, however the SCC retains responsibility for ensuring open access to local T&D facilities not regulated by FERC.

The importance of concerns regarding constraints on transmission import capability may be amplified by movements toward electric industry restructuring, however, the political and economic issues associated with the siting of new transmission facilities are neither new nor unique to electric industry restructuring. Moreover, the existence of transmission import constraints does not represent an insurmountable road block to either electric industry restructuring or retail competition for generation services. Restructuring legislation must recognize that transmission import constraints are likely to continue well into the future and that issues associated with market power in retail markets are not being addressed by the FERC. Rather, the FERC focuses primarily on analyses of wholesale generation markets. As a result, individual states must assume responsibility for assessing the impacts of transmission import constraints on market power in local retail generation markets. For this reason, the General Assembly must enact electric industry restructuring legislation that mandates SCC examination of market power issues for retail generation markets in Virginia.

Once ISOs are in place, the SCC should find little need for regulation of transmission service charges. In fact, SCC efforts to regulate charges for transmission services where transmission constraints exist may distort pricing in generation markets. Thus, after the advent of retail competition, the SCC should restrict its rate regulation activities to matters relating to the pricing of distribution and local transmission services that are not subject to FERC jurisdiction. If competition in retail markets is impacted adversely by transmission constraints, then the SCC must address market power issues for the affected areas through divestiture of generation, the creation of financial markets to facilitate price competition, and/or other means. However, AOBA believes that, although use of financial transactions (e.g., futures trading) may facilitate price competition, financial market transactions are not substitutes for competition in physical transactions. In other words, significant dichotomies between the pricing of financial market and physical market transactions cannot long endure. Rather, in the long-run financial market transactions that are not supported by physical market transactions cannot and will not eliminate market power concerns.

§56-581. Independent system operator.

Basic Issue: The role of regional independent system operators (ISOs) in furnishing generation dispatch coordination.

AOBA Position:

AOBA recognizes that much of the review of ISO proposals and the regulation of ISO activities is likely to fall under FERC jurisdiction. However, AOBA supports the idea of SCC development and application of a Virginia "public interest" standard for any ISO in which one or more of the State's utilities will participate. Of particular concern should be ISO organizational structures, policies, or pricing which result in either (a) significant increases in transmission service costs without corresponding expectations of energy cost savings and/or (b) migration of lower cost power from Virginia to higher energy cost states without substantial transmission cost savings. Issues of governance, ISO board membership, minimum size requirements, and dispatch of must run units should not be addressed in legislation, but may be factors that the SCC would consider in its development of a Virginia public interest standard.

Following the formation and approval of one or more ISO to serve Virginia, the SCC should be charged with ensuring the reliability of service that power marketers selling firm service within the Commonwealth provide to their customers. In this context, legislation should specifically authorize the SCC to set minimum generating capacity reserve requirements for all providers of firm electric generation services. The SCC should also be charged with responsibility of determining who and under what circumstances eminent domain and condemnation rights for the construction of new transmission facilities should be permitted.

Finally, there have been a number of suggestions by utilities that, with the formation of an ISO, transmission assets might be transferred to either a "Wiresco" or a "Transco" at greater than book value. The SCC must retain jurisdiction over the costs at which facilities currently included in retail rates for consumers in Virginia are transferred to such entities. Furthermore, if existing transmission facilities are sold or transferred to a Wiresco or a Transco at greater than book value, the SCC must ensure that the benefits of such gains are properly reflected in rates for retail distribution service.

§56-582. Regional Power Exchange.

Basic Issue: The role of regional power exchanges in providing electricity pricing mechanisms.

The appropriate role for the SCC in overseeing the development and operations of RPXs needs further investigation. Whether a Virginia "public interest" standard for RPXs is necessary or appropriate is not clear at this time. As long as there is true open access to T&D facilities and reasonable controls over the exercise of market power are in place, the formation of RPXs may be most appropriately left to market forces. However, AOBA believes strongly that nothing in the structure or operation of RPXs should inhibit or constrain opportunities for the negotiation of bi-lateral contracts for generation services. Although municipal and cooperative utilities may be provided greater time to transition to competitive retail power markets, their interactions with RPXs ultimately should be no different from those of any other provider of distribution services.

§56-583. Transmission and distribution of electric energy.

Basic Issue: The regulatory and structural framework for electricity's transmission and distribution.

AOBA Position:

The General Assembly should enact legislation that requires the SCC to develop, implement, and enforce codes of conduct for distribution utility interactions with both affiliated and non-affiliated marketers of generation services. Such standards should include, but should not be limited to, restrictions on activities such as:

1. Joint marketing of utility and non-utility services;

2. Shared use of employees, information, and logos between a utility and unregulated energy marketing entities;

3. Ties between the compensation of utility employees and the performance of unregulated affiliates;

4. Transactions between utilities and non-regulated marketers (either affiliated or non-affiliated);

5. Preferential treatment of affiliated marketers; and

6. Disclosure of confidential individual customer information or market sensitive information.

AOBA sees no need for mandated consolidation existing distribution utility service territories. This should allow for the initial preservation of current IOU, cooperative and municipal distribution service territories, although some voluntary consolidation may be anticipated in the future.

§56-584. Regulation of rates subject to SCC jurisdiction.

Basic Issue: Transitional and ultimate rate regulation for bundled and unbundled electric service.

AOBA Position:

(See AOBA Comments of June 15, 1998.)

§56-585. Licensure of suppliers of retail electric energy; license suspension or revocation; penalties.

Basic Issue: Licensing, financial responsibility and customer service requirements imposed on all suppliers of electricity within the Commonwealth.

AOBA Position:

The SCC must be given the authority to license power marketers who seek to sell generation services within the Commonwealth. The SCC should also be empowered to set financial and operating standards for marketers, as well as develop and enforce standards of conduct for marketers. Furthermore, the SCC should be empowered to establish minimum capacity reserve requirements for all marketers of firm generation services and require periodic demonstration of the adequacy of each marketer's owned and contracted generation resources.

§56-586. Suppliers of last resort [and default suppliers].

Basic Issue: Determining the generation suppliers of electricity customers who (I) are unable to obtain generation supply services, or (ii) do not affirmatively choose generation suppliers.

AOBA Position:

(See AOBA Comments of June 15, 1998.)

§56-587. Voluntary aggregation permitted.

Basic Issue: The framework within which individual electricity customers may aggregate demand in negotiation for generation supply.

AOBA Position:

AOBA sees no need for limits on aggregation. Entities should be free to negotiate purchases of generation services for aggregated electric service accounts without regard to utility service area, ownership of accounts, customer class, rate schedule, patterns or amounts of electricity usage, or geographic location.

§56-588. Metering, billing and other related distribution services.

Basic Issue: How billing, metering and other related distribution services will be handled and regulated.

AOBA Position:

(See AOBA Comments of June 15, 1998.)

§56-592. Nonbypassable wire charges.

Basic Issue: The extent to which and the methods by which retail customers could be assessed pro rata surcharges for stranded cost recovery, the costs of establishing ISOs and RPXs the costs of public purpose programs, etc.

AOBA Position:

Three key guidelines for stranded cost recovery should be established through legislation. Those guidelines are as follows:

1. No customer should be assessed charges for stranded cost recovery until the customer's rates for electric service are unbundled and the customer is offered the opportunity to select an alternative provider of generation services.

2. No current retail customer of an electric utility in the Commonwealth should be permitted to escape responsibility for stranded costs, if any, of that utility; and

3. Any rate treatment adopted for stranded cost recovery must be designed to mirror the treatment that would apply to any identified stranded benefits (or stranded margins).

§56-593. Divestiture not required; functional separation [and other corporate relationships].

Basic Issue: Treatment of incumbent utilities' current vertically integrated structure.

AOBA Position:

Effective competition in generation markets requires effective disintegration of utility functions. FERC policies are already moving toward segregation of the control of the utility transmission function from their generation and distribution activities. Thus, the primary focus of state restructuring activities should be the effective segregation of utility generation and distribution functions. In doing so, the General Assembly and/or the SCC must also ensure that utility holding company structures and relationships between regulated distribution utilities and non-regulated power marketing affiliates are not used to constrain or otherwise inhibit the development and on-going viability of competitive generation markets. As suggested in AOBA's June 15, 1998 comments, these objectives may be best accomplished by providing incumbent utilities incentives for divesting their generation assets.

Mergers and acquisitions should be addressed on a case-by-case basis, but in no event should transmission or distribution cost savings be used to justify the merger of utility generation activities, nor should parochial interests regarding the ownership of generation resources be permitted to override considerations regarding the development and operation of competitive generation markets.

Basic Issue: Striking a competitive balance between incumbent utilities and new market entrants.

AOBA Position:

AOBA submits that the basic issue in this instance is improperly characterized. The objective market power considerations should not be to strike a balance between incumbent utilities and other offerors of competitive generation services. Rather, the objective should be to achieve sufficient segregation between distribution utilities and all competitive suppliers of generation services (both affiliated and non-affiliated) that new market entrants and utility marketing power affiliates compete on an equal footing.

The benefits of competition in the supply of generation services cannot be achieved in an environment where the supplier of distribution services is also a competitor for sales of generation services. Rather, as indicated above, effective competition requires that distribution utility services be fully disintegrated from the supply of generation services. The only exception might be where the distribution utility is the administrator of "default" or "provider of last resort" services and the generation to meet those "default" or "provider of last resort" requirements is obtained through competitive bidding.

(Also See AOBA Comments of June 15, 1998.)