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Task Force on Structure and Transition

June 15, 1998, Richmond

The task force met at the Capitol to discuss three important topics: competitive services, market power, and default suppliers and suppliers of last resort. Meeting participants included investor-owned utilities, electric cooperatives, natural gas companies, power marketers, consumer and senior citizens groups, representatives of commercial and industrial electricity customers, the SCC and the Office of the Attorney General.

Competitive Services

The transition to a competitive environment requires a determination of which services--now provided to electricity customers in a "bundled" package--should be made competitive. This bundled package currently includes (i) electrical generation (ii) ancillary generation services (including load balancing, spinning reserves, etc.) and (iii) customer service functions (such as metering, billing and collections). Representatives of investor-owned utilities (AEP Virginia, Virginia Power, and Allegheny Power Systems), the electric cooperatives, and municipal power suppliers (represented by the Municipal Electric Power Association of Virginia, or MEPAV) told the task force that competition should be allowed in generation supply only at the outset of restructuring; other services should considered for competition in the future. The Virginia Citizens Consumer Council (VCCC) and the Apartment and Office Building Association (AOBA) generally agreed with this approach.

ALERT, Washington Gas, Statoil, Inc. (a power marketer), and the Southern Environmental Law Center, on the other hand, said that the competitive market should include all potentially competitive services. Commonwealth Natural Gas (CNG) offered a slightly different approach, suggesting that the General Assembly should legislatively determine which services could be competitive, authorizing the SCC to determine if and when the services could be deregulated. The American Association of Retired Persons (AARP) stressed that before any service is made competitive, (i) guidelines should be put in place to promote competition, and (ii) regulation should be preserved where competition is not effective in providing reliable electric service to Virginians.

Default Providers

If telecommunications deregulation is any guide, some say, many electric customers will not actively choose a new provider for deregulated services following restructuring. A key piece in the restructuring puzzle is determining who should provide a competitive electric service to those customers who neglect to choose--or who choose not to choose--a provider.

Virginia's investor-owned utilities, electric cooperatives, and municipal power suppliers believe that incumbent electric utilities should be default providers. However, other meeting participants (including ALERT, CNG and Statoil) said that default service should be determined by competitive bidding. The Southern Environmental Law Center also supports that position. Washington Gas takes an intermediate position: incumbents should be default suppliers during the transition to competition; thereafter, default suppliers should be determined by competitive bidding.

Suppliers of Last Resort

Closely related to the default provider issue is the question of providing competitive services to customers unable to obtain suppliers. For example, if a Virginia electricity customer obtaining generation services from an Ohio power marketer fails to pay for services, and the power marketer cancels the power supply contract, who should be obligated to provide replacement generation services for that customer? Similarly, if that Ohio power marketer fails to make delivery on its Virginia customer's generation contract, who should be responsible for back-up generation services? Task force participants also discussed electricity consumers who may be undesirable customers because of poor credit histories, or "slow pay" or "no pay" payment patterns.

The VCCC characterized the customers described above as "residual customers" who, in the VCCC's opinion, should be assigned to providers in proportion to their market share. The Southern Environmental Law Center suggested that responsibility for this residual market should be a condition of licensing for all electricity suppliers in Virginia's restructured market.

Virginia Power, AEP Virginia, Allegheny Power and the electric cooperatives all stated that incumbent utilities should be suppliers of last resort. However, Allegheny and Virginia Power also suggested that these efforts should be supplemented by universal service funds or their equivalents (a concept also endorsed by the AARP). Allegheny believes that no incumbent utility should be required to furnish service to customers who default on billing obligations to third party electricity suppliers, however. The electric cooperatives also support the creation of a universal service fund, suggesting, in addition, that local distribution companies be permitted to surcharge third party suppliers whose nondelivery triggers the need for services furnished by a supplier of last resort.

ALERT, CNG and Statoil believe that supplier of last resort service should also be furnished competitively. Statoil believes that default and supplier of last resort services should be consolidated and bid competitively. In Statoil's view all customers eligible for such services should be assigned on a random basis to sufficiently large groups of customers to attract supplier bids. AOBA also supports consolidating these services.

Market Power

A final discussion topic before the task force was the question of incumbent utility market power in a restructured environment. Market power can arise from two sources (separately or in combination): (i) a transmission system running through a service territory has little or no excess capacity (producing "import constraints"), or (ii) incumbent-owned generation units within the service territory must be operated virtually at all times to ensure a stable and reliable flow of power (called "must run" units). Thus, market power could provide an opportunity for an incumbent to enjoy unregulated monopoly power for generation services in its formerly regulated service territory if an alternate supply could not get into the service territory due to import constraints or if its generation plants must run to ensure voltage stability within that service territory.

The task force continued a discussion of this topic begun by the full joint subcommittee at its June 3 meeting (see above). The key issue is how best to mitigate that market power to enable the creation of a competitive market for generation. One idea suggested at the June 3 meeting by a Virginia Power representative, and also mentioned in submissions from AARP and other parties, was the idea that regional ISOs could use their oversight of regional generation and transmission to mitigate market power. Additionally, construction of so-called "merchant plants" in incumbents' service territories together with transmission line enhancements were also raised as potential solutions. A Virginia Power representative at the task force meeting stressed that utilities' business decisions during the transition to retail competition would play an important role in sorting out the market power issue.

An SCC consultant told the task force that "lightly regulated" ISOs are designed to dispatch generation and coordinate transmission. Their capacity to monitor and mitigate market power is inherently limited by their function and the complexity of the issue. While the Federal Energy Regulatory Commission (FERC) regulates wholesale transactions in the interstate market, it lacks clear statutory authority to address retail competition market power issues through its approval or regulation of ISOs. Equally uncertain is ISO operators' authority to limit or penalize ISO members for anti-competitive behavior resulting from the exercise of market power.

AOBA believes that generation divestiture and divestiture incentives should be the tools of choice to address market power and that utilities should be limited to a maximum 40 percent of total generation supply available resources. The Southern Environmental Law Center also supports divestiture. In a similar vein, CNG suggests that utilities should be required to submit their generation assets to an auction, on the theory that the level of stranded cost recovery by incumbent utilities may be the biggest barrier to new market entrants and thus a source of incumbent market power.

The VCCC stated that market power's elimination should be a prerequisite to retail competition. Furthermore, this consumer organization believes that the SCC should be authorized to (i) order divestiture, as needed, to mitigate market power and (ii) prohibit mergers or acquisitions that would produce or worsen anti-competitive conditions in the retail sale of electricity. A similar role for the SCC was outlined by Statoil.

Schedule and Future Meetings

The task force will convene its next meeting following the July 9 meeting of the joint subcommittee, the date to be announced. In the meantime, stakeholders and others interested parties will be submitting proposed restructuring plans (in narrative form) to the joint subcommittee's staff by June 30. These plans will then be posted to the joint subcommittee's web page, for dissemination to the study participants and public. This key submission will provide a structure for the remaining meetings of the task force, as it works to complete its work by early fall.

The Honorable Clifton A. Woodrum, Chairman
The Honorable Thomas K. Norment, Jr., Co-Chairman
Legislative Services contact: Arlen K. Bolstad