SJR 91

Task Force on Stranded Costs and Related Issues

June 30, 1998, Richmond

The task force on Stranded Costs and Related Issues met for the second time to hear further testimony from stakeholder representatives on the definition of stranded costs. These representatives offered views on which elements should be considered in any determination of allowable stranded cost recovery in conjunction with the introduction of a competitive retail market for electricity.

Definitions and Discussion

Power Companies. An analyst testifying on behalf of Virginia Power and the Virginia Independent Power Producers provided the task force with an historical overview and summary of Virginia Power's contractual involvement with non-utility generators for the wholesale purchase of electricity. Virginia Power, as a result of the federal Public Utility Regulatory Policies Act of 1978 (PURPA), was required to purchase electricity from qualifying facilities at the utility's "avoided cost." These "avoided costs" are the costs Virginia Power would have incurred if it had constructed traditional utility-owned generating facilities and had operated these facilities itself. The analyst explained how these PURPA-mandated expenditures may, in a future competitive market, contribute to stranded costs.

Electric Cooperatives. A representative of Virginia's electric cooperatives defined stranded costs as those reasonable and prudent generation costs incurred that would reasonably be recovered from its customers in the current cost-of-service regulatory scheme but would be unrecoverable in a competitive market. The electric cooperatives favor the recovery of prudently incurred stranded costs but cannot allocate stranded costs between cooperatives and customers since they are one and the same.

Consumer Groups. Two groups concerned about the effects of stranded cost recovery on retail residential customers addressed the task force. The Virginia Citizen's Consumer Council (VCCC) stated that stranded costs are the difference between the value of generation-related assets currently in rates that have a net book value equal to or above their market value and the value of generation-related assets that have a net book value below their market value, after mitigation efforts and excluding costs that are avoidable in the future. The VCCC also stated that stranded costs should be recoverable only when management had no discretion over incurring the costs or when failure to recover these costs would drive the utility into bankruptcy. The American Association of Retired Persons (AARP) emphasized that residential ratepayers should not have to pay for stranded costs unless such ratepayers benefit from retail competition. AARP also believes that stranded costs should be shared fairly and equitably among stockholders and all classes of consumers contributing to the need for plant capacity

Gas Companies. Consolidated Natural Gas (CNG), Enron, and Washington Gas provided insight on stranded costs from the potential suppliers' viewpoint. Washington Gas defined stranded costs as "those costs that utilities are currently permitted to recover through their rates but whose recovery may be impeded or prevented by the advent of competition in the industry." According to Washington Gas, factors potentially contributing to stranded costs include regulatory assets, unamortized demand-side management costs, and purchased power costs. CNG stressed the importance of handling stranded cost recovery in a manner that does not provide incumbent utilities with an unfair competitive advantage over new market entrants. Enron agreed to furnish the task force with information comparing the treatment of stranded costs in California with proceedings in Pennsylvania. CNG further explained that marketers are extremely concerned about a combination of stranded cost surcharges and default service rates that eliminate the development of a competitive market.

Union. The International Brotherhood of Electrical Workers (IBEW) maintained that investments in workers are just as real as investments in equipment and property and urged that utility employees affected by legislative change be identified as "stranded workers" and accordingly be included in the category of stranded costs. The IBEW provided examples of states that recognize that utility workers need legislative assistance and address this issue under stranded cost recovery, including Massachusetts and California.

Federal and State Actions. Virginia Power, in response to a request made at the May 30, 1998, meeting of the task force, presented further information on federal and state action and inaction that affect the generation of electricity and could result in potential stranded costs. Examples cited included the purchasing requirements of PURPA, environmental protection requirements, the clean up or decommissioning of Department of Energy-licensed nuclear facilities, reliability regulations, requirements imposed by global climate change policies, nuclear facility operating license renewal programs, and potential changes in the Internal Revenue Code or rulings issued by the Securities and Exchange Commission.

Next Meeting

Following the presentations and discussion, the chairmen set the next meeting of the task force for Thursday, July 30, at 9:00 a.m. in House Room 4 of the Capitol. Interested parties will submit their definitions of stranded costs and recovery mechanisms to staff by July 23, 1998, so that the submissions may be circulated and discussed at the July 30, 1998 meeting.

The Honorable Richard J. Holland, Co-Chairman
The Honorable John C. Watkins, Co-Chairman
Legislative Services contact: Robert Omberg