SB 1269

Legislative Transition Task Force of the Virginia Electric Utility Restructuring Act

July 13, 1999, Richmond

The Legislative Transition Task Force met for a second time to continue its monitoring of the SCC's implementation of the Virginia Electric Utility Restructuring Act as well as address whether incumbent electric utilities should be permitted to discount capped rates. The task force concluded that the act does not, and should not, authorize incumbent electric utilities to discount their capped rates, except to the extent current law allows for special rates after obtaining SCC approval.

SCC Implementation of the Restructuring Act

The SCC provided an update on its progress in implementing the act, mainly in the area of regional transmission policy. The commission initiated a proceeding seeking comments on questions relating to regional transmission entities (RTEs). At this time, the SCC has received a number of comments from utilities, industrial customers, rural cooperatives, private citizens, and other trade associations and entities, which the SCC will consider in preparing its comments for filing with the Federal Energy Regulatory Commission (FERC).

On July 7, the SCC filed a notice of intervention with the FERC regarding the Alliance RTO application. In its notice of intervention, the SCC expressed concerns in four areas: (i) geographic scope and regional configuration, (ii) RTO structure and governance, (iii) RTO operations and (iv) pricing. The proposed geographic scope and configuration of the Alliance raised questions about reliability, since the proposed boundaries bisect two major reliability regions, and market power. Neutrality was a key focus of the SCC's consideration of both the RTO's structure and governance and its operational activities; the commission stressed the importance of a neutral body's supervising the transmission system as well as making the operational decisions of the RTO. Finally, the SCC asked the FERC to closely examine the issue of "pancaking" in transmission pricing; that is, the access charge paid by transmission consumers each time the transmission path crosses an owner boundary. The Alliance proposal includes pancaking of charges during a six-year transition period.

Three uncertainties exist in the area of regional transmission policy, according to the SCC: market uncertainty (uncertainty as to who will be buying power from which generators), regulatory uncertainty (the FERC and Congress are still in the process of making policy), and legal uncertainty (lack of case law outlining FERC vs. state jurisdiction). The Eighth Circuit recently held that the FERC's curtailment procedures would indirectly regulate curtailment of transmission to retail customers, thereby exceeding the scope of the FERC's jurisdiction. The decision underscores the uncertainty of the boundary of authority between the FERC and state regulators. It also shows the wisdom of granting the SCC authority to take action regarding transmission policy, as the Restructuring Act does. This feature allows Virginia's regulatory commission to act on issues where action is appropriate but the FERC lacks jurisdiction.

Discounting of Capped Rates

The Restructuring Act directs the task force to "determine whether, and on what basis, incumbent electric utilities should be permitted to discount capped generation rates established pursuant to § 56-582." Section 56-582 directs the SCC to establish capped rates for every incumbent utility, effective January 1, 2001, and expiring July 1, 2007. There is a provision for adjustment of the rates to address (i) adjustments for fuel charges, (ii) changes in taxation, and (iii) financial distress of the incumbent utility. The SCC may terminate capped rates as early as January 1, 2004, if it finds an effectively competitive market for generation services. During the capped-rate period, incumbent utilities shall make electric service available at capped rates to any customer in the incumbent's service territory.

Title 56 of the Code requires uniformity of charges for all members of a class. The Virginia Supreme Court has held that the purpose behind such uniformity is to prevent discrimination among members of a class. A rate undercharge is preferential and in violation of law. However, § 56-235.2 was amended in 1996 to authorize the SCC to approve special rates when they would be in the public interest. The SCC must find that the special rates (i) protect the public interest, (ii) will not unreasonably prejudice or disadvantage any customer or customer class, and (iii) will not jeopardize the continuation of reliable electric service. SCC guidelines prevent other electric utility customers from bearing increased rates as a result of the special rates.

The task force examination of this issue focused on two related questions: To what extent, if any, are Virginia's incumbent electric utilities authorized to discount capped rates during the capped-rate period? Under what conditions, if any, should incumbent electric utilities be allowed to discount capped rates during the capped-rate period?

SCC's Position on Discounting of Capped Rates

The solicitor general of the SCC noted that the issue of discounting actually involves the bundled rates rather than merely the generation rate component, which will used principally to determine liability for wires charges. The appropriateness of the discount depends on whether the customer receiving the discount is eligible to shop for competitive generation services. If the customer is ineligible, the SCC feels that the utility may seek SCC approval of discounted rates under pre-1999 law. However, if the customer is eligible to shop for rates, discounting would conflict with two provisions of the Restructuring Act: (i) functional separation of generation, transmission and distribution services and (ii) stranded cost recovery.

Discounting is a competitive tool that can be used to attract or retain customers. Capped-rate service becomes non-competitive once customers are eligible to shop for competitive generation service. The Restructuring Act, in § 56-590, requires a separation between the noncompetitive transmission and distribution activities and the competitive generation activities of the incumbent utility. The act requires the functional separation between an incumbent utility's competitive activities (generation) and noncompetitive services (distribution and transmission). Allowing an incumbent utility to discount its capped, bundled rates for the benefit of a customer eligible to shop for competitive generation services is at odds with the act's principal tool for implementing competition: allowing customers who want "discounts" to shop for them in the market. If an incumbent utility wants to offer competitive prices for generation, it may do so through its separate generation entity, consistent with rules governing affiliate conduct to be developed by the SCC.

The SCC is also concerned with the effect of discounting on stranded cost recovery. Capped rates and wires charges are the statutory methods for recovering stranded costs. A portion of the capped rate that exceeds the utility's costs may be used for stranded cost recovery. If a customer leaves the incumbent utility to obtain a competitive, lower rate, the customer has to pay a wires charge, which will allow for recovery of the incumbent's stranded costs. If the customer receives a discounted rate from the incumbent, the customer pays less of a wires charge and the utility receives less revenue to cover its stranded costs.

Selective discounting of capped rates for noncompetitive, regulated physical distribution services may be appropriate once competition begins. The discounting could attract customers to locate or expand usage in Virginia. In this instance, discounting should be permitted, not required. Discounting of rates for distribution services under § 56-235.2 may be appropriate if they are competitive-neutral, do not increase distribution costs of non-discounted customers, and do not result in cost under-recovery. This discounting should be subject to SCC review and oversight. The commission will continue to examine the interplay between relevant existing Code sections and the Restructuring Act to determine if they adequately ensure the development of a competitive market for generation services.

Stakeholder Positions on Discounting

A spokesman for the Apartment and Office Building Association of Metropolitan Washington (AOBA) stated that discounting of capped rates, if allowed, should be made equally available to all members of a particular rate class for which discounts are issued to avoid discriminating among members of the same class. Though AOBA urged the task force to examine the issue of discounting capped rates, the spokesman acknowledged it is a complicated issue.

A Virginia Power representative agreed with the SCC's comments regarding discounting. The statutory intent behind capped rates, according to Virginia Power, is to fix incumbent electric utilities' rates, since the Restructuring Act outlines limited, specific grounds for SCC adjustment of capped rates. The act establishes capped rates for three purposes: (i) protecting consumers, since consumers may use the capped rates as a "safe harbor" if competitive rates become volatile, (ii) fostering true competition, so that consumers may measure offers from alternate suppliers, and (iii) recovering stranded costs. Discounting of these capped rates will likely deter the entry of new suppliers, as well as make some rate classes bear a disproportionate share of the stranded costs.

Virginia Power's spokesman also stressed that § 56-235.2 is still in place as a tool for incumbent utilities to provide special rates when doing so would be in the public interest. In response to Senator Watkins' question of whether incumbent utilities are permitted to discount rates for all classes of consumers in order to protect market share in a competitive environment, he pointed out that the act allows the SCC to terminate capped rates upon a utility's petition as early as 2004 if it finds that a competitive market for generation exists. While the Restructuring Act used the term "capped" rather than "frozen" rates, the Virginia Power spokesman contended that the development of the legislation resulted in a policy that rates are to be fixed, subject to the SCC's authority, in enumerated circumstances, to increase or decrease the rates. Therefore, the provisions of the Restructuring Act do not allow discounting of capped rates, either for individual members of a class or for a class or classes across the board.

According to AEP-Virginia, the issue of discounting is not pressing, and it would be inappropriate for incumbent utilities to discount the capped rates during their effective period. The capped rates exist to provide customers with a basis for evaluating competition. They are also critical to determining wires charges in the recovery of stranded costs. Discounting capped rates would result in a disincentive to alternative electric service providers to enter the Commonwealth and would affect wires charges. The task force was reminded that § 56-235.2 is still in effect and can be utilized to allow adjustments in capped rates.

The task force was urged by the Virginia, Maryland and Delaware Association of Cooperatives and Old Dominion Electric Cooperative to examine (i) how rate reductions interplay with stranded costs, (ii) the effect of discounting on new market entrants, and (iii) the option for SCC termination of capped rates after January 1, 2004. The cooperatives may like to consider the option of discounting, but it needs to be examined carefully.

The Virginia Independent Power Producers' (VIPP) spokesman agreed that allowing incumbent electric utilities to discount capped, bundled rates interferes with the Restructuring Act. Capped rates provide a safe harbor for consumers in the event that competitive rates become volatile. The capped rates also provide a competitive target for potential competitors in setting their rates. Discounting would retard the development of a competitive market, while capped rates do not preclude consumers from benefiting under the act by buying cheaper power from a new entrant or a functionally separate affiliate of an incumbent. VIPP sees no need to change the capped rate provisions of the Restructuring Act.

The Alliance for Lower Electricity Rates Today (ALERT) concurred in the belief that incumbent utilities should not be permitted to discount capped rates. The discounts will be anti-competitive, in that the incumbent utility has the ability to take advantage of caps when competitive rates are higher than the capped rates, but can also discount to remain at or lower than competitive rates. Therefore, non-incumbent competitors can never prevail in the marketplace. Discounting for certain individual customers is anti-competitive in that two customers who are direct competitors in their particular industry may pay different rates for electric service. ALERT is also looking into the anti-competitive effects of standard-offer discounts, to all within a certain rate class, and reserved the option to revisit this issue in the future. ALERT would like to know how the SCC and the FERC look at the relationship between incumbent utilities and their generation-providing affiliates, which may not be subject to rate caps. ALERT's spokesman agreed with Virginia Power's interpretation of the semantics of capped rates and frozen rates. When the SJR 91 subcommittee first adopted the term "capped rates," it may have been envisioned as a ceiling. However, as the bill proceeded, the term came to mean a fixed rate, which (unlike a "frozen" rate) is subject to adjustment by the commission in specific circumstances.

Future Task Force Activities

While the SCC is continuing to look at whether the criteria for approval of special rates under § 56-235.2 are adequate in a competitive market, the task force does not feel that the issue necessitates action at this time, especially in light of the near-consensus among stakeholders. As the Restructuring Act continues to be implemented, the task force may revisit this issue.

The task force will hold its next meeting in Richmond on August 16, at 10 a.m. Worker protection, energy assistance for low-income families, renewable energy programs and energy efficiency programs will be addressed. The task force suggested that, although the five gubernatorial appointments have not been made, the Consumer Advisory Board commence its deliberations.

The Honorable Thomas K. Norment, Jr., Chairman
Legislative Services contact: C. Maureen Stinger