Legislative Transition Task Force
of the Virginia Electric Utility Restructuring Act
June 21, 2002
The first meeting of the Legislative
Transition Task Forceís fourth year focused on the status of regional
transmission entities, also known as regional transmission organizations
RTOs are entities created to
operate transmission grids and ensure short-term system reliability, independent
of control by incumbent utilities and other market participants. Virginiaís
Electric Utility Restructuring Act recognizes that the development of
a competitive retail market for electric generation requires incumbent
utilities to transfer ownership or control of their electric transmission
assets to an RTO. The requirement of RTO independence is intended to ensure
that incumbent utilities, which traditionally controlled the generation,
distribution and transmission of electricity, do not use the control of
transmission assets to favor their generation arms over competing suppliers.
The act requires incumbent electric
utilities to transfer ownership or control of transmission assets to an
SCC-approved RTO by January 1, 2001. The issue of which RTO is appropriate
for Virginiaís utilities is complicated by the fact that Virginia is located
at the crossroads of three existing or proposed regional RTOs: PJM, Midwest
ISO, and GridSouth.
The Federal Energy Regulatory
Commission (FERC) has promoted the formation and development of voluntary,
geographically sensible regional RTOs. FERC released the "Big Ticket List,"
which outlines FERCís timetable for major standard market design and RTO
issues over the next 18 months. The task force was told that the resolution
of two RTO-related issues will be important to Virginia. First, FERC is
working to eliminate seams, which are regulatory, market and physical
barriers to trade among regions. Second, FERC is seeking to ensure that
RTOs create sensible geographic markets in the Eastern Interconnection.
FERC has asked Dominion, Virginia Power, AEP, and other utilities to explain
how their decision regarding RTO membership will affect seams issues and
be consistent with natural markets. Senior officials from these utilities
have been asked to address these concerns at a meeting with FERC on June
26. The issue of natural markets could be troubling in the Midwest and
Mid-Atlantic region if utilities join an RTO for which there are no contiguous
FERC is also drafting rules for
standard market design (SMD) that will apply to all public utilities.
SMD seeks to provide more choices and improved services to wholesale market
participants, reducing delivered wholesale electricity prices through
lower transaction costs and wider trade opportunities, improving system
reliability, and increasing certainty about market rules and cost recovery.
FERC contemplates that RTOs would be the primary entities to implement
FERCís efforts to have electric
utilities voluntarily join RTOs have been more torturous than anticipated
as the result of the problems with Californiaís experiment with deregulation,
the collapse of Enron and other energy trading firms, and public perceptions.
In reaction to allegations of improper trading practices, FERC has established
an Office of Market Oversight and Investigation.
Status of RTO Membership
American Electric Power (AEP)
and Dominion Virginia Power (DVP) had worked for two years to establish
the Alliance RTO. The Alliance would have operated a regional transmission
grid involving 16 utilities in 11 states. However, in December 2001, FERC
issued an order rejecting the Alliance RTO and ordering its companies
to investigate joining the Midwest ISO or another RTO. Negotiations with
Midwest ISO failed, and AEP and other companies asked FERC to issue a
declaratory ruling to resolve issues in their favor. Instead, FERC issued
an insufficient order on April 24, 2002, that required Alliance members
to file new RTO choices within 30 days.
The vice president of public
policy for AEP reported that AEP and the PJM RTO signed a memorandum of
understanding on May 7, 2002. He described AEP and PJM as a "natural,"
noting that PJM currently has an organized spot market and complies with
FERCís template for standard market design. Under the terms of their agreement,
which includes a 120-day development period, AEP can join PJM as either
a stand-alone transmission owner or as part of an independent transmission
company (ITC). AEP favors a for-profit ITC that offers the ability to
attract capital and squeeze out inefficiencies.
AEP contemplates the transfer
of functional control of its transmission system to PJM by December 2002,
and the integration of AEP into the PJM energy market by May 2003. AEP
proffered that PJM membership offers the opportunity to secure the benefits
of an RTO, thereby facilitating retail competition, sooner than do other
options. Other former Alliance members, including Commonwealth Edison,
Illinois Power, and Dayton Power & Light, intend to join PJM. Though
FERC has expressed concerns that proposals by some Alliance companies
to join PJM may not be consistent with natural markets, the AEP official
discounted its applicability to AEP. FERCís concern is more likely directed
at other former Alliance companies, with noncontiguous service territories
in Illinois, that wish to join PJM. AEP expressed confidence that FERC
will focus more on existing electrical ties and connections that on maps
of the utilitiesí service territories.
An Allegheny Power spokesman
recounted that his firm turned over functional control of its transmission
system to PJM on April 1, 2001, thereby forming PJM West. Under the PJM
regional market model, prices for power for the combined market area are
calculated. Depending on system congestion, that price would apply over
the whole region. The model also addresses the dispatch of generation
units in merit order and coordinates transmission outages for the entire
region. Other duties of the PJM RTO include conducting regional transmission
system planning and operating a market monitoring unit, which has responsibility
for monitoring membersí compliance with market rules and ensuring that
its policies are consistent with the operation of a competitive market.
A DVP representative told the
task force that the company recognizes its legislative and regulatory
obligations to join an RTO, and vowed to notify the task force of its
decision concurrently with the companyís notification of federal and state
regulators. A properly functioning RTO is viewed as meeting three goals:
providing improved price signals to consumers and suppliers, encouraging
efficient solutions to transmission congestion management, and exerting
competitive pressures on energy costs. Before DVP can join an RTO, approvals
are required from FERC, the Virginia SCC, and the North Carolina Utilities
Commission. In response to FERCís order of December 19, 2001, that rejected
the proposed Alliance RTO, Dominion has attempted to find an alternative
that will be accepted by regulators and customers.
In a summit with interested persons
convened by DVP on June 13, 2002, stakeholders identified relevant factors.
However, there was no consensus as to which RTO was best. The two leading
contenders were identified as PJM and the Midwest ISO. GridSouth, formed
by Duke Power, Carolina Power & Light, and South Carolina Electric
& Gas, had been under consideration but lost viability when it recently
announced that its members were suspending most aspects of its development.
Perspectives of Other Stakeholders
According to the Virginia Energy
Providers Association (VEPA), which represents merchant power plant developers,
the lack of a functioning, independent RTO is preventing wholesale competition
in Virginia. VEPA advocates incumbent utilities joining the PJM RTO in
part due to its governance structure and market design features. VEPA
also supports the issuance of all necessary approvals for PJM membership
by the end of 2002.
The Virginia Committee for Fair
Utility Rates, a group of large DVP customers, expressed concern that
the delays by incumbent electric utilities in joining RTOs have affected
the schedule contained in the Restructuring Act. While the act contemplated
a six and one-half year transition phase, delays in RTO development have
reduced this period to less than five years. The Alliance for Lower Electric
Today (ALERT) echoed concerns with the delays in transferring control
of transmission assets to an approved RTO. Both the act and the 1998 bill
that established a timeline for deregulation called for the establishments
of RTOs by January 1, 2001, because the legislature recognized that RTOs
are needed for the development of wholesale markets.
State Corporation Commission
staff outlined several FERC-related RTO developments. Concurrent with
the appointment of Pat Wood as the new FERC chairmen, the FERC has been
much more aggressive in its approach to RTO issues. In addition to rejecting
the proposed Alliance RTO and directing its members to pursue membership
on other RTOs, FERC has initiated mediation efforts to form larger RTOs,
evident in its effort to merge PJM, ISO-New England and NYISO into a Northeast
RTO. FERC has also started reaching out to state regulatory commissions
through regional workshops and questionnaires, has initiated efforts to
adopt a single market design, and has began an effort to assess the costs
and benefits of RTO formation.
The SCC has actively participated
in FERC RTO proceedings in order to ensure that the essential elements
of RTOs are in place and that RTO development will further the development
of competition in Virginia. In DVPís recent RTO summit, the SCC staff
noted that RTO practices and policies should promote reliability and appropriate
pricing for transmission service, be consistent with FERC requirements,
fairly compensate the transmission system owner, generally promote the
public interest, and assure that the RTO is managed independently of market
interests. In addition, they should provide for transmission planning
and construction of needed facilities, appropriate interconnection of
new generating facilities, effective relief of transmission congestion,
and effective market monitoring. The SCC staff also noted that ideally
Virginia utilities should participate in operational RTOs at least one
to two years prior to the end of the capped rate period.
An Old Dominion Electric Cooperative
representative explained that transmission system congestion is affecting
the wholesale pricing of electricity under RTO rules. He suggested that
utilities should not join RTOs where the price of electricity is highest.
For example, he stated that the price of electricity in PJM is about 40
percent higher than in MISO.
Functional Separation Issues
During the task forceís previous
meeting in January 2002, Judy Jagdmann of the Attorney Generalís Office
was asked to convene informal discussions of interested persons to discern
whether a consensus could be found with respect to several issues identified
in the SCCís order rejecting DVPís functional separation proposal. One
approach that parties discussed called for identifying specific items
that, if and when satisfied, would open the door to approval of a plan
of legal separation. The second approach focused on specific technical
issues identified in the SCCís order rejecting DVPís legal separation
plan, including wires charges, fuels costs, and the ability to designate
default service providers that do not have generation assets. After three
meetings, the only consensus the participants reached was that they could
not reach agreement.
Recent SCC Activities
At present, there is little competitive
activity in service territories where competition is now permitted. There
have been no competitive offers in the service territories of AEP, AP,
or Connectiv, which have been fully open to retail choice since January
1, 2002. In the areas of DVPís service territory that are currently open
to competition, only one competitive service provider (Pepco Energy Services)
is offering electricity to residential customers. Though the cost of Pepcoís
energy is approximately two cents per kWh higher than DVPís price to compare,
over 2,000 customers have signed up for this service, perhaps because
it is marketed as being renewable energy.
Potential competitive service
providers have told SCC staff that the structure of the Restructuring
Act, with its price caps and wires charges, is a deterrent to a competitive
retail market. They contend that the act does not allow sufficient "headroom"
to let them offer electric power at a price that covers their energy and
marketing costs while allowing them to earn a profit. Incumbent utilities
have countered that it is early in the process and competition will need
time to develop.
The SCC staff also updated the
members of the task force on its recent activities implementing the Restructuring
Act. These include:
- The SCCís retail access consumer
- Development of the SCCís second
annual report on the status of competition,
- An investigation of whether
further clarification of aggregation rules is needed,
- Development of a memorandum
of agreement with the Department of Environmental Quality pursuant to
SB 554 of the 2002 Session,
- The furnishing of default
service by non-incumbents pursuant to a bidding process,
- The methodology for calculating
market prices for purposes of determining incumbentsí wires charges,
- Competitive metering and billing
- Development of proposed standards
for distributed generation.
2002 Work Plan
The task force anticipates that
issues to be addressed at future meetings this year will include:
- Continuing to study the siting
of electricity generation facilities pursuant to SJR 116, focusing on
the SCCís permitting regulations and implementation of SB 554 of the
- Monitoring, with the assistance
of the SCC, the Office of the Attorney General, incumbent electric utilities,
suppliers, and retail customers, whether the recovery of stranded costs
has resulted or is likely to result in the over-recovery or under-recovery
of just and reasonable net stranded costs;
- Issues related to the functional
separation of the functions of incumbent electric utilities, including
the payment of wires charges and fuel factor issues;
- Recommendations to facilitate
effective competition in the Commonwealth, which are to be presented
to the task force as part of the SCCís report on the status of competition
in Virginia due September 1; and
- The status of the pending
federal Energy Policy Act of 2002.
The Hon. Thomas
K. Norment, Jr.
Franklin D. Munyan
Division of Legislative Services
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