Legislative Transition Task Force of the Virginia Electric Utility Restructuring Act

June 21, 2002
Richmond

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).

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.

FERCís Perspective

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 boundaries.

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 SMD.

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 education program,
  • 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 rules, and
  • 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 2002 Session;
  • 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.

Chairman:

The Hon. Thomas K. Norment, Jr.

For information, contact:

Franklin D. Munyan
Division of Legislative Services

Website: http://dls.state.va.us/elecutil.htm

THE RECORD

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