Legislative Transition Task Force
of the Virginia Electric Utility Restructuring Act
November 19, 2002
The Legislative Transition Task
Force was established in 1999 to work collaboratively with the State Corporation
Commission in conjunction with the phase-in of retail competition within
the Commonwealth. A report presented to the task force indicates that
the act's cap on electricity rates is generating substantial savings
for residential customers of Dominion Virginia Power.
Effect of Rate Cap
Chmura Economics and Analytics
(CEA) conducted a study of capped rate savings commissioned by Dominion
Virginia Power (DVP). In August 1998, a rate case settlement froze DVP's
retail rates through March 2002. With the enactment of the Virginia Electric
Utility Restructuring Act in 1999, the cap on retail rates was extended
from 2002 until July 2007. CEA's report concludes that the act's
cap on base rates, when compared to the base rates that would likely have
been in effect had the caps not been imposed, has produced total savings
for DVP's residential customers of between $780 million and $871
million over the period 1998 through 2007.
The estimated savings consist
of three elements:
- $285.6 million for period
19982001 from SCC-imposed rate case cap settlement;
- $302.7 million to $393.7
million, depending on the revenue forecast used, predicted for the 20022007
capped rate period under the Restructuring Act; and
- $192 million from DVP's
inability to obtain rate relief to cover extraordinary expenses, primarily
environmental project expenditures, during 20022007.
Assuming the average residential
consumer uses 1,000 kWh per month, average savings per residential customer
ranged from $429 to $480 from 1998 through 2007, which equates to an average
annual savings of $45 to $50 over the entire period. The report also states
that, through the multiplier effect, savings from the rate caps will generate
between $132 million and $148 million in additional economic activity
The study assumes that base
residential rates would have risen between 7.9 and 9.2 percent between
2001 and 2007 had the rate cap not been imposed. This assumption is based
on a model developed by CEA that attempts to take into account the factors
that the SCC confronts when approving rate changes.
Consumer Advisory Board
Chairman Bill Lukhard presented
the Consumer Advisory Board's recommendations. The board endorsed
the following actions:
- Amend the Restructuring Act
to allow shopping customers who return to the incumbent utility the
option to select market-based pricing, in order to avoid minimum stay
- Direct the SCC to convene
an Energy Management Work Group.
- Work with the Department
of Mines, Minerals and Energy (DMME) to define a program of consumer
education in energy management and energy efficiency that is designed
to reduce the cost of electricity to Virginia consumers and reduce the
risk of power shortages and extreme price swings at times of peak demand.
- Oppose any proposals to allow
incumbent electric utilities to legally separate their generation business
from their transmission and distribution business.
- Request DMME to prepare a
report on building codes relating to energy management and energy efficiency,
and addressing the authority to establish unique requirements for state-owned
- Amend the Restructuring Act
and the natural gas deregulation statutes to have the SCC develop models,
with both opt-in and opt-out provisions, for use in pilot programs for
municipal aggregation, by January 1, 2004.
- Assess each residential account
in the Commonwealth with a charge of three cents per month, to generate
revenue for the Home Energy Assistance Fund.
- Amend the Restructuring Act
to extend the term of the task force to at least July 1, 2008.
Members of the task force who
have an interest in pursuing any of these proposals were asked to contact
the chair of the Consumer Advisory Board.
Status of RTO Membership
American Electric Power (AEP)
and Dominion Virginia Power (DVP) briefed the task force on the status
of their attempts to join the PJM regional transmission organization (RTO).
The Restructuring Act required incumbent electric utilities to transfer
ownership or control of transmission assets to a SCC-approved RTO by January
1, 2001. Both utilities have applied for membership in the PJM Interconnection,
which is now responsible for the operation and control of the bulk electric
power system throughout major portions of five Mid-Atlantic states and
the District of Columbia.
DVP has applied to join PJM
under a plan whereby its service territory would be designated as PJM
South. DVP would cede operational control of its transmission lines to
PJM, but would continue to own these assets. DVP's director of electric
market policy told the task force that PJM offers several advantages,
including the approval by the Federal Energy Regulatory Commission (FERC)
of its RTO structure and the fact that all major electric utilities serving
Virginia will be members of the same RTO. DVP's schedule provides
that its plan for joining PJM will be filed with FERC and state regulators
in December 2002; a transmission tariff that eliminates rate pancaking
will be in place by February 2003; federal and state regulators will issue
their approvals by June 2003; and the integration of DVP into PJM's
system will be competed by October 2003.
Because AEP's decision
to join PJM as a part of the PJM West zone preceded DVP's election
to join PJM, AEP is scheduled to finalize its RTO membership sooner. AEP
expects to make its state filings in December, to turn over transmission
service and reliability functions to PJM by February 2003, and to be integrated
into PJM energy markets by May 2003.
Several members expressed concerns
regarding the possible reduction in SCC oversight that may ensue if these
incumbent utilities join PJM. The PJM structure, which complies with the
standard market design model being considered by FERC, cedes control over
the dispatch of generation to the RTO. In addition, some long-term resource
adequacy planning will be overseen by the RTO. One member commented that
the Restructuring Act contemplated RTO oversight of transmission, but
not generation, services.
Old Dominion Electric Cooperative
raised concerns with PJM's locational marginal pricing rules. These
rules provide that when generation is dispatched in transmission-constrained
areas, the price for all of the power will be the cost of the last-dispatched,
highest-priced power. Under the current system, as more expensive power
is dispatched, its cost is blended with that of all of the power. Fixed
transmission rights can in theory be purchased as a hedge against the
congestion costs associated with the locational marginal pricing rules.
However, in practice they have not been adequate. While the rules may
theoretically provide an incentive for the construction of new low-cost
generation and transmission assets to reduce congestion, the long periods
needed for approval and construction of power lines and other facilities
have forced customers to pay higher costs.
Recent Restructuring Activities
SCC spokespersons brought the
task force up to date on recent commission activities in implementing
the provisions of the Restructuring Act. Working groups have been convened
to address issues relating to competitive metering and billing and aggregation.
The commission is preparing comments to the FERC's controversial
proposed rules on standard market design, which are due by January 10,
2003. The commission is expected to issue an order in the near future
regarding the components of default service. Under amendments to the Restructuring
Act adopted in 2001, parties other than the incumbent electric utility
may be designated as default service providers.
The commission has approved
several applications to construct new generation facilities. In addition,
the commission and the Department of Environmental Quality have entered
into a memorandum of agreement regarding the agencies' respective
duties in reviewing the environmental impacts of power plant applications.
A final agreement between the agencies, executed in August, implements
the General Assembly's intent in enacting Senate Bill 554 during
the 2002 Session.
Stranded Cost Recovery
The Restructuring Act provides
that after the commencement of customer choice, members of the task force
shall monitor, 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. Just and reasonable net stranded costs are recoverable by incumbent
electric utilities through either capped rates or wires charges. Customers
choosing to purchase generation from a non-incumbent must pay a non-bypassable
wires charge as a surrogate for the stranded cost recovery that an incumbent
would recover from non-shopping customers.
Under the regulatory compact
theory, any departure from a regulated, cost-of-service environment must
allow a utility to recover prudent costs that were incurred while it was
regulated and that are rendered uneconomic because of restructuring. When
generation is deregulated, the market price for generation could drop
below the rate a given utility is receiving in the current, regulated
market. Consequently, the utility's generation assets could lose
some of their pre-restructuring book value. Primary sources of potential
stranded costs include generation asset devaluation and potential losses
associated with above-market purchased power contracts.
The Restructuring Act neither
defines stranded costs nor provides any formula or statutory framework
for their calculation. In order to monitor the progress incumbent utilities
are making toward their recovery of stranded costs, the SCC has observed
that the amount of stranded costs will need to be determined, and some
part of the wires charges and capped rates will need to be allocated to
their recovery. Since there was no determination of reasonable net stranded
costs going into the transition (nor any statutory structure for their
calculation thereafter), this may be a challenging task. The task force
will be considering alternative versions of a resolution requesting the
SCC to convene a working group to develop a definition of "stranded
costs" and to develop recommendations relating to the determination
of whether the Restructuring Act's stranded cost recovery mechanisms
are likely to result in the over-recovery or under-recovery of just and
reasonable net stranded costs.
The Hon. Thomas
K. Norment, Jr.
Franklin D. Munyan
Division of Legislative Services
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