Legislative Transition Task Force of the Virginia Electric Utility Restructuring Act

November 26, 2002
Richmond

The task force's third meeting of the 2002 interim featured the State Corporation Commission's annual report on the status of competition in Virginia. The task force also received a brief-ing on the PJM Interconnection regional transmission organiza-tion (RTO).

Status of Competition in Electricity Markets

The State Corporation Commission (SCC) presented its report on the status of the development of a competitive retail market for electric generation within the Common-wealth. The report concludes that Virginia is making slow progress toward allowing Vir-ginians to competitively choose their supplier of electricity. Competitors are not yet vying for customers in Virginia's electric power market. Other states that have implemented retail choice are largely experiencing similar low levels of competitive activity. The report can be viewed on the SCC web site at http://www. state.va.us/scc/division/restruct/main/staff/teirstaff.htm.

The director of the SCC's Division of Economics and Finance addressed competitive activity in Virginia's electricity market, as well as the SCC's activities over the past year to implement the Restructuring Act, develop a proper structure for competition, and educate Virginians about energy choice. As of September 1, 2002, 2.2 million of the 3.1 million customers in Virginia have the right to pick their electricity provider. All customers of utilities subject to the Restructuring Act will have retail choice by January 1, 2004. However, the right to choose does not mean the ability to choose. Only 2,375 residential customers and 23 commercial customers are buying electricity from an alternative supplier that offered "green" power at a higher cost than the incumbent utility's price-to-compare. This lone competitive supplier is no longer marketing its power to new customers.

The commission report outlines developments that may contribute toward competitive wholesale and retail markets. By January 1, 2004, all of Virginia's utilities should be members of operating RTOs, which are intended to provide a more efficient and fairly priced means of transmitting wholesale electric energy. However, the ability to attract competitive suppliers to Virginia's market depends to a large extent on the development of a competitive regional wholesale market. Recent disclosures of wholesale market improprieties and the "credit crunch" have contributed to a reduction in efforts by energy marketers to market electricity.

An economist with the National Regulatory Research Institute presented the portion of the report addressing the status of the development of regional competitive markets. There has been a drop-off in retail market activity in Virginia and nearby states that are considered a part of Virginia's regional market. Currently, Virginia has no residential competitive offer below the price-to-compare of any incumbent utility in the state. Pennsylvania has three such offers; Maryland has two; and the District of Columbia has one.

Since last year there has been a slight nationwide increase in residential offers, with most of the increase being attributable to the start of competition in Texas. The number of competitive offers during the year ending July 2002, at or below the prices paid by non-shopping customers, increased from 9 to 44 nationwide. Of the 44 offers below the price to compare, 29 were in Texas.

Evidence suggests that significant market power, or the ability of sellers in a market to set prices for products, is being exercised in all wholesale power markets. The ability of wholesale sellers to exercise market power will prevent the development of a workable retail electricity market. Another area of concern is the reduction in new power plant construction. Nationwide, almost 180,000 MW of planned new capacity have been tabled or canceled between January and July 2002, and General Electric's power systems division has forecast an 80 percent decline in gas-fired turbine orders and shipments.

On July 31, 2002, the Federal Energy Regulatory Commission (FERC) issued a notice of proposed rulemaking on a standard market design. The proposed rules are intended to address market design flaws and a lack of uniformity that cause a misallocation of transmission and generation resources. Elements of FERC's plan include independent transmission providers, transmission pricing reforms, congestion management through locational marginal pricing, and tradable congestion revenue rights. Anticipating that market incentives will not result in the construction of sufficient capacity, FERC's proposal also includes a resource adequacy requirement. The standard market design proposal includes the strongest assertions to date of the FERC's authority.

The economist expressed reservations with FERC's plans to increase efficiencies within and across RTOs. The net additional benefits from larger RTOs may be modest and are uncertain. Some inefficiencies in the current system are due to physical constraints, rather than market design flaws. In addition, the plan to manage congestion through locational marginal pricing may increase the potential for suppliers to exercise market power. He also cited a recent study prepared for the Southeastern Association of Regulatory Commissioners of the benefits and costs of estab-lishing three RTOs in the southeast. The report concluded that there is considerable uncertainty as to whether benefits from the RTOs and the proposed standard market design would exceed their implementation costs.

The third part of the SCC's report outlines 20 proposals submitted by electric utilities, competitive suppliers, business groups, and consumer representatives to foster the development of competition. The SCC recommends that the General Assembly consider two proposals. The first calls for amending the Restructuring Act to allow a large industrial or commercial customer to switch to a competitive service provider (CSP) without paying a wires charge if it commits to accept market-based pricing if it returns to its incumbent utility. The second would allow large customers who switch to a CSP and later return to their incumbent utility to select market-based prices as a means of avoiding a minimum stay requirement. Though these proposals are directed at large customers, the SCC observed that fostering retail market activity for large customers may improve the chance of competitive offers will be made to residential customers. Legislation to implement these two proposals will be prepared for task force consideration.

Implications of Membership in the PJM RTO

The Electric Utility Restructuring Act required all investor-owned electric utilities to join a regional transmission entity by January 1, 2001, subject to approval by the SCC. After their plans to join the proposed Alliance RTO were rejected by FERC, American Electric Power (AEP) and Dominion Virginia Power (DVP) applied to join the PJM Interconnection, a regional transmission organization (RTO) based in Valley Forge, Pennsylvania. PJM's presentation was prompted by concerns voiced at the task force's November 19 meeting regarding PJM's use of locational marginal pricing and the possible reduction in state regulators' oversight of electric generation dispatching and planning.

A PJM spokesman defined locational marginal pricing as the cost to serve the next megawatt of load at a specific location, using the lowest production cost of all available generation, while observing all transmission limits. It includes the marginal cost of generation, the cost of transmission congestion, and the cost of marginal losses. Because it results in higher costs when a transmission system is congested, it is viewed as creating incentives for investing in transmission infrastructure.

Locational marginal pricing poses two challenges. First, it exposes market participants to price uncertainty for congestion cost charges. Second, during constrained conditions, PJM collects more revenue from loads than it pays to the power generators. PJM's solution is to allow the system's users to obtain fixed transmission rights (FTRs). FTRs are contracts that entitle their holder to revenues based on the hourly energy price differences across the path. The owner of an FTR over a route receives a credit back for the amount of the congestion charge assessed as a result of the locational marginal pricing.

Kentucky Utilities Exemption

Kentucky Utilities (KU), which serves approximately 29,500 customers in five Southwest Virginia counties, asked the task force to endorse a proposal that would suspend the application of most of the Restructuring Act to KU until such time as the SCC determines that competition for residential customers exists in KU's service territory in another state. Under the proposal, KU would be exempt from provisions involving wire charges, stranded costs, default service, competitive metering and billing, and the loss of exclusive service territory until Kentucky enacts electric utility restructuring legislation. The act's capped rate feature, under which rates are fixed until July 1, 2007, would still apply to KU. After that date, the capped rates would continue until its rates are changed pursuant to a traditional rate case.

KU requested the exemption on grounds that its initial cost to comply with the act's consolidated billing provisions is $1,500,000, and the recurring annual cost will be $1,200,000. These costs would raise residential customers' bills by between 8 and 15 percent. As only about 5 percent of its revenue is from Virginia customers, expenses of complying with Virginia's Restructuring Act would not benefit 95 percent of its customers. In addition, KU asserted that electric utility restructuring would not benefit KU's Virginia customers because the utility's rates are so low that it would be virtually impossible for a competitive service provider to offer lower rates. The act's only result, it was said, would be a substantial unnecessary increase in customers' electric bills.

Members were skeptical about merits of exempting any utility from the Restructuring Act. KU was invited to revisit this policy issue when the task force meets prior to the 2003 Session.

Consumer Education

Delegate Parrish questioned SCC spokesman Ken Schrad about the use of consumer choice education program funds for print advertisements and "thunder sticks" distributed at recent college football games. Concerns regarding the extent to which such expenditures educate consumers about the retail electricity competition were shared. The SCC noted that the purpose of that portion of the education campaign was to raise public awareness of the advent of customer choice, and promised to provide additional information regarding the marketing program.

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

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