Legislative Transition Task Force of the Virginia Electric Utility Restructuring Act

December 12, 2002

The agenda for the task force's fourth meeting consisted principally of matters that were scheduled to be addressed at its November 26, 2002, meeting.

Taxes Collected from Electric Utilities

A representative of the Department of Taxation presented the most current available data on receipts from Virginia's electricity consumption tax and the corporate income tax on electric utilities. These two taxes, which were the product of the same legislative study that created the Electric Utility Restructuring Act, replaced the gross receipts tax that had been paid by investor-owned electric utilities. The study of the tax implications of electric utility restructuring estimated that the gross receipts tax generated $100 million annually. Of this sum, $13 million represented contributions paid by governmental entities. The electricity tax legislation was intended to generate $87 million per year, which would make the new levies revenue neutral after deducting the amounts paid indirectly by governmental entities.

The corporate income tax was expected to generate $21 million annually. This estimate was based on pro forma federal income tax returns from 1995 through 1997. Income earned in several states was apportioned among the states using a three-part test that gave equal weight to sales, payroll and property factors. The corporate income tax provisions enacted in 1999 included a tax credit of $3 per ton of coal purchased to generate electricity, which continued a coal tax credit that could be claimed against gross receipts tax liability. It also allowed a deduction from net income for the amortization of the difference between the aggregate adjusted book basis and the aggregate adjusted tax basis of certain assets. This FASB 109 adjustment represents nearly $300 million in reduced tax liability over 30 years.

The rates of the consumption tax were set at levels expected to generate $66 million, which is the difference between the revenue-neutral goal of $87 million and the expected $21 million of corporate income tax receipts. Three declining block consumption tax rates were adopted to reflect the differences in gross receipts tax paid by residential, commercial and industrial customers resulting from the lower rates charged to consumers of large amounts of power.

For the 2001 taxable year, Virginia electric suppliers paid $3.8 million in corporate income taxes. The discrepancy between this sum and the estimate of $21 million was attributed to several causes, including the volatility of this tax, the coal tax credit, the filing of consolidated returns, the enactment of legislation that implements a double-weighting of the sales factor in multi-state income apportionment, and the general decline in the economy.

For fiscal year 2002, the consumption tax is expected to generate an amount very near the $66 million that was expected. However, the distribution of tax collections among rate classes varies significantly from the anticipated distribution. Revenue from the consumption of less than 2,500 kWh per month represents 62.9 percent of the total, compared to the expected 54.5 percent. Large consumers (over 50,000 kWh per month) paid 23.4 percent, compared to the expected 14.9 percent. Consumers of between 2,500 and 50,000 kWh per month paid a substantially smaller share (13.7 percent) of the consumption tax than was projected (30.6 percent).

Consumer Education Program Update

An SCC spokesman reported on the status of the Virginia Energy Choice consumer education program. Though Virginia does not currently have any electricity service providers competing with incumbent providers for new customers, the education program has had success in raising awareness of electric utility restructuring. Specific objectives have included directing Virginians to the program's website and toll-free number where they can learn more about retail competition for generation services.

As a result of the slow pace of competition's development, the SCC has significantly reduced its spending on paid advertisements. Delegate Parrish's inquiry regarding Virginia Energy Choice's sports sponsorships prompted a discussion of the media objective of the consumer education campaign. Sports event sponsorships were defended as an effective and efficient means of building awareness in the program. They also were praised for being directed at the target audience of adult homeowners and adding a community-focused element.

Energy Infrastructure Data Collection

The SCC Energy Regulation Division director presented the report prepared pursuant to Senate Bill 684 (2002). The bill requested the SCC, for purposes of monitoring the adequacy of the energy infrastructure within the Commonwealth, to convene a work group to study the feasibility, effectiveness, and value of collecting data pertaining to Virginia's electric and natural gas infrastructure. The work group consisted of representatives of electricity generators, incumbent electric utilities, interstate gas transmission companies, large industrial customers, and SCC staff.

Work group participants generally agreed that collecting the data identified in the legislation is feasible. However, the value and effectiveness of collecting the information is more difficult to ascertain. The restructuring of Virginia's natural gas and electricity industries means the Commonwealth will rely on the competitive market to meet consumer demand for electric and natural gas service. Electric utility industry restructuring may shift jurisdiction for overseeing reliability over generation and transmission services from state regulators to the Federal Energy Regulatory Commission (FERC). FERC's recent notice of proposed rulemaking for the implementation of a standard market design, if implemented, will place significant new federal regulation over the pricing and reliability of electricity. In addition, if Virginia's utilities join regional transmission organizations that operate a regional electricity market, state regulators may lose jurisdiction over generation and transmission reliability.

A shift in oversight jurisdiction with respect to generation and transmission reliability will cast doubt over the value of collecting data about Virginia's electrical infrastructure. In addition, stakeholders have split on the issue of whether state regulators will be able to require incumbent utilities to build generation facilities to meet the needs of Virginians. Once Virginia's electric utility industry is regionalized, the concept of monitoring the dedication of facilities to the service of Virginia's native load becomes problematic.

The task force was presented with three options: collect the data and gauge its value at a future time; wait until the industry stabilizes and then request the data; or collect some basic data that could provide information about infrastructure adequacy and forecast load and planned reserve margins until such time as it is determined that either more or less information is necessary. The third approach is described in the SCC's report as being more practical in the current environment and less burdensome on the entities providing the information. The report is available on the inter-net at http://www.state.va. usscc/caseinfo/reports/sb684_ 112002.pdf.

In response to the presentation, Senator Watkins asked the staffs of both the task force and the SCC to look into the issue of whether anything could be done to ensure that the Commonwealth does not cede monitoring responsibilities to FERC or to a regional transmission organization. While FERC may eventually exert jurisdiction over transmission and other aspects of electric service, a state may be giving up its oversight authority prematurely if its utilities join a regional transmission organization that operates a wholesale market.

Implications of Joining PJM Interconnection

Virginia's two largest incumbent electric utilities have announced plans to join PJM Interconnection, a regional transmission organization based in Pennsylvania. PJM operates both a multistate transmission system and associated electricity trading markets. Locational market pricing (LMP) is a model for determining the cost of electricity in transmission-constrained areas within PJM's territory. In areas where LMP applies, the price of the power charged by the last unit dispatched to serve a load becomes the price for all of the power dispatched to meet that load. In the traditional model, the total price paid reflects a blend of the prices charged by a mix of suppliers. Under LMP, the unit that provides the increment of electricity that meets the load sets the price that all of the providers will receive, even if the price they would otherwise have charged is less than the price bid by the supplier of the last increment. As a result, the price of power is based on prices that are bid and not on actual cost.

Fixed transmission rights (FTRs) are intended to address some of the concerns with LMP by allowing suppliers to obtain contractual rights to the transmission of power as a hedge against transmission congestion costs. However, the process of obtaining FTRs is complex. In theory, the owners of generation facilities can be protected from risks associated with LMP because, while they may pay more for power to meet load needs, their revenues will reflect the higher marginal prices. Market participants who do not have generation capacity can in theory protect themselves by entering into bilateral contracts. However, generators may have little incentive to enter into bilateral contracts where doing so means giving up the potential advantages of higher LMP-based revenue.

The possibility of market manipulation can exist with LMP. If a generator withholds low-cost power from the market in order to have more expensive electricity set the marginal price, the cost of the power can rise. As a result, the need exists for strong market power monitoring and mitigation. PJM has a market monitoring unit with responsibility for determining transmission congestion costs and the potential of market participants to exercise market power within the PJM area. Concerns with market manipulation prompted Delegate Woodrum to request the preparation of legislation that would prohibit suppliers from withholding power for the purpose of driving up prices and revenues.

Other questions raised with respect to PJM membership include:

  • The effects of LMP on the development of retail access, as new entrants may face problems obtaining FTRs or generation capacity.
  • The effects of higher power prices in transmission-constrained areas, such as the Eastern Shore, on economic development.
  • Whether the high prices resulting from LMP will actually spur needed improvements, because suppliers who benefit from the higher prices may raise obstacles to upgrades that would abate the congestion.
  • When the SCC is required to set prices for default service, whether the market price will reflect prices resulting from LMP, and if so whether the price will be net of the effects of FTRs.
  • Whether state regulators will have any role in determining the need for additional transmission capacity, or whether their role in acting on project applications will be limited to such issues as environmental impact.

Stranded Cost Recovery Work Group

The Restructuring Act directs the task force, after the commencement of customer choice, to monitor whether the recovery of stranded costs has resulted in or is likely to result in the over-recovery or under-recovery of just and reasonable net stranded costs. The act also provides that such costs, if positive, shall be recoverable by each incumbent electric utility. Such costs are recoverable only through either capped rates or wires charges.

In October, Senator Watkins requested staff to draft a resolution pursuant to which the task force would request the SCC to convene a work group comprised of commission staff and representatives of the Office of the Attorney General, incumbent electric utilities, suppliers, and retail customers. The work group's purpose would be to develop consensus recommendations on issues relating to stranded cost recovery. After circulating the draft among stakeholder for comment, Dominion Virginia Power (DVP) prepared an alternative version of a resolution.

The major substantive difference between the resolutions involved the work group's objectives. Senator Watkins' version called on the work group to calculate each incumbent electric utility's recoverable stranded costs and the amounts it collects from capped rates and wires charges to offset such costs. The DVP alternative proposal asked the work group to develop a process, methodology or formula for determining whether the stranded costs recovered by an incumbent electric utility have resulted in the over-recovery or under-recovery of just and reasonable net stranded costs.

Interested parties offered a variety of perspectives on the issue. Pepco Energy Services recommended that the SCC should lead a quantification effort that would result in a stranded cost total for each utility. A formal proceeding before the commission would be preferable because the issues are complex and a work group is unlikely to reach a consensus.

The Virginia President of American Electric Power Co. (AEP), supported a modified version of the DVP alternative under which a subcommittee of the task force would direct and monitor stakeholder deliberations and make appropriate recommendations to the full task force. The group should first determine what is meant by the language directing the task force to monitor stranded cost recovery.

A Virginia Independent Power Producers representative agreed with AEP that a subcommittee of the task force should be convened, as in the deliberations in 1998. He expressed concern that the party convening the group can steer the work product. The only goal of the group should be to define stranded costs. The DVP representative contended that this issue was addressed on the floor of the House of Delegates in the 1999 Session when language was removed from Senate Bill 1269 that would have directed the SCC to conduct a proceeding to determine stranded costs. He urged the task force to start by adopting a process rather than by collecting numbers.

A representative of the Alliance for Lower Energy Rates Today supported Senator Watkins' version. The pilot programs for retail electric choice were a failure for consumers, and Virginia's utilities are two years behind schedule in joining or forming regional transmission entities. The clock is ticking on the scheduled lifting of capped rates in 2007, and the DVP alternative will only slow the process. Representatives of Old Mill Power Company, the Virginia Citizens Consumer Counsel, the Virginia Committee for Fair Utility Rates and Old Dominion Committee for Fair Utility Rates endorsed the comments in support of Senator Watkins' version of the resolution. The chairman of the Consumer Advisory Board opined that Senator Watkins' proposal is more appropriate.

After considering the two versions of the resolution, the task force directed staff to prepare a version that incorporates elements of both Senator Watkins' version and the DVP alternative. Two task force members will participate in the meetings of the work group, and the task force's subcommittee on stranded costs will be reconvened. The resolution envisions a two-step process. By July 1, 2003, the work group is to present its consensus recommendations regarding (i) definitions of "stranded costs" and "just and reasonable net stranded costs" and (ii) a methodology to be applied in calculating each incumbent electric utility's just and reasonable net stranded costs, amounts recovered, or to be recovered, to offset such costs, and whether such recovery has resulted in or is likely to result in the over-recovery or under-recovery of just and reasonable net stranded costs. By November 1, 2003, the work group is to present its recommendations on the amount of each incumbent electric utility's just and reasonable net stranded costs and the amount that it has received, and is expected to receive, to offset just and reasonable net stranded costs from capped rates and from wires charges. Delegate Woodrum voted against the proposal.

Other Business

Staff from the SCC's Office of General Counsel presented proposals for the task force's consideration that would implement the SCC's two suggestions for action that might encourage the development of competition in the Commonwealth. The first provides that if a commercial or industrial customer is willing to commit to market-based pricing should it ever return to its incumbent electric utility, that customer can switch to a competitive service provider without paying a wires charge. Customers who make this commitment and thereafter obtain power from suppliers without paying wires charges to their incumbent electric utilities may not subsequently obtain power from their incumbent electric utility at its capped rates. The second authorizes any commercial or industrial customer returning to its incumbent electric utility or default provider after purchasing power from a competitive supplier to elect to accept market-based pricing as an alternative to being bound to comply with the existing minimum stay requirement.


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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