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
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
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.
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.
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.
Franklin D. Munyan
Division of Legislative Services
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