VIRGINIA POWER COMMENTS TO LEGISLATIVE TRANSITION TASK FORCE
REGARDING DISCOUNTING OF INCUMBENTS' CAPPED RATES

William G. Thomas

July 13, 1999

Good morning, Mr. Chairman and members of the Task Force.

My name is Bill Thomas, and I am here today to give you Virginia Power's perspective on whether incumbent utilities should be allowed to discount capped generation rates. In the course of your deliberations, you will need to decide whether the restructuring act needs to be amended to address this issue.

Virginia Power sees no need for any changes.

The company believes that the intent of the current statute is clear: an incumbent utility's rates are fixed between January 1, 2001 and July 1, 2007. Three - and only three - exceptions to this rule are included in the restructuring law. In each case the Commission - not the electric companies themselves - are given authority to adjust the capped rates in response to:

1. Fuel costs;
2. Changes in the Commonwealth's taxation of utilities; and
3. Financial distress of a utility beyond its control.

Sound reasoning lies behind the legislative intent that the capped rates should be fixed during the transition to full competition - and not subject to easy alteration.

• First, the concept of the capped rate was put in place as a consumer protection measure - a haven, or "safe harbor" as some have termed it - to which customers could return during the transition period from 2002 to 2007. Customers would always know that they could fall back to the stability of the capped rate if market prices become volatile.

• The capped rates also foster true competition. It gives customers a benchmark to measure offers from alternative suppliers. If they can find better deals from other suppliers, they'll be free to leave their incumbents and switch to other providers. If incumbents are allowed to discount their capped rates in an attempt to undercut competitors, this will likely deter the entry of new suppliers - and potentially stifle the development of an effective competitive market.

• Capped rates are a key to the stranded cost recovery portion of the restructuring bill. The restructuring act provides a simple and fair solution to the stranded cost problem - a problem that has tied the restructuring process in knots in several other states. Utilities will have the opportunity to recover some of their potentially stranded costs, but only through wires charges and capped rates in effect during the transition period. Discounting capped generation rates would potentially erode an incumbent's ability to recover its stranded costs - and work against the intent of the bill.

• Even worse, this discounting could distort recovery so that some classes of customers would bear a disproportionate share of stranded costs.

Virginia Power supported SB 1269 in large part because it provided needed certainty and acceptable levels of recovery. We don't see the need for changing the ground rules.

I'd also like to note that current law does give incumbent utilities some flexibility in generation pricing. Under a statute you enacted back in 1996, incumbents may offer special economic development rates to individual customers - but only with SCC approval. In general, rates implemented under this provision must protect the public interest and not prejudice or disadvantage other customers or classes of customers. Our experience shows that the Commission conducts extraordinarily thorough examinations of such requests for special rates. The provision will certainly be used rarely, but it is there if needed to help promote job growth and economic development in the Commonwealth.

Also, it is worth noting that as competition develops, unregulated affiliates of incumbent utilities may enter the market as alternative energy suppliers. The restructuring law allows these affiliates to have the same pricing flexibility as any other alternative supplier. However, codes of conduct will be in place to ensure they receive no preferential treatment.

To summarize… Virginia Power sees no need at this time for any changes in the legislation's capped rates provisions. As SB 1269 developed, we believe this issue was dealt with conclusively: Under the bill, capped rates are fixed, and not subject to utility discounting.

Virginia Power believes we should let competition unfold in accord with the general principles of SB 1269. We are confident that the Task Force will closely monitor the transition to determine if and when any such corrections are needed. But for the time being, we should leave this well crafted legislation alone - and give it time to work.

Thank you. I would be happy to answer any questions.