Mr. Chairman, Members of the Legislative Transition Task Force ("LTTF"), I appreciate this additional opportunity to appear before you to present comments on behalf of the Virginia Retail Merchants Association ("VRMA") and its member consumers. My comments here address the issues related the reliability of the generation, transmission and distribution systems in a competitive environment.
Historically, vertically integrated public utilities have controlled the major decisions concerning the types, amounts, locations, and timing of investments in generation, transmission, and distribution systems. These decisions were often made subject to the approval of state public utility commissions, such as the State Corporation Commission ("SCC").
Vertical integration permitted utilities to engage in coordinated planning of additions to generation, transmission, and distribution plant, primarily with an eye toward serving their "native load" retail customers. Subject to regulatory oversight, a utility would determine the appropriate level of adequacy for its systems, determine the necessary lead times for planning and construction, and prices would be set by regulation that would provide a fair opportunity to earn a fair return on the utility’s investment.
With the introduction of retail competition, decisions whether to invest in new generation, transmission, or distribution plant will increasingly be made by entities that are not related, let alone vertically integrated. With competition established for generation at the wholesale level, and the introduction of competition at the retail level, generation decisions—whether to build new generators, or whether to retire, extend the lives of, or repower existing units—will be driven more by market decisions rather than reliability concerns; although, as discussed below, reliability issues can influence economic decisions.
Transmission decisions will continue to be regulated, although we will see the Federal Energy Regulatory Commission ("FERC") assume greater responsibility for regulatory oversight as retail service is "unbundled" and customers are able to choose an alternative generation supplier to the incumbent electric utility. State commissions will continue to have oversight authority regarding siting and environmental issues.
A principal transmission-related reliability issue is that transmission systems will increasingly be asked to handle large bulk-power transactions that they were not originally designed to accommodate. While we can expect these increased transactions as a result of both wholesale and retail competition, the addition of new transmission lines is difficult to accomplish, as AEP can testify from its experience in western Virginia.
In its Reliability Assessment for the years 1998-2007 the Reliability Assessment Subcommittee of the North American Electric Reliability Council ("NERC") provided a review of the overall reliability of existing and planned electric generation and transmission systems of the ten NERC Regional Councils. Each Regional Council corresponds to specific regions of the country. Virginia is rather unique, in that parts of the Commonwealth are located in three different reliability regions.
The NERC Reliability Assessment focuses on two different time frames: the near term, consisting of the next three to five years, and the long term, which is the remainder of the ten-year period. Some of the near-term conclusions reached in the NERC Reliability Assessment include the following:
NERC’s long-term prognosis raised additional concerns:
Closer to home, the NERC Reliability Assessment reports that the SERC region self-assessment, which includes Virginia Power, concludes that the overall capacity resource margin continues to decline, reflecting the members’ reliance on short lead-time generating resources and market uncertainties; however, many utility systems are planning to install or purchase peaking-type capacity during the 10-year period. Moreover, the ability to transfer power above contractually-committed uses, both within the SERC region and among other regions, has become marginal on some transmission interfaces, under both studied and actual operating conditions. The SERC self-assessment indicates that "[t]he unknown increase in bulk power marketing activity over the review period is expected to push the operating state of the transmission system beyond that which is planned and must be considered in the overall ability to transfer power." This self-assessment does not sound encouraging from the customer’s perspective.
The view from the utility’s side of the field is unclear—management is reluctant to make far-ranging plans to invest in new generation or transmission until the rules have become established and the lines between competitive activities and regulated activities are more brightly drawn. Pressures to reduce costs and lower prices are also straining reduced budgets for operations and maintenance activities. Utilities are reluctant to make these major investments as long as the rules are unclear, or if such investments (notably transmission) may improve reliability, but may cause them to lose market share. Regulators are understandably concerned that generation additions by incumbents will lead to an increase in generation market power.
The view from the competitor’s side of the field is also unclear, and reflects the same uncertainties about the future structure of the industry. Management must evaluate whether the company’s investments will have sufficient opportunity to earn a competitive return. Until decisions are made with regard to Regional Transmission Entities, and more states have committed to retail competition, competitors may be reluctant to invest at-risk capital, with no "captive customers" to support these investment decisions. Moreover, the incumbent’s market power, whether perceived or demonstrated, may increase the reluctance of competitors to commit their resources.
While controversy continues to circulate concerning the respective roles of the FERC and state public utility commissions, authority over distribution system reliability is clearly within the jurisdiction of state commissions. Here in Virginia, the Commission will provide oversight pursuant to the Virginia Electric Utility Restructuring Act and the other applicable provisions of Title 56 of the Code of Virginia.
The Restructuring Act provides the Commission with some important tools to assure that both competitors and customers receive nondiscriminatory access to transmission and distribution systems. Equally importantly from a distribution reliability standpoint, the General Assembly has provided a significant reliability tool for customers in the form of distributed generation. As more customers utilize distributed generation and other forms of dispersed generation, this frees up existing capacity to service additional demands at peak times, bringing reliability benefits to all electric customers.
Under the Restructuring Act, distribution companies are required to provide distribution service within their service territories on a basis that is just, reasonable, and not unduly discriminatory to suppliers of electric energy, including distributed generation, as determined by the Commission. Distribution services provided to each supplier of electric energy are to be comparable in quality to those provided by the distribution utility to itself or to any affiliate. Moreover, all distributors of electric energy have the obligation to connect any retail customer, including those using distributed generation, located within their service territories to those facilities of the distributor that are used for delivery of retail electric energy, subject to Commission rules and regulations and approved tariff provisions relating to connection of service.
The Commission is tasked with establishing interconnection standards to ensure transmission and distribution safety and reliability, which standards shall not be inconsistent with nationally recognized standards acceptable to the Commission. In adopting these standards, the Commission must prevent barriers to new technology if possible, and assure that compliance with these standards does not become unduly burdensome and expensive.
The Restructuring Act also provides for the Commission to consider developing expedited permitting processes for small generation facilities of fifty megawatts or less. The Commission is also to consider developing a standardized permitting process and interconnection arrangements for those power systems less than 500 kilowatts which have demonstrated approval from a nationally recognized testing laboratory acceptable to the Commission.
Where does this leave the customer? In the short term, the customer has few options, with the exception of distributed generation. Until the rules become more defined at the state and federal levels, the horizon for investment in generation and transmission at the bulk power level will remain cloudy. In the longer term, states such as Virginia must encourage the development of distributed generation. At the same time, Virginia must become an attractive place for new investment in generation within the state, as new transmission investments become increasingly difficult, costly, and time-consuming.