Commission on Electric
Utility Regulation

Legislative Transition Task Force of the Electric Utility Restructuring Act

December 13, 2000, Richmond

The Legislative Transition Task Force featured presentations by Navigant Consulting and the Edison Electric Institute focusing on the issues affecting the restructuring of the electric utility industry nationwide. The Task Force also addressed issues bearing upon Virginia's Restructuring Act that are likely to be considered during the next General Assembly session.

National Developments

Craig McDonald of Navigant Consulting's Philadelphia office briefed the Task Force on the status of active retail electric markets. Factors such as high natural gas prices and limited generation capacity during capped rate periods have recently produced markets where the wholesale price exceeds the retail price. The resulting negative retail margin has led many competitors to withdraw from markets and caused many of their customers to return to the provider of last resort. Over time, he expressed confidence that new generation will lower wholesale prices. Commodities markets tend to experience volatility and cyclical pricing, and electricity is not expected to be any different. The electricity market is complicated by local opposition to power plant siting, which may impair the market's ability to increase supply as demand grows. The ability of electricity generators to build anywhere will tend to foster the direction of capital to locales where plant construction is comparatively inexpensive and faces less opposition.

The lack of construction of new generation capacity was cited as one contributor to the spikes in electricity prices in California. Other contributing factors include unseasonable weather and requirements that distribution companies purchase supply from the state's power exchange on a daily basis and that the highest bid sets the price for all of the power sold. The sharp rise in rates paid by San Diego customers was also due to the fact that the utility had recovered its stranded costs and the price caps were removed. When this occurs the distribution company is required to provide service at the market price, which is determined on a daily basis.

Mr. McDonald predicts that, notwithstanding the California conundrum, the restructuring of the electric industry is likely to continue across the nation. New generation may be needed to reduce wholesale prices. Based on the experience of other industries, retail competition for electricity should be viable. He acknowledged the tension between wishing to dampen dramatic swings in standard offer residential prices while recognizing that allowing the market to set the price for power is the best way to foster the development of a competitive market.

David Owens of the Edison Electric Institute addressed the prospects for federal restructuring legislation. The most significant issues to be addressed are market power, transmission, consumer protection, and reliability. Federal regulatory policy, through the Federal Energy Regulatory Commission (FERC), is likely to be influenced by the outcome of the presidential election because the president is allowed to appoint a majority of its members.

Mr. Owens agreed that much of the problem with California's power prices is attributable to rules that banned long term fixed cost contracts, which prevented utilities from hedging costs and restricted them to purchasing load on the volatile short-term spot market. Environmental constraints were also allotted some responsibility. State law requires certain generators to purchase pollution allowances, and the cost of allowances has soared recently.

FERC's recent actions in response to California's problems focus on bringing temporary price stability through modifying wholesale power purchase rules while addressing longer-term reforms such as managing transmission congestion and ensuring adequate reserve margins. Differences both in the restructuring laws of Virginia and California and in such factors as reliance on natural gas, environmental policies, and plans to build generation and transmission capacity led to the conclusion that the Commonwealth may avoid the problems facing California.

SCC Restructuring Activities

The Task Force is directed to monitor the work of the SCC in implementing the Restructuring Act. Commission staff reported on developments in five areas. The SCC has promulgated rules addressing regional transmission entities, functional separation by incumbent utilities, net energy metering, rate cases, and interim pilot programs. Major cases and proceedings include the divestiture plans submitted by Delmarva Power & Light and Potomac Edison and the plan for competition for metering services and billing services.

The Commission briefed the Task Force on the status of its consumer education program and Virginia's three electric pilot programs, sponsored by Dominion Virginia Power, American Electric Power, and Rappahannock Electric Cooperative. New and future proceedings will address the phase-in of statewide competition, permanent rules for competition, and rules for competitive metering and billing services. As restructuring implementation continues, the SCC will hear regional transmission entity cases and functional separation plan cases.

Functional Separation Order

The SCC has adopted rules for plans for the functional separation of the generation, distribution, and transmission services of incumbent electric utilities. The Restructuring Act authorizes the SCC to impose conditions upon its approval of any plan for functional separation, including requirements that its generation assets or their equivalent remain available for electric service during any period it provides default service. The Commissioners split on the issue of how incumbent utilities' functional separation plans must address the provision of "generation assets or their equivalent" during any period that they are default service providers. The majority concluded that the Act obligates the SCC to regulate rates for default service, under traditional ratemaking principles, until the market provides reliable and economic service. Commissioner Miller dissented on grounds that the Act requires the costs of generation, after rate cap protections have expired, to be set by the market rather than by regulators. In his view, the SCC's only rate regulation power for default service after the capped rate period is to disallow imprudently incurred costs.

The Commissioners agreed to postpone the deadline for compliance with certain regulations until April 2, 2001. This deferral of the statutory deadline gives the General Assembly the opportunity, if it finds necessary, to address the issue of whether, and to what extent, default service customers should have any generation price protection after the capped rate period.

Representatives of incumbent electric utilities and large consumers reported to the Task Force that they are working with other interested parties to develop a consensus response to the Commission's order. They were urged to present any proposal at the Task Force's next meeting.

Proposals for Legislative Action

The Task Force received information on several proposals for legislation intended for introduction in the 2001 Session that will affect electric utility service.

• Senator Whipple discussed legislation that creates several tax incentives for clean and efficient energy, including (i) tax credits of 85 cents per kW from wind and other qualified energy resources produced and sold in Virginia; (ii) 15 percent income tax credit for the costs of solar photovoltaic and solar water heating equipment; (iii) sales tax exemptions for purchases of energy efficient appliances and commodities; and (iv) titling tax reductions for hybrid fueled vehicles.
• Electric cooperatives seek to require that consumers who switch to a competitive service provider and later return to their incumbent utility must then stay with their incumbent utility for a 12-month customer retention period.
• Electric distribution cooperatives want the option, if approved by a two-third vote of members, to withdraw from SCC regulation and become self-regulated.
• Delegate Kilgore asked that the capped rate provisions of the Restructuring Act be made applicable to governmental customers purchasing bundled electricity services for governmental uses from their incumbent utility.
• SCC staff identified nine issues that may be appropriate for legislative action.

Report of Consumer Advisory Board

In its twelve meetings over the past two years, the Consumer Advisory Board has developed recommendations in areas of assisting low-income consumers in meeting their energy needs, energy efficiency, and renewable energy. The Board recognizes that the major thrust of deregulation is to establish a competitive market in which residential and small business consumers will benefit. The Board also recognizes that the General Assembly would be reluctant to enact legislation generating revenue through mechanisms that would increase the cost of electricity, and that current information indicates a potential lack of general fund revenues to fund new programs.

Pursuant to Senate Joint Resolution 154 (2000), the Board has examined low-income energy assistance for all sources of energy. The Board recommended that the Task Force endorse the following actions addressing energy assistance needs for low-income Virginians:

• Codifying a state policy supporting the efforts of public agencies, private utility service providers, and charitable and community groups seeking to assist low-income Virginians in meeting their seasonal residential energy needs and designating the Department of Social Services (DSS) as the state agency responsible for coordinating these efforts.
• Establishing an office within DSS to be responsible for statewide coordination of all state and federally funded energy assistance programs, as well as any non-state programs that wish to participate.
• Establishing a dedicated special fund as a repository for funds from various sources to enhance existing sources of funds for low-income energy assistance efforts.
• Creating an income tax refund check-off for donations to the energy assistance program.
• Providing a special incentive for donations by business firms to the fund through an expansion of the Neighborhood Assistance Act, with the $1,000,000 in tax credits earmarked for contributions to the special fund.
• Making contributions to energy assistance programs tax deductible for non-itemizers.

Much of the debate over programs to encourage the development of renewable energy sources and improvements in energy efficiency involved their costs. Board members generally endorsed the goals such programs seek to advance. However, members questioned whether utility customers should bear the costs through their bills, or whether all taxpayers should bear these costs through the general fund. The goal of preserving Virginia’s status as a state with inexpensive electricity was consistently recognized. The Board adopted the following recommendations dealing with energy efficiency and renewables:

• Adopting a definition of renewable energy sources that includes those, which are derived from the sun or other natural processes and are replenishable by those sources over relatively short time periods.
• Requiring the SCC to establish guidelines for competitive service providers marketing their energy as "green." Non-qualifying electricity providers will be barred from using the "Green Power" label.
• Adopting a tax credit for the purchase and installation of equipment that generates electricity from solar energy or uses solar energy to heat or cool a structure or provide hot water.
• Designating the Department of Mines, Minerals and Energy to develop consumer education programs about energy efficiency, including usage-reduction techniques, energy-efficient equipment available, and weatherization services.

The Board also asked the Task Force to study, or to direct the Board to study, how the development of aggregation in Virginia and other states is, or is not, facilitating market power for the consumer and small business classes of electricity users.

Next Meeting

The Task Force will convene its next meeting in Richmond on January 5, 2001, at 9:00 a.m. Topics to be addressed include the SCC's report on competition for metering and billing services, the status of the Alliance regional transmission organization, and proposals to amend the Restructuring Act.

COMMISSION HOME