MEMBERS OF THE LEGISLATIVE TRANSITION TASK FORCE

Senator Thomas K. Norment, Jr., Chairman

Delegate Clifton A. Woodrum, Vice Chairman

Delegate Eric I. Cantor

Senator Richard J. Holland

Delegate Jerrauld C. Jones

Delegate Terry G. Kilgore

Delegate Harry J. Parrish

Delegate Kenneth R. Plum

Senator Kenneth W. Stolle

Senator John Watkins

STAFF

Division of Legislative Services

Franklin D. Munyan, Senior Attorney

C. Maureen Stinger, Staff Attorney

Michelle Montgomery, Operations Staff Assistant

Senate of Virginia - Clerk's Office

Thomas C. Gilman, Coordinator of Committee Operations

ii

The passage of Senate Bill 1269 (1999), establishing the Virginia Electric Utility Restructuring Act, marked the start of a new era in the way Virginians buy electric power. Starting in 2002, consumers in the Commonwealth will have the ability to choose the entity from which they purchase electrical generation services.

Implementing the deregulation of the generation component of electric service is a complex undertaking. For most of the past century, electric power was sold at retail by licensed public utilities that were granted service monopolies within specified areas while their rates and services were subject to regulation by the State Corporation Commission. In moving to retail competition for electricity generation services, Virginia has joined a growing number of other states that seek to take advantage of the efficiencies and lower costs that a market-based system offers. While generation is being made competitive, other elements of electric utility service will continue to be provided as they were prior to the passage of the Restructuring Act. The distribution and transmission of electricity will remain regulated by the Commission and the Federal Energy Regulatory Commission, respectively.

While the shift to competition creates new opportunities for economic efficiencies, the General Assembly has acknowledged that implementing retail choice must be done in a manner that maintains the Commonwealth's position as a low-cost electricity market and ensures that residential customers and small business customers benefit from competition.

Though the Restructuring Act was the product of three years of intensive work by a legislative joint subcommittee, it is widely acknowledged that the General Assembly's work did not end with the enactment of SB 1269. Restructuring Virginia's electric utility industry will be an ongoing endeavor, requiring monitoring of competition and addressing issues that arise as the framework established by the Act is implemented.

The Legislative Transition Task Force was established pursuant to § 56-595 of the Restructuring Act to work collaboratively with the Commission in conjunction with the phase-in of retail competition in electric services. The Task Force met eight times between June 23, 1999, and January 19, 2000. The Task Force recommended, after receiving valuable information and participating in lively airings of a range of perspectives, that the Restructuring Act be amended in the 2000 Session to address a variety of issues. Recommendations of the Task Force to the General Assembly include:

• Directing the State Corporation Commission to report to the Task Force, commencing January 1, 2001, with a recommended schedule and draft plan for implementing competition for metering services, billing services, or both.

• Implementing the Commission's proposed consumer education program, to be funded through the special regulatory taxes that the Commission is authorized to levy under existing statutes.

iii

• Eliminating the possibility that incumbent electric utilities may be assessed negative wires charges if the projected market price for generation and other allowable charges exceeds the capped rate for electric service.

• Clarifying that a person providing legal services or uncompensated educational services, default service, or conducting certain other activities will not need to obtain licensure from the Commission as an aggregator.

• Re-writing provisions of 1999's Senate Bill 1286 relating to the conversion of the local consumer utility tax on electricity from a tax based on the cost of power consumed to a tax based on the amount of power consumed.

• Refining the definition of "projected market price for generation."

• Directing the Consumer Advisory Board to continue and expand its study of low-income energy assistance programs.

The Task Force also recommended several technical and clarifying amendments to the Restructuring Act. The recommendations of the Task Force were introduced in the 2000 Session as Senate Bills 163, 532 and 585 and Senate Joint Resolutions 95 and 154. All of the recommendations of the Task Force were enacted by the General Assembly.

Though the Task Force tackled a number of the controversial issues raised by passage of the Restructuring Act, its work is not completed. The Task Force is scheduled to remain in existence until July 2005. Until that time, it will continue to monitor the Commission's introduction of retail choice for electrical services, recommend appropriate legislation, and study the issues delegated to the Task Force by various provisions of the Restructuring Act.

Table of Contents

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii

I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

A. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

B. Membership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

C. Consumer Advisory Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

II. Issues Examined by the Task Force . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

A. Implementation of the Electric Utility Restructuring Act . . . . . . . . . . . . . . . . . . .3

B. Consumer Education Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

C. Competition for Metering, Billing and Other Services . . . . . . . . . . . . . . . . . . . . 8

D. Discounting of Capped Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

E. System Reliability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

F. Energy Assistance Programs for Low-Income Households . . . . . . . . . . . . . . . . 15

G. Energy Efficiency Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

H. Renewable Energy Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33

I. Utility Worker Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35

III. Consideration of Proposed Amendments to Restructuring Legislation. . . . . . . . . . . . . .36

A. Licensing of Aggregators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36

B. Licensing of Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

C. Metering and Billing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38

D. Negative Wires Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39

E. Consumer Education Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

F. Local Electric Utility Consumption Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40

G. Public Benefits Fund for Energy Efficiency and Renewable Programs . . . . . . . .40

H. Renewable Portfolio Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

I. Utility Worker Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

J. Net Energy Metering Under the Electricity Consumption Tax . . . . . . . . . . . . . . 42

K. Technical Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

L. Study of Low-Income Energy Assistance Program . . . . . . . . . . . . . . . . . . . . . . . 43

M. Consumer Education Program in Natural Gas Deregulation Legislation . . . . . . 44

N. Projected Market Price for Generation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 44

O. Capped Rate for Certain Distribution Cooperatives . . . . . . . . . . . . . . . . . . . . . . 45

P. Other Issues Brought Forward by Consumer Advisory Board . . . . . . . . . . . . . .. 45

IV. Action by the 2000 General Assembly Session . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46

A. Senate Bill 585 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

B. Senate Bill 163 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

C. Senate Bill 532. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

D. Senate Joint Resolutions 95 and 154 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

V. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

v

Appendices

A. Restructuring Act Provisions Imposing Duties on the Legislative Transition Task Force.............A-1

B. Alliance Regional Transmission Organization Membership..........................................................A-3

C. Summary of State Electric Utility Legislation: Universal Service Provisions...............................A-5

D. Energy Assistance for Low-Income Households -- Service Provider Questionnaire Results........A-16

E. Energy Assistance for Low-Income Households -- Charitable Organization Programs.................A-20

F. Low-Income Electric Rate Affordability in Virginia: Funding Low-Income Assistance..............A-21

G. Low-Income Rate Affordability and Energy Efficiency Funding VACAP Proposal....................A-27

J. Renewable Energy Policy Options -- October 7, 1999...................................................................A-40

K. State Renewable Energy Incentive Programs................................................................................A-50

L. Proposed Amendment to Definition of Aggregator.......................................................................A-52

M. Proposal Addressing Competition for Metering and Billing Services..........................................A-54

O. Proposed Definition of "Projected Market Price for Generation".................................................A-68

Q. Senate Bill 585 (2000)....................................................................................................................A-72

R. Amendments Proposed by the Senate Committee on Commerce and Labor to SB 585................A-82

S. Proposed Amendment Regarding Licensure of Retail Electric Energy Suppliers..........................A-83

T. Senate Bill 163 (2000).....................................................................................................................A-84

U. Senate Bill 532 (2000)....................................................................................................................A-88

V. Senate Joint Resolution 154 (2000)................................................................................................A-90

vi

To: The Honorable James S. Gilmore, III, Governor of Virginia

and

The General Assembly of Virginia

Richmond, Virginia

April, 2000

The 1999 Session of the General Assembly enacted Senate Bill 1269, which created the Virginia Electric Utility Restructuring Act. With the adoption of the Act, Virginia joined 21 states that have enacted legislation deregulating the market for electricity generation services.

The Legislative Transition Task Force, established by § 56-595 of the Act, was created to work collaboratively with the State Corporation Commission in conjunction with the phase-in of retail competition in electric services within the Commonwealth. The members of the Task Force are directed to monitor the work of the Commission in implementing the Act, as well as to (i) determine whether, and on what basis, incumbent electric utilities should be permitted to discount capped generation rates; (ii) monitor the recovery of stranded costs by incumbent electric utilities; (iii) examine utility worker protection during the transition to retail competition; (iv) examine generation, transmission and distribution systems reliability concerns; (v) examine energy assistance programs for low-income households; (vi) examine renewable energy programs; and (vii) examine energy efficiency programs. The Task Force is further directed to make annual reports concerning the progress of the each stage of the phase-in of retail competition, offering such recommendations as may be appropriate in order to maintain the Commonwealth's position as a low-cost electricity market and ensure that residential customers and small business customers benefit from competition.

The Virginia Electric Utility Restructuring Act was the product of three years of effort by the Joint Subcommittee Studying Restructuring of the Electric Utility Industry, established by Senate Joint Resolution 118 (1996) and chaired by Senator Jackson Reasor of Bluefield. The joint subcommittee was charged with determining whether restructuring the retail electricity market in Virginia is feasible and in the public interest. That study was continued under Senate Joint Resolution 259 of 1997 and Senate Joint Resolution 91 of 1998. House Bill 1172, enacted in 1998, established a framework for the restructuring of the Commonwealth's electric utilities, and provided that future sessions of the General Assembly would address the details required to implement the deregulation of the industry. The task of providing the details needed to effect electric utility restructuring was accomplished in the joint subcommittee's third year. The work of the joint subcommittee in crafting the comprehensive restructuring plan, which was introduced in the 1999 Session as Senate Bill 1269, is described in Senate Document 34 (1999).

The membership of the Legislative Transition Task Force is required by § 56-595 to consist of 10 members, of whom six are members of the House of Delegates and four are members of the Senate. The members appointed to the Task Force had all previously served on the 11-member joint subcommittee under Senate Joint Resolution 91. The reduction to 10 members reflected the resignation of Senator Reasor prior to the 1999 Session.

The members of the Task Force are Senator Norment of James City County, who was elected chairman; Senator Holland of Isle of Wight County; Senator Stolle of Virginia Beach; and Senator Watkins of Chesterfield County; Delegate Woodrum of Roanoke, who continued to serve as vice chairman; Delegate Cantor of Henrico County; Delegate J. C. Jones of Norfolk; Delegate Kilgore of Scott County; Delegate Parrish of Manassas; and Delegate Plum of Fairfax County.

Subsection C of § 56-595 provides that Task Force members are appointed to serve until July 1, 2005. The term of the Task Force overlaps the period of phasing in customer choice, which is scheduled from January 1, 2002, through January 1, 2004, with the possibility that competition for generation may be delayed based on considerations of reliability, safety, communications or market power, but in no event shall any delay in the implementation of customer choice for all customers extend beyond January 1, 2005.

The Act, at subsection C of § 56-595, establishes a Consumer Advisory Board. The Board is directed to assist the Task Force in its work under § 56-595, and in other issues as may be directed by the Task Force.

The 17-member Board is required to be appointed from all classes of consumers and with geographical representation. The six members of the Board appointed by the Senate Committee on Privileges and Elections are Emmitt Carlton, Robert Goldsmith, Jack Hundley, William Lukhard, Donald Sullivan, and Jimmie Trent. The six members appointed by the Speaker of the House are Quentin Wilhelmi, Bradley Wike, Linda Sharpe-Anderson, The Reverend Fletcher Lowe, Aubrey Layne, and Ann Hedgepeth. The five members appointed by the Governor are Otis Brown, James Copp, Steve Walker, John Greenhalgh, and Oswald Gasser. The members of the Consumer Advisory Board elected William Lukhard as chairman and Otis Brown as vice chairman. The Board was requested by the Task Force at its August 16, 1999, meeting to examine and make recommendations regarding programs for low-income energy assistance, energy efficiency, and renewable energy. Delegate Plum served as liaison between the Task Force and the Consumer Advisory Board.

The Restructuring Act envisions that the Legislative Transition Task Force will have an active, multi-faceted role in its implementation. The duties of the Task Force are listed in Appendix A.

In the course of its eight meetings, the Task Force addressed many issues relating to the transition of Virginia's electric utility market from a system of regulated monopolies to a market-based system providing for customer choice in the provider of generation and other services. Much of the material presented by persons testifying at Task Force meetings may be viewed on the Task Force's internet web site (http://dls.state.va.us/elecutil.htm). The materials are posted by the date of the meeting at which they were presented.

The Restructuring Act requires the State Corporation Commission to perform much of the groundwork in implementing customer choice for certain electric services in the Commonwealth. Rather than reducing its workload, the task of overseeing the paradigm shift from a regulated industry to a competitive market has increased the work required of the Commission's staff. Beyond preparing the groundwork for a competitive market for electricity generation services, the Commission is adopting an approach that recognizes competition as a new constituency. This approach requires Commission staff to inquire whether actions will facilitate or hinder competition, and whether actions will reward the efficient while holding the inefficient accountable.

The Commission reported to the Task Force, at the commencement of most of its meetings, on the status of implementation issues. Topics addressed by the Commission spotlight the complexity of issues faced in implementing industry restructuring.

1. Regional Transmission Entities

The Restructuring Act imposes two duties on the Commission relating to regional transmission entities (RTEs). Commission approval is a prerequisite to the transfer of ownership or control of transmission assets. It must also adopt rules and regulations for RTEs, including whether incumbent electric utilities may transfer to an RTE all or part of their control of, ownership of, or responsibility for, transmission capacity. Commission staff is focusing on ways to use the multi-state transmission grid, of which Virginia is a member, in a manner that advances competition.

The Commission will play a prominent role in the establishment of RTEs in the Commonwealth. Every incumbent electric utility owning, operating, controlling or having an entitlement to transmission capacity is required to join or establish an RTE by January 1, 2001. In May 1999, the Commission issued an order establishing an investigation of, and requesting comments on, proposed guidelines for transfer of control of transmission assets to RTEs.

In early June 1999, American Electric Power (AEP) and Virginia Power, along with Consumers Energy, Detroit Edison, and First Energy, filed a request with the Federal Energy Regulatory Commission (FERC) regarding the establishment of the Alliance Regional Transmission Organization (RTO). These five firms serve a population of 26 million and have 43,000 miles of transmission lines, service territories of 124,000 square miles, and more than 71,000 megawatts of generating capacity. If approved, the Alliance RTO will be the largest RTE in the nation in terms of generating capacity and control area peak load, and tied for second largest in terms of square mileage of combined service areas (Appendix B).

Under the Alliance RTO's business model, all electric suppliers will have equal, nondiscriminatory access to the electric power grid and to wholesale and retail customers. The proposed structure of the Alliance RTO calls for a publicly-held independent transmission organization that would control, and perhaps own, transmission facilities. This structure will give the owners of transmission assets the flexibility to maintain or divest ownership of these facilities. It will be controlled by an independent board of directors, the members of which cannot have any material business relationship with a member or user of the RTO.

On July 7, 1999, the Commission filed its notice of intervention with the FERC regarding the Alliance RTO application. In its notice of intervention, the Commission expressed concerns in four areas: (i) geographic scope and regional configuration, (ii) RTO structure and governance, (iii) RTO operations and (iv) pricing. The proposed geographic scope and configuration of the Alliance RTO raised questions about reliability, because the proposed boundaries bisect two major reliability regions, and market power. The Commission stressed the importance of a neutral body supervising the transmission system as well as making the operational decisions of the RTO. Finally, the Commission asked the FERC to closely examine the issue of "pancaking" in transmission pricing, i.e., the access charge paid by transmission consumers each time the transmission path crosses an owner boundary.

The Commission identified three uncertainties that exist in the area of regional transmission policy: market uncertainty (questions as to who will be buying power from which generators); regulatory uncertainty (the FERC and Congress are still in the process of making policy); and legal uncertainty (lack of case law outlining FERC vs. state jurisdiction). The Eighth Circuit recently held that the FERC's curtailment procedures would indirectly regulate curtailment of transmission to retail customers, thereby exceeding the scope of the FERC's jurisdiction. This court decision underscores the uncertainty of the boundary of authority between the FERC and state regulators. It also shows the wisdom of granting the Commission authority to take action regarding transmission policy, as the Restructuring Act does. This feature allows Virginia's Commission to act on issues where action is appropriate but beyond the jurisdiction of the FERC.

On August 16, 1999, the Commission filed comments with the FERC on rulemaking proceedings regarding rules for RTEs. The Commission voiced its support for the development of RTEs and urged FERC to require true independent operators for RTEs, to give RTEs system reliability planning responsibility and to establish complaint resolution and rules enforcement mechanisms. The Commission also cited the complementary roles of state and federal regulation and reminded the FERC of state law not inconsistent with the Federal Power Act.

Section 56-777 of the Act specifically provides that prior to and during the period of transition to retail competition the Commission may conduct pilot programs encompassing retail choice of electric energy suppliers. Both Virginia Power and AEP-Virginia have filed proposals for retail customer choice pilot projects with the Commission. In addition, Mecklenburg Electric Cooperative and Rappahannock Electric Cooperative announced at the Task Force's June 23 meeting that they intend to file proposals for pilot programs.

Virginia Power's Customer Choice program is viewed as the first step in a seamless transition to full retail competition. The prototype pilot, which will encompass 24,000 customers drawn from all classes, will help the utility understand the processes and systems required for retail competition. Alternative suppliers are expected to begin providing electricity to customers who participate in the pilot around June 1, 2000. The pilot will end on January 1, 2002, when full retail competition begins to be implemented.

Under the pilot's first phase, choice will be offered to residential and small commercial customers in the Richmond area. In its second phase, choice will be offered to a limited number of large commercial and industrial users throughout Virginia. The pilot's design will give about 7.4 percent of the customers in the phase one area the option to buy electricity from a competitive service provider. The program proposal includes a rescission period for customers who change their minds, safeguards to prevent unauthorized switching of customers, and other customer protection measures.

On November 2, 1998, AEP-Virginia filed a pilot program with the Commission whereby between 3,200 and 3,500 of its customers would have a choice regarding the provider of their electricity. Representing all classes, these customers would account for two percent, or 50 mW, of the supplier's Virginia retail customer load. Following the enactment of Senate Bill 1269, AEP-Virginia redrafted its pilot program design to incorporate a wires charge and other aspects of implementing choice in accordance with the parameters described in the legislation, and has resubmitted its pilot proposal. Depending on the outcome of the pending interim rules case and the nature of the approvals granted by the Commission, a customer choice pilot could begin in AEP-Virginia's service territory by mid-2000.

Mecklenberg Electric Cooperative decided to establish a retail customer choice pilot program for two reasons. First, the cooperative may influence the restructuring process in such a manner that residential and small business consumers will benefit on par with industrial, government, or aggregated loads. Second, it may provide knowledge relating to the administrative and technical changes that must be made to fully implement retail competition. The co-op's plan is expected to include about 350 customers, most of whom are residential, or approximately three megawatts of load, near Chase City. During the pilot program, participants will be able to change suppliers as of their monthly meter reading date.

Rappahannock Electric Cooperative (REC) identified three issues that are critical to pilot programs. First, they provide an opportunity to help formulate and test the interim rules relating to codes of conduct applicable to various parties participating in pilot projects. The interim rules, which may be the foundation for the permanent rules during and after the transition to a competitive energy market, were initiated by the Commission in December 1998. Second, the development of standards for electronic data interchange (EDI) is crucial if a competitive marketplace will be able to efficiently distribute the ensuing large volume of data to the local delivery company, the transmission entity, the competitive service provider, the generator, and the customer. An EDI working group is assisting in the development of standards that will be effective and acceptable to all of these groups. The third issue is consumer education. The educational programs, it was suggested, should be coordinated with the pilot projects so that the effectiveness of educational materials can be evaluated prior to the distribution to all Virginians.

REC's Energy Choice pilot proposal anticipates including 1.4 percent of its system load. Approximately 900 customers, of whom the vast majority will be residential customers, will be allowed to participate. Though customers within all classes will be eligible to participate in the pilot, the selection method for each class will vary in order to ensure that the load dedicated to each class will roughly match existing load characteristics. The pilot is expected to start in the spring or summer of 2000 and run until December 31, 2001.

3. Other Commission Activities

Much of the burden of preparing the Commonwealth for the transition to retail competition for electrical generation has been placed on the State Corporation Commission. In addition to the tasks outlined elsewhere in this report, the Commission's staff has:

• Held a workshop on net energy metering for a diverse group of stakeholders, and drafted rules for net energy metering have been prepared in anticipation of its July 1, 2000, commencement.

• Proposed procedures for electric utility rate cases to be held prior to the start of the capped rate periods.

• Conducted hearings on utilities' pilot programs.

• Developed standards for functional separation and affiliate relations.

• Prepared policies for designating default service providers.

• Analyzed rules for distribution services, including interconnection standards.

• Worked with a group of stakeholders to develop standards for electronic data interchange.

• Begun studying transmission capacity needs and whether transmission constraints require pricing limits.

B. CONSUMER EDUCATION PROGRAM

Section 56-592 of the Restructuring Act requires the Commission to develop a consumer education plan designed to provide information to retail consumers during the period of transition to retail competition and thereafter. The Commission was required to develop the program, and report its findings and recommendations, to the Task Force by December 1, 1999.

Kenneth Schrad, Director of the Commission's Division of Information Resources, presented the Commission's Consumer Education Report to the Task Force at the meeting on December 8, 1999. The Commission's Report to the General Assembly on a Consumer Education Plan for Virginia's Retail Energy Supply Market (December 1999) is available on-line at www.state.va.us/scc/orders/case/edrpt.pdf.

The objective of the "Virginia Energy Choice" plan is to provide Virginians with relevant and comprehensible information without creating an advantage for one competitive supplier over another. The plan aims to provide objective, credible information on how a deregulated market will operate to give residential and small business consumers a greater opportunity to become full participants in that market.

The Commission, in developing the plan, attempted to determine, through review of similar efforts in a dozen other states, the most efficient means of educating the public about deregulation of the electricity market. The Virginia Energy Choice plan covers years from 2001 through 2005. The timing of plan elements is keyed to dates connected with the development of retail access throughout Virginia. A toll-free number and a web site for Virginia Energy Choice will be operational shortly after the Commission issues final orders on the pilot programs, and the Commission has created a position for a full-time employee to help administer the plan. The education plan will be continually evaluated during its five-year run. Adjustments to the plan will occur as necessary to ensure that funds are being spent in the most cost-effective manner.

The education plan will be coordinated with the Commission's rules governing the marketing practices of public service companies, licensed suppliers, and other providers. Although this plan is specific to a retail electric market as directed by the Act, it has been designed to be energy neutral and could easily emphasize customer choice and the mechanics of choice for both electric and natural gas supply, offering "one-stop" educating. The Commission will create an education advisory committee to receive input and suggestions from those with a direct interest in the education effort. Enlisting the involvement of community-based organizations, with which consumers already have established relationships, will be an important means of educating consumers.

The total estimated cost of the five-year "Virginia Energy Choice" education plan is $30 million. The annual cost to each Virginian is 89 cents. The figures are subject to change as the effectiveness of the plan is determined through continuous program monitoring. Education programs being implemented in other states that are introducing retail competition for energy services have ranged from 55 cents to $1.45 per resident. Mass media marketing and advertising comprise nearly 70 percent of the projected cost.

Funding for the consumer education program will be provided through the special regulatory revenue tax currently authorized by § 58.1-2660 and by the special regulatory tax component of the electric utility consumption tax scheduled to take effect on January 1, 2001. The cost of the consumer education program, it is assumed, can be funded by increasing the amount currently charged under the regulatory revenue tax, which is now capped at 0.2 percent of the incumbent utilities' gross receipts. The Commission did not perceive a need to raise the maximum levels in order to fund the consumer education program.

The current rate charged by the Commission is 0.11 percent; the Commission is authorized to increase the rate of its assessment by 0.09 percent without further statutory approval. Section 58.1-2900, which is effective on and after January 1, 2001, sets the maximum rate of the special regulatory tax rate at $0.00015/kWh for the first 2,500 kWh consumed; $0.00010/kWh for electricity consumed in excess of 2,500 kWh but not more than 50,000 kWh; and $0.0007/kWh for electricity consumed in excess of 50,000 kWh. Under § 58.1-2902, the Commission may omit the levy on any portion of such tax as in unnecessary, in the Commission's discretion. The Commission reported that the special revenue tax is a funding option that is equitable to utilities; is one that it has existing authority to administer; and will allow the Commission to direct the consumer education program and monitor consumer education cost recovery.

The Restructuring Act phases in a competitive market for electric energy generation. Distribution and transmission of electric energy, to the extent not preempted by federal law, will continue to be regulated by the State Corporation Commission. Subsection B of § 56-581 provides that no later than September 1, 1999, and annually thereafter, the Commission shall submit a report to the General Assembly evaluating the advantages and disadvantages of competition for metering, billing, and other services that have not been made subject to competition under the Act. The Commission's reports are to include recommendations as to when, and for whom, such other services should be made competitive.

The Commission presented its first such report at the Task Force's September 28 meeting. The Staff Report on Competition for Electric Metering Billing and Other Services (September 1999) is available on-line at www.state.va.us/scc/orders/case/mandb1.pdf.

The Commission reported that opening electric metering and billing services to competition will stimulate the development of the competitive retail electricity market in Virginia by promoting diverse pricing and billing options. Virginia's electricity customers currently receive all of their metering and billing services from their local electric utilities. These utilities own, install, maintain, and read their customers' electric meters. Most meters are read manually once every month at the customer's residence or business. Utilities offer their customers few, if any, billing options. Some electric utilities are already outsourcing metering and billing services to non-utility entities.

A majority of the states that have passed electricity competition laws have either required metering and billing to be competitive, or directed their respective regulatory commissions to address the issue. Competitive billing may allow suppliers to distinguish their services through such means as "value-added" services. Competitive metering may also encourage entry into the market of companies offering to price their power based on the time of day of its consumption.

The Commission recommended that it be authorized to decide on the timing and type of metering and billing competition. Under this proposal, the General Assembly would direct the Commission during the 2000 Session to make the necessary decisions regarding implementation of competition in metering, billing, or both, based on criteria adopted by the legislature. The criteria would require the Commission to consider such issues as economic and physical feasibility, safety, accuracy, and consumer preparedness.

The Commission's Solicitor General suggested that the report's recommendation reflects a middle course between those who are urging that a date be set for competition in metering and billing services, and those who are asking that consideration of legislation authorizing competition be postponed until the 2001 Session. Technological developments affecting safety, reliability and other concerns can change rapidly, and fixing a date for competition will leave the Commission and the market unable to respond quickly. On the other hand, postponing action for another year might forestall entry by marketers that are seeking to avoid uncertainty. The implementation of competition in a historically monopolistic industry was acknowledged to be a difficult task. Competition for metering and billing do not need to occur simultaneously, but will be addressed separately as the process advances.

The Task Force heard a wide range of reactions to the Commission's metering and billing report. The Alliance for Lower Electric Rates Today (ALERT) strongly endorsed the recommendations in the Commission's report. Authorizing the Commission to determine if, when, and how to have competition for metering, billing, and ancillary services is preferable to adopting statutory language that prohibits, or that allows, competition for these services. Delaying action on this issue until the 2001 Session, ALERT argued, ensures a competitive advantage for incumbent utilities.

The Commission's recommendation was also endorsed by Enron Corporation, the Virginia Retail Merchants Association, the American Association of Retired Persons (AARP), and the Office of the Attorney General.

Virginia's electric cooperatives agreed that giving the Commission the authority to decide questions regarding the implementation of competitive metering and billing is preferable to having the General Assembly make all of the relevant decisions. The Commission should have the power to examine the issue on a utility-by-utility basis, and be able to exempt classes of utilities in appropriate cases. It was noted that Maryland's restructuring law exempts electric cooperatives from the deadlines for implementation of competitive metering and billing. Delaware's law goes further by providing that electric cooperatives shall continue to conduct metering and billing functions within its service territory.

AEP-Virginia agreed that metering and billing services should be competitive, and sooner rather than later. While the Commission's report was described as well-done first step, other issues--especially regarding metering--need to be addressed. Legislation should be based on the premise that metering and billing will be competitive and on the schedule already approved by the General Assembly for competition. Competitive metering and billing merits early attention. Legislation should make it clear that competition will be permitted as soon as is reasonably practicable. The utility endorsed a directive from the 2000 Session of the General Assembly providing for implementation of competition for these services on the basis of acceptable, yet-to-be developed criteria.

Allegheny Power Systems agreed with the recommendation that the Commission should have the authority to implement competition for metering and billing. However, the implementation can be phased in and need not be required for all areas at the same time as customer choice for generation services. Concerns about customer education led the company to propose a delayed start of competitive metering and billing in Maryland.

Virginia Power voiced concerns with the Commission's approach and offered an alternative. Metering and billing are two different issues, presenting different technological and business challenges. Both services should eventually be competitive. Opening them to competition may produce additional benefits for consumers. But before these functions become competitive, Virginia Power believes that issues of timing and the means used to open these two functions to choice need to be addressed.

Moreover, a high level of consumer confidence is vital to the development of a truly competitive marketplace for the supply of electricity. The introduction of competition for generation will present significant challenges for consumers. Adding competition for either competitive metering and billing at or near the same time could lead to customer confusion, thereby damaging public confidence in the entire restructuring process. Delaware, Maryland, Massachusetts, New Jersey, Nevada, and Pennsylvania have delayed the start of competitive metering until customers have had a chance to get used to choice in supply.

Virginia Power asked the Task Force to carefully consider the means through which the billing and metering markets are opened to competition. Substituting choice for monopoly in the provision of any service related to electricity is a major policy decision. That decision should be made by the policy-making arm of government: the General Assembly. Virginia Power proposed that in the 2000 Session the General Assembly should adopt legislation stating that it is the policy of the Commonwealth that both metering and billing be opened to competition, to the extent practicable and when customers are ready. The legislation would direct the Commission to form working groups to examine the timing of the opening of competition in metering and billing services and the methods needed to implement competitive markets. Based on their findings, the Commission would be required to submit reports on competitive metering and billing to the General Assembly.

The Restructuring Act directs the Task Force to "determine whether, and on what basis, incumbent electric utilities should be permitted to discount capped generation rates established pursuant to § 56-582." Section 56-582 directs the Commission to establish capped rates for every incumbent utility, effective January 1, 2001, and expiring July 1, 2007. The Act allows the Commission to adjust capped rates to address situations such as changes in fuel costs, changes in taxation, and financial distress of an incumbent utility. The Commission may terminate capped rates as early as January 1, 2004, if it finds an effectively competitive market for generation services. During the capped rate period, incumbent utilities are required to make electric service available at capped rates to any customer in the incumbent's service territory.

Other provisions in Title 56 generally require uniformity of charges for all members of a class. The purpose behind such uniformity is to prevent discrimination among members of a class. A rate undercharge may be an unlawful preference. C & P Telephone Co. v. Bles, 218 Va. 1010, 243 S.E. 2d 473 (1978). However, § 56-235.2 was amended in 1996 to authorize the Commission to approve special (preferential) rates when they would be in the public interest. The Commission must find that the special rates (i) protect the public interest, (ii) will not unreasonably prejudice or disadvantage any customer or customer class, and (iii) will not jeopardize the continuation of reliable electric service. Commission guidelines prevent other electric utility customers from bearing increased rates as a result of the special rates.

The Task Force examination of this issue focused on two related questions: To what extent, if any, are Virginia incumbent electric utilities authorized to discount capped rates during the capped rate period? Under what conditions, if any, should incumbent electric utilities be allowed to discount capped rates during the capped rate period?

Stewart Farrar, Solicitor General of the Commission, noted that the issue of discounting involves the bundled rates rather than merely the generation rate component, which will be used principally to determine liability for wires charges. The appropriateness of the discount should turn on whether the customer receiving the discount is eligible to shop for competitive generation services. If the customer is ineligible, the utility may seek the Commission's approval of discounted rates under § 56-235.2. However, if the customer is eligible to shop for competitive rates, discounting would conflict with two provisions of the Restructuring Act: (i) functional separation of generation, transmission, and distribution services and (ii) stranded cost recovery.

Discounting is a competitive tool that can be used to attract or retain customers. The provision of electric service at capped rates becomes a noncompetitive service once customers are eligible to shop for competitive generation service. The Restructuring Act, in § 56-590, requires a separation between an incumbent utility's noncompetitive transmission and distribution activities and its competitive generation activities. Allowing an incumbent utility to discount its capped, bundled rates for the benefit of a customer who is eligible to shop for competitive generation services would be contrary to the Act's principal tool for implementing competition: allowing customers who want "discounts" to shop for them in the market. If an incumbent utility wants to offer competitive prices for generation services, it may do so through its functionally separate generation entity, consistent with rules governing affiliate conduct.

Discounting capped rates may adversely effect stranded cost recovery. Capped rates and wires charges are the statutory methods for recovering an incumbent electric utility's stranded costs. The portion of the capped rate that exceeds the utility's costs may be used for stranded cost recovery. If a customer leaves the incumbent utility to obtain a competitive (lower) rate, the customer must pay a wires charge, which will allow for recovery of the incumbent's stranded costs. If the customer receives a discounted rate from the incumbent, the customer pays less of a wires charge and the utility receives less revenue to cover its stranded costs.

The Commission suggested that selective discounting of capped rates for noncompetitive, regulated distribution services may be appropriate after retail competition begins. This discounting could attract customers to locate or expand usage in Virginia. Discounting of rates for distribution services under § 56-235.2 might be appropriate if they are competitive-neutral, do not increase distribution costs of non-discounted customers, and do not result in cost under-recovery. Such discounting should be subject to Commission review and oversight. The Commission will continue to examine the interplay between relevant existing Code sections and the Restructuring Act to determine if they adequately ensure the development of a competitive market for generation services.

Interested stakeholders agreed with the Commission's critique of discounting capped rates. Tom Hyland, spokesman for the Apartment and Office Building Association of Metropolitan Washington (AOBA), stated that the discounting of capped rates, if allowed, should be made equally available to all members of a particular rate class for which discounts are issued to avoid discriminating among members of the same class. Though AOBA had urged the Task Force to examine the issue of discounting capped rates, it acknowledged the issue is complicated.

Virginia Power agreed with the Commission's comments regarding discounting. The statutory intent behind capped rates is to fix incumbent electric utilities' rates, since the Restructuring Act outlines limited, specific grounds for Commission adjustment of capped rates. The Act establishes capped rates for three purposes: (i) protecting consumers, since consumers may use the capped rates as a "safe harbor" if competitive rates become volatile, (ii) fostering true competition, so that consumers may measure offers from alternate suppliers, and (iii) recovering stranded costs. Discounting of these capped rates will likely deter the entry of new suppliers, as well as make some rate classes bear a disproportionate share of the stranded costs.

Section 56-235.2 continues to provide a tool for incumbent utilities to provide special rates when doing so would be in the public interest. In response to Senator Watkins' question of whether incumbent utilities are permitted to discount rates for all classes of consumers in order to protect market share in a competitive environment, it was pointed out that the Act allows the Commission to terminate capped rates upon a utility's petition as early as 2004 if it finds that a competitive market for generation exists. While the Restructuring Act used the term "capped" rather than "frozen" rates, Virginia Power spokesman William G. Thomas contended that the development of the legislation resulted in a policy that rates are to be fixed, subject to the Commission's authority in enumerated circumstances to increase or decrease the rates. Therefore, the provisions of the Restructuring Act do not allow discounting of capped rates, either for individual members of a class or for a class or classes across the board.

AEP-Virginia concurred, contending it would be inappropriate for incumbent utilities to discount the capped rates. Capped rates will provide customers with a basis for evaluating competition. They are also critical to determining wires charges in the recovery of stranded costs. Discounting capped rates would result in a disincentive to alternative electric service providers to enter the Commonwealth's competitive market, and would negatively affect wires charges and stranded cost recovery.

The Virginia, Maryland and Delaware Association of Cooperatives and Old Dominion Electric Cooperative urged the Task Force to examine (i) how rate reductions interplay with stranded costs, (ii) the effect of discounting on new market entrants, and (iii) the option for Commission termination of capped rates after January 1, 2004. Other groups endorsing this position at the Task Force's July 13 meeting included the Virginia Independent Power Producers and ALERT, whose spokesman agreed with Virginia Power's interpretation of the Act's use of the phrase "capped rates" rather than "frozen rates." When the SJR 91 joint subcommittee first adopted "capped rates," the phrase may have been envisioned as a ceiling. However, as the bill proceeded through the legislative process, the term came to mean a fixed rate, which (unlike a "frozen" rate) is subject to adjustment by the Commission in specific circumstances.

The Commission will continue to look at whether the criteria for approval of special rates under § 56-235.2 are adequate in a competitive market. The Task Force did not believe that the issue necessitates action at the present time, in light of the near-consensus among stakeholders. As the Restructuring Act continues to be implemented, the Task Force may revisit the propriety of allowing the discounting of capped rates.

In response to the direction in subsection C of § 56-595 that the Task Force examine generation, transmission, and distribution systems reliability concerns, the Commission briefed the Task Force regarding factors that affect reliability in the electric utility industry. Currently, responsibility for reliability rests primarily with electric utilities, which have an obligation to provide adequate service at just and reasonable rates. Other entities with roles in maintaining reliability include control area operators, regional reliability councils (of which Virginia is a member of three), the voluntary North American Reliability Council (NARC), FERC, and state regulatory commissions.

Under competition, utilities may have less overall responsibility for maintaining reliability. Though regulated utilities will continue to construct and maintain distribution facilities, RTEs will probably assume much of the transmission reliability obligations, and the adequacy of generation capacity will largely be determined by market forces.

The roles of control area operators and regional reliability councils are not expected to change to a great extent. The NARC is working on plans that would transform it from a voluntary system of reliability management into a mandatory organization with the backing and support of governments. The FERC's role in ensuring reliability could increase as RTEs assume ongoing responsibilities for ongoing assessments of transmission adequacy and system security. The FERC's policies and approved tariffs will influence RTE activity. The role of state commissions will diminish as reliance on market forces for generation increases. There is little practical experience for predicting how reliability may be affected after generation adequacy becomes a function of market forces.

The Restructuring Act alters the Commission's ongoing reliability oversight role. It will continue to monitor reliability developments and will report significant reliability-related developments to the Task Force. To date, the Commission has not identified the need for any legislative changes to address reliability issues.

The Commission reported that it currently has the necessary tools to ensure reliability in electricity distribution. It can assess reliability in making its determinations regarding the allocation of assets relating to the functional separation of generation, transmission and distribution services. In exercising its authority to regulate distribution rates, the Commission reviews quality and service. Finally, the Commission has the authority to revoke distribution rights if service is inadequate and the provider has not cured the problem.

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. The addition of new transmission lines is difficult to accomplish. A NARC reliability assessment concludes that electric supply and transmission systems in the United States and Canada are adequate for the next three to five years. Transmission systems will be increasingly challenged to accommodate the demands of the evolving competitive electricity markets. In the long-term, electric supply adequacy could deteriorate if development of additional generating and transmission capacity does not keep pace with growing customer demand.

The Virginia Retail Merchants Association warned that system constraints will cause problems with reliability as demand increases. In a deregulated electric market, decisions concerning the types, amounts, locations, and timing of investments in generation, transmission, and distribution systems will no longer be made by vertically-integrated firms, subject to the approval of state public utility commissions. With the introduction of retail competition, such decisions will increasingly be made by unrelated entities. Generation decisions will be driven more by market decisions rather than reliability concerns.

The International Brotherhood of Electrical Workers (IBEW) suggested that the issue of statutory protections for utility workers is closely tied to the issue of safety and reliability of the electrical system. The Commonwealth should ensure that the workers who build and maintain generation, transmission, and distribution systems in Virginia are qualified and certified to do their jobs. This should be accomplished by a mandatory training, certification, and licensing program developed by labor and utility industry representatives, trade associations, educational institutions, and the Department of Labor and Industry. An IBEW spokesman urged the adoption of industry-wide maintenance plans and inspection standards. Financial penalties for noncompliance should be set high enough to discourage any financial gains by cutting service quality.

Joshua Lief, Deputy Secretary of Commerce and Trade, addressed the Task Force at its November 9, 1999, meeting, and noted that reliability currently is the responsibility of utilities. In a restructured market, reliability will be addressed by the marketplace. Restructuring will not bring total deregulation; there are still regulatory controls over utilities, and the Occupational Safety and Health Administration will still govern address worker safety. Therefore, licensing and certification requirements for utility workers will not be necessary.

It has been suggested by advocates for low-income persons that electric utility industry restructuring may increase, rather than decrease, the energy burden borne by low-income households. They predict that their energy costs will rise as costs are shifted to groups that have little market power and existing regulatory protections are eroded.

Other groups have countered that the implementation of retail choice for electric service is unrelated to the adequacy of Virginia's programs providing assistance to low-income households, and that lowering the burden of energy costs paid by low-income households by programs funded by other classes of consumers will raise the cost of power, thereby undercutting the potential benefits of competition for other consumers. While Virginia has not had a state-financed program to assist low-income households with their electric energy costs, the Commonwealth does administer several federal programs and is served by a number of voluntary programs.

After hearing testimony on this issue at its August meeting, the Task Force asked the Consumer Advisory Board to develop recommendations on this issue. Developing a consensus position proved very difficult. Among the issues raised in the Board's deliberations were (i) whether an energy assistance program should assist consumers of electricity or all types of energy; (ii) how a program should be funded; and (iii) the extent to which existing programs are meeting the energy needs of low-income Virginians.

Of the 21 states that have passed legislation to restructure the electric utility industry, 18 have included provisions for low-income utility assistance programs as a part of their restructuring legislation. In at least six other states, utility commissions have adopted comprehensive restructuring orders. Some of these commission restructuring orders, including New York's, have required the continuation of low-income assistance programs in utility's new restructuring plans.

Several states (including California, Massachusetts, and Montana) with restructuring legislation have called for the continuation and expansion of existing low-income rate assistance and conservation programs. Others (including Illinois and New Hampshire) funded low-income rate assistance programs for the first time as part of the restructuring process. Maryland, Oregon, and Texas granted new and significant amounts for rate and conservation assistance through system benefits or public benefits charges. Table 1 summarizes actions with respect to low-income electricity assistance programs in states that have enacted restructuring legislation.

A summary of state restructuring statute provisions prescribing universal service programs for households, submitted at the Task Force's August 16 meeting, is attached as Appendix C.

States have adopted a variety of approaches to providing assistance to low-income residents with their energy payments. The low-income assistance programs of other states include a variety of unique features, such as: (i) allowing municipal utilities and cooperatives to opt out of funding requirements for a universal service program, with customers of those utilities not eligible to receive benefits under the program; (ii) allowing utilities to receive credits for their costs in implementing these programs; (iii) crediting excess funding at the end of each year back to consumers, or (iv) requiring excess funds, interest earned, and penalties assessed utilities to be placed in a dedicated special fund for use in meeting low-income energy needs.

However, most long-term energy assistance programs, as contrasted with crisis assistance programs, conform to one of three models, based on the type of benefit provided and the method by which the benefit is provided: rate discount programs, percentage of income payment plans (PIPPS), or payment restructuring programs.

Examples of rate discount programs include straight discounts (off the amount of the bill), discounts on usage charge/marginal cost-based rate (off the rate per kWh), consumption-based discounts (where the discount percentage declines as the amount of consumption increases), lifeline rate structures (where the charge for a minimum amount of service is kept relatively low), and customer charge waivers (where the fixed charge for such things as metering and billing is waived). Charge waivers have been adopted in Alabama, Georgia, Mississippi, and Washington. States with rate discounts include Alaska, Arizona, California, Massachusetts, Minnesota, Montana, New York, North Carolina, Oklahoma, Rhode Island, Texas, Washington, and West Virginia.

Under a PIPP, a household is obligated to pay a portion of its energy bill, with the percentage being tied to the household's income. The balance of the bill is paid by program funds. For example, if a household has an income of $10,000 and the limit on the percentage of income to be used for electricity is six percent, the household would be responsible for paying $600 per year, or $42 per month, for service, and the balance of the household's electricity bill would be paid by the energy assistance program. Variations of the straight PIPP include the percentage of bill plan, in which the administrator determines the percentage of the energy bill that the customer would pay under a basic PIPP program and then requires the program participant to pay an equivalent percentage of each month's bill rather than a fixed dollar amount. Some PIPPs require the household's energy bill to exceed a certain percentage of household income in order to be eligible for a credit, which is tiered based on income. Others require the customer to pay a certain percentage of resources left after all necessary household expenses are paid. States with PIPPs include Kentucky, Maine, New Hampshire, New Jersey, Ohio, and Pennsylvania.

Elements of payment restructuring programs include budget billing and arrearage forgiveness. Arrearage forgiveness programs have been established in Connecticut, New York, and Wisconsin.

At the Consumer Advisory Board's September meeting, staff was asked why several other states' electric utility restructuring programs included provisions providing assistance for low-income customers. Responding definitively to such an inquiry is problematic because state legislatures often act as they do in response to a variety of pressures and motivations, often obscure to outsiders.

Utility commissions and legislatures in many other states apparently perceive that fixed and low-income households face unique market barriers to obtaining low-cost services in an open market. To address some of these concerns, low-income program advocates have pushed for consumer education programs and aggregation policies, as well as for programs to reduce the cost of electricity for low-income households. As a result, "In every state that has moved toward deregulation, consumer activists have raised concerns about whether low-income customers would be worse off as power producers vied for more affluent users and shunned the poor." (Washington Post, Sunday, October 17, 1999, p. 3).

The arguments raised in Colorado are illustrative of the case made by advocates of low-income energy assistance during the transition to a restructured electric industry. Colorado Governor Romer's Energy Assistance Reform Task Force concluded that restructuring of both the gas and electric industries may put low-income households at a tremendous disadvantage, and that the threats to this vulnerable population in an unregulated environment are numerous.

Among the potential risks identified by low-income advocates, and apparently adopted by legislatures and regulators in other states, are:

• Higher rates. A study by economist Roger Colton prepared for Colorado's legislative study panel identified three concerns with respect to low-income populations: (i) an increasing disparity between prices charged to large and small customers as common costs are disproportionately allocated to the less competitive class; (ii) an eventual fly-up in rates charged to high-risk, high-cost customers; and (iii) the imposition of a variety of ancillary fees akin to the propensity of the banking industry to attach unbundled fees to services that historically have been included in basic service charges.

• Negative policy changes regarding termination protection, credit policies, collection practices, payment practices, and understandable billing. The regulated system is seen as protecting the vast majority of customers from unfair treatment.

• Redlining of low-income neighborhoods and demographic groups. The regulated system benefits small consumers by obligating utilities to serve all customers within their franchised service area and by setting an established rate for all residential customers. Some small customers fear that they could be refused service based on their neighborhood, credit rating, or limited usage of electricity.

Low-income and other advocates in various states are taking advantage of the upheaval of gas and electric industry restructuring to push for statewide independent administration of utility low-income bill assistance and energy efficiency programs. The public utility commissions in California and New York have created statewide non-utility administration of a number of public benefit programs, including some low-income programs. In some cases, statewide administration of utility programs is mandated or fostered by industry restructuring legislation. California, Illinois, New Hampshire, New York, and Wisconsin have moved toward statewide administration. Maine and Massachusetts have recognized the value of statewide programs. Montana has a mixed statewide and utility-based program (which functions like Vermont's home energy assistance trust, in that utilities can receive credits against statewide obligations for local programs).

During the Task Force's August meeting, staff was asked for data regarding the extent of assistance provided by government and private sector programs to low-income families in meeting their energy needs, and to quantify the extent to which these current programs fail to meet the need for such assistance. The inquiry was not limited to electricity but covered all sources of energy.

a. Assistance Provided by Existing Programs

Responding to the inquiry required identifying the amount of assistance currently available to meet energy needs of low-income families, as well as identify the amount of need not met by these programs. In an attempt to answer this question as thoroughly as possible, staff prepared a Service Provider Questionnaire and sent it to energy providers, charities and local social services agencies. The responses to the questionnaire are summarized in Appendix D. Staff's estimate of expenditures on aid for Virginia's low-income families with their energy needs for the preceding three years are set forth in Table 2.

Program	1997	1998	1999
LIHEAP	$23,595,601	$20,406,965	$29,379,398
WAP	$ 5,886,857	$ 4,941,258	$ 6,648,655
Voluntary Utility Programs	N/A	$ 1,849,708	$ 1,946,961
FEMA Emergency Food & Shelter*	N/A	$ 418,297	$ 359,437
Local/Charitable Programs	N/A	$ 45,434	$ 41,314
Total

The largest program for the provision of energy assistance to low-income Virginians is the Low-Income Home Energy Assistance Program (LIHEAP). The Virginia Department of Social Services (DSS) administers the program, which is a federally-funded block grant program. It is not an entitlement program; assistance is provided to approved applicants only to the extent funds are available.

Residents are eligible for LIHEAP and Weatherization assistance if they have a total household income at or below 130 percent of the federal poverty guideline. For an individual living alone, 130 percent of the federal poverty guideline is $10,716 per year. Approximately $3,700 are added for each additional family member. In addition, households are ineligible if they exceed certain resource levels. Resource levels are $3,000 with households with elderly and/or disabled members and $2,000 for all others. "Resources" include cash or other intangible assets that are convertible into cash, such as deposits, retirement accounts, bonds, and burial accounts. Houses and cars are not counted in determining eligible resources.

Virginia's LIHEAP has three major components: fuel assistance program, crisis assistance program, and cooling assistance program. The largest of the three is the fuel assistance program.

Priority is given to the elderly (over age 60), the disabled and families with young children (under age 6). Of the households served, more than one-third included at least one member age 60 or older, one-third included at least one disabled member, and nearly one in four had at least one child under age six. Priority is also given to households with the highest energy costs (based on their heating source) and lowest incomes. Benefit levels are based on household size and the climate zone tied to geographic area of the state.

Local departments of social services accept applications for help with home heating costs in October and November. The applicant is required to identify the vendor, on an approved list, from which he or she purchases fuel. The information obtained from the eligible applications is analyzed by a computer program that determines the benefit level. The results are generated in early December. An award letter, stating the amount of the benefit for the season, is mailed by the DSS to both the approved applicant and the applicant's fuel vendor. The letter acts as a credit authorization. Fuel payments may be made until the following March 31, unless the household uses all of its benefit allowance prior to that date. In most cases, payments are made by the DSS directly to the fuel vendor. However, homes using wood or coal, or having limited fuel storage capacity receive direct payments. Awards may be applied to accrued arrearages for fuel for the current season. Once the benefit is exhausted, the vendor is not required to continue serving the customer.

The average payment was $232, with the largest payment amount being $346. Data in Table 3 reveals that during the past seven years, the amount of fuel assistance and number of households served have fallen by 20 to 30 percent, respectively, while the average benefit per household has jumped by approximately 20 percent. The DSS expected to have approximately $20 million for its fuel assistance program for the winter of 1999-2000.

The DSS collects data on the source of energy used to heat households applying for LIHEAP fuel assistance. Table 4 indicates that a plurality of the eligible households designate electricity as the primary heating source.

The LIHEAP crisis assistance program seeks to prevent or alleviate a crisis by ensuring that a household has heat. It consists of two sub-components: emergency assistance and primary fuel assistance. For each of the past two year, Crisis assistance program funds have not been fully utilized; leftover funds are used for the cooling assistance program. Local DSS representatives reported that funding has been exhausted in very cold winters requiring increased fuel usage. In 1993, crisis assistance program funds ran out in February.

The program's income and resource eligibility criteria are the same as for the fuel assistance program. An average of 3,300 households received LIHEAP crisis assistance during each of the past five years (Table 5).

For fiscal year 2000, emergency assistance sub-program applications must have been received between November 1, 1999, and March 15, 2000, or until funds are exhausted. These funds may be used only for customers needing help with security deposits and heating equipment repair or replacement.

Applications for the primary fuel assistance component of the Crisis Assistance Program may be submitted between early January and March 15, or until the funds are exhausted. This sub-program is for households that have a vulnerable person (under six, over 60, or disabled) in the home, who did not receive LIHEAP fuel assistance, and that have received a service cut-off notice. Applications are made at the local DSS office and forwarded electronically to Richmond for determination of the amount of the award.

The LIHEAP cooling assistance program has in some years provided funding for paying for electricity and purchasing new cooling equipment. The Department of Social Services contracts with Community Action Programs, Area Associations on Aging, the United Way and weatherization grantees for administration of the program. The purchase of window air conditioning units comprises the largest percentage of funding, payment of electric bills is the second largest, and the program may also include the purchase of fans and repair of air conditioning systems. No actual numbers are available for the 1999 season, but an estimated $3.5 million was spent on administration costs and benefits distributed. Of that sum, contractors get a fee on a per-case basis. The determination of whether or not to operate a cooling assistance program is based on the amount of funding left over from the winter crisis programs.

The Weatherization Assistance Program (WAP) has been managed by the Department of Housing and Community Development since 1991. According to the DHCD's 1999 report on the structure and delivery of low-income energy assistance program services, the homes of approximately 2,100 low-income families received state weatherization services in FY 1997. Approximately 89,000 Virginia households have received assistance since the inauguration of the WAP. Funding for the program has fluctuated between $4.9 million and $6.6 million during the past five years. As compiled in Table 6, sources include federal WAP funding, a set-aside of 15 percent of LIHEAP funds, state general funds, oil overcharge funds, and special needs funds.

The Federal Emergency Management Agency (FEMA) provides funding for the Emergency Food and Shelter National Board (EFSNB) Program. This program provides a variety of types of crisis assistance to families, including assistance with utility bill payments, limited to one month’s past due bill. Funding is appropriated by the federal government. The National Board and a board at each local level, comprised of representatives of the same organizations as the National Board, administer the program. The local board determines which organizations receive funding, then organizations are paid directly by National Board.

Data were not available for provided in or after 1997. In 1996, $407,447.48 was provided to pay 5,967 energy bills; in 1995, $484,641.62 paid 5,350 bills; and in 1994, $506,215.80 paid 5,215 energy bills. The amount of low-income household energy assistance provided for the past three years has been estimated based on the fact that approximately 25 percent of Virginia's EFSNB Program funds were spent on utility bill payments in years that such data were available.

(iv) Voluntary Utility Programs

Many electric and gas utilities in the Commonwealth conduct programs to assist low-income households with their energy needs. Programs include:

• Virginia Power's EnergyShare program: The program is funded by voluntary contributions from customers, stockholders, employees and business partners. Virginia Power pays all administrative and advertising costs and provides full-time staff management. Customers are eligible for assistance of up to $500 once during a heating season. Applicants must live within the Company’s service area; be in danger of losing the primary source of fuel; have household income that is 50 percent or less of the local median income; have the head of household be unemployed or have a demonstrated family crisis; and have exhausted other available sources of fuel assistance. A network of approximately 70 local health and social service agencies, selected by local Virginia Power Citizen Oversight Committees and including groups such as United Way, Salvation Army, American Red Cross, and local departments of social services, determine eligibility and distribute funds to vendors on the clients' behalf. In 1996-97, contributions of $1,155,157 helped 6,149 households; in 1997-98, $1,254,601 helped 6,336; and in 1998-99, $1,282,288 helped 6,439 households.

• AEP-Virginia's Neighbor-to-Neighbor program: Contributions solicited from customers during the months of November, December, January, and February are matched by the utility dollar for dollar up to a maximum of $37,500. The DSS determines the eligibility of customers and authorizes deductions from the Neighbor-to-Neighbor Special Account maintained by AEP. In 1996-1997, 1,481 customers received $135,809.15; in 1997-1998, 1,125 customers received $146,736.77; and in 1998-1999, 1,396 customers received $106,648.98.

• Allegheny Power System's Community Energy Fund: Allegheny Power solicits contributions from customers annually for distribution to its selected Community Energy Fund agency. The contributions are matched 50 cents on the dollar by Allegheny Power. The Community Energy Fund agencies determine eligibility and issue payment to Allegheny Power, which credits the eligible customers’ accounts. In 1998-99, 1,389 customers received $ 154,505; in 1997-98, 1,403 customers received $131,505.

• Northern Virginia Electric Cooperative’s Operation Round Up: The program is funded through voluntary customer donations primarily through the rounding up of the monthly bill to the next higher dollar. It provides bill payment assistance and community grants. Benefits are administered by community service agencies. Contributions totaled $37,237 in 1996; $24,000 in 1997; $36,000 in 1998; and $27,000 in 1999. In 1998-99, 238 households received assistance. In addition, $14,800 in community grants were made in 1998 and 1999 with leftover funds.

• Shenandoah Valley Electric Cooperative's Energy Assistance: Voluntary contributions from SVEC members/consumers and employees fund the program, which provides bill payment assistance for any type of permanent residential energy fuel bill. The Cooperative may contribute additional funding. The Cooperative bears the cost of administering the program. Donations are remitted to the Salvation Army and local DSS agencies. Contributions by consumers in 1996 totaled $6,867; in 1997 totaled $5,099; and in 1998 totaled $6,245.

• Columbia Gas' HeatShare program: Voluntary customer contributions are matched by Columbia Gas. The Salvation Army administers the program. Data were not available regarding eligibility guidelines, number of customers served by the program, or the dollar amounts used.

• Virginia Natural Gas' EnergyShare: Voluntary customer contributions are matched dollar-for-dollar by VNG. The Salvation Army administers the program, and VNG contributes $10,000 per year for administrative costs. VNG’s EnergyShare provides an average of almost $60,000 per year to go directly to low-income family assistance.

• Washington Gas' Washington Area Fuel Fund (WAFF): Washington Gas serves as the collection agent for voluntary customer contributions, which are distributed by the Salvation Army to low-income families regardless of their primary fuel source. Money is collected throughout the year, but distributed only January through June. To be eligible for assistance, the customer must first exhaust all possibility of government energy assistance, must present a service cut-off notice or have had utility service disconnected, and provide proof of income. Benefits are limited to $400 per customer per year, and are made only for the primary source of heat. In 1999, the program provided $303,000 to 1,179 Virginia customers; in 1998, $287,766 to 1,268 customers; and in 1997, $293,376 to 1,126 customers.

(v) Local and charitable assistance programs

Several of Virginia's 16 municipally-owned electric systems have low-income assistance programs. Examples include Harrisonburg Electric Commission's Energy Share and Bristol Utilities Board's Help Your Neighbor programs. Some municipal electric systems, including Manassas and Martinsville, make direct or indirect payments to their local Department of Social Services that are designated for low-income energy assistance. Survey information regarding low-income assistance provided by municipal utilities and local government programs is included in Appendix D.

Staff also solicited information from a number of small local charities, including faith-based organizations and small volunteer groups. Few were able to provide information regarding the number of requests received or amount of assistance provided. Appendix E provides information regarding a sample of the programs operated by charitable organizations. However, these funding amounts are not an accurate total of the amount of assistance provided in Virginia. Certain programs provide energy assistance as part of their general emergency assistance, but do not enumerate the amount of those funds spent solely on energy assistance. Responses were received from some local agencies that described their programs, but did not provide dollar amounts for assistance.

b. Difficulty of Determining Unmet Need

As the preceding part of this report illustrates, collecting data on the amount of aid for low-income households for energy assistance programs is difficult and the results are incomplete. Moreover, the data that are available does not answer the question posed by the Task Force: Whether enough assistance is being provided.

Hurdles in obtaining the type of information necessary to quantify any shortfall in energy assistance programs for low-income households include:

(i) Lack of data on people who are turned away or do not apply

The DSS does not keep records of the number of persons seeking fuel assistance who contact the state agency or local social service offices outside of the 30-day application period. Staff could not determine the number of persons who would have applied and been eligible for energy assistance had they known about the program or the procedure for applying for benefits.

Energy burden, or the percentage of income that is spent on energy, is often cited as evidence of the need for a low-income assistance program. However, information provided in program applications does not include the amount of the applicant's energy expenses. As a result, it is not possible to determine the extent to which program benefits reduce a household's energy burden.

In order to determine the extent of any unmet need for low-income energy assistance, the parameters of the population intended to be served must be ascertained. However, there are no uniform standards for persons eligible for energy assistance, either for federally-funded programs or for voluntary or charitable programs within Virginia. The federal LIHEAP program allows states to adopt income thresholds that range between 110 and 150 percent of poverty level or 60 percent of state median income. LIHEAP fuel assistance program eligibility in Virginia is based on 130 percent of federal poverty level. The LIHEAP crisis assistance program imposes the additional requirement that a household have an elderly, child, or disabled member. Other assistance programs use different eligibility criteria. For example, Virginia Power conditions eligibility for its Energy Share Program on income being 50 percent or less of the median income of the locality where the applicant resides. Several advocacy groups have suggested that "low income" be set at 150 percent of the federal poverty level.

The task of ascertaining the extent to which there is unmet "need" in the Commonwealth for low-income energy assistance ultimately turns on the gap between the level that is currently provided and what is needed to bring that level up to an adequate amount of assistance. But there is no consensus regarding the amount of energy a household needs, or what portion of that need should be covered by energy assistance programs. Caps on amounts of assistance would provide a benchmark against which existing expenditures could be measured. The LIHEAP fuel assistance program allocates available dollars among eligible applicants, but does not set dollar caps on the amount of aid that a family is eligible to receive. Virginia Power's EnergyShare program caps the amount of assistance per applicant at $500 per year, but the program is directed at crisis situations rather than at ensuring households receive bill payment assistance throughout the heating season. Other programs have different caps on annual benefits.

The Consumer Advisory Board deliberated, but did not reach a consensus on, the question of whether an energy assistance program should help low-income households with heating costs, with general electricity usage (such as operating appliances), or both. Research in Colorado has found that a low-income policy focusing exclusively on home heating would address less than half of the average low-income household's energy expenditures. A related issue is whether energy assistance within the context of the restructuring of the electric utility industry should encompass all types of fuel or be limited to assistance with additional costs related to electricity deregulation.

c. Alternative Approaches to Measuring Unmet Need for Low-Income Assistance

Given these obstacles to compiling an answer to the question of whether (and how much) unmet need exists, several approaches to measuring unmet need were offered for Task Force consideration.

As part of the survey of energy assistance provided to low-income households, organizations were asked to identify any unmet need for their program. Though most respondents were not able to provide information on unmet need, the data supplied by the following organizations illustrates that the demand for services often exceeds available resources.

Spotsylvania County's response is typical: "The numbers and amounts (of unmet need) are unknown. Each year we probably cannot service almost as many as we actually service due to lack of funds and/or not meeting the local requirements of eligibility (these requirements are necessitated by shortage of funds)."

The agencies administering the Virginia Power EnergyShare program turned away 752 applicants in 1998-99, 2,452 in 1997-98, and 2,884 in 1996-97. The figures for 1996-97 and 1997-98 include turnaways recorded when funds were exhausted, and include some applicants who would have been ineligible for assistance. The 1998-99 number reflects only turned-away applicants who met the eligibility requirements.

The Salvation Army, which administers Washington Gas's WAFF program, estimated that 20 percent of people in need are not helped. During the distribution period about 10 percent of the applicants are ineligible because they slightly exceed the income guidelines. About 50 percent of all people who are helped are deemed underserved because the WAFF assistance payments are not sufficient to pay their outstanding energy bill balances.

Bristol's local Department of Social Services office estimated the dollar amount of unmet need in 1996 at $18,000, 1997 at $10,000, and 1998 at $10,000. Most other local social services departments did not keep similar records quantifying the amount of aid requested but unfunded.

The only survey respondent that did not report any unmet need was the Northern Virginia Electric Cooperative. Its "Operation Round Up" had enough funds to meet all requests received in its service territory for 1996, 1997 and 1998.

According to testimony of the Deputy Secretary of Commerce and Trade at the August meeting of the Task Force, nearly 375,000 households, not in public housing, are eligible for weatherization assistance in Virginia.

The LIHEAP application form asks whether the applicant has previously received weatherization services. The applications from FY 1999 indicate that 14,191 (about 16 percent) of the 88,323 approved for LIHEAP assistance had received weatherization services.

Data regarding the extent of current unmet need are available for the Weatherization Assistance Program, based on polling program sub-grantees for information regarding waiting lists for service. According to Billy Weitzenfeld of the Association of Energy Conservation Professionals, the total number of clients on waiting lists is 3,600. This generally does not include jobs in progress or applications that are approved and waiting for services. This number is a constant number and represents households that are not expected to receive weatherization services for a long time. Based on the average cost of conducting weatherization services on a residence of $2,032, and multiplying it by the number of residences on the waiting list, it is possible to float as an estimate of the amount of current unmet need for weatherization assistance in Virginia at $7.3 million.

The LIHEAP Crisis Assistance programs are available to applicants on a first-come, first-served basis until funds run out. For each of the past two year, Crisis Assistance Program funds have not run out. Unused funds are carried forward to fund the LIHEAP cooling program or other programs. Local DSS representatives indicate that funds have run out in past years when very cold winters have increased fuel consumption.

The Fuel Assistance Program constitutes the largest component of LIHEAP, which in turn is by far the largest energy assistance program in the Commonwealth. From 1993 to 1999, the number of Virginia households served by both the LIHEAP fuel assistance and crisis assistance programs declined from approximately 138,000 to 88,000. Part of the reason for the decline in households participating in the program may be due to declines in the number of households in poverty. In Virginia, the poverty rate fell from 12.5 percent to 10.8 percent between fiscal year between 1996-97 and 1997-98. Another reason may be implementation of the TANF program, which is believed to reduce the rates of participation by eligible persons in programs administered by local social services offices.

The federal Department of Health and Human Services has estimated, based on the three-year average from the March Current Population Survey data files for 1994, 1995, and 1996, that in fiscal year 1995 there were 346,245 LIHEAP-eligible households in Virginia, using Virginia's eligibility threshold of 130 percent of federal poverty guidelines. Using a 1994-96 three-year average of approximately 117,000 households receiving LIHEAP fuel assistance and the 1994-96 average of 346,000 eligible households, approximately 34 percent of eligible households received fuel assistance in Virginia in that period. However, if the 1999 figure of 84,068 households receiving LIHEAP fuel assistance is used, and if we assume the number of eligible households was 346,000, then approximately 24 percent of eligible households receive fuel assistance in Virginia.

If 150 percent of the federal poverty level is used as the threshold for a "low income" household, there are approximately 430,000 low-income households in Virginia. This estimate is based on 2.444 million residential electric utility accounts and census data that 17.7 percent of Virginians live at or below that income level. Based on these assumptions, around 20 percent of low-income households received LIHEAP assistance.

Participation in LIHEAP by 100 percent of income-eligible households is not possible. A certain percentage of eligible persons elect not to participate, and others that are income-eligible will be disqualified because they are not responsible for heating their residence, exceed the limits on financial resources, or are otherwise barred from the program. In each of the past three years, approximately 10,000 households have been denied LIHEAP benefits for various reasons. In addition, eligible persons may not be aware of, or may miss, the 30-day window during which applications must be filed with local social services offices.

The National Consumer Law Center estimates that participation levels average less than 40 percent of those eligible. If a 40 percent participation rate is adopted as a measure of the maximum achievable rate of participation in the program, the number of Virginia households that would be expected to receive benefits is approximately 138,400. Based on serving an average of 90,000 households during the past three years, the number of eligible households that could be viewed as not having any of their energy needs met by the program could be estimated at approximately 48,400. At an average benefit during the past three years of $204, the cost to provide that benefit to 48,400 additional households could be $9.9 million.

However, if the percentage of participation deemed achievable with greater resources is assumed to be 30 percent, the number of unserved households would be closer to 20,000. The cost of providing the FY 1999 average benefit of $231 to this currently-unserved population could be $4.6 million.

(v) Amount of LIHEAP Fuel Assistance Benefit per Household

The absence of guidelines establishing a uniform policy as to determining at what point an appropriate degree of assistance has been given makes it difficult to ascertain the extent of unmet need. As LIHEAP is designed, available moneys are divided among eligible applicants. The goal of LIHEAP is to provide assistance to low-income families in meeting their energy needs, and not to pay the full amount required to meet the energy needs.

A better measure of whether low-income families are receiving "enough" energy assistance may be the difference between the amount of assistance provided to applying households in recent years compared to the level in previous years. For example, if the average benefit under the LIHEAP program for the most recent year is $231 per participating household, and in 1992 the average benefit was $262 (unadjusted for inflation), the difference, $31, would be a measure of the unmet need per participating household. Based on 84,068 households that received LIHEAP fuel assistance in fiscal year 1999, the cost to raise the benefit to the 1992 level, unadjusted for inflation, would be approximately $2.6 million. However, as Table 3 (p. 20) shows, increased LIHEAP funding and declining participation made the average amount of the benefit awarded in fiscal year 1999 larger than that paid in any of the preceding six years.

(vi) Effect of LIHEAP Fuel Assistance Benefits on Household Energy Burden

Low-income households on average spend less on energy needs than do median-income households. Part of this difference is because low-income households tend to live in smaller units with smaller areas to heat. While low-income households may spend less on energy in absolute terms, they generally spend a greater percentage of their income on energy. According to the federal Department of Energy, the cost of energy makes up about three to five percent of the budget for an average-income household. Low-income families pay, on national average, approximately 14 percent of their household income for energy, and poor families that heat with electricity may spend up to 40 percent of their monthly income in winter on electricity.

According to the National Consumer Law Center, in 1992, Virginia's average LIHEAP benefit of $262 exceeded the national average of $214 (A State-By-State Analysis of Energy Burden (Jan. 1995), Table 14). Virginia's benefit level paid a greater percentage of a low-income household's annual average energy costs (23.3 percent) that did the national average (20.6 percent).

The energy assistance need of households participating in LIHEAP may be measured by calculating the amount of annual benefit required to reduce their energy expenditures as a percentage of income to a targeted level. The National Consumer Law Center's calculation of the effect of LIHEAP benefits on the energy burden for families receiving AFDC benefits and for couples receiving SSI benefits, shown in Tables 7 and 8, shows that the reduction in the energy burden for these classes of Virginia's LIHEAP recipients ranged between 5.2 and 6.2 percent. The post-LIHEAP energy burden was still approximately five times that of median-income households (17 to 20 percent vs. 3.5 percent).

Table 7: LIHEAP's effect on burden on AFDC families, 1992

Table 8: LIHEAP's effect on burden on SSI Individuals, 1992

(vii) VACAP's Estimate of Low-Income Assistance Funding Needs

A report presented by the Virginia Council Against Poverty (VACAP) at the Task Force's August meeting (Appendix F) estimated that the total annual amount of new funding needed to address low-income electric needs in Virginia at $65.1 million dollars. This estimate of unmet need was prepared in November 1998, based on fuel assistance needs of $54.6 million (comprised of $49.1 million for general use and $5.5 million for electric space heating) and on weatherization needs of $10.5 million. The report concluded that this sum could be raised by a kWh charge of $0.000765/kWh. This rate would generate an estimated $65 million, based on calculations that a one mil charge in Virginia would raise approximately $85 million.

The figures of $49.1 million for general use and $5.5 million for electric space heating are based on (i) low-income meaning household income at or below 150 percent of the federal poverty level; (ii) 215,000 low-income customers statewide; (iii) a 50 percent program participation rate, for 107,500 participating households; (iv) electricity bills for this population of $850 for general use and $400 for space heating; and (v) a legislated "fixed credit" percentage of income payment program (PIPP) that requires low-income households to pay between five and seven percent of their income for general electric usage (and between three and five percent for electric space heating) and a credit equal to the difference between household payment obligation and the bill amount.

Staff contacted the study's author, Roger Colton, to discuss his assumption that the number of low-income households in Virginia, based on 150 percent of the federal poverty level, is 215,000. As noted previously, based on (i) census data that 17.7 percent of Virginians live at or below 150 percent of the federal poverty level and (ii) an estimated 2.444 million households, the number of households meeting this test of eligibility is approximately 430,000. An estimate of 430,000 eligible households is consistent with the federal Department of Health and Human Services' estimated that in fiscal year 1995 Virginia had 346,245 LIHEAP eligible households in Virginia, based on an eligibility threshold of 130 percent of the federal poverty level. If this estimate is correct, the cost of implementing VACAP's program would double to $130 million annually, requiring a wires charge $0.0013/kWh.

In addition, the assumed 50 percent participation rate is almost double the current estimated participation rate for Virginia's LIHEAP fuel assistance program. A 50 percent rate is at the high end of other PIPP program participation rates, which range between 40 and 50 percent. The cost of the program would be affected by the percentage of participation, as well as by the percentage of household income that the members of the classes of participating households are required to spend on energy.

6. Stakeholder Perspectives

At the Task Force's August 16 meeting, a variety of interest groups staked their positions regarding the advisability of expanding low-income energy assistance programs in Virginia.

Virginia Power suggested that a single point of contact would be more efficient and helpful to Virginians in need. Current programs are administered by a variety of agencies, which may hinder some Virginians from receiving the assistance they need. Programs generally assist households on an emergency basis and only during the heating season. Funding is at risk, and must be shared by both LIHEAP and the Weatherization Assistance Program. While private programs are successful and do help many families, a statutory program would help citizens with their utility bills and consumption. The Restructuring Act would benefit from a statement of state policy endorsing a right of access to affordable basic energy services.

The Virginia Poverty Law Center's representative testified that most states implementing restructuring have provided for programs in their statutes because they recognize the need to protect all consumers' access to affordable electricity. The VPLC recommends that electric utilities be required to provide discounted transmission rates for low-income consumers, with the costs of such discounts included in the rates charged to all other consumers. The goal should be that no low-income customers should pay more than six percent of their income for electric utility usage.

The American Association of Retired Persons expressed support for a statutory year-round universal service policy to assist low-income families with energy resources. Eligibility could be determined by federal poverty guidelines, and assistance should be provided as a credit on the utility bill, rather than a cash payment. Funding could be provided by a charge per kilowatt hour levied on electric suppliers or a portion of revenue from the "special regulatory tax rate" as alternatives to the nonbypassable wires charge. The AARP recommends that, at a minimum, the Task Force should introduce legislation ensuring universal service and authorizing the Commission to create a program to assist low-income households with their energy service and designate a funding source.

The VACAP urged the Task Force to add low-income energy assistance programs to the Restructuring Act. The decline in federal funding for programs and the increase in state programs around the country may lead to the demise of the LIHEAP program. The VACAP urged Virginia to join the mainstream of states with restructuring legislation and provide for low-income Virginians' access to electricity. To that end, draft legislation originally presented to the SJR 91 joint subcommittee in December 1998 was re-offered for the Task Force's consideration. A copy of the proposal is attached as Appendix G.

The deputy secretary of Commerce and Trade provided the Task Force with an overview of the current state programs for energy assistance. He observed that Congress is currently considering legislation that would require states to provide a 25 percent match of federal funding for the LIHEAP program.

The Task Force began its examination of energy efficiency programs, including weatherization programs, in the context of the Restructuring Act at its August 16 meeting. Efforts to promote electric utility energy efficiency fall into two broad categories: conservation programs and load management programs. These concepts are collectively referred to as demand side management (DSM) programs. Conservation involves reducing usage, while load management allows generating units to be used more efficiently by shifting usage patterns. The reduced costs of new gas-fired generation, shortened planning horizons and declining power prices have led to the reduction or elimination of some state DSM programs.

Sixteen of the 20 states with restructuring legislation have established funding for energy efficiency programs, weatherization programs, or both, through a "systems benefit charge" or similar mechanism (Appendix H). Several of these specifically provide that a portion of the revenue generated from a charge for low-income assistance programs is to be used for energy efficiency programs for low-income families, or weatherization. Provisions of other states' electric utility restructuring legislation addressing energy efficiency programs are summarized in Appendix I.

The Commission observed that investments in energy efficiency, as well as renewable energy sources, can serve the purpose of the Restructuring Act; that is, to provide for diverse suppliers of varied electric products with competitive prices and numerous substitutes for reliability. The Commission also outlined arguments that have been raised both in favor of and in opposition to energy efficiency programs. One concern about implementing such programs is that they would actually increase the short-term costs of electricity and defeat one purpose of implementing competition--to make electricity cheaper. Proponents of energy efficiency programs counter that incentives are needed to overcome existing barriers, including retail transaction costs, such as marketing associated with sales of energy efficiency services, and limited access to financing capital. Supporting these programs, Commission staff reported, could provide long-term economic benefits and societal benefits.

The Virginia Tech Center for Energy and Global Environment (CEAGE) supports energy efficiency programs in the Commonwealth. The types of public benefits programs the Task Force could and should consider are (i) cost-sharing of research and development; (ii) rebates of incremental first costs; (iii) performance- and production-based financial incentives; (iv) outreach activities such as technical assistance, training and education; and (v) deployment of energy efficiency and renewables technologies in schools. Funding of these programs has achieved least-cost delivery of energy services and reduction of pollutants as well as equitable distribution of benefits to consumers of all classes.

The Association of Energy Conservation Professionals (AECP) provided the Task Force with statistical information about weatherization programs nationwide. There is currently a three-month to five-year waiting list for weatherization. Nationally, only 16 percent of eligible homes have been weatherized. Weatherization increases disposable income by making energy more affordable. Weatherization tries to identify underlying causes of energy hardship rather than simply provide crisis assistance to those in need.

The Southern Environmental Law Center (SELC) also expressed support for energy efficiency programs, including weatherization efforts aimed at low-income consumers. Weatherization assistance has generally cut energy use by about 25 percent. Energy efficiency is the most cost effective way to decrease air emissions under restructuring. Investments in energy efficiency also help foster development of clean industries and help create jobs.

The VACAP expressed concern that funding limits may severely restrict weatherization programs, and observed that the demand for such programs already exceeds the resources available. The current program is not advertised or promoted and the demand still far outweighs available funding. The VACAP recommended state-sponsored programs for weatherization at increased funding levels and replacement of inefficient appliances and lighting for low-income families to reduce electricity consumption and, therefore, electric bills.

The Direct Current Electrical Association (DCEA) asserted that energy efficiency programs should be designed to give citizens and plant owners greater control over power generation, protection from power interruptions and more energy information about equipment used for on-site energy production. All inverters and transformers should be required to display their coefficient of energy conversion and loss of energy so that producers and consumers can make informed energy decisions, including the option to use solar and fuel cell energy sources. The DCEA also recommended that electric power lines be buried underground, based on its assertion that above-ground lines are overloaded, inefficient and hazardous.

The definition of renewable energy turns on legislative or regulatory decisions. Renewable energy generally includes wind, solar, hydro, geothermal, and biomass. Burning waste to create energy is sometimes included in the definition of renewable energy.

Advocates of renewable energy have argued that retail competition for generation (with its emphasis on price) may extend the operation of older, less efficient power plants entitled to emit at higher levels under federal clean air laws. Restructuring legislation enacted in may other states has attempted to encourage the use of renewable energy sources by (i) instituting wires charges to fund renewable energy initiatives, such as research and development of renewables technologies, incentives for implementing renewables, and consumer education; (ii) adopting a renewable portfolio standard requiring suppliers to purchase or generate a specified percentage of electricity from renewable sources; and (iii) requiring a disclosure of information regarding the type, emissions, price volatility, or other aspects about generation sources. A table identifying states with these types of programs is also included in Appendix H.

Addressing the Task Force at its August 16 meeting, the Commission raised the issue of whether the electricity markets emerging from the Restructuring Act will generate a level of investment in renewable energy (as well as energy efficiency) consistent with the Commonwealth's long-term interests, or whether some change to the Act may be necessary to monitor and adjust this level of investment. Competition for electricity generation services, as mandated by the Act, may not necessarily generate the appropriate level of investment, due to historic and future defects and barriers in energy markets. The question is whether reasonable measures might be formulated that can encourage these investments, in a manner compatible with the goals and objectives of electricity competition. The Commission observed that intervention to correct market defects can be phased and moderated in a variety of ways. Appendix J describes options identified by Commission staff for encouragement of the production of renewable energy as part of the implementation of retail electricity competition. A chart attached thereto identifies differences between a renewables portfolio standard and a systems benefit charge for funding production incentives. The Commission expressed its willingness to work with the Task Force to determine how to encourage generation from renewable energy sources in the Commonwealth.

Appendix I summarizes provisions of other state restructuring legislation addressing renewable energy programs. Information about funding levels, where available, has been included in this material.

Virginia Power urged the Task Force to continue exploring funding and incentives for renewable energy initiatives. The SELC and CEAGE also support state funding for renewable energy programs and incentives. Both BP-Solarex and the Maryland-District-Virginia Solar Energy Industries Association (MDV-SEIA) have recommended that the Commonwealth develop a public benefits fund to pay for expansion of solar manufacturing incentives.

The Restructuring Act, at § 56-592, requires the Commission to establish billing information standards and standards for marketing information that require suppliers and aggregators to disclose, to the extent feasible, fuel mix and emissions data on at least an annual basis. The Restructuring Act also fosters renewables through its net energy metering provisions.

The Commonwealth currently provides several other incentives for the use and manufacture of renewable energy technologies. These include the Solar Photovoltaic Manufacturing Incentive Grant Program, VHDA loans for the installation of solar and other alternative energy sources, and authorization for local property tax exemptions for solar energy equipment and energy generating equipment used to convert from oil or natural gas to renewable sources. Virginia's income tax credit for renewable energy source expenditures remains in the Code, though it is not available for expenditures made after 1987.

Responding to a question from the September Task Force meeting, staff presented the Task Force with a description of renewable energy programs in all 50 states, including those that are not directly linked to electric utility restructuring (Appendix K). States have implemented a broad range of programs to encourage and promote the use of renewable energy sources. In states that have restructured the electricity industry, some programs have been created or modified, but many are continuations of existing programs. Many states provide loan programs and grant programs to producers of renewable energy. Loan programs may include interest rate subsidies, and grants are sometimes based on outputs. In the area of tax relief, several states provide either income tax credits, property tax relief (to include total or partial exemptions, or valuation of systems at conventional levels), sales tax relief on purchases of renewable energy, or a combination of these. A number of states have industrial recruitment incentives for manufacturers, and three states have demand-side management for renewables. Other types of programs include research and outreach programs and solar and/or wind easements. Some states have construction policies that require renewable energy sources to be used in new buildings if the additional costs would pay for themselves through energy savings over time. Restructuring has caused the development of disclosure requirements as well as the application of systems benefits charges to fund programs. Finally, the most common renewable energy program is net metering, which many states had prior to electric utility restructuring, and that Virginia has included in the Restructuring Act.

Clause (iv) of subsection C of § 56-595 directs the Task Force to examine utility worker protection during the transition to retail competition. The Task Force heard testimony on this issue commencing with its August 16 meeting. The Consumer Environment and Education Task Force under the SJR 91 joint subcommittee began studying this issue during 1998, and heard concerns that industry restructuring could affect electric utility workers adversely.

A representative of the IBEW expressed his concerns for Virginia's electricity workforce. Workload is increasing due to added customer base and layoffs of other electric utility employees, as well as structural changes at generation units to increase efficiency and reliability. The onset of competition will result in the closing of some generation units, with the loss of jobs caused by statutory and regulatory changes affecting a utility's business decisions. It was reported that 11 of the approximately 20 states that have adopted restructuring laws have enacted some form of worker protection. These protective measures include requiring utilities to provide retraining and education of displaced employees, severance and reemployment packages, continuation of employees' licenses and health insurance benefits, and protection of employee jobs in the event of a merger or acquisition of the utility. Five other states have directed studies of the issue, and four states have excluded worker protections.

AEP-Virginia called the attention of the Task Force to the utility's comments from the 1999 study regarding worker protection issues. The utility has worker staffing standards developed through federal and state regulations and collective bargaining agreements. The Task Force was asked to keep the following questions in mind as it considers these issues: Does development of competition in the generation services market, combined with regulation of transportation and distribution, truly require substantial change in existing public policy to expand programs addressing worker protection issues? If so, how should worker protection programs be implemented to be most efficient and effective in meeting these needs? Do adequate regulations exist for programs to address these issues? Do the proposals to fund programs through nonbypassable systems benefit charges recognize that the utility's current rate structure, which is capped during the period provided by the Act, does not now provide for their payment?

The DCEA recommended that Virginia implement a certification program for plant operators under the National Institute for the Uniform Licensing of Power Engineers (NIULPE) and expressed the belief that the NIULPE program would provide plants with safe and efficient operators.

In the course of its initial year of work, the Task Force undertook to identify provisions of the Restructuring Act that needed to be clarified, corrected, or otherwise amended. The process of considering amendments to the Restructuring Act was contemplated by subsection C of § 56-595, which charges the Task Force with annually offering such recommendations as may be appropriate for legislative consideration. In compliance with the chairman's directive that stakeholders allow the Task Force an ample opportunity to review any legislative proposals affecting the Restructuring Act prior to the start of the 2000 Session, proposed amendments were presented during the Task Force's November meeting. Additional amendments to the Restructuring Act, as well as to Senate Bill 1286 (1999), which restructures the Commonwealth's system of taxing electricity, were offered at the Task Force's December meeting. The proposed amendments, which can be viewed at the Task Force's web site, were considered at length during the Task Force's work session held in the State Capitol Building on January 6, 2000.

The Task Force was asked to address two issues relating to aggregation. The Act's aggregation provisions allow customers to band together to negotiate more favorable economic terms. Under § 56-588 of the Act, entities that aggregate are required to be licensed by the Commission. The first issue addresses who should be deemed to be an "aggregator" and thus subject to the licensure requirements. The second issue involves aggregation by state and local units of government.

The Act defines an aggregator as a person licensed by the Commission that purchases, or arranges for the purchase, of electric service as an agent or intermediary for sale to, or on behalf of, two or more retail customers. Virginia Power, Allegheny Power, ALERT, and the Virginia Retail Merchant's Association offered amendments to re-define "aggregator" and "aggregation." Though worded differently, each of the amendments narrowed the definition of an "aggregator" by excluding a person that arranges or facilitates agreements between retail customers and suppliers under various circumstances.

In response to concerns raised by the Office of the Attorney General that the proposals may eliminate some consumer protections, the Task Force deferred action on this issue until its last meeting on January 19, 2000. By that time, the interested parties had developed a new definition of an aggregator (Appendix L) that includes a person that offers to purchase electric energy or offers to arrange for the purchase of electric energy for sale to, or on behalf of, two or more retail customers not controlled by or under common control with such person. It specifically excludes a person whose role is limited to furnishing legal services or educational, informational, or analytical services to customers unless paid for such services by an aggregator or supplier. It also excludes default service providers, licensed retail energy suppliers, and retail customers acting in common to issue a request for proposal or to negotiate a purchase by them.

The second issue relating to aggregation involves state and local governments. The Commission's proposed a clarification of § 56-589, to provide that municipalities and other political subdivisions may aggregate intra-governmental and inter-governmental load without being required to be licensed as an aggregator. It also clarifies that the state government is exempt for the aggregator licensure requirements when aggregating the load of its own agencies. The Virginia Municipal League offered an amendment that addressed the aggregation of the loads of two or more political subdivisions in a narrower manner than was proposed by the Commission. The VML's language exempts localities from licensure requirements when they act jointly to negotiate or arrange for themselves agreements for their energy needs directly with licensed suppliers or aggregators.

The Task Force decided at its January 6 meeting to endorse the Commission's proposals applicable to state government aggregation and intra-governmental aggregation by municipalities and other political subdivisions, while endorsing the VML's proposal regarding inter-governmental aggregation by municipalities and other political subdivisions.

Allegheny Power proposed amending § 56-587, which currently requires any person who sells electric energy to any retail customer on and after January 1, 2002, to obtain a license. An exemption exists for the leasing or financing of property used in the sale of electricity to a retail customer. Allegheny Power's proposed amendment would exempt persons who own or lease facilities such as apartment buildings, mobile home parks, or commercial buildings from the supplier licensing requirements when arranging for electric energy supply for the occupants of the building, where the electricity is furnished to the tenants without financial gain to the facility's operator. The Task Force expressed concerns with how it would be determined that electric services were being provided to occupants without financial gain. No motion was made on this proposal.

The proposed change to the Act also included language clarifying that default service providers are not required to be licensed as suppliers; this provision was added to Senate Bill 585 during Senate Commerce and Labor Committee deliberations.

Virginia Power and the State Corporation Commission offered different approaches to legislating the introduction of competition for metering services and billing services. The major point of disagreement involved who would determine when competition for either, or both, of these services would commence: the Commission or the General Assembly.

The Commission proffered amendments to the Act that would have authorized the Commission to determine, before January 1, 2002, whether and when electric metering services and electric billing services may be provided competitively. The determination would be subject to specific guidelines, including requirements that the determinations (i) take into account customer readiness for competition and (ii) not jeopardize the safety, reliability, or quality of electric service.

Virginia Power's proposal provided that retail electric energy customers would have the opportunity to obtain these services from competing providers as determined by the General Assembly, and that competition would not be introduced until it is technologically feasible to do so and reasonable steps have been taken to educate and prepare retail customers for the implementation of competition for such services. The proposal directed the Commission to report to the Task Force, by December 1, 2000, and at least annually thereafter, with recommendations regarding a schedule for implementing competition.

The Task Force perceived merit in portions of both proposals. It directed that elements of both be merged into a draft that mandates competition for these services but reserves to the General Assembly the policy decision on the date of implementation of competition for metering and billing services.

A draft attempting to merge the two proposals was considered at the Task Force's January 19 meeting (Appendix M). As offered for consideration, the draft called for the Commission to recommend to the Task Force, on or before December 1, 2001, whether metering services, billing services, or both, may be provided by licensed persons. The Commission's recommendation would follow notice and an opportunity for hearing and would take into account, among other considerations, customer readiness and the technological feasibility of providing the services on a competitive basis. Members of the Task Force expressed concerns with timing of the commencement of the process of phasing in retail competition, which is scheduled to start on January 1, 2002. Reservations focused on the short time frame between a December 2001 reporting date and the start of customer choice for generation, coupled with the need to develop a plan for introducing competition in metering services, billing services, or both. These concerns were addressed by advancing the due date for the Commission's recommendation to the Task Force from December 1, 2001, to January 1, 2001. In addition, the Commission's recommendations are to include a draft plan for the implementation of competition.

An amendment adopted at the Task Force's January 19 meeting clarified that the requirement that an incumbent electric utility's affiliate undertakes coordination with licensed providers of the competitive services applies only if the affiliate controls a resource that is necessary to the coordination required of the incumbent electric utility.

The Restructuring Act contemplates that incumbent electric utilities will recover just and reasonable stranded costs through capped rates (under § 56-582) or wires charges (under § 56-583). Wires charges are to be collected from customers who choose suppliers of electric energy, other than the incumbent utility, or are subject to default service, during the capped rate period.

Wires charges are to be established by the Commission upon the commencement of customer choice, and will be subject to adjustment not more frequently than annually. Wires charges are the difference between an incumbent utility's capped unbundled rate for generation and the projected market price for generation, as determined by the Commission. Wires charges are also to include just and reasonable transition costs incurred by the utility. The total of the wires charges, the unbundled charge for transmission and ancillary services, the distribution rates, and the projected market price for generation are not to exceed the utility's capped rate.

When the Restructuring Act was being crafted, it was assumed that the projected market price for generation and other allowable component charges would be less than the capped rate for electric service, with the difference being the wires charge amount. However, as the AEP-Virginia and Virginia Power pilot programs came under scrutiny by the Commission's hearing examiner in late 1999, the possibility arose that the statutory language in the Act could be construed to produce a "negative" wires charge if the capped rate was less than the projected market price for generation and other allowable component charges. In such event, the incumbent utility may be required to provide a credit to customers who opt to purchase electric generation services from a supplier other than their incumbent utility.

The prospect of negative wires charges was brought to the Task Force's attention by AEP-Virginia. Working with the Commission's staff, the utility offered an amendment to § 56-583 that clarified that wires charges would exist only where an incumbent utility's capped unbundled rates for generation exceed the projected market price for generation. The amendment spells out that no wires charge shall be less than zero. The Task Force endorsed the proposed amendment at its January 6 meeting.

The Commission presented the Task Force with the Virginia Energy Choice consumer education plan on December 8, 1999. The Commission also suggested amendments to the Restructuring Act to authorize the Commission to implement its consumer education recommendations (See Part II B of this report). The proposed new § 56-592.1 requires the Commission to establish and implement the program, taking into account the findings and recommendations of the Commission's December report to the Task Force. The new section also specifically authorizes the use of regulatory tax revenues to finance the consumer education plan. The Task Force endorsed the Commission's proposal at its January 6 meeting.

Senate Bill 1286 (1999), in addition to converting the state and local gross receipts taxes on electric utilities to consumption-based taxes, also converted the local consumer utility tax on electricity from being based on the cost of the electricity consumed to the amount of electricity consumed. Under § 58.1-3814, local governments were authorized to tax electricity consumers at a rate of up to 20 percent of the monthly charge. However, the rate on residential consumers was capped at $3 per month unless a higher rate had been levied prior to July 1, 1972.

Senate Bill 1286 sought to effect the conversion by requiring that on and after January 1, 2001, the maximum rate of tax on electricity consumption would be one and one-half cent per kWh. To maintain the $3 per month cap on residential consumers, subsection F of § 58.1-3814 provided that the tax would apply only to the first 200 kWh consumed per month.

As local governments began preparing to implement this new system of taxation, problems became apparent. The Virginia Municipal League and Virginia Association of Counties informed the Task Force that § 58.1-3814 required technical amendments in order to give local governments the flexibility needed to accomplish revenue neutrality, to avoid shifting the burden of the tax among classes of consumers, and to clarify collection procedures for both the local portion of the consumption tax and the local consumer utility tax.

Amendments accomplishing these goals were presented to the Task Force at its January 6 meeting. To address the concerns raised by local implementation of the 1999 legislation, the proposal requires that on or before October 31, 2000, any locality imposing a tax on electricity consumers shall amend its ordinance to provide for the conversion of the tax to a kilowatt-hour basis at rates that, to the extent practicable, avoids shifting the amount of the tax among electricity consumer classes and maintains annual revenues. The amendments were endorsed by the Task Force, and were introduced as part of Senate Bill 163.

At its August meeting the Task Force asked the Consumer Advisory Board to provide recommendations regarding energy efficiency programs and renewable energy programs. The Consumer Advisory Board began its examination of these issues in December 1999, when the SELC and the MDV-SEIA proposed the establishment of a public benefits fund. Under their proposals, all consumers of electricity would pay a non-bypassable systems benefit charge at a rate of one-half mil ($0.0005) per kWh. The proceeds from the charge would be distributed as follows: (i) 40 percent for low-income energy efficiency (weatherization), (ii) 30 percent for renewable energy programs and projects, and (iii) 30 percent for energy efficiency programs and projects. The proposals submitted by the two organizations were very similar, with the only substantive differences relating to the definitions of "emerging renewable energy resources" and "renewable energy system."

Several members of the Consumer Advisory Board raised specific concerns about the public benefits fund proposal, including (i) the absence of criteria for expenditures of funds for the classes of programs, (ii) the failure to provide for the establishment of advisory boards to make funding decisions, and (iii) the amount of funds that will be spent on program administration. Other concerns raised by Board members focused on the broader issue of whether a charge on electricity usage should be assessed to pay for environmental and other societal-benefit programs, and whether it is appropriate to link funding for such programs to the implementation of competition in electricity generation services.

Similar legislative proposals for a public benefits fund were offered for Task Force consideration at its January 6 meeting. The Consumer Advisory Board advised the Task Force that it had serious questions about the proposal and did not recommend its consideration during the 2000 Session. The Board requested that it be allowed to continue its examination of the issues of energy efficiency and renewable energy. Based on these recommendations, the Task Force agreed that the issues should remain with the Consumer Advisory Board.

In conjunction with its examination of renewable energy issues, the Consumer Advisory Board had been presented with a proposal from the MDV-SEIA for the establishment of a renewables portfolio standard to be met by Virginia's electricity suppliers. Under the proposal, electric utilities would be required to obtain a certain percentage of their electricity generated from renewable sources. By July 1, 2001, the percentage of electricity sold in Virginia that is derived from renewable energy generating systems must equal the greater of (i) five percent of their power sales or (ii) one percent above the current percentage of electricity sold in Virginia that is derived from renewable energy generating systems. The Commission would be authorized to adopt a credit trading mechanism. Sellers who failed to comply with the renewable portfolio standard regulations would be subject to financial penalties to be set by the Commission. Any moneys collected from the penalties would be added to the renewable energy component of a state-administered Electric Public Benefits Fund.

Advocates of the proposal suggested that the establishment of a portfolio that would encourage development of renewable energy resources. Such a standard should provide for the aggregation of generation from small-scale installation, such as small wind and distributor solar thermal heating, solar thermal electric, and photovoltaic systems.

The Consumer Advisory Board recommended that the legislative proposal for a renewable portfolio standard not be considered during the 2000 Session of the General Assembly, and that the Board be able to continue its examination of this issue. At its January 6 meeting, the Task Force adopted the Consumer Advisory Board's recommendation that the issued be examined further.

The IBEW asked the Task Force to consider legislation that would establish employment-related protection for electric utility workers. The proposed legislation sought to accomplish three things. First, it directed the Commission and the Department of Labor and Industry to develop staffing standards and standards for electric utility worker training, competency, and/or certification. All electric utility work of a permanent nature would be required to be performed by employees who have completed training programs, have demonstrated competency in skill sets for the tasks being performed, and hold a license issued by the Commission or Department. Second, the legislation requires entities that acquire electric power generation assets to employ sufficient workers at the same salaries and benefits as were provided prior to the acquisition. If existing workers are not offered continued employment following such an acquisition, they must be provided a transition plan. Such a plan includes continued health care coverage, early retirement benefits payments, job re-education and retraining, outplacement services and a severance benefit. Finally, the proposal would provide unspecified extended unemployment benefits to any employee of an electric utility company who is terminated as a result of electricity deregulation and is otherwise eligible for unemployment benefits.

The draft legislation was presented to the Task Force on December 8, and was considered on January 9. The Task Force took no action on the proposed legislation.

The Restructuring Act provides at § 56-594 that the Commission shall establish a net energy metering program by July 1, 2000. Net energy metering regulations are to establish a system by which certain customers who own and operate small-capacity solar, wind or hydro-powered generating facilities, intended to offset the customer's own electricity requirements, will be able to contract with this distribution company to offset the electricity the customer adds to the power grid against the amount of electricity such customer obtains from the power grid.

The Commission perceived that the 1999 electricity consumption tax legislation (SB 1286) could be construed to require a customer-generator to pay consumption tax on the basis of the gross, rather than the net, amount of electricity supplied from the power grid. The Commission offered an amendment to § 58.1-2900 that provides that the taxable kWh delivered to a customer-generator will mean the amount of electricity supplied from the electric grid, minus the amount of electricity it generates and feeds back to the electric grid. The Task Force adopted the Commission's proposed legislation at its January 6 meeting.

The Commission proposed corrections or clarifications to the Restructuring Act, all of which were ratified by the Task Force on January 6, 2000. The amendments:

• Corrected an error in subdivision D1 of § 56-588 by substituting "an aggregator" for "a supplier."

• Added language to § 56-593 to make clear that private rights of action arise under subsection A of § 56-593.

• Provided that the capped rates established pursuant to rate application made prior to July 1, 2001, will become effective on that date, but such rates will be interim rates until the Commission has completed its investigations of the rate applications. If the interim rates are found to be excessive, they will be subject to refund with interest, as is currently provided with respect to other rate applications.

• Clarified that customers subject to default service are only obligated to pay wires charges during periods that they actually receive default service.

As it delved into the issue of programs assisting low-income households with energy needs, the Consumer Advisory Board ascertained that the issue encompassed more than electric utility industry restructuring. The complexity of the issues prevented the Board from concluding its examination of this issue prior to the 2000 Session.

In order to continue its study of low-income energy assistance issues encompassing electric utility industry restructuring as well as other energy topics and related social benefit programs, the Board asked the Task Force to recommend a joint resolution to the 2000 Session. The proposed study resolution directs the Consumer Advisory Board to study low-income household energy assistance programs in the Commonwealth. The study will address, but not be limited to, whether Virginia should (i) establish a state policy with respect to the availability of affordable electricity and other sources of energy to all Virginians; (ii) create a new program assisting low-income households with a basic level of electric utility service; (iii) expand existing programs, or establish new programs, assisting low-income households with seasonal energy needs regardless of the energy source; (iv) consolidate existing public programs providing energy assistance for low-income households; (v) coordinate efforts of private, voluntary energy assistance programs with public programs and other private programs; (vi) provide incentives to encourage voluntary contributions to energy assistance programs; and (vii) address the likelihood of continued declines in federal funding for LIHEAP and the Weatherization Assistance Program. The Board's report would be made to the 2001 Session of the General Assembly.

The Task Force recommended that the resolution be supported in the 2000 Session. At their January 19 meeting, the members of the Task Force received a recommendation from the Office of the Attorney General directing the Consumer Advisory Board to include the feasibility of tax incentives and the availability of other funding sources in its study of low-income energy assistance programs (Appendix N). Rather than introduce it as a separate resolution, the Task Force asked that the Attorney General's proposal be incorporated into the resolution that had been agreed upon at the January 6 Task Force meeting.

The 1999 Session of the General Assembly adopted legislation deregulating aspects of both the electric utility industry and the natural gas utility industry. Often overshadowed by the Electric Utility Restructuring Act, Senate Bill 1105 provided for the deregulation of natural gas at the retail level. Though the bill was enacted into law, it provided that plans for conversion to consumer competition would not be filed prior to July 1, 2000, and a sunset clause provided that the legislation would expire on that date. Consequently, the effect of Senate Bill 1105 was limited to two purposes: to direct standing committees of the General Assembly to examine the effect of deregulation on the system of taxation of natural gas utilities, and to allow interested parties to study the legislation in greater detail.

In the course of its examination of the Commission's consumer education plan for electric utilities, the Consumer Advisory Board became aware that the natural gas deregulation legislation did not provide for the development of a similar consumer education plan. The Consumer Advisory Board recommended to the Task Force that such a provision be included in the natural gas deregulation legislation.

The Task Force noted that it lacked the authorization to recommend legislation addressing natural gas deregulation issues. However, it raised no objection to the Consumer Advisory Board's proposal. Under the proposal, the Commission would be required to develop a natural gas consumer education program for retail consumers by December 1, 2000, that addressed (i) opportunities and options in choosing retail suppliers of natural gas and related services; (ii) marketing and billing information; (iii) rights and obligations concerning the purchase of natural gas and related services; and (iv) other information deemed necessary and appropriate. The plan is, to the extent feasible, to be consistent with and complement the consumer education program for retail competition for electricity.

The Task Force suggested that staff incorporate the proposal into appropriate legislation that may be introduced during the 2000 Session.

Virginia Power spokesperson William G. Thomas brought to the Task Force's attention, during its January 6 meeting, an issue that came to light during the Commission's hearing examiner's review of Virginia Power's pilot program proposal. The issue involves the Commission's calculation of wires charges under § 56-583 of the Act. As noted previously, wires charges are the difference between the capped unbundled rate for generation and the projected market price for generation as determined by the Commission.

The statutory language in § 56-583 is apparently capable of multiple interpretations. The specific example cited involved use of the spot market price of electricity as quoted at an existing power market. Virginia Power and other utilities objected to an interpretation that would not account for the costs of delivering the electricity. A Virginia Power proposal (Appendix O) offered at the January 19 meeting would have defined the projected market price for generation as the net price available to an incumbent electric utility for sale into the market of power not required to serve its customers. The net price would recognize all associated costs of delivery into the market.

Spokespersons for ALERT and the Virginia Retail Merchants Association objected to the proposed definition of the projected market price for generation. The Commission voiced no objection to the proposal. The Task Force declined to incorporate Virginia Power's proposed amendment into the Restructuring Act, but invited the parties to raise the issue when the Task Force's legislation was before legislative committees during the 2000 Session.

The Restructuring Act provides that incumbent electric utilities may recover net stranded costs through the use of capped rates or, for consumers that switch to non-incumbent providers of generation services, through wires charges. Stranded costs represent the decline in value of an incumbent electric utilities assets, including electricity purchasing contracts and electricity generating facilities.

Prior to the Task Force's last meeting, concerns were expressed by two distribution cooperatives that the capped rate provisions, under which the cost of their electricity would be fixed during the capped rate period of January 1, 2001, until as late as July 1, 2007. These cooperatives contended that the capped provisions would be inequitable in their application to their member-customers, because these distribution cooperatives did not generate any electricity and are not members of a power supply cooperative. Thus, they have no stranded costs.

Subsection B of § 56-582 provides for several exceptions to the capped rates. For example, the Commission is authorized under the Act to adjust capped rates with respect to cooperatives that were not members of a power supply cooperative (such as Old Dominion Electric Cooperative) to reflect their cost of purchased wholesale power. The two cooperatives sought to expand the existing authorization for the Commission to adjust their rates in order to provide discounts from capped rates to match the cost of providing distribution services.

The Task Force considered the proposal at its January 19 meeting. Commission staff voiced no objection to the proposal, and observed that the Act also contained several provisions allowing exceptions to be made to the capped rate requirements in order to address unique sets of circumstances. The Task Force elected not to incorporate this amendment to the Restructuring Act into its package of legislation for the 2000 Session, and suggested that the amendment be introduced as a separate piece of legislation. It was introduced as Senate Bill 532.

The Consumer Advisory Board reported to the Task Force on two additional issues. The first, raised by Board member Jack Greenhalgh, involved aggregation for small consumers. He expressed concerns that the aggregation process provided in the Restructuring Act may not effectively provide market power for residential and small business consumers. In the paper presented to the Consumer Advisory Board at its December 30 meeting, and included in the Board's January 6 report to the Task Force (Appendix P), Mr. Greenhalgh observed that experience in other states with competition for electric generation shows little success in attracting significant numbers of consumers to switch from their incumbent providers. Consequently, competition has not reduced the cost of electricity for this class of consumers. Additional study, he urged, is need on how to make the aggregation process more effective. Because the Consumer Advisory Board's report to the Task Force's December 8 meeting characterized the issue as having been raised by one member, the Board was asked to advise the Task Force that most of the Board's members share Mr. Greenhalgh's concerns. A majority of the Board's members asked that the following recommendation be conveyed to the Task Force at its January 6 meeting: "During the pilot program, a parallel investigation be undertaken of 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. This investigation should include analysis of progress during the pilot program as well as coordination with interested parties and experts from deregulation of other industries."

The Task Force chairman acknowledged that the need for additional examination at the impact of deregulation is a policy issue that the Task Force ought to embrace. The existing provisions of the Restructuring Act charge the Task Force with monitoring the work of the Commission in implementing the Act, which provisions authorize the Task Force to conduct the type of analysis that appears to be envisioned in Mr. Greenhalgh's request.

The second issue brought to the Task Force's attention by the Consumer Advisory Board involves the VASE program. Under the VASE program, the federal Department of Energy has provided Virginia with $2.1 million for demonstration projects relating to the commercialization of alternative energy. The grant, which was one of 11 awarded nationwide, was applied for jointly by BP-Solarex and the state Department of Mines, Minerals and Energy. Consequently, BP-Solarex is the only Virginia company that is eligible for the program's funds. The full $2.1 million has been allocated to projects using solar energy technologies. The Consumer Advisory Board discussed, but did not endorse, a proposal to ask the Task Force to consider continuing and expanding the VASE program on the state level, with funding from the Commonwealth's general fund. The Board will continue to examine this program next year.

The Task Force directed at its January 6, 2000, meeting that most of its proposals for amendments to the Restructuring Act be incorporated into an omnibus bill. These amendments encompassed (i) competition for metering services and billing services; (ii) elimination of negative wires charges; (iii) the Commission's consumer education program; (iv) aggregation issues; and (v) technical changes addressing the interim period for certain capped rates, wires charges for default service, aggregator references, and private right of action language.

A draft addressing these topics was placed before the Task Force for consideration at its last meeting on January 19. The Task Force agreed to incorporate an amendment proffered by AEP-Virginia regarding affiliates in the context of metering and billing competition. It also revised the metering and billing language to advance the Commission's report's due date from December 1, 2001, to January 1 of that year, with one negative note (cast by Delegate Woodrum). The Task Force then endorsed by omnibus bill.

The bill was introduced in the 2000 Session of the General Assembly by Senator Norment as Senate Bill 585 (Appendix Q). The bill was referred to the Senate Committee on Commerce and Labor, where it was amended twice. The first amendment addressed the issue of ascertaining the projected market price for generation. Over objections of ALERT and the Virginia Retail Merchants Association, the Utilities Subcommittee of the Commerce and Labor Committee adopted language (Appendix R) amending subsection A of § 56-583 to require the projected market price for generation to be adjusted for any project cost of transmission, transmission line losses, and ancillary services subject to the jurisdiction of the Federal Energy Regulatory Commission which the incumbent electric utility (i) must incur to sell its generation and (ii) cannot otherwise recover in rates subject to state or federal jurisdiction.

The second subcommittee amendment, offered by Allegheny Power Systems, clarifies that a default service provider is not subject to the licensing requirements imposed on suppliers (Appendix S). The amendment to subsection A of § 56-587 creates an exception for default service providers from the requirement that, as a condition to doing business in the Commonwealth, each person seeking to sell, offering to sell, or selling electric energy to any retail customer on or after January 1, 2002, must obtain a license to do so. An APS spokesman pointed out that under § 56-585, the Commission designates the provider of default service, and in doing so is required to take into account factors necessary to protect the public interest.

The full Commerce and Labor committee reported Senate Bill 585 with the two amendments recommended by its Utilities Subcommittee. The Senate passed the bill without further amendment with one negative vote (and one abstention). The bill was then communicated to the House of Delegates and rereferred to the House Committee on Corporations, Insurance and Banking, where it was reported unanimously. The House of Delegates unanimously passed Senate Bill 585 on February 28, 2000.

At its January 6, 2000 meeting, the Task Force requested that the legislative proposals relating to electric utility taxation be introduced as separate legislation. The resulting legislation, which was patroned by Senator Watkins as Senate Bill 163, included the amendments proposed by the Virginia Municipal League and the Virginia Association of Counties regarding the local consumer utility tax on electric utility service and technical amendments regarding collection of the local portion of the new electricity consumption tax (Appendix T). It also included the Commission's proposal that addressed taxation of net energy metering.

The legislation was required to be filed by the first day of the 2000 Session because of its local fiscal impact. Consequently, it was introduced prior to the Task Force's January 19 meeting. The bill was referred to the Senate Finance Committee. The Committee amended subsection F of § 58.1-3814 to provide that the levy of the local consumer utility tax would be based on the net amount of electricity supplied from the electric grid, in the case of consumers who are eligible customer generators engaged in net energy metering under § 56-594 of the Act.

As amended, Senate Bill 163 was reported from the Finance Committee by a vote of 15-0, with one abstention. The bill was then communicated to the House of Delegates and was rereferred to the Committee on Finance. The Committee reported the bill (23-0) and the House of Delegates passed the bill on March 1, 2000, by a vote of 67-29.

Senate Bill 532 was endorsed by the Task Force at its January 19 meeting (Appendix U). This bill authorizes the State Corporation Commission to adjust the capped rates for any electric cooperative that was not a member of a power supply cooperative on January 1, 1999, or thereafter. The bill, patroned by Senator Watkins, amends § 56-582 to allow the Commission to adjust the capped rates for such cooperatives to match the cost of providing distribution services. This measure passed the General Assembly without a dissenting vote.

Senate Joint Resolution 154 incorporated the provisions of SJR 95 and added the language requested by the Attorney General's Office that directed the Consumer Advisory Board to address whether Virginia should provide incentives to encourage voluntary contributions to energy assistance programs (Appendix V). Options for incentives mentioned in the resolution include tax credits for energy consumers and suppliers and the designation of other funding sources such as penalties or fees assessed against competitive energy providers to pay for energy assistance programs for low-income households. SJR 95, introduced by Senator Norment, was incorporated into SJR 154 by the Senate Committee on Rules on February 14. The resolution passed the Senate on February 15 and the House of Delegates on March 8, 2000.

The Task Force will continue during 2000 to carry out the duties assigned to it pursuant to § 56-595 of the Restructuring Act. The Task Force extends it gratitude to all interested persons who provided assistance throughout its first year of work.

Respectfully submitted,

Senator Thomas K. Norment, Jr., Chairman

Delegate Clifton A. Woodrum, Vice Chairman

Delegate Eric I. Cantor

Senator Richard J. Holland

Delegate Jerrauld C. Jones

Delegate Terry G. Kilgore

Delegate Harry J. Parrish

Delegate Kenneth R. Plum

Senator Kenneth W. Stolle

Senator John Watkins