SJR 91
The Joint Subcommittee Studying
Electric Utility Restructuring
Stranded Costs and Related Issues
May 26, 1998
The task force on Stranded Costs and Related Issues met on May 26, 1998 in Richmond. The initial meeting focused on the definition of stranded costs. The task force heard from the State Corporation Commission (SCC), the investor-owned utilities who provide service in Virginia, and from a representative of the Apartment and Office Building Association of Metropolitan Washington (AOBA).
The Director of the Economics and Finance Division of the SCC stated that stranded costs will occur if there is a net loss in economic value of existing generation-related utility assets and contracts from a restructured industry. The change in economic value will be based upon the difference between embedded-cost electricity rates calculated under regulation and competitive market-based electricity prices. The SCC also presented to the task force an overview of other issues relating to stranded costs.
Virginia Power defined stranded costs as principally losses in the economic value of an electric utility's investments and obligations related to the supply of electric generation that result from the implementation of competition in the purchase and sale of electric energy. Virginia Power also raised the issue of transition costs- those investments undertaken and increased expenses incurred during and beyond the transition to competition.
Both American Electric Power and Allegheny Power agreed with the definitions offered by Virginia Power and the SCC. American Electric Power also presented their position on negative stranded costs, which occur when the market value of existing generation-related utility assets exceed book value. American Electric Power stated that any payment of negative stranded costs to customers or former customers would be unfair to the shareholders of a company who practiced prudent management and implemented technology successfully.
AOBA stated that stranded costs represent costs that are recoverable by a utility under existing regulatory policies that are not recoverable under competitive market pricing of services if current regulated rates are above competitive market prices. Stranded value, which AOBA states is a necessary corollary to the consideration of stranded costs, represents profits in excess of a regulated fair rate of return that the owners of regulated generation resources would derive if they are permitted to price energy and capacity services on the basis of market values that are in excess of current cost-based ratemaking levels. AOBA also stated that the most consistent approach to measurement of the future value of a utility's generation assets is obtained when the utility sells its generation resources through an open competitive bidding process.
Following these presentations, the chairmen set the next meeting of the task force for Tuesday, June 30 at 9:00 a.m. Additional interested parties will be given the opportunity to present their definition of stranded costs, and staff will provide examples of stranded cost legislation and regulation from other states.
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