June 30, 1998

The Virginia, Maryland & Delaware Association of Electric Cooperatives ("VMD Association" representing, in Virginia, A&N Electric Cooperative, BARC Electric Cooperative, Community Electric Cooperative, Craig-Botetourt Electric Cooperative, Mecklenburg Electric Cooperative, Northern Neck Electric Cooperative, Inc., Northern Virginia Electric Cooperative, Powell Valley Electric Cooperative, Prince George Electric Cooperative, Rappahannock Electric Cooperative, Shenandoah Valley Electric Cooperative and Southside Electric Cooperative, Inc.) and Old Dominion Electric Cooperative ("Old Dominion") (collectively, the "Cooperatives") join in submitting these comments to the Stranded Cost Task Force of the SJR 91 Joint Subcommittee on Restructuring the Electric Utility Industry.

Stranded costs are those generation costs that a utility has reasonably and prudently incurred in meeting its public service obligations and that it would reasonably expect to recover from its customers if the current, cost-of-service regulatory scheme continued, but that it may not be able to recover in a competitive market because its generation costs push its price above the market price. If a cooperative secures an agreement with a new power supplier or if a cooperative's customer chooses to make retail purchases from other sources after restructuring takes effect, there may be stranded costs. This discussion paper will explore how the Cooperatives may incur stranded costs and why the Cooperatives must be able to recover stranded costs fully and in a reasonable and equitable manner.

The obligation of all departing customers to make an electric utility whole for its stranded cost liability has been recognized in federal regulations promulgated by FERC, in state restructuring initiatives and in most proposed federal and state legislation. Both the regulatory and legislative decision-makers have adopted the premise that attendant to the cost of restructuring is the assumption, by all consumers, of the obligation to pay for stranded costs. The established policy at all levels, including the legislation adopted thus far in Virginia, favors stranded cost recovery.

The Cooperatives believe that all prudently incurred stranded costs should be recovered and that the State Corporation Commission should be given the authority to determine the amount to be recovered and the method of recovery. For the Cooperatives, this issue takes on enhanced significance because, unlike the investor-owned utilities, these costs cannot be shared with or shifted to someone other than their consumers. While the IOUs have stockholders that may have to bear the losses associated with any unrecovered stranded costs (and share in any future benefits), the Cooperatives' customers and owners are one in the same. Any unrecovered stranded costs will adversely affect the interests of a cooperative's member/consumers.

At the same time, the legislature can be less concerned about the Cooperatives recovering excess stranded costs because cooperatives operate on a not-for profit basis. Any revenues above costs collected by a cooperative will be returned to the member/consumer, either as a refund of patronage capital or a year-end margin adjustment. Still, the legislature must pay special attention to the impacts any inability fully to recover stranded costs will have on the largely rural, residential, cooperative member/owner/consumers because, in the event those costs go unrecovered, the member/consumers will be directly affected.

The amount of a utility's stranded costs will be very difficult to quantify with precision. Any stranded cost determination may fluctuate over time, changing according to the conditions and assumptions influencing the stranded cost calculation. However, the difficulty inherent in making projections and predictions about the course of events affecting the electric utility industry has never stood as a bar to public utility commissions, utilities or consumer representatives making assumptions and preparing forecasts and estimates of things to come. While it is not necessary to make actual stranded cost determinations until legislative actions have been taken, restructuring has been implemented and costs have been stranded, it is appropriate to determine what factors will affect stranded cost projections and what assumptions will be made in determining those costs, so that consumers will be able to make informed decisions when the time for choice comes. It is not fair to ratepayers, utilities, investors or shareholders to permit continued uncertainty about stranded costs.

The need for a clear definition of stranded costs is particularly important here in Virginia because the SCC currently is empowered, under section 56-235.7 of the Code of Virginia, to assess stranded costs in the event a federal government facility changes from a retail customer to a wholesale customer owing to a change in federal law. Accordingly, the Commission must have in place a methodology for addressing stranded costs so that it will be prepared if and when such costs become a contested issue in an actual proceeding.

The analytical models for determining stranded costs will be difficult to create and will have to be applied on a case-by-case basis. For example, the relationship between the Old Dominion-member distribution cooperatives and their exclusive power supplier, Old Dominion, creates unique issues concerning stranded costs. Based on the ownership interest the Old Dominion-member distribution cooperatives have in the power supply cooperative, as well as the all-requirements contract between Old Dominion and its members, if retail competition leads to the a loss of load at the distribution cooperative level, costs may be stranded at the Old Dominion level.

The loss of load by any Old Dominion-member cooperative would leave less load and fewer customers over which to spread Old Dominion's fixed generation costs, leading to increased costs to each member. Old Dominion stranded costs attributable to one member cooperative could be shifted to another cooperative, even between cooperatives in different states, if the stranded cost issue is not properly considered and addressed. Simply stated, there must be a coordination of stranded costs issues between Old Dominion and its member cooperatives whereby Old Dominion stranded costs are attributed to and collected by the member cooperatives responsible for those stranded costs and passed back through to Old Dominion.

Stranded costs will have different implications for cooperatives and municipal utilities as compared to investor-owned utilities. While many discussions of stranded costs focus on generation plant assets, regulatory assets and, sometimes, non-utility generator ("NUG") contract obligations, a cooperative's stranded costs usually will be derived according to the cooperative's wholesale power purchase contract. While regulatory and generation plant stranded costs often will be administratively determined, stranded costs related to NUGs and other wholesale power purchase contracts will involve negotiations with utilities and independent power producers and may involve a FERC proceeding. Such a proceeding may take a substantial amount of time to resolve.

The Cooperatives look forward to working with the legislature to develop a cogent approach to the treatment of their stranded costs, particularly the stranded costs relative to the Old Dominion-member cooperatives' status as a member/owner of Old Dominion.

Finally, at the May 26, 1998, meeting of the Stranded Cost Task Force, Virginia Power commented on the transition costs facing the electric utilities in restructuring. The Cooperatives would also like to comment on transition costs. The transition costs are, for the most part, additional, ongoing costs related to the effort to restructure the electric utility industry. ISOs and RPXs are completely new entities, and significant expenditures will be required to establish and operate these entities. Customer information and protection programs, designed to ensure that consumers understand the new structure so that they will not be taken advantage of by unscrupulous operators (as has already occurred in California) will also create new, ongoing expenses that must be absorbed by electric customers.

Transition costs are another reason why it is so important that issues such as stranded cost and market power are resolved appropriately, and with a sympathetic eye on the impact on residential consumers. If all of these issues are not handled properly, residential consumers could be left carrying other parties' stranded costs, paying higher generation costs owing to the abuse of market power, and paying transition costs to create and sustain a competitive utility structure that has provided them little or no benefit. In considering the potential impacts of stranded costs, the SJR 91 Subcommittee should also evaluate the transition costs involved in restructuring and the effect those costs will have on customers, particularly residential consumers.