June 30, 1998
Potential Stranded costs result from investments and obligations related to generation supply and can include all costs associated with federal or state action or inaction that affects generation, including federal and state environmental protection requirements. Utilities' past expenditures that are the result of government policy and which have not been fully recovered at the onset of competition, can also constitute stranded costs. Likewise current and future government policies that occur prior to competition and impact power generation can result in potential stranded costs. This discussion of examples of policies that contribute to potential stranded costs is based on the premise that only generation will be deregulated. If it is later determined that other non-generation services are to be competitive services, the discussion will need to be expanded accordingly.
FEDERAL ACTIONS THAT RESULT IN POTENTIAL STRANDED COSTS
Public Utilities Regulatory Policy Act (PURPA).
This legislation which was enacted in 1978 requires utilities to buy power from certain power generators at "avoided cost". This unprecedented federal intervention into matters generally handled at the state level was justified as a response to the "energy crisis". PURPA is the basis for the major portion of Virginia Power's potential stranded investment in that it led to the numerous contracts between Virginia Power and non-utility generators (NUGs). This law is still on the books and utilities could still be pressured by it, however, there is a growing consensus in Congress that it must be amended as part of comprehensive restructuring legislation.
Federal legislation implementing environmental protection requirements aimed at reducing air emissions, water pollution, etc. could result in increased compliance costs.
Example: The Clean Air Act Amendments of 1990 resulted in substantially increased compliance costs to the nation's electric utilities especially with regard to the rain acid provisions of the Act. Utilities are the primary target of this legislation which mandates those annual emissions of sulfur dioxide will be capped in the year 2000 at one half of the national total sulfur dioxide emissions for 1980. Compliance involved installation of "scrubbers" and/or purchase of "allowances." Reauthorization of the Clean Water Act, the Resource Conservation and Recovery Act, the Endangered Species Act, and others are likely to impose additional compliance costs on electric utilities.
Clean up of Department of Energy (DOE) nuclear facilities could result in increased costs for nuclear operations.
Example: The decontamination and decommissioning costs associated with the closure of the DOE uranium enrichment site in Oak Ridge, Tennessee became an increased expense for all electric utilities that used the facilities for uranium enrichment. The United States Enrichment Corporation, a private entity, continues to operate two uranium enrichment sites in Paducah, Kentucky and Portsmouth, Ohio and nuclear utilities may have to bear a portion of the remediation costs for these facilities.
DOE regulations on the reliability of the nation's electric power system could result in capital outlays and/or increased compliance costs.
Example: In response to two Western outages in the summer of 1996, the DOE recently established a 21-member task force to evaluate and ensure the reliability of the nation's electric power system. The initial term of the task force is for three years, but may be extended.
Ratification of the Kyoto Treaty or other global climate change policy would impact fossil generation.
At present the U.S. Senate is on record as opposing the international treaty to reduce greenhouse gas emissions, however changes in the treaty language or agreement by developing countries to participate could change that. Ratification of such a treaty would make coal-fired power generation uneconomical in the United States. Other related measures such as a carbon-tax would also impose substantial costs on fossil-fueled generation.
Nuclear License Extension (Renewal) Program.
The NRC has opened the option to renew the operating license for existing nuclear units if it can be demonstrated that they meet certain high standards that will ensure continued safe operation. The activities associated with collection of data and preparation of applications in accord with NRC rules will impose sizable costs on utilities that choose to pursue that option.
Nuclear Regulatory Commission (NRC) requirements for decommissioning could result in accelerated collection of and/or increased costs.
Under current NRC rules, Virginia Power collects through existing rates, from all customers, funds being accumulated in an external trust for the decommissioning of its nuclear units. In anticipation of restructuring, the NRC Proposed Rule for Financial Assurance Requirements for Decommissioning Nuclear Power Reactors and Draft Regulatory Guide DG-1060, endorsing the Financial Accounting Standards Board (FASB) Standard for Decommissioning Cost Accounting. This could result in nuclear utilities bearing the full up-front funding of decommissioning costs.
Changes in the Internal Revenue Code could result in increased tax expense and/or a reduction in tax deductions.
Example: California utilities recently received private letter rulings from the Internal Revenue Service (IRS) concerning the income tax treatment of rate reduction bonds. One utility characterized the IRS ruling as favorable, however, it could have easily gone the other way. The Tax Reform Act of 1986 resulted in an increased tax liability for the nation's electric utilities. In 1993 the Clinton Administration proposed an energy tax (BTU Tax) which would have heavily impacted electricity generated from fossil fuels. This effort was defeated but could reappear.
Unfavorable rulings by the Securities and Exchange Commission (SEC) could result in increased costs or debt for the nation's electric utilities.
Example: The SEC recently ruled that the financial accounting treatment for the securitization of transition costs will not create an asset and therefore the proceeds of the bonds must be recorded as debt or deferred revenues. This would impact Virginia utilities only if securitization were to be used as a means of managing stranded or transition costs.
STATE ACTIONS THAT RESULT IN POTENTIAL STRANDED COSTS
Changes in Virginia's environmental legislation and/or regulation could result in significant new expenditures for utilities.
EPA has set minimum standards for environmental compliance and has delegated much authority to the states. Virginia could choose to impose environmental requirements that are more stringent than those set by EPA, which would be costly for utilities. States are currently under orders from EPA to revise their State Implementation Plans (SIPs) to address new standards for NOx and particulate emissions, and fossil fueled power stations will be the primary target for further NOx reductions.
FEDERAL INACTION THAT COULD RESULT IN POTENTIAL STRANDED COSTS
Federal legislation that does not include a "grandfather" clause for state restructuring plans could result in increased costs to the nation's electric utilities.
Example: Utilities in a number of states have incurred and continue to incur considerable expense related to restructuring activities at the state level. If federal restructuring legislation is passed that does not recognize these state plans, they will be preempted and the incumbent electric utility's previously incurred transition costs could become stranded.
Failure of the Department of Energy (DOE) to provide nuclear waste storage or disposal could result in increased costs to utilities with nuclear generation.
Nuclear utilities have a contractual agreement with DOE whereby the utilities pay into a fund for development of a disposal facility with the understanding that DOE will accept the spent fuel from commercial nuclear units. Despite repeated efforts by Congress, DOE does not appear to be willing to honor this obligation with the result that nuclear utilities will continue to pay for disposal site development while bearing the burden of providing for extended on-site storage of spent fuel. The current Congress is considering legislation to compel DOE to accept the spent fuel and get on with development of the disposal facility. A number of lawsuits have been filed against the Federal government for failure to accept nuclear waste. Duke Energy is asking for $1 billion, as is Northern States Power. Florida Power & Light is seeking $300 million and American Electric Power is asking for $150 million.
STATE INACTION THAT COULD RESULT IN STRANDED COSTS
Failure by the Commonwealth to provide for disposal of low-level radioactive waste.
The Low-level Waste Policy Act assigns responsibility for disposal of this waste to the states. Virginia is a member of the Southeast Compact for the Management of Low-level Waste. Over the past decade this seven-state compact has tried, without success to bring a new regional disposal facility into operation. If this effort collapses and the existing disposal facilities refuse to accept this waste, it will have to be stored at nuclear power stations for an indefinite period. Absent state action to provide for disposal, utilities will bear the cost of packaging and storing this waste in accord with NRC specifications.