I. Definitions

Washington Gas takes a broad view of stranded costs and defines them to be:

"Those costs that utilities are currently permitted to recover through their rates but whose recovery may be impeded or prevented by the advent of competition in the industry." (Baumol and Sidak)*

or

Utility investments whose implied output price is higher than those obtained from a competitive market.

Washington Gas believes that utilities are entitled to collect such costs as long as they are determined to have been prudently incurred. The Company further recognizes that regulatory assets (i.e., Qualifying Facilities under PURPA), unamortized Demand-Side Management costs (i.e., energy conservation programs), and purchased power costs (i.e., IPP's built under 1992 EPACT) may contribute significantly to a utility's stranded costs.

II. Time period for collecting stranded costs

Washington Gas proposes stranded cost-recovery for a limited yet reasonable time period. A limited recovery period provides the electric utility with an incentive to mitigate such exposure as quickly as possible. A shorter time period will enable true market prices to be reflected in a timely manner. Washington Gas recommends that an appropriate time period for the recovery of stranded costs is five years.

III. How stranded costs should be collected

Washington Gas proposes a competitively neutral non-bypassable surcharge on all distribution customers. The Virginia State Corporation Commission (VSCC) may wish to consider certain mitigation measures, such as Performance-Base Ratemaking, that incent utilities to reduce potential stranded cost liability amounts.

It is important to note that in order for stranded costs to be properly determined and recovered, Energy Service Providers (ESPs) must provide accurate sales price information to the Commission during the stranded investment recovery period. While this may be objectionable to third parties, it is necessary for the Commission to obtain reliable information on market prices during the transition to competition.

IV. Who should pay stranded costs?

It is fundamentally unfair to force investors to absorb stranded costs that were made in an earlier and quite different economic regime. The recommended surcharge for stranded costs would be a wires charge and should be paid by all distribution customers.

V. Other stranded cost recovery approaches

Divestiture of generation assets. The advantages of this approach are that it is easy to administer, it produces a market-based solution, and it minimizes transition time. The disadvantage is that it requires an estimate of market prices at a point in time. If market prices are overestimated, shareholders are disadvantaged. Conversely, if they are underestimated, ratepayers are disadvantaged.

Exit Fees. Washington Gas believes exit fees are anti-competitive and would discourage movement to competitive options. This approach also requires estimating future market prices.