COMMENTS OF THE DIVISION OF CONSUMER COUNSEL,
OFFICE OF THE ATTORNEY GENERAL, TO THE
MEMBERS OF THE JOINT SUBCOMMITTEE STUDYING
ELECTRIC UTILITY RESTRUCTURING (SJR 91) ON THE
ISSUE OF STRANDED COSTS

Overview
       The Office of the Attorney General, Division of Consumer Counsel ("Consumer Counsel") submits the following comments to the Joint Subcommittee studying electric utility restructuring on the issue of stranded costs (and stranded benefits). Consumer Counsel also submits definitions for stranded costs and stranded benefits, a list of factors that should be considered in their quantification, and thoughts regarding the appropriate mechanism for their delivery. By definition, there can be no stranded costs or benefits until consumers have effective competition, which is the choice of competing sources for the supply of electric needs. Consumer Counsel believes that the procedure for quantifying stranded costs and stranded benefits should be flexible to permit recognition of the different circumstances facing each incumbent utility. Likewise, we believe that there should be flexibility to determine the mechanism for delivering such costs and benefits that best suits each utility’s particular situation. The mechanism should ensure that all customer classes share equitably in paying stranded costs and receiving stranded benefits.

I. No costs or benefits can be stranded until retail customers actually leave their current electricity provider in favor of another provider of electricity.
       Unless and until there is effective competition in the retail electric generation market, no stranded costs or benefits can exist. Upon the existence of retail competition, all just and reasonable net stranded costs incurred by a public service company should be recovered. The converse is also true: upon the existence of competition, all just and reasonable net stranded benefits should be returned to customers. The existence and amount of stranded costs or stranded benefits are factual determinations that will need to be made for each existing electric utility.

II. Proposed definition of stranded costs and stranded benefits
       Consumer Counsel is aware of the stranded cost definition provided by the Staff of the State Corporation Commission ("Commission Staff")⁽¹⁾  and Virginia Electric and Power Company ("Virginia Power"),⁽²⁾  at the May 26, 1998 meeting of this subcommittee. Consumer Counsel offers the following definition of stranded costs. Stranded costs in a competitive market are a utility’s lost revenues associated with prudently incurred and unrecoverable costs related to utility investments in power production assets. Consumer Counsel also offers a definition of stranded benefits. Stranded benefits in a competitive market are a utility’s net profits over and above earnings that would result under the continuation of traditional cost-based regulation.

III. Guidelines for determining which stranded costs and benefits are recoverable
       To determine the costs to be recovered or the benefits to be returned will be a fact-intensive process that must be repeated for each existing utility. The State Corporation Commission ("Commission") is best suited to make this determination. The General Assembly, however, may wish to provide the factors the Commission should consider in its deliberations. Consumer Counsel offers the following factors for consideration:

1. The extent to which the utility was legally required to incur the costs and the assets and obligations.
2. The extent to which the market value of the assets and obligations of the utility, relating to the provision of potentially competitive services, exceeds the costs of the assets and obligations.
3. The effectiveness of the efforts of the utility to increase the market value and realize the market value of any assets, and to decrease the costs of any obligations, associated with the provision of potentially competitive services.
4. The extent to which the rates previously established by the Commission have compensated shareholders for the risk of not recovering the costs of the assets and obligations.
5. The effects of the difference between the market value and the cost, including, without limitation, tax considerations, for the assets and obligations.
6. If the utility had the discretion to determine whether to incur or mitigate the costs, the conduct of the utility with respect to the costs of the assets and obligations when compared to other utilities with similar obligations to serve the public.
7. The extent that any amounts have been previously disallowed by the commission as imprudently incurred.
8. The extent that such costs are verifiable.
9. The degree to which recovery of net stranded costs will provide an incentive or disincentive to utility management to decrease net stranded costs in the future.
10. The extent that the recovery of stranded costs and the receipt of stranded benefits will have an impact on the competitiveness of the market.
11. The degree to which utility management has maintained adequate and reliable electric service in the past and proposes reasonable programs and procedures to maintain such service in the future.
12. The degree to which customers have previously supported a depreciated plant.
13. Such other factors as the Commission may find are necessary to protect the public interest.

IV. Proposed stranded cost mechanism
       The Commission should be given the flexibility to develop and implement a procedure—with appropriate public input—for the direct recovery of stranded costs and benefits. The mechanism should ensure that all customer classes share equitably in paying such costs and in receiving such benefits.

V. Conclusion
       Consumer Counsel appreciates the opportunity to present comments on stranded costs and benefits to the Stranded Cost Working Group for SJR91. Consumer Counsel stands ready to assist in drafting legislation or providing any other assistance the subcommittee may desire.

² Va. Power stated that stranded costs are 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.