The following proposed definition of "stranded costs" and related definitions, and a proposed mechanism for the recovery of stranded and related costs, are submitted by Virginia Power in response to the request made by the Stranded Cost Task Force of the SJR 91 Joint Subcommittee at the Task Force's last meeting on June 30, 1998:

§ 56-xx1. Definitions.

As used in this chapter:

"Commission" means the State Corporation Commission.

"Consumer and employee benefits" means the investments that are made and the costs of operation that are incurred by an electric utility, either during or after the transition to competition in the supply of electric energy to retail customers, or both, due to the need to provide: (i) consumer education programs that inform retail customers of the changes in the regulation of the purchase and sale of electric energy implemented by this chapter and that provide those customers with the information necessary to assist them in making an informed choice regarding their selection of a supplier of electric energy; (ii) programs that provide for the education, retraining and outplacement services and early retirement or unemployment benefits for employees of electric utilities whose employment will be affected by the implementation of competition in the supply of electric energy to retail customers; and (iii) public purpose programs, including universal service, energy efficiency and conservation, protection of the environment, and research and development.

"Customer choice" means the opportunity for a retail customer in the Commonwealth to purchase electric energy from any supplier that is licensed by the Commission and seeks to sell electric energy to that customer.

"Electric energy" means electricity or the capacity to produce that electricity, or both.

"Electric utility" means any person that generates, transmits, or distributes electric energy that ultimately will be used by retail customers in the Commonwealth, including any investor-owned electric utility, cooperative electric utility, or electric utility owned or operated by a municipality.

"Incumbent electric utility" means each electric utility in the Commonwealth that, prior to the effective date of this chapter, supplied electric energy to retail customers located in an exclusive service territory established by the Commission.

"Investments and obligations related to the generation of electric energy" means all of an incumbent electric utility’s generation-related investments and obligations that traditionally were included in regulated rates and were paid by retail customers, including, but not limited to (i) electric energy generating facilities and units owned in whole or in part by the incumbent electric utility, (ii) all costs associated with federal or state action or inaction that occurred prior to the deregulation of the generation of electric energy in the Commonwealth, including federal or state environmental protection requirements, and (iii) all generation-related regulatory assets.

"Mandated obligations" means all of an incumbent electric utility’s costs that traditionally were included in regulated rates and were paid by retail customers and that were associated with (i) all nonutility power purchase contracts pursuant to which an incumbent electric utility purchases electric energy for resale to its customers and that were entered into by or transferred to that utility, including those that exist as a result of the Public Utility Regulatory Policy Act of 1978, (ii) federal or state requirements for decommissioning nuclear electric energy generating units, and costs associated with decommissioning requirements beyond the minimum requirements imposed by the Nuclear Regulatory Commission, and (iii) any other requirements imposed by mandate of the federal or state government prior to the deregulation of generation in the Commonwealth.

"Municipality" means a city, county, town, authority or other political subdivision of the Commonwealth.

"Person" means any individual, corporation, partnership, association, company, business, trust, joint venture, or other private legal entity, and the Commonwealth or any municipality.

"Regulatory assets" means previously deferred, generation-related costs or obligations that have been incurred by a regulated electric utility in providing electric energy service prior to the deregulation of generation in the Commonwealth, that represent the effect of regulatory actions, regardless of their recognition or classification in financial statements, and that have been included among a utility’s costs for purposes of developing electric energy rates. Such costs and obligations include, but are not limited to, (i) uncollected deferred federal income tax liabilities and other post-employment benefits based on service of employees prior to 1993, and (ii) the requirement that utilities with nuclear generation contribute funds annually to the United States Department of Energy for the decontamination and decommissioning associated with the closure of Department of Energy uranium enrichment sites.

"Retail customer" means any person that purchases retail electric energy at a single metering point or non-metered point of delivery located in the Commonwealth.

"Retail electric energy" means electric energy sold for ultimate consumption by a retail customer.

"Stranded costs" means net losses in the economic value of an incumbent electric utility’s investments and obligations related to the generation of electric energy that result from either (i) the deregulation of the generation of electric energy in the Commonwealth, or (ii) a federal statute or regulation requiring the implementation of customer choice or some other form of competition in the supply of electric energy to retail customers in the Commonwealth.

"Supplier" means any generator or other person that offers to sell or sells electric energy to retail customers in the Commonwealth and is licensed by the Commission to do so, but it does not mean a generator that produces electric energy exclusively for its own consumption or the consumption of an affiliate.

"Supply" or "supplying" electric energy means the sale of or the offer to sell electric energy to a retail customer in the Commonwealth.

"Transition costs" means the investments that are made and the costs of operation that are incurred by an electric utility during the transition to competition in the supply of electric energy to retail customers, due to the need to provide the infrastructure and systems to allow such competition to take place and to provide for certain programs and services within a competitive environment. "Transition costs" include, but are not limited to, (i) investments in infrastructure to allow such competition to take place, including information technology and other costs associated with the establishment and operation of one or more independent system operators and one or more regional power exchanges in the Commonwealth, and (ii) the costs associated with the planning for, and the operation and closure of, any pilot project for competition in the supply of electric energy to retail customers in the Commonwealth.

§ 56-xx2. Recovery of stranded costs.

A. Beginning January 1, 2002, each incumbent electric utility, or its successor, shall be entitled to recover in full the stranded costs it incurs as a result of the deregulation of generation in the Commonwealth, either (i) through a guaranteed frozen generation rate, as provided in subsection B of this section, or (ii) through a nonbypassable wires charge, as provided in subsection C of this section and § 56-xx5.

B. Each incumbent electric utility shall be given a reasonable opportunity to recover its stranded costs through a guaranteed offer of frozen rates for generation service, as approved by the Commission, that will be made available to the retail customers located in the geographic area that was the service territory of the incumbent electric utility upon the deregulation of generation on January 1, 2002. The Commission shall not require a sale or divestiture of any utility's generating facilities or units in order to determine its stranded costs.

1. A guaranteed frozen generation rate shall be made available to each retail customer until customer choice is implemented for that retail customer, and for a period of three years after that date or until December 31, 2006, whichever is earlier. The guaranteed frozen generation rates for each incumbent electric utility shall be established based on the embedded cost ratemaking methods and principles that were recognized and approved by the Commission in the utility's last general rate proceeding prior to the effective date of this chapter, and shall be sufficient to permit the electric utility to recover its stranded costs over the period such rates are made available and to provide the electric utility an opportunity to earn a reasonable rate of return.

2. At any time after customer choice is implemented for a retail customer, that customer may reject the guaranteed frozen generation rate and choose to purchase its electric energy from any supplier seeking to sell electric energy to that customer. Any retail customer that rejects the guaranteed frozen generation rate and purchases its electric energy from another supplier shall pay all applicable nonbypassable wires charges authorized by subsection C of this section and §§ 56-xx3 and 56-xx4. Any retail customer that accepts and pays the guaranteed frozen generation rate shall not be required to pay separately any such nonbypassable wires charges during the period the guaranteed frozen generation rate is available to that customer; such charges shall be included in that retail customer's guaranteed frozen generation rate. Regardless of whether a retail customer accepts or rejects the guaranteed frozen generation rate, once that rate no longer is available to that retail customer, that customer shall continue to pay any nonbypassable wires charge that is still applicable under §§ 56-xx3 and 56-xx4, but no longer shall be required to pay the nonbypassable wires charge authorized by subsection C of this section.

3. Any retail customer that rejects the incumbent electric utility’s guaranteed frozen generation rate and purchases its electric energy from another supplier may choose to purchase its electric energy once again from the incumbent electric utility at the guaranteed frozen generation rate during the period that rate is available. A retail customer may reject the guaranteed frozen generation rate or return to that rate more than once during the period it is available.

§ 56-xx3. Recovery of costs associated with mandated obligations.

A. Each incumbent electric utility shall recover its net costs associated with its mandated obligations that are nonutility power purchase contracts entered into by that utility prior to January 1, 1999, or entered into prior to that date and subsequently transferred to that utility, through a nonbypassable wires charge or credit to be determined by the Commission, as follows:

1. The electric utility shall estimate annually, over the terms of its power purchase contracts, the revenues expected to be received that year from the sale of electric energy purchased pursuant to those contracts. In accordance with the ratemaking methodologies and principles that were recognized and approved by the Commission in the utility's last general rate proceeding prior to the effective date of this chapter, the electric utility also shall estimate the annual revenues that it must receive that year to ensure recovery of its cost of service related to those contracts. This latter revenue requirement shall be calculated to match exactly the actual costs of those contracts incurred by that electric utility, without profit or loss to the utility. Only above-market costs shall be recovered, through a nonbypassable wires charge, and any benefits from below-market costs shall be returned to retail customers as a credit. For those contracts for which the utility has dispatch rights, above-market costs may not exceed the fixed component of the costs of those contracts.

2. If the estimated amount to be received from the sale of electric energy purchased pursuant to all power purchase contacts is less than the estimated amount the electric utility must receive to recover its cost of service for those contracts, the difference shall be recovered in full from retail customers located in the geographic area that was the service territory of the incumbent electric utility through a nonbypassable wires charge to be determined by the Commission as provided in § 56-xx5.

3. If the estimated amount to be received from the sale of electric energy purchased pursuant to all power purchase contracts is more than the estimated amount the electric utility must receive to recover its cost of service for such contracts, the difference shall be returned in full to retail customers located in the geographic area that was the service territory of the incumbent electric utility through a credit to be determined by the Commission as proved in § 56-xx5.

4. The Commission shall determine on an annual basis whether the estimated amount the electric utility would receive from the sale of electric energy purchased pursuant to its power purchase contracts and the estimated amount the electric utility would need to receive to recover its cost of service related to those contracts were more or less than the amount the electric utility in fact received from the sale of electric energy purchased pursuant to its power purchase contracts and the amount it actually needed to receive to recover its cost of service related to those contracts, and shall adjust the nonbypassable wires charge or credit ordered pursuant to paragraph 2 or 3 of this subsection for the next year accordingly. In determining the amount the electric utility actually needed to receive to recover its cost of service related to its power purchase contracts, the Commission shall determine the amount, if any, by which that cost was reduced because of the utility’s efforts to mitigate that cost, and if there was such a reduction, shall calculate any adjustment required by this paragraph so that any such reduction is shared equally by (i) the retail customers located in the geographic area that was the service territory of the incumbent electric utility and (ii) the shareholders of that utility. The Commission shall allow recovery of an electric utility's prudently incurred costs related to cancellation, buyout, buydown or renegotiation of nonutility power purchase contracts, provided, however, that nothing in this chapter shall authorize the Commission to require an electric utility to buy down, buy out, terminate, or otherwise renegotiate or restructure a power purchase contract.

5. The incumbent electric utility shall file the data required by this section with the Commission no later than March 31 of each year, and the Commission shall review and issue an order approving the adjustments if any to the applicable nonbypassable wires charge or credit not more than 90 days after the data are filed.

C. An incumbent electric utility shall recover all costs associated with any other mandated obligation from the retail customers located in the area that was its service territory, through a nonbypassable wires charge to be determined by the Commission as provided in § 56-xx5, so that those costs are recovered as they are incurred over the time the mandate is in effect.

§ 56-xx4. Recovery of transition costs and costs of consumer and employee benefits.

Transition costs and costs associated with consumer and employee benefits shall be recovered by each electric utility and supplier incurring those costs through a nonbypassable wires charge to be determined by the Commission as provided in § 56-xx5 and paid, as appropriate, by the retail customers located in the geographic area that was the service territory of the incumbent electric utility, or the by the retail customers of the electric utility or supplier. Such costs shall be paid, as appropriate, over the useful life of the equipment or assets, or the duration of the operation, program or service associated with a particular transition or consumer and employee benefit cost.

§ 56-xx5. Determination of nonbypassable wires charges and credits.

A. Each nonbypassable wires charge or credit authorized by this chapter shall be determined by the Commission on a per unit of usage basis for retail customers subject to its jurisdiction and, beginning January 1, 2002, shall be paid by or credited to the retail customers specified in those sections of this chapter that authorize such a charge or credit. The Commission shall determine each year the total of all nonbypassable wires charges to be paid by, or the credits to be given to, each incumbent electric utility’s retail customers subject to its jurisdiction based on the cost allocation methodology last approved by it prior to January 1, 2002, and shall determine a fair and reasonable methodology for allocating any such amount to be paid or credit due among such customers as may be in the public interest.

B. If a retail customer served by an incumbent electric utility as of the effective date of this chapter is later served by local or on-site generation facilities that significantly reduce or eliminate its purchases of electric energy through the incumbent electric utility's transmission and distribution systems, that retail customer shall pay its full allocated share of mandated obligation, stranded, transition, and consumer and employee benefits costs through an exit-fee or other charge to be calculated by the incumbent electric utility and approved by the Commission. Such exit fee or other charge shall not be paid by a retail customer for local or on-site generation facilities that are added to provide electric energy to new or expanded customer load that has not previously been served through the incumbent electric utility's transmission and distribution systems.