Williams Mullen
Christian & Dobbins
ATTORNEYS & COUNSELORS AT LAW

TO: Structure and Transition Task Force

FROM: Ralph L. "Bill" Axselle, Jr.
Reginald N. Jones
Co-counsel for ALERT

DATE: August 12, 1998

Introduction

The purpose of this report is not to detail or even summarize ALERT's June 30 report to your Task Force and our July 30 report to the Stranded Costs and Related Issues Task Force. Our purpose is two-fold:

(i) To highlight those areas where there appears to be a consensus as how to proceed in the retail competition implementing legislation; and

(ii) To highlight those areas where differences of approach are evident.

As you will determine, there are many more areas of agreement than disagreement. Having said that, some of the areas of disagreement are on very important issues. It should also be noted that even in areas of consensus, there are some slight differences as to detail.

It would appear that the Joint Subcommittee could commence the drafting of legislation on the areas of consensus. The drafting process may help in working out some specificity in areas in which there is already general agreement.

The Joint Subcommittee will also very shortly be in the position where it can begin to focus on and make decisions regarding areas where there remain differences of approach on major issues.

The initial portion of this report highlights the areas of consensus and some of the differences in details that can be worked out during the preparation of the implementing legislation. The latter part of the report highlights the more substantive differences in approach that will need additional Joint Subcommittee policy determination.

We do not represent that the areas of "agreement" or "consensus" are areas of universal concurrence. In each of the stated areas, several stakeholders, including our client, ALERT, may not agree with the position expressed as being the consensus position or the appropriate position from a public policy perspective.

Using the same format as the June 30 reports to your Task Force, it would appear that there may be some consensus among the stakeholders in the areas set forth below.

Areas of General Agreement

• Applicability of retail competition to all utilities except (i) municipally owned or operated electric utilities (unless they opt to market outside their service territory) and (ii) generation solely for self-consumption at site of generation.

• Commence competition on January 1, 2002, with full competition by January 1, 2004 as set forth by HB 1172 (1978), with ability of SCC to accelerate timetable if appropriate or delay timetable if necessary based on specific considerations of reliability, market power, etc.

• SCC to have even broader powers of delay, flexibility and protection of residential consumers and small business customers.

• Retail competition to be phased in from January 1, 2002 to January 1, 2004. (Likely scenario: one-third of each class of customers by January 1, 2002; two-thirds of each class of customers by January 1, 2003; 100 percent of each class of customers by January 1, 2004.) Grant authority to SCC to determine specifics of phase in.

• Appropriate to tie commencement of retail competition in Virginia to establishment of ISO and RPX.

• Not appropriate to tie establishment of retail competition in Virginia to the timetable of commencing retail competition in other states served by ISO/RPX.

• Need for a "going in" or "base line" rate case to determine certain issues e.g., charges for distribution services, aspects of distribution, if any, to be subject to competition and for coordination with stranded costs or stranded benefits determinations.

• Unbundling of generation, transmission and distribution upon retail competition.

• Generation subject to competition.

• Transmission subject to FERC oversight.

• Distribution subject to SCC oversight.

• While the wisdom of pilot projects is generally accepted, there does not appear to be a need for implementing legislation to mandate pilot projects that are already subject to SCC orders and will be in place prior to commencement of retail competition. Additionally, the retail competition plan calls for a two-year phase in or transition period.

• Nondiscriminatory access to transmission and distribution systems for all, at rates that are just, reasonable and nondiscriminatory.

• There will be a need to address the impact of transmission constraints on market power in retail generation markets; FERC only addresses wholesale competition markets, not retail generation markets.

• Utilities should not be allowed to transfer ownership or operational control of transmission assets until SCC is satisfied such transfers are in the best long term interest of Virginia consumers; disagreement as to role of SCC post-ISO formation i.e., input or regulatory control.

• ISO needed to operate the transmission systems and to dispatch must-run units to ensure reliability.

• Agreement as to need for independent governance of ISO, with appropriate stakeholder input and/or representation; disagreement, perhaps, over what constitutes an independent board which includes stakeholder representatives.

• No need for size of ISO/RPX to be dictated by the state; leaves that determination to the market place with SCC approval and FERC approval.

• A continued need for rights of condemnation/eminent domain by utilities, subject to SCC approval; issues whether similar rights should be afforded to competition.

• Regional power exchanges (RPX) advisable for retail competition in the Commonwealth, with SCC having power to approve involvement of Virginia utility in RPX.

• Virginia electricity consumers may purchase through the RPX or, at their option, direct from a generator/supplier through a bilateral contract.

• All consumers should be allowed to aggregate their purchases.

• Cooperatives and municipal power suppliers may also purchase from RPX.

• Agreement as to the need for setting policy for the pricing of generation for "must-run" units; disagreement as to exactly what that policy should be.

• Incumbent utilities and new market entrants to be treated the same with regard to both their rights and responsibilities and SCC oversight.

• SCC to have continued siting authority over new transmission facilities subsequent to the formation of the ISO and the commencement of competition.

• Need to both encourage and facilitate development of merchant plants to provide additional, competitive generation sources to promote retail competition, due to existing generation market shares and transmission constraints; eliminate need for "certificate of convenience and necessity" by SCC as known today, as the market place will determine the necessity for such facilities and their costs will not be in any rate base; SCC to retain authority for siting and determination that merchant plant is in compliance with environmental requirements.

• Preservation of exclusive distribution territories (current service territories) of IOUs, cooperatives, municipals.

• Rate regulation will continue for transmission (FERC) and distribution (SCC); generation will be subject to competition and not regulation consistent with resolution of market power issues.

• SCC to have full regulatory authority over all retail suppliers, aggregators, marketers and brokers.

• SCC to establish reasonable rules and regulations regarding the obtaining, retaining and renewing of appropriate licenses issued by SCC.

• Retail suppliers required to obtain appropriate approvals from SCC, demonstrate appropriate financial responsibility/practical capabilities and comply with requirements of Commission necessary for the protection of the public.

• Agreement as to need to have a specified supplier(s) of last resort and default provider(s). There is disagreement whether the default provider should be the incumbent utility or left to the determination of the SCC.

• Any and all customers may voluntarily aggregate their electrical energy demand for the purpose of negotiating the purchase of electric energy from any supplier.

• While there is agreement that billing, metering and related services may become subject to competition, there is a disagreement as to whether that should take place at the onset of retail competition, later or never.

• (No comment is made on consumer protections and customer services on public service programs as those issues are for the Consumer Task Force and have not yet been addressed by the interested parties.)

• To help address some market power issues, there should be a functional separation of generation, transmission and distribution capabilities, with appropriate codes of conduct for affiliate transaction and enforcement of anti-trust laws.

• There should be a legislative policy oversight entity during the transition to retail competition, most likely the Joint Subcommittee.

• The SCC should have the authority to modify or delay residential consumer choice if it determines that such retail competition is not in the interest of such residential consumers at that time.

As stated at the onset, none of the interested parties including ALERT would agree with each of the above statements. We do believe, however, that the foregoing represents the consensus of several stakeholders on the issues addressed. We are confident that all stakeholders will work diligently to address any differences we may have during the drafting and subsequent discussion process.

Areas of Disagreement

We have set forth herein what we believe to be the fairly limited but very important areas of disagreement on which no consensus has yet developed. These areas require additional discussions and ultimate Joint Subcommittee determination.

(1) Market power. Everyone recognizes that the electricity generation, transmission and distribution "systems" in Virginia were built and designated to be operated in a manner consistent with the existing exclusive service territories and not in contemplation of competition that the result is at the onset of retail competition there will be certain inadequacies of competitive generation capacity in the Commonwealth and certain transmission constraints and that going to retail competition without adequate safeguards could produce market power for a utility due to existing generation market shares and/or transmission constraint issues. There is less agreement as to what is necessary to assure that no utility has market power that would work to the detriment of electricity consumers once we begin implementing retail competition.

Overly simplified, it appears the utilities would rely upon the benefits of the operations of the ISO and the RPX, and the regulatory authority of FERC at wholesale, to protect Virginia's retail consumers. While comforted somewhat by those protections, most customer-oriented groups would prefer that the implementing legislation also provide for SCC authority to determine that market power concerns have been addressed to protect Virginians at the time retail competition commences. The consumers we represent want to go forward with the implementing legislation now, but give the SCC the authority to address the market power issues through a factual, utility-specific case-by-case analysis. We would go forward with the mandate of retail competition under the principles and timetables previously established, but give the SCC safeguard authority to review and remedy retail market power issues as Virginia makes the transition to retail competition.

Additionally, as one means of mitigating retail market power, we believe that the SCC should have authority to determine if generation divestiture is necessary to resolve market power or determine stranded costs.

(2) Deregulation of generation assets. HB 1172 provides that the "[t]ransition to the deregulation of generation facilities, as defined and determined by the General Assembly and, thereafter, by regulation of the State Corporation Commission, shall commence in Virginia on January 1, 2002". There is disagreement among the parties as to what "deregulation" means in the retail context, and whether such deregulation takes place automatically upon commencement of retail competition (utilities) or upon determination by SCC that effective competition exists (consumer-oriented entities).

(3) Stranded costs and Stranded Benefits. Not unexpectedly, this, along with the market power issue, are the areas of most disagreement. Stranded costs and stranded benefits have been discussed in more detail by the Stranded Costs and Related Issues Task Force and are not being included in any detail here.

(4) Effective competition. To state the obvious, the goal for electricity consumers in Virginia is to promote effective competition among generators and suppliers that will produce truly competitive market prices for reliable electricity. If we have deregulation without effective competition, electricity consumers will be forced to make their purchases of electricity from deregulated monopolies.

Some utilities believe that the development of ISOs and RPXs to be established under the implementing legislation are sufficient to assure effective competition. Consumer-oriented groups do not agree. Consumer groups believe that it would be appropriate for the protection of Virginia electricity consumers to provide the SCC with full authority to make a determination that effective competition exists as it relates to appropriate issues. Let us illustrate.

Stranded costs are both a condition precedent and the result of effective competition. The costs incurred by the utilities may not be stranded if there is ineffective competition. ALERT has advocated that utilities should not receive stranded costs payments unless and until there is effective competition.

If a utility has market power due to generation capacity or transmission constraints, there will not be effective competition.

Stranded costs payments by Virginia's utility consumers to the utilities could be established in a way that precludes there being effective competition. The amount, method and timetable for payment of stranded costs may have a significant effect on market power.

For these reasons, ALERT and other electricity consumers believe that the SCC should be given the power to determine when effective competition exists before stranded costs recovery, if any, and the deregulation of generation assets are allowed. The determination of effective competition would obviously be founded upon the determination that market power problems have been resolved.

We hope this will be of some assistance to you in framing the issues.

***
Ralph L. "Bill" Axselle, Jr. (804) 783-6504
Reginald N. Jones (804) 783-6468
Co-counsel for ALERT