On behalf of the 16 municipal electric systems in Virginia, the Municipal Electric Power Association of Virginia (MEPAV) is pleased to summarize its comments on key components of electric industry restructuring.
Applicability, municipalities.
With regard to restructuring and its applicability to municipalities, we believe that this question should ultimately be left up to the citizens in each municipality to decide. The municipal electrics believe that as a practical matter, most municipally owned systems will opt for retail choice if competition and lower prices can be achieved. The timing of that choice, however, should remain with each municipality.
With regard to a municipality serving energy to customers outside its service territory, MEPAV believes that if that occurs, municipals can properly be required to open their service area to retail competition as a matter of reciprocity.
The present local regulation of municipal service and rates by local governing bodies has been very effective and should continue without state intervention.
Schedule for transition to retail competition.
MEPAV believes that it is probably best to phase-in competition so that transitional and other problems can be worked out. MEPAV believes that it is premature to open up other services to competition until generation is competitive. It is critical, however, that a functional and truly independent ISO be in place before competition can be achieved. The municipal electrics are concerned that opening up the market to retail choice before this mechanism is in place will further enhance the market power of those companies that now control transmission.
Independent system operator.
The Virginia municipal electric systems are actively participating in the development of a voluntary independent system operator - the Alliance ISO as well as intervening in the Mid-west ISO filing at the FERC. MEPAV'S objective is to assure that this ISO is truly independent, starting with the need for an independent governance structure. The FERC's 11 principles for ISO development can provide the basis for an essentially self-regulating ISO with the need for only limited oversight.
However, if the Alliance ISO that evolves from the present process falls short of the letter or spirit of these principles, MEPAV will raise its concerns before the FERC, the Virginia SCC and the Virginia legislature.
The nature of any ISO will help determine the need for and role of a regional power exchange. A properly formed ISO should be sufficiently large in area to constitute the "region" that would be a regional power exchange. If there is a regional power exchange, it will have to deal with many of the issues confronted by an ISO. Any regional power exchange should recognize existing bilateral contracts between and among market participants and should facilitate new bilateral arrangements.
Regulation of generation, transmission and distribution.
The FERC continues to be the appropriate agency to regulate the nondiscriminatory availability of transmission service. The SCC should continue its current oversight of distribution services offered by IOUs and cooperatives.
The municipal electrics believe that the current geographic service territories should be preserved, but that once retail choice is offered, they will be meaningful only for the distribution functions. New customers requiring the extension of distribution lines would be provided service by the utility serving the geographic area.
Regarding the licensure of suppliers of retail electric energy, MEPAV supports the view that the SCC should be given the authority to create a certification program for power suppliers. This is a necessary consumer protection role.
Suppliers of last resort and default providers.
We accept that responsibility as do the other utilities in the state.
Metering, billing and other related distribution services.
MEPAV believes that the only area that offers significant potential benefits from competition at this time is the generation market - assuming market power problems, including transmission constraints, are resolved. Distribution and related activities, such as billing and metering, should continue to be local distribution services regulated as at present - in the case of the municipals, locally regulated by elected officials.
Divestiture and functional separation.
For there to be an effective competitive market, there needs to be a sufficient number of entities in the market to ensure that the market is subject to competitive forces rather than under the control of one or relatively few players. This means that mergers and acquisitions need to be scrutinized and that market power issues need to be addressed. However, it will take more than preventing harmful increases in market power through mergers to make competition a reality in the electricity industry. The obstacle to competition posed by the high degree of concentration that exists already, without additional mergers, also needs to be remedied. MEPAV respectfully submits that the legislature should not categorically rule out divestiture of generation as a necessary means to achieve real competition in today's highly concentrated electric industry.
Other states that have looked closely at this question have concluded that generation divestiture needs to be a part of a transition to a competitive market. The Virginia legislature should include divestiture of generation to multiple unaffiliated entities within the authority available to the SCC to ensure the retail competition does not result in the worst of all worlds - unregulated monopolists.
If a fully independent ISO is not established, then transmission divestiture would likely be required to prevent market power abuses. MEPAV's experience is that Codes of Conduct dealing with functional separation within a company have not been at all effective and are likely to be not effective in the future. If a utility wishes to achieve functional separation by creation of affiliates (rather than structural separation), there must be SCC oversight to ensure that such separation is effective and to verify that costs are not shifted improperly between functions, an oversight role that needs to be undertaken by FERC as well.
Legislative transition task force.
The municipal electrics support the establishment of a legislative transition task force to work collaboratively with the SCC. Because of the magnitude of the issues involved in restructuring and the changes in the electric industry, it is likely that future legislative action will need to be considered to allow restructuring to accomplish its intended purpose.
Market Power.
The municipal electric systems in Virginia purchase over 98% of their electricity at wholesale and distribute it to their customer-owners. The municipal systems are transmission dependent utilities, completely dependent on the transmission facilities of the vertically integrated investor owned utilities within whose transmission system they are located. In this sense, the municipals are like retail customers who will also be dependent on the IOU transmission systems to gain access to competing generation supplies.
MEPAV members are greatly concerned about the issues of import constraints and market power as they affect their ability to access the lowest cost reliable electricity for our customer-owners. This has been our goal since our first member began providing service in 1886, over 112 years ago. Even in the absence of constraints, the high levels of market concentration in this industry, and particularly in this Commonwealth, present significant obstacles to achievement of real competitive choices for retail customers. The major areas that need to be addressed to ensure that constraints and market power are minimized are:
And finally, with regard to comments from other interested parties, we note that no entity opposed aggregation - and as the state's first aggregators, we find that very encouraging.