Good morning. I am going to walk you briefly through the key points of Virginia Power's Narrative Restructuring Plan and address in a little more detail certain aspects of our response.
56-578. Schedule for transition to retail competition; Commission authority.
Almost all stakeholders recognize that competition should be introduced in distinct phases. After considerable internal debate, we arrived at what we regard as the best solution from a physical standpoint. Virginia Power proposes that competition should be phased in with the largest customers, which are primarily industrial, starting 1/1/2002, commercial customers starting 1/1/2003, and residential customers starting 1/1/2004. The large customers comprise the smallest group, numbering about 1500, while the commercial group represents between 50,000 to 100,000 customers and the residential group is by far the largest at around 1.5 million. This is the most practical sequence for the transition for the following reasons.
Starting with the smallest group will help manage the infrastructure changes needed to implement competition. It will allow time for the necessary infrastructure to be phased in gradually which will help ensure reliability.
In addition it enables each step to focus on the unique needs of each type of customer.
The industrials which are the largest customers are better equipped to accept the risks associated with the emergence of the new system.
This sequence allows residential customers to benefit from the lessons learned in implementing choice for the industrial and commercial customers.
There are other approaches to phasing-in that can be made to work and probably the only one that I would strongly advise against from a practical standpoint is the all-at-once method.
Customer choice for the industrial and commercial customers could be delayed by the SCC only if the ISO or RPX is not ready or if there is a proceeding pending before the Virginia Supreme Court. In the case of residential customers, the SCC should be able to vary the schedule for choice if it is found to be in the public interest to do so.
Once generation is deregulated, even those customers that continue under regulation will receive the benefit of the wholesale market. Utility and regulatory experts generally agree that the greatest benefits in terms of potential savings for the consumer will be through competition at the wholesale level. So a delay in opening choice for any group of customers would still enable the benefit of competition to flow through to them, if generation has been deregulated.
HB 1172 calls for these to be in place by January, 2001 which should provide sufficient time for them to become operable. The SCC should have the power to delay competition if the ISO or RPX is not ready.
Virginia Power supports the use of rate freezes in mitigation of stranded costs. On August 7, the SCC approved a settlement of Virginia Power's regulatory plan which included a rate freeze which will be in place through March 1, 2002. This gets us into the transition period provided in HB 1172, which would start January 1, 2002.
I will not review the details of this case, but it does include a write-off of $220 million in regulatory assets which are generation related expenses that are built into rates. This means that Virginia Power will divert what would otherwise be earnings into the elimination of this liability which would alternatively need to be recovered as a stranded cost on the commencement of competition.
We envision another rate case prior to March 1, 2002 to set rates that would be frozen through the transition period and available to those who do not choose to switch suppliers and for those that have not yet been given the opportunity to choose.
Deregulation of generation is the cornerstone of competition. When deregulated generation is bid into the market it will effectively implement wholesale competition for all retail customers in Virginia. This will bring the benefit of competition even to those customers for which choice is not yet available. Virginia Power strongly supports this approach.
In accord with an SCC order, Virginia Power is developing a retail pilot program. It does not appear to us that any additional legislation is required to conduct pilot programs.
Transmission constraints are physical in nature, while market power is a financial issue. It is not possible to determine market power until the size and shape of the market is known. The ISO that evolves will shape that market and it will certainly not conform to any one utility's service territory. It will cover a multi-state area which will help mitigate market dominance. With time, the transmission grid and new generation facilities will evolve as needed to serve this region, in response to market forces.
56-581. Independent System Operator.
56-582. Regional power Exchange.
Virginia power's comments regarding these entities are fairly technical and available on the website for those who need to read them. In summary, it is vital that the ISO insure non-discriminatory access to the power grid and to do it should be governed by a truly independent board. These components of a competitive market should be allowed to evolve to best serve the needs of the region. To provide sufficient flexibility, legislation should avoid being prescriptive regarding these structures.
56-583. Transmission and distribution of electric energy.
Virginia Power's view is that these functions will continue to be regulated.
Virginia power has always supported the equitable treatment of all who wish to sell power in a competitive market.
With the deregulation of generation, market pressure will drive the building of new generating facilities and the SCC will have a diminished role in the process. All existing environmental regulations will still apply and will undoubtedly play a major role in the selection of a site.
The distribution business will continue to be regulated and the assigned distribution service territories will be preserved.
56-585. Licensure of suppliers of retail electric energy
To ensure reliability and protection of consumers, all suppliers doing business in the commonwealth should be required to obtain a license from the SCC. There should be substantial penalties for those who violate the conditions of the license.
56-586. Suppliers of last resort and default providers.
The incumbent utility should provide these services to ensure continuity and a needed level of certainty for consumers.
56-587. Voluntary aggregation permitted.
Virginia Power supports aggregation as it will enable smaller customers to join together to gain "buying power" equivalent to that of larger customers.
56-588. Metering, billing and other related distribution services.
Virginia power's position is that only generation and supply of electric power should be competitive at the outset of competition and the complexity of opening other components to competition should be avoided. At some later date this could be revisited.
56-592. Nonbypassable wires charges.
This is a competitively neutral means of collecting stranded and other transition costs in a competitive structure and we support the use of nonbypassable wires charges for this purpose.
56-593. Divestiture not required: Functional separation
Virginia Power supports functional separation of generation and distribution. Divestiture of utility assets should be neither required or prohibited--this should be a business decision.
56-594. Legislative transition task force established.
This would be a valuable means of maintaining legislative oversight of the transition to competition and would facilitate any in-course corrections that may be needed.
Market Power.
Virginia Power filed a relatively detailed response to this topic and I will only summarize it here. In order for competition to move forward in Virginia, the ISO must demonstrate to FERC's satisfaction that it will prevent market power abuses. In addition, a utility will be allowed by FERC to charge market-based rates for power sales into the wholesale market, only if and when it can demonstrate that it lacks market power. Furthermore, the SCC should have the authority to delay residential customer choice if market power has not been sufficiently mitigated.
That concludes my comments. I will be glad to answer any questions.