In anticipation that other speakers will provide more-than-ample detailed recommendations for the benefit of electricity consumers under retail competition legislation, may we take a different approach: a step back to examine some of the bigger policy issues of interest to the electricity consumer members of ALERT. This is timely because your Joint Subcommittee has done an excellent job of (i) having all of the issues put on the table for discussion and (ii) obtaining from the interested parties their recommendations on each of those issues. (iii) Now, over the next few months, you will be formulating your policy recommendations to the General Assembly.

As we indicated last week to your Structure and Transition Task Force, there is a lot of consensus on most of the issues to the point where drafting legislation on those many points is now practical to help iron-out any remaining differences in detail. But, as we also indicated, there are some key issues on which there are significant differences of opinion issues on which you will be making those very important policy decisions these next few months.

As you know, our goal remains to have the implementation of effective competition in the Commonwealth as soon as practical.

You know well the reasons ALERT feels we need to implement retail competition as soon as practical:

• Each year's delay costs Virginia electricity consumers millions of dollars e.g., $867 million annual savings in Virginia with a 17% reduction on electricity costs anticipated under the independent Regional Financial Associates' study or $510 million in savings each year under a more conservative 10% reduction which is more in line with the 8%-15% price reduction anticipated in Virginia per the recent study by the Energy Information Administration of the United States Department of Energy.
• The loss of a competitive advantage over other states that will be lowering the electricity costs for their businesses and residents through competition e.g., 18 states have now enacted restructuring legislation or had comprehensive restructuring regulatory orders entered per the attached information from the Energy Information Administration.
• Virginia business and residential consumers having a choice, with their rates being set by competition and not regulation.
• Putting in place a system most advantageous to Virginia on our timetable, not under some mandate.

In addition to desiring retail competition as soon as practical, ALERT feels that our retail competition system must also assure effective competition. The details of the implementing legislation are very important; it is even more important, however, that those details result in effective competitive. We are confident that can and will be done here in the Commonwealth.

Let us look at what we believe are the five keys to effective competition.

To have effective competition, these five issues must be properly addressed by the General Assembly and the State Corporation Commission.

1. MARKET POWER. If an incumbent utility has market power (regardless of the nature or cause of such market power), there will not be effective competition and electricity will be purchased from an unregulated monopoly to the detriment of all consumers. To prevent market power abuses, the following must be addressed:

• Transmission constraints and load pockets.
• Generation capacity limitations.
• Identification and pricing of must-run units.
• Stranded costs payments. (The extent and nature of stranded costs payments by consumers to incumbent utilities itself can create market power.)
• Anti-competitive behaviors, e.g., strategic bidding; capacity withholding; etc.
• Assuring that action by the Commonwealth regarding market power does not create a state action immunity for anti-competitive behavior.
• Barriers to entry of new transmission, generation and power marketers.
• Ability of new entrants to compete with owners of largely depreciated generation plants (existing stranded margins).

2. STRANDED COSTS. As the treatment of stranded costs can prevent the development of effective competition from a practical standpoint, the following is recommended:

• General Assembly establishes appropriate definition/scope of stranded costs as part of a comprehensive restructuring plan.
• SCC determines if effective competition exists; as such, effective competition is a precondition for the possibility of stranded costs recovery.
• SCC determines the amount of stranded costs on a fact-specific basis.
• SCC determines whether electricity ratepayers or shareholders of a utility pay what portion of stranded costs and during what timeframe.

3. RELIABILITY. Effective competition also involves the providing of reliable electricity supply by the marketplace; this will involve the following:

• Appropriate structure and authority for ISOs.
• Appropriate structure and authority for RPXs.
• Appropriate FERC and SCC regulatory oversight.
• Licensing and other standards.

4. DEREGULATION OF ASSETS. Simply put, deregulation of generation facilities before there is effective competition will cause market power problems. Please consider:

• "Deregulation" is actually a misnomer: a Virginia law providing for "deregulation of generation facilities," without more, merely divests the SCC of authority to protect Virginia's retail consumers.
• Generation would be still regulated, but by FERC which only regulates wholesale sales, such as would take place through the Regional Power Exchange (RPX); FERC has no jurisdiction over retail generation sales.
• FERC tests of market power do not protect Virginia's retail consumers; thus if market power problems are not resolved prior to "deregulation," the SCC cannot protect retail consumers from the resulting deregulated monopoly.
• Once jurisdiction is given up, Virginia may not be able to get it back.
• There is also a question regarding the practical capabilities of FERC to identify, supervise and rate-regulate all the must-run units in the country.
• Solution: state deregulation of generation facilities should be conditioned upon an SCC finding of effective competition.

5. FAIL-SAFE PROTECTIONS. There should be built into an effective competition system, certain "fail-safe" protections for electricity consumers; examples include the following:

• SCC role in determining when effective competition exists
• Supplier of last resort, default provider and other universal service issues
• Stand-by rate protection for residential and other small customers

Are these five highlighted keys to effective competition insurmountable problems? Absolutely not. What we recommend is passage of comprehensive restructuring implementation legislation that puts in place the timetables, principles and framework of retail competition for the Commonwealth, but which recognizes that restructuring cannot take place merely by legislative fiat and is not a one-time legislative decision. In fact, Virginia needs both legislative policy mandates and transitional, regulatory implementation.

We conclude by highlighting for you two separate comments from the recent report of the SCC to your Structure and Transition Task Force that we believe summarize well your decisions over the next few months:

"The Commission Staff believes, as do many others, that competition is clearly superior to regulation and that competition will generally lower costs and increase innovation." For ALERT, this is competition as soon as practical.

"The Commission Staff believes that a prudent competitive transition plan should not treat restructuring as a one-time, final decision and that an appropriate plan would provide for a diminishing level of regulation that corresponds with an increasing level of competition. Such an approach recognizes that competition for electricity will not be established over night and that competition must be allowed to evolve." For ALERT, this is assuring effective competition.

ALERT looks forward to working with you in this continued effort to implement effective competition for Virginia electricity consumers as soon as practical.

Ralph L. "Bill" Axselle, Jr. (804) 783-6405
Reginald N. Jones (804) 783-6468