The Division of Consumer Counsel, Office of the Attorney General ("Consumer Counsel") appreciates this opportunity to present comments on behalf of consumers to the Members of the Joint Subcommittee Studying Electric Utility Restructuring (SJR 91) ("Joint Subcommittee") concerning the proposed electric restructuring plans for Virginia submitted by other parties on June 30, 1998. The comments presented herein are designed to identify any areas of consensus on major issues as reflected in the comments of other parties and to set forth Consumer Counsel's recommendations for the restructuring of the electric utility industry serving Virginia consumers. Consistent with the Joint Subcommittee's instructions, Consumer Counsel's comments are offered in a format based on Senate Bill 688.

Article 1 – General Provisions

§ 56-578. Applicability; Municipalities
Most parties believe that municipal utilities should be able to opt out of (or be exempt from) retail competition as long as such utilities do not sell power outside their existing service territories. Conversely, most parties agree that municipal utilities that do choose to participate in retail competition should be required to open up their systems to competition from other suppliers. Consumer Counsel recognizes the unique jurisdictional and ownership factors that must be considered in crafting policy regarding the treatment of municipal utilities in a deregulated electric industry. While Consumer Counsel believes that all consumers should have equal opportunity to choose their power supplier once retail competition is introduced in Virginia, we also concur with the majority opinion that municipal utilities should have the option to continue serving their existing customers in the event such utilities agree not to participate in competition for retail customers in other areas.

§ 56-579. Schedule for transition to retail competition; Commission authority

a. Timetable
The parties expressed a range of opinions regarding the timetable that should be established for introducing retail competition in Virginia. Virginia Power suggested following the proposed schedule set forth in House Bill 1172 that calls for a phase in of competition beginning 1/1/2002 and concluding with full competition on 1/1/2004. ALERT suggested an extremely aggressive schedule that would allow competition to commence on 7/1/2000 and to be fully operational one year later. Several other parties, including the Co-ops, MEPAV, SELC and the SCC Staff, generally indicated that the date of commencement of retail competition should not be pre-specified but rather should arise only when the proper conditions and infrastructure required to allow real competition are in place. There is much to be accomplished (ISO, RPX, mitigation of market power, alleviation of transmission import constraints, unbundling of rates and services) before retail competition can be effectively introduced in a manner that benefits Virginia consumers. Consumer Counsel recommends that the SCC retain the right to defer the dates for the introduction of retail competition in Virginia, in the event that the pre-conditions for accomplishing real competition have not been met.

b. Phase-in by customer class, or concurrent commencement for all customer classes
Most of the parties generally expressed support for concurrent commencement of competition for all customer classes. Virginia Power, however, proposes a multi-year phase-in of competition, beginning with the industrial class, then the commercial class and finally the residential class. Consumer Counsel agrees with the majority opinion that, when it is appropriate for retail competition to commence, all consumers should have concurrent access to the competitive market.

c. Linkage between ISO/RPX readiness and retail competition
Virtually all of the parties agree that ISO/RPX readiness is a necessary pre-condition of the introduction of full retail competition in Virginia. Consumer Counsel agrees with this majority position.

d. Linkage between retail competition in Va., and in other states served by same regional ISOs
The large majority of the parties indicated that there should not be any linkage between the introduction of retail competition in Virginia and the introduction of competition in other states served by the same regional ISO that ultimately serves the Virginia market. Consumer Counsel concurs with this majority opinion. The ISO serving Virginia will likely include many states with varying interests and incentives to pursue retail competition. Even if all states allow retail competition by the time Virginia is ready to introduce competition in its electric industry, the terms under which competition is allowed in each state may vary widely. Given these factors, it may be unwise and unnecessary to delay potential benefits of competition for consumers in Virginia in the event that other states have not similarly allowed retail competition in their respective jurisdictions.

e. SCC authority to vary time schedule
Consumer Counsel agrees with the overwhelming majority position of the parties that the SCC should retain the authority to vary the time schedule for introduction of retail competition in Virginia. Without this authority, consumers in Virginia could be faced with the risk that they will be forced to take service from a non-regulated near-monopoly supplier once the market is deregulated. It is likely that electricity prices will increase from the current regulated rates if this were to occur.

f. Mandatory baseline rate cases
Most parties indicated that there is a need for base rate cases to establish baseline rate levels prior to the introduction of retail competition. Virginia Power commented that such baseline rate cases are not required in light of the fact that its recently adopted multi-year rate freeze extends through March 1, 2002. The Company noted that March 1, 2002 is several months after the HB 1172 proposed date for the initial introduction of retail competition in Virginia. Consumer Counsel agrees with other parties that, at minimum, a baseline rate case will be necessary to address unbundled rates; baseline rate levels for transmission, distribution and other services that will remain regulated; recovery of stranded costs or benefits; and other changes in rates brought on by the introduction of retail competition in Virginia.

g. Rate freezes in mitigation of stranded costs
Consumer Counsel believes that appropriately structured rate freezes may be an appropriate means to accomplish mitigation of potential stranded costs and benefits during the period of transition to a competitive market. The recent Virginia Power rate plan provides one example of how such plans can be structured to allow mitigation of potential stranded costs and benefits. Consumer Counsel believes that ultimate recovery of potential stranded costs and benefits must be subject to a later determination that such stranded costs are prudently incurred, verifiable and non-mitigable. In the event that earnings set aside for mitigation of potential stranded costs are ultimately determined to exceed the level of stranded cost recovery allowed by the SCC, such amounts should be immediately returned, with interest, to Virginia consumers. Furthermore, until the time real competition exists in Virginia, there will be no stranded costs.

h. Preliminary wholesale competition
Most parties indicated that wholesale competition has already been introduced and should continue to benefit retail consumers in Virginia during the transition to full retail competition. Consumer Counsel agrees with this majority position.

i. Unbundling
The majority of the parties agree that unbundling of rates and services is a necessary precursor to the introduction of retail competition in Virginia. Consumer Counsel agrees and urges that hearings to address the unbundling of rates and services commence, at the SCC, at the earliest opportunity. Experience in other jurisdictions has shown that the unbundling process can be extremely complex and contentious, therefore substantial lead-time is needed to address this important issue.

j. Pilot Programs
Most parties support the use of retail pilot programs as a means to begin to educate consumers and to develop hands-on experience with programs and information systems needed to implement retail competition. Consumer Counsel supports the implementation of retail pilot programs for these limited purposes, but cautions that the results of these pilot programs should not be relied upon as a means of demonstrating the costs or benefits of retail competition.

§ 56-580. Nondiscriminatory access to transmission and distribution system

a. Delineating jurisdictional limits of SCC and FERC
Virtually all parties indicated that the FERC has jurisdiction over interstate transmission while the SCC shall retain jurisdiction over local distribution service. Consumer Counsel concurs with this majority position.

b. Transmission import constraints
The parties expressed different opinions regarding the means for mitigation of transmission import constraints that may limit the development of competition in the Virginia retail generation market. Virginia Power and AEP indicated that the FERC and the ISO will ultimately work to address any significant transmission import constraints. The Virginia Cooperatives and other parties expressed concern regarding the ability of the ISO to effectively address transmission import constraints and noted the critical importance of this issue to the development of a competitive retail market in Virginia. Consumer Counsel agrees with the view of these parties, that the SCC should be empowered to require incumbent utilities in Virginia to address transmission import constraints that will impede the development of real competition within Virginia. While an ISO may be successful in identifying such constraints, it is not clear that an ISO can effectively require a utility to make the investments necessary to alleviate the constraint, particularly in instances where that utility directly benefits from the constraint. The SCC should have the authority to require Virginia utilities to make the necessary investments in transmission facilities to alleviate existing transmission import constraints into the Virginia market.

c. Regulation of transmission rates where transmission is constrained
Most parties agree that, depending upon the type of entity controlling transmission, the FERC and/or SCC will continue to regulate transmission rates, regardless of whether a transmission constraint exists. The Virginia Cooperatives further note that generation rates should remain regulated in instances where transmission is constrained and results in market power. Consumer Counsel agrees with both of these positions.

§ 56-581. Independent System Operator; roles and functions
The jurisdictional split between the SCC and the FERC over various aspects of ISOs and their governance is unclear. At the request of the Subcommittee, the Office of the Attorney General is submitting to the FERC a request that it delineate its authority over ISOs and their governance. Virtually all parties agreed that the role of the ISO should be to ensure nondiscriminatory access to the transmission system and to operate the transmission system in a manner that facilitates competition in generation markets while maintaining system reliability. Consumer Counsel agrees with this majority position.

a. ISO board composition
Virtually all parties agreed that the ISO's governance board should be structured to insure independence and to provide input or representation by all stakeholders. The Virginia Cooperatives further stated that the majority of the ISO Board should have no financial interest in any entities whose assets are controlled by the ISO. Consumer Counsel agrees with these positions and recommends that the SCC and Virginia consumers should have representation on the ISO board that ultimately controls transmission service to the Virginia market.

b. ISO conformity to Va. Public interest standard
The majority of the parties expressed the opinion that the SCC would and should have input to and influence over the ISO development and governance. Because many states with varied interests will be participants in the ISO, it would be impractical to expect the ISO to conform solely and strictly to the public interest of Virginia or any other state. Accordingly, Consumer Counsel believes that the SCC can and should take certain actions to ensure that the ISO serves the Virginia public interest to the extent practicable. These actions should include active participation in the ISO governance; establishment of guidelines that specify the SCC's expectations with regard to the participation by Virginia utilities in the ISO; and continued oversight of transmission siting and planning issues within the Virginia jurisdiction.

c. SCC oversight of ISOs after their implementation
The majority of the parties indicated that, at a minimum, the SCC should continue to have oversight and influence over ISO activities through participation in ISO governance, their ability to intervene in ISO related proceedings before the FERC and through continued jurisdiction over transmission siting within the state. Consumer Counsel agrees with this position.

d. ISO coordination with load serving entities (LSEs); voltage stability, generation reserves, etc
Virtually all parties agreed that the ISO should have primary responsibility for coordination with load serving entities for matters such as voltage stability, generation reserves, transmission upgrades and reliability. The AOBA noted in their comments that the SCC should retain oversight over the reliability of service provided by power marketers and generating reserve requirements maintained by all firm power suppliers. Consumer Counsel generally agrees with these positions, and adds that it may be appropriate for the SCC to retain some oversight over the reliability of all power suppliers, not just power marketers. We further caution that the ability of the SCC to actively monitor or enforce generating reliability will be very difficult given the large number of suppliers that will hopefully exist once the market is fully deregulated. As such, we believe that the ISO should retain primary responsibility for these functions.

e. Identification and obligations of must-run units
The majority of the parties agreed that the ISO should have primary responsibility for identification and obligations of must-run units. Consumer Counsel agrees with these positions. We caution the need to ensure that ISOs be held accountable to some regulatory body.

f. Eminent domain
Virtually all parties agreed that the power of eminent domain and rights of condemnation for new transmission and distribution facilities should remain under the oversight of the SCC and the State. Consumer Counsel agrees with this majority position. However, the current legal structure governing eminent domain should be evaluated for its appropriateness/effectiveness in light of the many utilities that will exist in a truly competitive market.

§ 56-582. Regional power exchanges; miscellaneous comments
Several parties offered comments regarding the need, structure and pricing of power under an RPX. Allegheny Power, MEPAV and AOBA noted that an RPX may not be needed and its development, if at all, should be left to market forces. Consumer Counsel notes that an RPX may be necessary to provide sufficient access to competitively priced power by smaller consumers. Furthermore, while market forces should play a major role in the development of the RPX, SCC oversight and participation in the RPX development process is needed to ensure that parties with vested interest in the RPX are not able to structure the RPX to the advantage of suppliers.

a. RPX conformity to public interest standard
The parties expressed a mix of opinions on the issue of whether the RPX should be required to conform to a Virginia public interest standard. ALERT stated that the involvement of Virginia utilities in the RPX should be subject to SCC approval. Virginia Power and AEP stated that RPX development should be left to market forces and that there should be minimal involvement by the SCC or the FERC in this process. The Virginia Cooperatives suggested that the SCC should influence development of the RPX through participation in relevant FERC proceedings, participation on advisory boards and through exerting its authority over the siting of generation in Virginia. Consumer Counsel generally agrees with the positions of ALERT and the Virginia Cooperatives. Consumer Counsel is concerned that any legislation permit the RPX to develop in a manner that ensures truly competitive pricing of generation and full access to such competitively priced power by smaller consumers. To this end, Consumer Counsel recommends that the SCC have input on the basic structure of the RPX. Additionally, the SCC should closely monitor the results of the RPX operations, and exert its influence over those operations to the extent possible, through participation in advisory groups and continued authority over generation siting and other related issues.

b. Bilateral contracts between suppliers and customers
Many parties agreed that bilateral power contracts should be allowed between suppliers and consumers even after an RPX has been established. Consumer Counsel does not oppose this majority position. The preservation of a bilateral market option is one important means to ensure competitive functioning of the RPX.

c. RPX relationship to electric cooperatives and municipal suppliers
All parties agreed that electric cooperatives and municipal utilities should be permitted, but not required, to participate in the RPX. The Virginia Cooperatives expressed concerns that their participation in an RPX could jeopardize tax-exempt status, thus resulting in unnecessary price increases to consumers. Consumer Counsel agrees with the majority position that electric cooperatives and municipal utilities should be permitted but not required to participate in an RPX.

d. Pricing of generation from must-run units
Most parties indicated that generation from must-run units should remain subject to SCC (or FERC) jurisdiction and priced under cost-based principles. Consumer Counsel agrees with this majority position.

§ 56-583. Transmission and distribution of electric energy

a. Equality of treatment between incumbent utilities and new market entrants
All parties agreed that all market participants should have equal rights and responsibilities with regard to the transmission and distribution of electric energy once retail competition is fully implemented. The parties noted that the ISO, backed by the FERC, should ensure equal access for transmission service. AOBA stated that the SCC should develop codes of conduct governing incumbent utility actions regarding provision of distribution services to affiliate and non-affiliate suppliers. Consumer Counsel agrees with the majority position that all market participants should have equal access to transmission and distribution service and generally supports the adoption by the SCC of codes of conduct designed to prevent affiliate abuses in the provision of distribution services.

b. Eminent domain under SCC oversight
Again, virtually all parties agreed that the SCC and the State should retain their existing oversight over powers of eminent domain and rights of condemnation for new transmission and distribution facilities. Consumer Counsel agrees with this majority position. However, the legal structure governing eminent domain should be evaluated for its appropriateness/effectiveness in light of the many utilities that will exist in a truly competitive market.

c. Siting of merchant plants; role of SCC
The majority of parties stated that the SCC should retain authority over siting of new generation facilities but that the public interest test for approval of such applications should be modified. Consumer Counsel generally agrees with this majority position.

d. Preservation of current IOU, cooperative and Muni distribution service territories
All parties agreed that existing distribution service areas should remain intact and that distribution of generation to end use customers should remain a regulated monopoly service. Consumer Counsel agrees with this position.

§ 56-584. Regulation of rates subject to SCC jurisdiction

a. Services subject to regulation, and those subject to competition
All parties agreed that generation should ultimately be subject to competition, and most parties agreed that transmission and distribution services should remain fully regulated. CNG, AOBA and SELC stated that metering, billing and other related distribution services should be subject to competition. Consumer Counsel agrees with the majority position that only generation services should be considered for deregulated, at least for the foreseeable future. The potential for savings due to the introduction of competition in metering and billing services are likely to be much lower than savings in the generation supply market. Accordingly, the deregulation of such distribution services should be subjected to further study and, if determined to be in the public interest, phased in after the generation market is fully deregulated and functioning effectively.

§ 56-585. Licensure of retail electric energy suppliers
Consumer Counsel agrees with the majority position that the SCC should have full authority over registration and licensing of potential suppliers. Consumer Counsel also agrees that the SCC should establish licensing standards and reporting requirements to establish that all suppliers have adequate financial resources to ensure delivery of power to consumers pursuant to offered pricing terms and in a reliable manner. Periodic relicensing of suppliers should be considered.

§ 56-586. Suppliers of last resort; default suppliers; backstop providers
The parties offered a range of opinions regarding who should serve as the suppliers of last resort, default suppliers and backstop providers once generation markets are deregulated. Virginia Power, AEP, Allegheny, the Virginia Cooperatives and MEPAV all indicated that the incumbent local distribution service provider should continue to provide such services. ALERT, CNG, SELC and VCAP generally indicated that such services should be provided competitively, whether provided by the incumbent distribution service provider or through some other process. Consumer Counsel believes that during the period of transition to a fully deregulated market, the local distribution service provider should have the responsibility for providing supplier of last resort, default supplier and backstop services, with continued SCC oversight over the reasonableness of charges for such services. After the market is fully deregulated and functioning properly, as determined by the SCC, such services should continue to be provided by the incumbent distribution service provider but procured from the RPX or through some other competitive bidding process.

§ 56-587. Voluntary aggregation permitted
Consumer Counsel agrees with all other parties that voluntary aggregation should be permitted and encouraged as an important means to provide access to competitively priced power supply services for small consumers.

§ 56-588. Metering, billing and other distribution services
The parties expressed a wide range of opinions with regard to deregulation of metering, billing and related distribution services. ALERT, AEP and SELC stated that such services should be provided competitively. Virginia Power, Allegheny Power, the Virginia Cooperatives and MEPAV indicated that such services should continue to be regulated and supplied by the distribution service provider, at least during the transition to a fully competitive market. CNG and Washington Gas indicated that introducing competition for such services should be considered. Consumer Counsel is concerned that the potential savings from introducing competition for such services may be very small and, therefore, insufficient to offset the risk that costs would increase in the event that adequate competition does not materialize. There are many other serious and more important issues that must be addressed to accomplish effective competition in generation supply markets. Accordingly, Consumer Counsel recommends that such distribution services continue to be regulated and provided by the incumbent suppliers during the period of transition to deregulated generation markets. After generation markets are fully deregulated and functioning properly, the SCC should revisit the appropriateness of deregulating these services.

§ 56-592. Non-bypassable wires charges
Virtually all parties generally support the use of non-bypassable wires charges for the recovery of transition costs created by the move to a competitive market. Consumer Counsel recognizes that the use of a properly designed non-bypassable wires charge is one way to recover prudently incurred, verifiable and non-mitigable transition costs.

§ 56-593. Divestitures; functional separation and other corporate relationships

a. Divestiture to create a competitive generation market
All parties with the exception of SELC and VCAP opposed mandatory divestiture of generation assets as a means to address market power and to facilitate a competitive power market. Consumer Counsel cautions that, if generation divestiture is required prematurely (before the likelihood of a fully competitive market exists), it could result in highly discounted plant values. In such cases divestiture would serve to increase rather than mitigate stranded costs.

b. Functional separation of generation and distribution
The majority of parties indicated support for the functional separation of generation, transmission and distribution services. Consumer Counsel supports these positions.

c. Relationships between suppliers or distributors and their affiliates
Virtually all parties support the SCC establishment of codes of conducts to govern transactions between affiliated generation, transmission and distribution service providers. Consumer Counsel supports this majority position.

d. Mergers and acquisitions
Consumer Counsel supports the majority of parties' position that mergers and acquisitions must be closely scrutinized to ensure they do not adversely impact the development of competition in retail generation markets, particularly in regions such as Virginia where substantial market power concerns exist. Consumer Counsel agrees that existing provisions for regulatory oversight of mergers and acquisitions by the SCC, FERC and Justice Department and the Office of the Attorney General should be maintained.

§ 56-594. Legislative Transition Task Force
The majority of parties support the continuation of the Joint Subcommittee during and after the transition to competition to work collaboratively with the SCC in providing a legislative policy oversight function. Consumer Counsel agrees with this majority position.

OTHER ISSUES

Mitigation of Market Power
There were a wide range of opinions on the need and means for mitigation of market power in Virginia. ALERT recommended incentives to encourage construction of merchant plants and distributed generation as means to mitigate market power. Virginia Power and AEP stated that market forces and FERC oversight will serve to appropriately mitigate power. The Virginia Cooperatives and VCAP stated that as long as market power exists, generation pricing should be constrained to regulated cost of service rates. Washington Gas supported a comprehensive study to examine generation divestiture and other potential options to mitigate market power in Virginia. As noted in its previous comments to the Joint Subcommittee, Consumer Counsel believes that Virginia faces substantial structural market power concerns due to transmission import constraints and the high concentration of generation ownership by incumbent utilities serving the state. Until market power is appropriately mitigated in Virginia, Consumer Counsel supports the position expressed by the Virginia Cooperatives and VCAP that generation pricing should be constrained to no greater than the regulated cost of providing generation supply services.

Consumer Counsel appreciates the opportunity to present its comments on structure and transition issues to the Joint Subcommittee Studying Potential Changes In Restructuring The Electric Utilities Industry In The Commonwealth (SJR 91). We stand ready to provide any assistance the subcommittee may desire.