TO: Robert A. Omberg
Division of Legislative Services

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

DATE: September 8, 1998

RE: ALERT Comments on Stranded Costs Issues-- Areas of Consensus and/or Disagreement with Other Stakeholders

On behalf of the Alliance For Lower Electric Rates Today ("ALERT"), we appreciate the opportunity to provide these comments on Stranded Costs Issues as to areas of consensus and/or disagreement with other Stakeholders. As with our comments on the Division of Legislative Services ("DLS") Staff Draft Matrix on Stranded Costs Issues, we have arranged these comments by subject area [e.g., Role of SCC (State Corporation Commission)]. We then set forth what we presently perceive to be major areas of agreement and/or disagreement with the positions of other Stakeholders.

We are not prepared at this time to offer suggestions as to methods for reconciling the Stakeholders' positions, where such reconciliation may possible. Such suggestions as to reconciliation could be read or interpreted to reflect a change in ALERT's position on a particular subject area. As the issues addressed herein are inextricably linked to other restructuring issues, ALERT reserves the right to adhere to or modify its stated positions on these and other issues as the debate moves forward.

Finally, it should be noted that because of the rather "broad-brush" approach to these comments, certain Stakeholders may take issue with ALERT's characterization of their positions on a given issue as neatly falling into one of two categories. ALERT recognizes that details do indeed matter, and that such an approach can lead to gross over-generalizations. Indeed, many Stakeholders' positions, ALERT's included, are not fully capable of being categorized as either "for" or "against" a particular point of view. We do not intend by our remarks to "pigeon-hole" any Stakeholder, or to imply that the issues are as simple or straight-forward as they might otherwise appear herein. Rather, our intent is to provide some very general observations as the members of the Task Force and the Joint Subcommittee consider the Stakeholders' comments on Stranded Costs Issues to date.

1. Role of SCC

a. Stakeholders in Agreement/Alignment with ALERT's Position

• All Stakeholders agree that the SCC should play some role in Stranded Costs and their recovery; major differences as to scope of SCC authority

• ALERT, SCC Staff, Attorney General's Office, Division of Consumer Counsel ("Consumer Counsel"), American Association of Retired Persons ("AARP"), Apartment and Office Building Association ("AOBA"), Consolidated Natural Gas ("CNG"), Virginia Citizens Consumer Council ("VCCC") VA Committee for Fair Utility Rates ("VCFUR"), Washington Gas generally call for more flexibility, authority for the SCC in determining stranded costs and providing for their recovery

• Several Stakeholders, including ALERT, have provided specific legislative factors (principles) for the SCC to apply when determining the amount of recoverable Stranded Costs and Stranded Benefits, while charging the SCC with implementation

b. Areas of Disagreement/Non-Alignment with ALERT's Position

• Virginia Power, American Electric Power- VA ("AEP"), Potomac Edison Company ("Allegheny" or "APS") generally favor a more narrowly prescribed role for the SCC, limiting authority and discretion

2. What Elements Included in Calculation?

a. Stakeholders in Agreement/Alignment with ALERT's Position

1. Level of Specificity

• ALERT, SCC Staff, Consumer Counsel, AARP, AOBA, VCCC, VCFUR, Washington Gas generally call for SCC to determine specific elements of assets and obligations eligible for recovery, based upon equitable principles (e.g., unavoidable, unmitigable, legitimate, verifiable, prudently incurred and administered)

2. Return of Investment(Level of Recovery)/Return on Investment

• ALERT, SCC Staff, Consumer Counsel, AOBA, CNG, VCFUR, do not prescribe a specific level or percentage (e.g., 100%) of recovery, although some refer to equitable principles (e.g., just and reasonable)

• ALERT has proposed that any recovery of stranded costs shall not continue to include a return on such investment, regardless of the level of recovery

• AARP calls for no more than 50% recovery; VCCC calls for customers and shareholders to "share equitably" stranded costs

• Several Stakeholders have not specifically addressed this issue

b. Areas of Disagreement/Non-Alignment with ALERT's Position

1. Level of Specificity

• Virginia Power, AEP, Allegheny, CNG, Cooperatives generally provide more specificity/detail regarding specific costs/categories of costs eligible for recovery

2. Return of Investment/Return on Investment

• Virginia Power, Cooperatives, Washington Gas call for 100% or "full" recovery of investment, but do not specifically address return on investment

• Allegheny calls for 100% recovery, as well as a return on all stranded costs

• AEP, Virginia Power appear to call for recovery to take place through a combination of capped/frozen rates and nonbypassable wires charges (credits)

3. When are Stranded Costs/Stranded Benefits Recovered

a. Stakeholders in Agreement/Alignment with ALERT's Position

• ALERT calls for recovery period to commence when there is effective competition (Consumer Counsel's position appears to be the same), and for SCC to determine length of recovery period under the circumstances present at the time the recovery period begins

• SCC Staff, Consumer Counsel, AOBA, VCCC, VCFUR do not call for a defined recovery period

• Although not defined, CNG calls for no surcharge or recovery mechanism that would delay the development of competitive markets beyond the year 200_

• Cooperatives call for each distribution cooperative to file a recovery plan with the SCC as part of its overall restructuring plan, with the SCC conducting periodic reviews and reconciliation; otherwise, period not defined

• Washington Gas calls for recovery period to commence after SCC hearing and implementation of surcharge, and to last not more than 10 years, unless the SCC finds it necessary

b. Areas of Disagreement/Non-Alignment with ALERT's Position

• Several Stakeholders have provided specific periods of recovery, including

• AARP-commence in 2002; no more than a 10-year recovery period

• AEP-commence in 2002, end in 2005, contingent upon the full and successful establishment of an ISO on or after 1/1/01

• Allegheny-5 years after implementation date, unless extended by the SCC (up to 7 years) or mutually agreed upon by the utility and the customer

• Virginia Power-3-year period for generation-related assets; costs associated with "mandated" "obligations" recovered through wires charge/credit, generally over the term of the obligation

4. Frozen Rates

a. Stakeholders in Agreement/Alignment with ALERT's Position

• ALERT (reviewable and adjustable, for each customer class), AEP (generally exempt from regulatory review) call for price caps

• SCC Staff calls for an extended embedded-cost rate freeze or rate cap

• Washington Gas agrees with SCC position on rate caps (v. freezes)

• Several Stakeholders do not specifically address the issue

b. Areas of Disagreement/Non-Alignment with ALERT's Position

• Allegheny (per Staff Matrix) calls for 5-year rate freeze at existing levels

• AOBA does not support a price cap or price cap formula

• Virginia Power calls for 3-year frozen rates

5. Exit Fees

a. Stakeholders in Agreement/Alignment with ALERT's Position (specifically addressing exit fees, as opposed to wires charges)

• ALERT calls for no exit fees for those who elect to self-generate, and no exit fees in addition to opportunity for recovery of Stranded Costs

• Several Stakeholders do not explicitly address or call for exit fees

b. Areas of Disagreement/Non-Alignment with ALERT's Position

• Allegheny, Cooperatives, Virginia Power support an exit fee

• AOBA appears to support charging customers who elect to self-generate or who physically bypass the incumbent's system to obtain power from a third party

6. Completion of Transition Period

a. Stakeholders in Agreement/Alignment with ALERT's Position

• ALERT calls for the transition period to end, for purposes of Stranded Costs/Stranded Benefits recovery mechanism and the deregulation of generation facilities, when there is Effective Competition (no date certain); the recovery period for Stranded Costs/Stranded Benefits may extend beyond Transition Period

• AOBA, while not explicitly calling for a transition period, calls for on-going findings of effective competition and a suspension of stranded costs recovery if effective competition no longer exists

• Several Stakeholders, including the SCC Staff and Consumer Counsel, do not call for an explicit end to the transition period

b. Areas of Disagreement/Non-Alignment with ALERT's Position

• (?)AARP calls for a 10-year recovery period

• AEP considers the transition period complete on 1/1/05

• Allegheny appears to consider the transition period to be complete 5-7 years after implementation of the Competitive Transition Charge, with some surcharges extending beyond the period

• Virginia Power appears to call the transition period complete three years after implementation of the frozen rate, or 12/31/06, whichever is earlier, with a wires charge continuing after the period

• (?) Washington Gas considers the 10-year recovery period to be the transition period as well

7. Stranded Benefits

a. Stakeholders in Agreement with ALERT's Position

• ALERT, SCC Staff, Consumer Counsel, VCFUR, Washington Gas support Stranded Benefits recovery

• Virginia Power's proposal appears to flow back any excess revenues received from the sale of electric energy purchased pursuant to purchase power contracts

• Several Stakeholders do not explicitly address Stranded Benefits

b. Areas of Disagreement with ALERT's Position

• AEP opposes Stranded Benefits recovery

• Virginia Power appears to oppose Stranded Benefits recovery with regard to its generation assets

8. Mitigation

a. Stakeholders in Agreement/Alignment with ALERT's Position

• All Stakeholders appear to agree in principle that Mitigation should be a consideration; wide divergence, though, as to degree of specificity as to actions

• Consumer groups generally favor more specificity as to mitigation measures, and electric utilities generally favor less specificity

• AEP appears to contemplate mitigation taking place during and through rate cap period

1. Divestiture as means of mitigation

• Several Stakeholders do not explicitly address as a mitigation measure

• ALERT, AARP, VCCC, VCFUR appear to either require or support divestiture as a mitigation mechanism

• Cooperatives appear to support the sale of idle or under-utilized existing rate-base generation assets

b. Areas of Disagreement/Non-Alignment with ALERT's Position

1. Divestiture as a means of mitigation

• Allegheny, Virginia Power appear to oppose any obligation or requirement to divest, although the utility may choose to divest

9. Standard or Burden of Proof When Determining Recovery of Stranded Costs

a. Stakeholders in Agreement/Alignment with ALERT's Position

• General consensus that the entity seeking recovery bears the burden of proof

• Standards vary in specificity and comprehensiveness, with consumer groups generally favoring greater specificity and comprehensiveness as to required showing for recovery, and utilities favoring less specificity

b. Areas of Disagreement/Non-Alignment with ALERT's Position

• None specifically noted other than as above

10. Applicability of Proposal to Electric Cooperatives

a. Stakeholders in Agreement/Alignment with ALERT's Position

• ALERT proposal does not apply to a cooperative that provides service only to its own members

• Cooperatives address their stranded costs through amendments to the sections of the VA Code dealing with cooperatives

b. Areas of Disagreement/Non-Alignment with ALERT's Position

• SCC Staff, Consumer Counsel, Virginia Power, AEP, Allegheny, AARP, appear to explicitly or implicitly apply Stranded Costs provisions to cooperatives

11. "True-Up" Mechanisms

a. Stakeholders in Agreement/Alignment with ALERT's Position

• Stakeholders generally provide for (or acknowledge) a "true-up" mechanism, although there is rather wide divergence among the Stakeholders regarding the degree of latitude and authority given to the SCC

• Generally, consumer groups, new entrants, the SCC Staff and Consumer Counsel favor more latitude and authority for the SCC to make adjustments to any stranded cost recovery mechanism, while electric utilities generally favor more restrictions on SCC authority

b. Areas of Disagreement/Non-Alignment with ALERT's Position

• None, other than as noted above

On behalf of ALERT, we again appreciate the opportunity to provide these comments on the Stakeholders' positions concerning the Stranded Costs Issues covered in the DLS Staff Draft Matrix. Should you have any questions, please give us a call. You may also direct any questions to Tom Nicholson at (804) 783-6904.