Role of SCC

Most parties call for significant involvement of the SCC in implementing General Assembly policy decisions under established guidelines with respect to stranded cost recovery policy. Some utility proposals tend to call for greater specificity with respect to utility entitlements, legislated guidelines, and recovery mechanisms and periods, all of which would reduce the implementation flexibility. On the other hand, the SCC Staff believes that maximum implementation flexibility is appropriate in view of: 1) the uniqueness of circumstances faced by each utility and its customers; 2) the significant complexity and uncertainty surrounding the determination and recovery of stranded costs and stranded benefits; 3) the evolutionary and dynamic nature of electric industry restructuring; and, 4) the potentially substantial public interest impact of such policy.

Elements Included in Calculation

Most utilities have included transition costs (e.g., costs associated with new market structures and employee benefit and retraining) along with stranded cost and benefits. Several other parties, including the SCC Staff, believe stranded costs and transition cost are entirely different issues and should be considered separately. Stranded costs are historically incurred sunk costs or obligations associated with the traditional provision of regulated electric service while transition costs are new or incremental costs associated with restructuring efforts. Because of these differences, vastly different approaches with respect to allocation and recovery of these two types of cost may be appropriate.

It should be noted that Virginia Power's proposal calls for varying treatments of different stranded cost items and directly contradicts an important and generally accepted stranded cost recovery concept -- the netting of total stranded costs and benefits over the remaining useful life of existing assets. Under the Company's proposal, its own generation assets, some of which have remaining useful lives of over thirty years, would be considered for only a three-year period when stranded costs may be expected to be highest or stranded benefits the lowest. This expectation is attributable to the combined factors of 1) a declining financing cost function of capital asset investment as it is depreciated over its useful life and 2) the reasonable anticipation of increasing market prices as any excess generation capacity is more fully utilized to serve load growth. In short, the Company's proposal would totally ignore the probable large stranded benefits that would be realized over the long remaining useful life of many of these assets. At the same time, the Company proposes consideration of stranded costs associated with NUG contracts over the remaining useful lives of such contracts. Further, any mitigation of such NUG contract costs would be shared fifty percent between the Company and customers, thereby, ensuring greater than 100 percent of stranded cost recovery for the Company. The Staff believes that the combined effect of these two components of the Company's proposal would very likely be a significant over-recovery of stranded costs from Virginia consumers.

When are Stranded Costs/Stranded Benefits Recovered & Frozen Rates

The utilities propose specified periods for stranded costs recovery ranging from three to five years with coincident rate cap periods. The SCC Staff believes that specific periods for either stranded costs recovery or rate caps should not be predetermined since both stranded costs and the need for consumer protection through rate caps will in large part be a function of the development of effective competition which cannot be predetermined. The SCC Staff believes that the evolution of an effective competitive market and the elimination of undue market power may be a lengthy process and require consumer rate protection for an extended period of time, perhaps significantly longer than three to five years.

Exit Fees

Alert proposes no exit fees for retail customers who elect to self-generate since customers always have been able to pursue this option. The SCC Staff notes, however, that with industry restructuring, self-generation options may be more attractive than in the past and such a policy, therefore, may result in a greater amount of stranded costs for other consumers to bear.

Stranded Benefits

The proposals of utilities largely ignore or limit consideration of stranded benefits. The SCC Staff believes that the return of stranded benefits to consumers is a symmetrical issue to utility recovery of stranded costs. As a practical, an extended rate cap may be the most effective and realistic way of returning stranded benefits to consumers. At a minimum, stranded costs must be fully reduced by anticipated stranded benefits over the expected useful life of existing generation-related assets. Again, it must be noted that the greatest amount of stranded benefits for a particular asset will logically occur in the later years, when that asset is largely depreciated.

Mitigation and Burden of Proof

The proposals of utilities suggest certain limitations on stranded cost mitigation requirements or a sharing of mitigation savings between shareholders and consumers. The SCC Staff strongly believes that consumers are entitled to 100 percent of any stranded costs mitigation and that utilities must fully shoulder the burden of proof for any proposed stranded cost recovery.

Applicability of Proposal to Electric Cooperatives

Because owners and customers of electric cooperatives are the same, the treatment of stranded costs and benefits issues should consider the uniqueness of the situation. The SCC Staff is not opposed to separate legislative language addressing electric cooperatives.

"True-Up" Mechanisms

Most parties provide for some form of SCC monitoring and adjustment of stranded costs and benefits recovery over a specified recovery period. However, as stated previously, the SCC Staff believes it would be inappropriate to set a predetermined recovery period at this time.