CHRISTIAN & BARTON, L.L.P.
(804) 697-4120
lmonacell@cblaw.com

Sen. John C. Watkins, Co-Chair
Sen. Richard J. Holland, Co-Chair
Del. Harry J. Parrish
Del. Kenneth R. Plum
Del. Terry G. Kilgore
Members of the Task Force on Stranded Costs and Related Issues
Sen. Jackson E. Reasor, Jr., Chair, SJR 91 Joint Subcommittee
c/o Division of Legislative Services
General Assembly Building
910 Capitol Street, 2^nd Floor
Richmond, Virginia 23219

RE: Principal Points of Disagreement and Consensus, Draft Matrix of Stranded Cost and Related Issues

Dear Members of the Task Force and Senator Reasor:

As requested at the meeting of the Task Force on Stranded Cost and Related Issues on August 21, 1998, this letter presents the views of the Virginia Committee for Fair Utility Rates with regard to principal points of disagreement and consensus appearing in the draft matrix of stranded cost and related issues.

Role of SCC: The utilities want the SCC merely to be a number counter, with no discretion, no exercise of expert judgement. Rather, their proposed legislation would mandate a legislatively determined, one-size-fits-all mechanism for guaranteed, one-hundred percent recovery of stranded costs and broadly defined transition costs through either a wires charge or a frozen rate set high enough to guarantee such recovery.

In contrast, all other parties, including the Virginia Committee, the SCC Staff, Consumer Counsel, ALERT, and AARP maintain that the SCC, guided by enumerated legislative principles, should determine, using its expertise and based on utility-specific findings and circumstances, (a) the "just and reasonable" degree of recovery by shareholders and reimbursement by consumers of stranded costs and (b) which recovery method is best suited for each utility, including whether a wires charge, frozen or capped rate, other recovery mechanism singly or in combination, is most appropriate.

Elements Included/ "Transition Cost": The utilities attempt to tack on to the stranded cost concept a guarantee of recovery of what they characterize as 'transition cost." They attempt to include within transition costs such things as costs of ISO and RPX formation, retail access pilots, consumer and employee education, downsizing cost, and future increases in environmental cost.

The Virginia Committee, and we believe all other parties other than the utilities, oppose legislation that would guarantee recovery of what the utilities define as "transition costs" through a distribution service or wires charge. Much of such cost appears to be the cost of during business for which there has never been a guarantee, nor should there be now. For example, increased environmental cost for generation is a normal and traditional business risk of those in the business of generating, whether they be regulated or competitive generators and no guarantee for those that have been regulated utilities is appropriate or in the public interest. Cost of ISO formation, to the extent such recovery is appropriate, should be recovered through normal transmission rate regulatory policies and procedures. In short, any bailout of utilities' stranded cost resulting from making their generation services subject to the market should be narrowly defined to include only booked generating assets, booked generation-related regulatory assets, and the cost of purchase power contracts.

Elements Included/Netting: The utilities want legislation to mandate separate quantification and separate one-hundred percent recovery of different categories of what they characterize as stranded cost and transition cost. For example, Virginia Power and AEP want legislation that mandates separate one-hundred percent recovery through a wires charge of generation-related regulatory assets. Both also want legislation that mandates a frozen rate for a relatively short period of time to allow one-hundred recovery of what they characterize as stranded cost related to their booked cost of their own generating asset. Because, however, their proposed legislation would limit the quantification of such stranded cost with respect to their own generating assets to a relatively short period of time, this calculation will not reflect the significant stranded benefits that will exist over the life of such generating assets. Furthermore, Virginia Power proposes a separate wires charge to be trued up each year through the year 2023 for its non-utility generator contracts to provide for separate one-hundred percent recovery of stranded cost related to such contracts. Thus, the utilities propose no netting of the significant stranded benefits over the for life of their own generating assets against the stranded cost that they demand one-hundred recovery for with respect to regulatory assets and, in the case of Virginia Power, also the non-utility generating contracts.

The Virginia Committee and we believe all other parties, including the Commission Staff, ALERT, and AARP, propose, as consistent with HB1172, the netting of all stranded costs and stranded benefits without compartmentalization as advocated by the utilities, which would prevent such netting to the detriment of consumers and to the unfair enrichment of the utilities.

When Stranded Cost Recovered/Relationship to Start of Retail Competition: The utilities want legislation that mandates recovery starting from day one of when any portion of their retail sales of generation services are subject legally to competition, even if no effective competition is present.

The Virginia Committee, ALERT, and AARP would require a SCC finding that the utility seeking recovery will not be able to influence unduly the price of electricity before stranded cost recovery is allowed for that utility.

When Stranded Cost Recovered/Length of Recovery Period: As discussed above with respect to netting, the utilities want legislation to mandate a relatively short period of time relevant to calculating and recovering stranded cost related to their own generating assets because they do not want the significant stranded benefits that will result from their ownership of such generating units during the later years of the useful life of the units to be considered. In contrast, Virginia Power wants guaranteed one-hundred percent recovery through the year 2023 for its non-utility generator stranded cost. Such lopsided and rigid legislative mandates would prevent the SCC from using its judgment, based on the specific circumstances of each utility and based upon specific findings, to determine a recovery mechanism and recovery period that provides for netting of stranded cost and benefits.

The Virginia Committee, and we believe all other parties including ALERT, AARP, and the Commission Staff, would have the legislation direct the SCC to hold hearings to determine the appropriate recovery mechanism for each utility based upon that utility's specific circumstances and the Commission's findings with respect to each such utility.

Frozen or Capped Rates: Most of the utilities, including Virginia Power, want legislation to mandate freezing of the generation rate during a relatively few number of years at a level designed to entitle it to recovery one-hundred percent of any shortfall between its embedded cost of service including a rate of return and what its generation would sell for in the market. As discussed above, because stranded cost for their own generation would be defined in the utilities' legislation only on the basis of looking at this relatively short period of time, the significant stranded benefits from such units over the life of the units would be ignored, unjustly enriching the utilities.

The Virginia Committee, and we believe all of the other parties other than the utilities, do not support legislation that would guarantee a frozen generation rate. Rather, as discussed above, the Virginia Committee and, we believe the other parties besides the utilities, support legislation that would direct the Commission to determine the most appropriate recovery mechanism for each utility based upon that utility's specific circumstances. The circumstances of several of the utilities may, for example, make the most appropriate mechanism, to be determined by the Commission, a capping of either the bundled rate, (bundled to include the generation, transmission, and distribution service), or a capping of the generation rate, with the transmission and distribution rate to be set based upon cost of service as that might be set periodically through the regulatory process. Such a capping of either the bundled rate or the generation rate may provide the most appropriate method of affording consumers rate protection in the situation of a utility that has significant stranded benefits with respect to its own generating assets.

Exit Fees: Utilities, including Virginia Power and the cooperatives, want legislation to mandate that the wires charge to recover stranded cost and what they define as "transition costs" to include future environmental cost, cost of retraining their employees and downsizing, etc., be assessed against customers' past usage of electricity that they no longer consume because in the future they self-generate. This is what they characterize as an "exit fee." In other words, they want legislation that mandates the assessment of a wires charge for non use of the wires because the customer self generates. Thus, these utilities seek protection from competition from self generation, which they have always faced in the past. It is unfair and inappropriate, and against public policy, to protect the utilities against competition from self generation, a type of competition they have always faced, on grounds that they will now face a new form of competition from competitive generation suppliers.

Consumer representatives, including the Virginia Committee and ALERT, oppose legislation that would mandate assessments of a wires charge against the customer on the basis of the customer's past usage, which the customer no longer needs because it self generates.

Mitigation: The utilities want legislation that prohibits the SCC from requiring an electric utility to mitigate purchase power contracts. Moreover, Virginia Power wants legislation to entitle it to recover more than one-hundred percent of stranded cost from non-utility generator contracts. According its proposed legislation, it would receive one-hundred percent of the difference between what it pays the non-utility generator and the market price, plus fifty-percent of the reduction in such payments the utility is successful in achieving through mitigation.

The Virginia Committee, ALERT, the Commission Staff, Consumer Counsel, and AARP would empower the Commission consider the specific circumstances and actions of each utility in determining the "just and reasonable" level of stranded cost recovery based upon, among other enumerated legislative factors, the degree and reasonableness of the utility's efforts to mitigate such stranded cost.

Burden of Proof: The Virginia Committee and believe all other parties support legislation providing that the utility seeking stranded cost recovery has the burden of proving all of the elements necessary for establishing recovery of stranded cost.

Administratively-Determined versus Market-Determined Stranded Cost: The utilities want legislation that would give them complete freedom to divest their generating assets and contracts. At the same time, their legislation would prohibit the SCC from ordering divestiture of generation assets. Thus, under the utilities' proposed legislation the SCC would have neither the discretion nor power to require a market determination of stranded cost.

The Virginia Committee's proposed legislation would require that stranded cost and stranded benefits be determined by considering the results of the actual sale of all or a portion of the utility's interest in generating assets and purchase power contracts in arms' length transactions. Thus, under the Committee's proposed legislation, there would be no administratively-determined stranded costs and stranded benefits.

On behalf of the Virginia Committee, we appreciate this opportunity to provide these additional comments regarding principal points of disagreement and consensus based on the draft matrix of stranded costs and related issues.

Sincerely,

Louis R. Monacell