12/1/98

DRAFT

The Apartment and Office Building Association (AOBA)

As a key premise for electric industry restructuring legislation, AOBA submits that any plan for retail competition in the provision of generation services in Virginia must provide incentives for VOLUNTARY DIVESTITURE of incumbent utility generation assets through open competitive auctions. Use of incentives for this form of voluntary divestiture facilitates restructuring by reducing controversy over proper valuation of utility generation assets and by making the divestiture a business decision for incumbent utilities, not a governmental mandate.

Restructuring legislation must also ensure the establishment of competitive markets before ratepayers are required to pay for costs that may be "stranded" by the transition to competitive offering of generation services. In this context, it must be remembered that Stranded Costs can only occur where competition exists. In other words, in the absence of effective competition there can be no stranded costs and no justification for stranded cost recovery.

Furthermore, legislation must guard against both (a) unfair treatment of investments undertaken by utility shareholders to meet their existing public service obligations and (b) treatments of generation assets which result in utility shareholders deriving Windfall Profits at the expense of consumers.

56-579. Schedule for Transition to Retail Competition

1. September 1, 1999 the SCC renders a determination regarding minimum criteria for effective competition in retail electric generation markets in Virginia for (a) energy and (b) firm generating capacity, as well as specific criteria for utility filings for the implementation of retail competition transition plans.
2. January 1, 2000 commencement of large scale pilot programs for retail competition open to not less than 10% of each utility's total generation service requirements.
3. April 1, 2000 incumbent utilities file retail competition transition plans which provide for: (a) the establishment and maintenance of competitive retail markets for electric generation services (including markets for both electric energy and firm electric generating capacity) unbundled rates for electric services, (b) a full assessment of the market value of all utility-owned generation assets, and (c) a plan for the availability of Customer Choice for at least one-third of customers in each rate class by January 1, 2002 and Customer Choice for all customers no later than January 1, 2004.
4. July 1, 2001 the SCC renders utility-specific orders regarding each utility's transition plans including (a) approval of unbundled rates for electric services, (b) appropriate transition charges, establishment and maintenance of competitive markets, and (c)
5. No recovery of Stranded Costs is permitted for a utility until (a) the SCC certifies that minimum criteria for competitive retail markets have been met within the utility's service territory for both electric energy and firm generating capacity, and (b) Customer Choice is made available to all customers.
6. The appropriate time period for the recovery of net Stranded Costs from ratepayers or the return of net Stranded Benefits to ratepayers shall be determined by the SCC on a case-by-case basis with due consideration to (a) moderation of impacts on customers bills and (b) facilitating the development of competitive generation markets.

56-580. Nondiscriminatory Access to Transmission and Distribution

1. Access to transmission and distribution systems for all, at rates that are just, reasonable and nondiscriminatory.
2. Distribution rates and services are subject to SCC oversight with rate calculated using traditional cost of service principles. Unbundled rates for distribution services shall be established in a manner that reflects only those risks directly associated with the provision of such services.
3. Transmission services subject to FERC oversight (no need for state legislation).

56-582 Regional Power Exchanges:

1. Electricity consumers in Virginia may purchase generation through any RPX or, at their option, direct from a generator/supplier through a bilateral contract.
2. The SCC shall have oversight of the structures and operations RPXs serving Virginia retail markets to the extent necessary to ensure that in no event is an RPX used to impede retail competition.

56-585 Licensure and Regulation of Suppliers of Retail Electric Services:

1. The SCC shall have appropriate regulatory authority over all retail suppliers, marketers, and brokers of retail electric generation services.
2. Retail suppliers of competitive electric services shall be required to demonstrate to the satisfaction of the SCC appropriate financial strength and responsibility, technical expertise, and practical capabilities to comply with all requirements for such suppliers that are established by the SCC for the protection of the public.
3. The SCC shall be authorized to set minimum generation capacity reserve criteria for all providers of firm electric generation services and to require periodic demonstration that each supplier, marketer or broker of firm generation services operating within the state has title to sufficient generation capacity to meet the SCC's minimum firm generating capacity requirements for their existing and projected service requirements.
4. The SCC shall establish reasonable rule and regulations (including codes of conduct) regarding utility interactions with competitive marketers of generation services.
5. In no instance shall an officer or director of a utility also service as an agent, employee, officer, director of an unregulated affiliate that is engaged in the marketing of competitive electric services.

56-586 Supplier of Last Resort and Default Provider:

1. Until further action of the SCC, the utility will retain the obligation to serve customers who are unable to obtain generation from an alternative supplier or who terminate service with (or are terminated by) an alternative supplier of generation services.
2. The SCC may establish criteria for and methods for selecting the entity to be the supplier of last resort and default provider of generation services.
3. Customers who do not use an alternative supplier of generation services will be provided power that is obtained by the distribution utility through competitive wholesale market transactions or the equivalent thereof.
4. The SCC shall establish appropriate penalties to be paid by suppliers who fail to meet their firm power supply obligations.

56-587 Voluntary Aggregation:

1. Any and all customers may voluntarily aggregate their electrical energy and demands for the purpose of negotiating the purchase of electric generation services from any supplier.
2. Customers with multiple accounts may, at their discretion and direction, aggregate and/or assign their generation requirements within and across customer classes so as to maximize their competitive options.
3. As long as all tariff otherwise applicable charges are paid for distribution services, the SCC shall impose no restrictions on the decisions of customers or groups of customers to aggregate loads across utility service territories and across jurisdictional boundaries.

56-591 Transition Costs and Benefits (Stranded Costs/Stranded Benefits)

1. The SCC may not order divestiture of utility assets, but the SCC may provide reasonable incentives for utility divestiture of generation assess in the form either or both (a) the withholding of stranded cost recovery until effective competition in retail generation markets is demonstrated or (b) sales commissions paid to utility shareholders for open auctioning generation assets.
2. The results of a reasonably structured, open, and independently administered auctions of utility generation assets shall be accepted by the SCC as a demonstration of the market value of such assets.
3. If an auction of a utility generation asset is administered by an independent third-party, there shall be no restriction on an affiliate of the utility bidding for the purchase of such assets.
4. The SCC shall limit utility recovery of Transition Costs to demonstrated stranded costs plus those costs actually incurred to facilitate the transition to competitive retail markets for electric services that cannot reasonably be provided by competitive suppliers of generation services.
5. Recoveries of net Stranded Costs and payments of net Stranded Benefits as applicable must be reconciled for each utility with the total Stranded Cost recoveries (or Stranded Benefits payments) determined by the SCC for that utility.

56-592. Wires Charges:

1. The SCC may use wires charges as a means of payment of stranded costs or collection of other transition costs. (Note the word "nonbypassable" is stricken because it is not enforceable. In reality, utilities would have great difficulty collecting revenues from persons or entities that are not current distribution system customers.)
2. Wires charges may be designed to the load characteristics of specific rate classes and of individual customers within rate classes. Wire charges may have both demand and energy components and need not be collected solely on a cents per kilowatt-hour basis.

56-593 Functional Separation

1. Functional separation of generation, transmission, and distribution activities of each incumbent utility shall be achieved not later than January 1, 2001.
2. The SCC shall encourage existing investor-owned utilities to achieve complete financial segregation of their existing generation, transmission and distribution functions by not later than January 1, 2002 such that no direct or indirect cross-subsidies can occur in the pricing of generation, transmission, and distribution services.
3. The SCC shall have oversight responsibility with respect to all transactions (including cost sharing arrangements) between a utility and its affiliates.
4. Sharing of utility operating personnel with affiliates shall be minimized.
5. The SCC shall establish reasonable rules and regulations (including codes of conduct) regarding utility interactions with affiliated entities, including utility interactions with its parent company (i.e., holding company) where the parent company either directly, or through an affiliate or subsidiary, participates in the competitive marketing of generation services within the utility's service territory.
6. In no instance shall the SCC permit the compensation of a utility employee to be influenced by the performance of an unregulated affiliate that is engaged in the marketing of competitive electric services.