The draft legislation prepared by the State Corporation Commission (the "Commission") in response to HB1172 passed by the 1998 General Assembly sets forth a process for the implementation of customer choice in electric service markets. The draft also gives the Commission authority to (1) seek to ensure that effective competition develops for the benefit of consumers to the extent possible and (2) protect consumers from difficulties, both foreseeable and unforeseeable, that may arise from the transition to customer choice.
This summary covers the following subjects:
The draft legislation provides that, by January 1, 2004, "every person may purchase competitive electric services at retail from one or more alternative suppliers." Competitive electric services will not be subject to traditional rate regulation. Section 56-578(A).
By January 1, 2002, the Commission must also establish programs by which customers may shop for electricity, unless the Commission finds adverse effects from such earlier implementation. Section 56-578(D). These programs will be established unless the Commission finds that they will (a) impede implementation of full customer choice by January 1, 2004, or (b) adversely affect nonparticipating customers, safety, reliability, or the incumbent utility's ability to carry out any of its implementation obligations.
Today, the electric service sold by the incumbent utility is a "bundle" of many services. The legislation recognizes this fact by distinguishing several types of services.
For retail electric sales, the legislation mandates customer choice.
For other electric services (examples would be metering, billing, customer service), the Commission may authorize customer choice after a finding that customer choice for that service will promote the public interest.
In General: If an electric service has not been made a competitive electric service by the General Assembly or by the Commission, it is a "noncompetitive electric service." A service also may be declared a noncompetitive electric service if the Commission designates it as such, under the limited conditions described below.
Standards: The Commission may designate a competitive electric service as noncompetitive only if it finds, after notice and opportunity for hearing, that competition for that service "will have a serious adverse effect on the safety, reliability or price of electric service...." Section 56-578(E). If necessary, the Commission can target this finding to particular customer classes or geographic territories.
Commission Reports: A Commission determination that retail sales should be a noncompetitive service must be reported to the General Assembly. Section 56-578(F). If the determination is to take effect on January 1, 2004, the Commission must inform the General Assembly by November 1, 2003; and must report any later determination within thirty days. Also, the Commission must revisit and reevaluate any such determination at least once every two years.
Providers: Where the Commission has determined that a competitive service should be a noncompetitive service, it must (1) select one or more entities to provide the service, and (2) regulate the service under its traditional authority. Section 56-578E(2).
Inevitably, some customers will (1) opt not to exercise their new right to select an alternative supplier of a competitive electric service or (2) be unable to find an alternative supplier willing to serve them. For these customers, the Commission will make available "basic electric service." See Sections 56-577 and 56-579.
Elements: "Basic electric service" will consist of "essential electric services" that the Commission determines should be available to those retail customers who fail to choose or are unable to find an alternative supplier. The Commission would establish the rates, terms and conditions for such services.
Availability: Basic electric service must be available to all customers who do not obtain one or more competitive electric services from an alternative supplier. The service must be available no later than the date that all customers have customer choice.
Providers: The Commission may select one or more companies to provide various components of basic electric service throughout the state. The Commission can require the incumbent utility or its affiliate to provide one or more components of basic electric service within its service territory, at a fair and compensatory rate.
Not necessarily a permanent program: If the Commission determines there is sufficient competition so that the elimination of basic service is not harmful to the public interest, the Commission may eliminate it, but the Commission may reinstate the program if it becomes necessary.
A. General Tools
After decades of monopoly structure, a market cannot become competitive overnight. At the outset, some companies might have "market power." The statute defines "market power" as the power to "impose on customers a significant and nontransitory price increase above the price level which would prevail in a competitive market." Section 56-580(D). The proposed statute gives the Commission three methods for addressing market power so as to protect consumers and promote competition:
1. Protective conditions: The Commission may determine that a market participant has, or is likely to acquire, market power over one or more electric services. The Commission also may determine that an affiliate of a market participant will be able to assist it in acquiring market power. In these situations, the Commission may "institute conditions or limitations" on the activities of the market participant, the affiliate or both. The conditions or limitations can apply to prices charged for such service, or the "ownership or operation of, or sales from, assets or lines of business relating to any electric service provided by the public service company or by the affiliate...." Section 56-580(A). The Commission must limit its conditions to those necessary to protect consumers and promote competition.2. Generation market power: Transmission constraints make it difficult to import electricity into some parts of Virginia. Those who control generation capacity or energy within Virginia may have market power over buyers located in the state. If the Commission finds market power over generation capacity or energy, the Commission may, to the extent not preempted by federal law, require the person to file tariffs with the Federal Energy Regulatory Commission ("FERC"). These tariffs would make generation capacity and energy available to alternative suppliers on terms that protect consumers and promote competition, while affording the person a reasonable opportunity to earn a fair rate of return. Section 56-580(B).
3. Transmission expansion: For generation competition to exist, there must be sufficient transmission capacity at reasonable rates. The proposed legislation allows the Commission to, among other things, require transmission system owners or operators to (1) expand transmission facilities, (2) file tariffs with FERC to make transmission capacity available on terms described by the Commission, and (3) allocate costs of transmission to owners of generation capacity, to the extent these actions are not preempted by federal law. Section 56-580(C).
B. Mixing of Competitive and Noncompetitive Businesses
A seller of noncompetitive services or basic electric service, like a utility today, will have its rates, terms and conditions established by the Commission. As a result of this special status, this seller may have resources available, paid for by regulated rates, which would be useful in a competitive market. Where a seller of a competitive service is an affiliate of a provider of noncompetitive services or of basic service, the competitive seller could gain unfair competitive advantages over unaffiliated competitors. (For purposes of the statute, an affiliate is an entity that controls, is controlled by or is under common control with the person specified.) The draft statute gives the Commission tools to address this problem.
1. Nondiscrimination in Distribution Service: Distribution facilities link transmission systems to consumers. Distribution service, like transmission service, is essential to competition. The Commission is authorized to establish conditions requiring distribution utilities to offer distribution service to alternative suppliers, providers of basic electric service and retail consumers on a nondiscriminatory basis. Section 56-581.2. Affiliate Relationships: Mixing competitive and noncompetitive activities in the same corporation creates dangers to consumers and competition, such as cross-subsidies and preferential access terms. The proposed statute therefore requires a seller of noncompetitive services to place any competitive activities in a separate affiliate, and a provider of basic electric service may be required to do so. Before granting a license to sell a competitive service, the Commission must determine that the affiliate relationship will not impede the development of competition. Section 56-584(C).
C. Mergers, Acquisitions and Consolidations
Even before discussions of retail competition began, mergers and acquisitions involving electric companies were occurring with increasing frequency. This trend is likely to continue as new companies try to enter the market and are acquired by others. Mergers can be efficient, but they also can reduce competition. Present Virginia statutes give the Commission authority to review some mergers. The draft statute updates this authority, applying it to the types of transactions that might occur once customer choice begins.
Transactions and entities subject to review: Of concern are transactions that result in any person obtaining "control" over those entities providing services on which the public is particularly dependent, specifically, providers of basic electric service and noncompetitive electric service. (The statute refers to these providers as "covered entities.") Therefore the Commission would review acquisitions of (1) covered entities, (2) assets, or the products or services produced with such assets, which are or may be essential to the provision of an electric service by a covered entity and (3) affiliates that provide critical support to covered entities. (The various transactions are referred to as "covered transactions.") Section 56-591(A).
Since this provision addresses changes in "control" which will affect the provision of electric service in Virginia, it defines control as the power to determine the management or policies of a person or the management or utilization of assets. Control may be acquired by ownership, contract or otherwise. The statute further states that control may be presumed from 10% ownership of voting rights. Section 56-577.
Commission actions: A person proposing to enter into a covered transaction must obtain Commission approval first, by filing an application. The Commission must act on the application within 60 days, subject to an additional 120 day extension, or it goes into effect as filed. The Commission must approve the application if the transaction will not be harmful to competition or to the safety or reliability of electric service, or impair the provision of any competitive service or basic service at just and reasonable rates. The Commission may establish conditions on the transaction if necessary to achieve these protections. Section 56-591.
D. Monitoring
The Commission must monitor the development of customer choice and submit a report to the appropriate committees of the General Assembly every two years, beginning January 1, 2003. Section 56-587.
To make generation competition work, Virginia will need new institutions that will promote fair and nondiscriminatory access to transmission and generation services.
A. Independent System Operator
The Commission may require that the ownership, control or responsibility to operate all or part of a transmission system be transferred to an "independent system operator." The Commission also can approve transfers if and when proposed by present owners of transmission. The Commission must find that the transfer promotes transmission policies and practices which are reliable, safe, efficient, nondiscriminatory and consistent with the orderly development of competition. The Commission also must make sure that the transferor of the transmission control (probably the incumbent utility) receives fair compensation. Section 56-582(C).
An independent system operator may not be a provider of a competitive electric service, or an affiliate of one, without Commission approval. Section 56-582(E).
B. Power Exchange
The Commission may authorize or require that a public service company join a power exchange for the non-discriminatory trading or exchange of electric power services. The creation of the power exchange will be designed to promote the development of effective competition and prevent the exercise of market power. Section 56-583. Commission action on this subject will not preclude direct contracts between alternative suppliers and customers, however, unless the Commission finds such practice would be adverse to the public interest.
In addition to protection from ineffective competition, consumers will require protection from other potential effects of introducing customer choice.
A. Consumer Protection Rules
The Commission must establish rules to protect consumers from harm. The statute identifies advertising, disclosures, and the initiation and termination of electric service as some of the areas to be addressed in such rules. Section 56-585.
B. Consumer Education
Consumers previously have needed to know little about various electric services because there was only one electric service provider (the regulated utility), and usually only one product (the service provided by that utility). Consumers will have much to learn about what to purchase and how to compare alternative suppliers. The legislation would require the Commission to develop a program to educate customers on these issues. Section 56-586.
C. Licensing
The statute will provide protection for consumers against unqualified and unreliable alternative suppliers by establishing a mandatory licensing process. The Commission will require that licensees are financially viable, have the requisite expertise to provide safe and reliable service, comply with regulations and exhibit procompetitive behavior. Such licenses may be granted without regard to previously franchised territories. Section 56-584.
Today's utility rates include the costs incurred by the utility to carry out the utility's historic obligation to serve customers. In a competitive market, the assets associated with these costs will have value. That value may be lower than the costs, or it may be higher. The statute requires the Commission to determine the just and reasonable treatment of these costs or benefits, taking into account the interests of the utility, customers, and the public interest. In determining appropriate treatment, the Commission must consider (1) the incumbent electric utility's efforts to minimize its costs; (2) the market value of the resources associated with those costs, as well as the utility's efforts to maximize and realize this market value; (3) whether the Commission directed the utility to incur any specific costs; and (4) other factors the Commission deems necessary. Section 56-588.
Once the Commission has determined the just and reasonable treatment of costs and benefits, it must apply that treatment to those customers buying transmission or distribution service from the utility after the date customer choice begins.
To fulfill the goals of the legislation, the Commission will have the authority to promulgate rules and regulations (Section 56-592); order filings with state and federal agencies (Section 56-593); collect information (Section 56-595); and assess against public service companies, their customers and license applicants the costs reasonably incurred by the Commission in carrying out its duties (Section 56-596). The Commission also will have the power, by issuing injunctions and imposing fines of up to $10,000 per day, to enforce compliance with the statute and related Commission rules, regulations and orders (Section 56-594).