JOINT SUBCOMMITTEE STUDYING
REPORT OF THE
RESTRUCTURING OF THE
ELECTRIC UTILITY INDUSTRY
TO THE GOVERNOR AND
THE GENERAL ASSEMBLY OF VIRGINIA
SENATE DOCUMENT NO. 34
COMMONWEALTH OF VIRGINIA
RICHMOND
1999
Sen. Jackson E. Reasor, Jr., Chairman
Del. Clifton A. Woodrum, Vice Chairman
Sen. Richard J. Holland
Sen. Thomas K. Norment, Jr.
Sen. Kenneth W. Stolle
Sen. John C. Watkins
Del. Eric I. Cantor
Del. Jerrauld C. Jones
Del. Terry G. Kilgore
Del. Harry J. Parrish
Del. Kenneth R. Plum
STAFF
DIVISION OF LEGISLATIVE SERVICES
Arlen K. Bolstad, Senior Attorney
Robert A. Omberg, Staff Attorney
Cynthia G. Liddy, Senior Operations Staff Assistant
SENATE OF VIRGINIA - CLERK'S OFFICE
Thomas C. Gilman, Coordinator, Committee Operations
Page
Joint Subcommittee Studying
Restructuring of the Electric Utility Industry
To
The Governor
and the
General Assembly of Virginia
Richmond, Virginia
1999
TO: The Honorable James S. Gilmore, III, Governor
and
The General Assembly of Virginia
A. OVERVIEW
Senate Joint Resolution 91 of 1998 (Appendix A) continued
the General Assembly's examination of electric utility industry
restructuring. The study was initially begun pursuant to Senate
Joint Resolution 118 of 1996 to determine whether restructuring
the retail electricity market in Virginia is feasible and in the
public interest. Thereafter, the study was continued under Senate
Joint Resolution 259 of 1997. Restructuring, as envisioned by
its proponents, would permit industrial, commercial and residential
electricity customers to purchase electric generation services
from the providers of their choosing, leaving regulated transmission
and local distribution of electricity.
House Bill 1172, passed by the 1998 General Assembly (Appendix
B), established a general framework and timetable for restructuring.
However, the bill left the development of a detail restructuring
plan to future sessions of the General Assembly. Thus, this study
proceeded with the mandate to prepare such legislation in anticipation
of its consideration in the 1999 General Assembly.
B. MEMBERS APPOINTED
The following General Assembly members who served on the
SJR 118 and SJR 259 subcommittees were reappointed to serve on
the SJR 91 joint subcommittee: Senators Reasor of Bluefield,
Holland of Windsor, Norment of Williamsburg, and Watkins of Midlothian
appointed by the Senate Committee on Privileges and Elections;
and Delegates Woodrum of Roanoke, Plum of Reston, and J.C. Jones
of Norfolk, appointed by the Speaker of the House. The joint
subcommittee's size was increased by SJR 91 to include one additional
Senate member and three additional House members. These new members
included Senator Stolle of Virginia Beach, appointed by the Senate
Committee on Privileges and Elections; and Delegates Cantor of
Henrico, Parrish of Manassas and Kilgore of Scott, appointed by
the Speaker of the House.
Senator Reasor was elected to serve as the joint subcommittee's
chairman for the third consecutive year. Delegate Woodrum was
also elected to serve as vice chairman, his third year in that
role. Delegate Woodrum chaired the subcommittee following Senator
Reasor's resignation from the Senate in November 1998.
C. WORK OF THE SUBCOMMITTEE AND ITS TASK FORCES IN 1998 AND
1999
SJR 91 directed the joint subcommittee to develop a comprehensive
restructuring plan for the 1999 Session of the General Assembly.
To help meet this objective, the joint subcommittee established
the following four task forces to develop and assess significant
restructuring policy options in four areas: (i) structure and
transition, (ii) stranded costs, (iii) consumer, environment and
education, and (iv) electric utility taxation. The task forces
met throughout the year, with joint subcommittee meetings interspersed
throughout to (i) receive interim and final task force reports
and (ii) provide examination and discussion by the full membership
of such major issues as incumbent utilities' market power and
the development of independent system operators. A list of each
task force's membership is attached. (Appendix C)
In November, a drafting group was established, consisting of the
task force chairmen and the vice chairman. The drafting group
worked from decision trees developed from policy option matrices
prepared and submitted by the four task forces. By way of illustration,
the decision tree incorporating the work of the Structure &
Transition task force is attached as Appendix D. A sample
page from that task force's policy option matrix is attached as
Appendix E. The drafting group developed a working draft
which was submitted to the full joint subcommittee for review
and final development. The joint subcommittee held its final
meeting on January 18, approving and recommending a restructuring
bill that was introduced in the 1999 General Assembly Session
as Senate Bill 1269 (patroned by Senator Norment) and House Bill
2615 (patroned by Delegate Plum). A copy of Senate Bill 1269
as passed and signed by the Governor is attached as Appendix
F.
The restructuring legislation approved and recommended by the
joint subcommittee restructures Virginia's electric utility industry
through a two-year phase-in of generation customer choice for
all electricity customers in combination with a seven-year rate
cap. The customer choice phase-in is from 2002-2004 and the capped
rate period begins in 2001 and ends in 2007. Transmission and
distribution remain regulated for the foreseeable future, and
the Virginia State Corporation Commission is assigned the task
of regulatory oversight of this process, working collaboratively
with a legislative oversight committee to be established in 1999
and ending its work in 2005.
Critical to joint subcommittee and task force work throughout
the year were the development and maintenance of a joint subcommittee
website on the Internet. The website served many important functions,
including the electronic publication of meeting summaries, posting
of stakeholder and interest group submissions and comments, and
electronic dissemination of task force and joint subcommittee
working papers. The website also made possible electronic distribution
of the preliminary and final drafts of the comprehensive restructuring
bill assembled by the drafting draft and the joint subcommittee.
A view of the SJR 91 home page is attached as Appendix G.
At this writing, the SJR 91 home page can be accessed on the Internet
at http://dls.state.va.us/sjr91.htm. Working papers of
the joint subcommittee, its task forces and the drafting group
can be accessed from the site, and it is anticipated that this
site or its contents will be accessible for an indefinite period
of time.
D. LEGISLATIVE ACTIVITY IN THE 1999 SESSION
Senate Bill 1269 became the principal vehicle for restructuring
legislation in the 1999 Session of the General Assembly. As introduced,
SB 1269 was virtually identical to the draft legislation adopted
and recommended by the joint subcommittee. Following its introduction,
the bill was assigned to the Senate Committee on Commerce and
Labor, where it was considered at length by that committee's Utilities
Subcommittee. A number of amendments were recommended by that
subcommittee and adopted by the full committee prior to the bill's
passage by the Senate on February 9 (33 ayes, 4 nays and 3 abstentions).
However, the bill's principal provisions concerning capped rates,
default service and others, remained unchanged in the bill.
Following its passage in the Senate, the bill was communicated
to the House of Delegates and referred to the Corporations, Insurance
and Banking Committee on February 15. A special CIB subcommittee
(which included all House members of the SJR 91 joint subcommittee)
examined the bill and recommended several noncontroversial amendments
to the bill. However, when the bill was heard before the full
committee, the committee adopted the amendments recommended by
the subcommittee, together with an amendment that was vigorously
opposed by the incumbent electric utilities. That amendment would
have permitted the Virginia State Corporation Commission (SCC)
to adjust capped rates prior to 2002. This provision was removed
from the bill on the House floor prior to the House voting to
pass the bill by a vote of 77 to 23. The Senate concurred with
the House amendments and sent the bill on to the Governor, who
signed the bill into law on March 25.
Senate Bill 1286 (patroned by
Senator Watkins) was introduced to address taxation issues generated
by electric utility restructuring (Appendix H). The principal
problem it addressed was the difficulty in imposing the gross
receipts tax on out-of-state electricity suppliers, when such
suppliers will (in a restructured market) be unlikely to have
sufficient physical presence in this Commonwealth to provide a
constitutionally sufficient nexus for taxation purposes. The
bill also addressed the likely revenue shortfall generated by
switching from gross receipts taxation to corporate net income
taxation. Locality utility taxes were also modified by the bill's
provisions.
As passed and signed by the Governor,
the bill eliminates the state gross receipts tax, the State
Corporation Commission special assessment tax, and the local gross
receipts tax on electric suppliers. In place of these taxes,
consumers of electricity will pay a declining block consumption
tax and corporations will be subject to corporate income tax.
The consumption tax, which contains
components for a state gross receipts tax, SCC regulatory tax,
and local consumption tax, will be levied at rates of (i) $0.00155
for the first 2,500 kWh consumed; (ii) $0.00099 for between 2,500
and 50,000 kWh; and (iii) $0.00075 for power consumed in excess
of 50,000 kWh. These combined rates may be reduced to reflect
lower SCC regulatory charges and to omit the local tax component
in localities served by municipality-owned electric utilities
that opt not to assess the local tax. In addition, most electric
suppliers will pay a net corporate income tax. Electric cooperatives
are not subject to the corporate income tax except to the extent
sales are made to nonmember customers. Electric suppliers will
report real and personal property to the State Corporation Commission,
which will centrally assess their property. These changes are
in anticipation of federal deregulation of the electric utility
industry. The effective date of the legislation is January 1,
2001.
A. OVERVIEW
The Structure and Transition task force was directed by the joint
subcommittee to examine issues pivotal to Virginia's transition
to a restructured market, and to determine what such a market
could look like following that transition. Before the task force
were questions such as (i) when should retail competition begin?
(ii) what services should be made competitive? (iii) should
incumbent utilities be required to join independent system operators?
(iv) should "going in" rate cases be required? (v)
should Virginia's incumbent utilities be required to divest themselves
of generation assets in the interest of establishing a competitive
market? and (vi) who should provide generation services to electric
customers who cannot or are unable to choose generation suppliers?
This task force was co-chaired by Delegate Woodrum and Senator
Norment, who convened four meetings between May and September.
Other task force members included Delegates Cantor and Jones,
together with Senator Stolle. The issues before this group comprised
the core of the restructuring debate. Consequently, stakeholders
and interested parties participated extensively in this task force's
activities. The task force first addressed the key issues of
competitive services, market power, default suppliers and suppliers
of last resort. Then, at the suggestion of several stakeholders,
all stakeholders and interested parties were asked to submit narrative
restructuring proposals, keyed to an outline prepared by the joint
subcommittee's staff.
Based on these submissions, staff prepared a chart, or matrix,
summarizing the positions of the stakeholders and interested parties
on an issue-by-issue basis. Cumulatively, the matrix showed the
range of alternatives available to the joint subcommittee in fashioning
the broad structure and transition provisions of a restructuring
plan. The task force subsequently approved a final matrix and
summary for submission to the joint subcommittee (summary attached
as Appendix I). The summary presented to the joint subcommittee
in September is presented in this report's next section.
B. REPORT OF TASK FORCE TO THE JOINT SUBCOMMITTEE
Services to be Made Competitive
Most of the restructuring stakeholders believed that generation
should be made competitive, and that transmission and distribution
should remain regulated services. However, the American Association
of Retired Persons (AARP) and the Virginia Citizens Consumer Council
(VCCC) said that the Virginia State Corporation Commission
(SCC) should have the authority to determine which, if any, services
should be made competitive once it determines that effective competition
exists for these services. Additionally, some stakeholders, including
AEP-Virginia, the Apartment and Office Building Association (AOBA),
Consolidated Natural gas (CNG), Virginia Power, and Washington
Gas, said that metering, billing and other ancillary distribution
services could be considered for competition following the transition
to retail competition for generation services.
Commencement of Retail Competition
A key issue generating much debate was the kick-off date for
retail competition. Some parties, including the Alliance for
Lower Electricity Rates Today (ALERT) and the Virginia Committee
for Fair Utility Rates, coalitions of large industrial and commercial
electricity customers, favored an aggressive approach with ALERT
favoring full retail competition by 2001 (with industrial customers
going first) and the Committee by 2002. However, representatives
of AARP and VCCC said that no service should be made competitive
until there exists in the market, effective competition for that
service. Virginia's investor-owned electric utilities generally
favored transition periods, culminating in full retail competition
for generation services by 2004-2006.
Default Providers and Suppliers of Last Resort
One critical restructuring issue was the assignment of electricity
customers to generation suppliers in a competitive market when
(i) customers fail or neglect to choose a generation supplier
or (ii) customers are unable to obtain generation services. Suppliers
for each of these categories are called "default providers"
and "suppliers of last resort," respectively. A related
category of necessary post-restructuring service was emergency
service to be provided to customers when their generation supplier
fails to deliver on its electrical load commitment.
Nearly all of the parties believed that incumbent utilities should
furnish both of these services-and emergency service-in their
current distribution service territories. However, others (including
the Southern Environmental Law Center and AARP) believed that
these services should be bid competitively. The Virginia Center
Against Poverty and Washington Gas supported a third position
in which default service would be bid competitively following
the transition to retail competition.
Transitional Ratemaking
A key issue that sharply divided the stakeholders was the question
of "going in" rate cases. Simply put, the issue was
whether each incumbent utility's rates should be examined and
adjusted by the SCC at the outset of retail competition for generation
services. Allegheny, Virginia Power, CNG and the electric cooperatives
suggested that rate unbundling would serve the same purpose; thus,
baseline rate cases would be unnecessary. AEP-Virginia generally
agreed with that position, but also stated that there may be a
need to examine costs at the time of transition, including mandated
environmental costs. Washington Gas, on the other hand, favored
going-in rate cases, and AOBA offered a third approach: the SCC
should have discretion to require baseline cases, but rate cases
for unbundling purposes should be mandatory.
A related issue was the question of rate caps or rate freezes
accompanying the transition to retail competition for generation
services. During the restructuring debate, these rate strategies
were described by some as devices providing rate stability during
the transition to retail competition. Others viewed them as potential
barriers to competitor entry at the early stages of retail competition.
Broadly stated, capped rates would generally function as ceilings
on the rates that could be charged for bundled or unbundled services.
A utility with capped rates could also choose to charge less
than the capped rates. Frozen or fixed rates, on the other hand,
would-for their duration-neither rise nor fall as a general matter.
When the task force submitted its report to the full joint subcommittee
in September 1998, all of the investor-owned electric utilities
favored or supported rate freezes or rate caps, with AEP-Virginia
and Allegheny favoring frozen retail rates during a four to
five-year transition period. The cooperatives stated that a preliminary
review of stranded costs should precede any such rate freezes.
CNG and AOBA, however, opposed rate freezes, with CNG voicing
its opinion that such freezes stifle competition.
The Role of the SCC in ISO Development
The parties generally agreed that regional independent system
operators (ISOs) or regional transmission entities (RTEs) would
be essential to the operation of transmission grids in a restructured
market. Currently, all of Virginia's investor-owned utilities
are participating in the formation of ISOs under the authority
of the Federal Energy Regulatory Commission (FERC). A continuing
topic of discussion was the role of the Virginia State Corporation
Commission (SCC) in determining whether and when a Virginia utility
may participate in an ISO, and what role the SCC should play thereafter.
ALERT and the Virginia Committee for Fair Utility Rates stated
that the SCC should have oversight and enforcement authority over
utilities' ISO involvement. ALERT, for example, suggested that
any change in structure or operation of an ISO should trigger
an SCC review to determine whether continued participation by
Virginia utilities is appropriate. On the other hand, Virginia
Power, Allegheny, and Consolidated Natural Gas (CNG) said that
once Virginia's utilities are ISO members, further concerns about
ISO participation should be directed by the SCC to the Federal
Energy Regulatory Commission (FERC).
Market Power
Incumbent utility market power following restructuring was an
issue of continuing discussion and concern. The cooperatives
and municipal power suppliers, in particular, voiced strong concerns
about potential market power in some incumbent utilities' former
exclusive service territories. This market power was said to
stem from west-to-east transmission constraints.
The Alliance for Lower Electricity Rates Today (ALERT) and the
investor-owned utilities believed, in general, that market forces
(via the construction of merchant plants, in particular) will
ultimately resolve market power associated with transmission constraints.
Additionally, AEP-Virginia advocated transmission line
construction in its service territory as a means of alleviating
some existing constraints.
However, the cooperatives believed that all "must-run"
generation in transmission-constrained areas (such as that generation
needed for voltage stability) should be regulated and priced by
the SCC on a cost-of-service basis until any such constraint is
eliminated. AEP-Virginia, Allegheny, and CNG concurred.
Virginia Power, on the other hand, believed that pricing
of must-run units should be addressed by FERC, which can establish
rates based on cost and a reasonable return.
Divestiture and Functional Separation
Whether incumbents should be required to divest themselves of
their generation assets in connection with restructuring was a
source of much debate before the task force. Proponents of divestiture
believe that the sale of incumbents' generation will clear the
way for new market entrants. They said that market power associated
with incumbents' generation ownership could very well thwart the
entry of new competitors into the market for generation services.
As an alternative to divestiture, some parties proposed that
incumbent utilities be directed to establish at least three separate
business entities, each with ownership of the utilities' assets
corresponding to generation, transmission and distribution operations.
This process was characterized as functional separation.
The SCC's energy regulation staff suggested that functional separation
and divestiture could help alleviate generation market power concerns.
Additionally, the SCC said that divestiture could also be helpful
in quantifying stranded costs and benefits. The investor-owned
electric utilities and cooperatives told task force members that
they opposed mandatory divestiture, while either supporting or
not opposing functional separation. The Municipal Electric Power
Association of Virginia (MEPAV) said that functional separation
may require SCC or FERC oversight to prevent cost-shifting. ALERT,
MEPAV, the VCCC and the Virginia Council Against Poverty (VCAP)
said that the SCC should have the authority to mandate divestiture
if necessary to eliminate market power. Suggesting another approach,
CNG and AOBA said that incumbent utilities should be given incentives
to divest.
The Virginia Committee for Fair Utility Rates said its members
favored (i) permitting the SCC to require divestiture of a utility's
generating assets if it determines that the utility may influence
unduly the price of electricity, and (ii) permitting the SCC to
impose conditions on the sale of such assets in order to promote
competition and the public interest (including conditions to ensure
that any buyer or group of buyers is not able to influence unduly
the price of electricity).
A. OVERVIEW
Throughout the past three years, the term "regulatory compact"
was used by some utilities appearing before the joint subcommittee.
The term characterizes an assumption said to be implicit in the
relationship between regulated utilities and their regulators:
in exchange for fulfilling their obligation to serve all customers
within certificated service territories, costs prudently incurred
by regulated utilities in furtherance of providing such service
will be recovered in regulated rates. Therefore, any departure
from a regulated, cost-of-service environment must make allowance
for utility recovery of costs (prudently incurred while fully
regulated) rendered uneconomic because of restructuring, utility
representatives said.
Thus, if generation is deregulated, then market prices for generation
could drop below the rate a given utility is receiving in the
current, regulated market. Consequently, that utility's generation
assets-constructed and financed at a time when cost-of-service
regulation was in place-could lose substantial portions of their
pre-restructuring book value. Similarly, power purchased from
nonutility generators by investor-owned utilities may be at above-market
prices in a deregulated market for generation. Additionally,
"regulatory assets" were also identified as costs potentially
stranded in connection with generation deregulation. Regulatory
assets were described as previously deferred, generation-related
costs or obligations incurred by a regulated electric utility
in providing electricity prior to generation deregulation.
Utility representatives told the joint subcommittee that utilities
should be shielded from all of these potential losses. In some
states, stranded costs have been or will be recovered via kWh-based
ratepayer surcharges paid over a fixed period. However, some
argued, since Virginia's prevailing electricity prices are low
to moderate, some utilities may realize measurable increases in
generation prices above their current, regulated levels following
generation's deregulation. This, in turn, could increase the
value of a utility's generation assets above their pre-restructuring
book value, resulting in windfall appreciation termed "stranded
benefits." Some suggested that if ratepayers are to be surcharged
for stranded costs, then ratepayers should enjoy some benefit
from stranded benefits-perhaps, in the form of credits against
their electricity bills received from incumbent utilities with
stranded benefits.
As most agreed, however, neither stranded costs nor stranded
benefits can be calculated in advance of restructuring. The key
variable-market prices for generation-is indeterminate until a
competitive market for such generation exists in fact. Nevertheless,
the task force concluded that the stranded costs issue could not
be avoided prior to restructuring and the development of a competitive
generation market. Stranded cost recovery, along with transitional
ratemaking and default service, was one of the most critical policy
hurdles the joint subcommittee had to clear as it developed Virginia's
restructuring bill.
The task force, chaired by Senators Watkins and Holland, held
five public meetings during the interim. Other task force members
included Delegates Parrish, Plum and Kilgore. As part of its
process, the task force requested and received from stakeholders,
statutory language describing stakeholder positions concerning
the definition of and appropriate recovery mechanisms for stranded
costs and benefits in a competitive market for generation. The
task force's staff prepared a matrix and a summary (summary attached
as Appendix J) identifying stakeholders' positions, and
these two documents were first approved and refined by the task
force and then presented as the task force report to the full
joint subcommittee in September.
B. TASK FORCE REPORT TO THE JOINT SUBCOMMITTEE
Elements Of Stranded Costs
As discussed above, utility stakeholders identified the primary
sources of potential stranded costs as (i) generation asset devaluation,
(ii) potential losses associated with above-market, purchased
power contracts (including cooperatives' wholesale power purchase
contracts), and (iii) regulatory assets. Task force members distinguished
stranded costs and its elements from "transition costs,"
or costs which utilities may incur in transitioning from a regulated
to deregulated market for generation. Illustrative of transition
costs are utilities' costs in (i) establishing or joining an independent
system operator or regional power exchange and (ii) funding mandatory
consumer education programs concerning restructuring. While one
utility's stranded costs proposal would have included some transition
costs in its stranded costs formula, the task force did not adopt
this blended approach.
Determining Stranded Costs and Benefits, Generally
The stakeholders agreed that
the State Corporation Commission should play a significant role
in addressing stranded costs and stranded benefits. Several proposals,
including those of the SCC staff, the Office of the Attorney General's
Consumer Counsel, ALERT, and the Virginia Committee for Fair Utility
Rates, specifically enumerated factors that the SCC would use
in calculating and determining stranded costs and stranded benefits.
Virginia Power, AEP-Virginia and
Allegheny stated that capping or freezing retail rates during
the transition period would provide a fair and balanced treatment
of any stranded costs and any stranded benefits. The electric
cooperatives stated that because of the cooperatives' structure,
any benefits "stranded" by restructuring eventually
would accrue to the cooperative member-consumers.
Commencement and Duration of Stranded Costs Recovery Period
Virginia Power, AEP-Virginia,
and Allegheny proposed initiating the recovery of stranded costs
by a "date certain" and for a specified interval. Transition
periods ranged from three to five years. The electric cooperatives
suggested that the period for recovery of stranded costs and transition
costs be determined for each cooperative by the SCC.
Washington Gas and AARP said that
the collection of stranded costs or payment of stranded benefits
should not extend beyond 10 years. Virginia Power, AEP-Virginia
and Allegheny all proposed that when the transition to competition
ends, customers should pay a competitive generation rate and a
nonbypassable wires charge for any remaining transition costs
over the duration of the programs or service. Virginia Power
also proposed collection (via a nonbypassable wires charge) of
costs associated with (i) power purchase contracts over the remaining
terms of the contract, and (ii) nuclear decommissioning costs
over the remaining terms of the Nuclear Regulatory Commission
(NRC) licenses.
The Attorney General's Office
of Consumer Counsel, ALERT, the Virginia Committee for Fair Utility
Rates, and the VCCC suggested that any stranded cost recovery
be delayed until an SCC finding of an effective, competitive marketplace.
Under ALERT's proposal, however, the SCC would begin monitoring,
measuring, and adjusting stranded costs once alternative sellers
are authorized to provide competitive generation services in the
Virginia market.
Stranded Costs Collection
Frozen or capped rates for nonshopping
generation customers were proposed by the SCC staff, Virginia
Power, AEP-Virginia, Allegheny, Washington Gas, and ALERT. Virginia
Power, Allegheny, the electric cooperatives, and CNG proposed
that retail customers switching to an alternative generation supplier
pay a competitive transition charge, or nonbypassable wires charge,
during the transition period. AEP-Virginia proposed a competitive
transition charge for those retail customers who switched during
the transition period, as well as a nonbypassable wires charge
which could be extended beyond the transition period. The electric
cooperatives proposed that all distribution customers share in
stranded cost recovery through a competitive transition charge.
Virginia Power and the electric
cooperatives also proposed a disconnection charge payable by retail
customers who might otherwise avoid stranded cost payments by
switching to on-site generation. Such payments, also called "exit
fees," were opposed by Washington Gas and ALERT.
Burdens of Proof, Mitigation, and True-Up Mechanisms
The staff of the SCC, Washington
Gas, ALERT, and the Virginia Committee for Fair Utility Rates
proposed that the entity seeking to recover stranded costs have
the burden of proof to establish such costs. The Attorney General's
Office of Consumer Counsel, CNG, and AARP noted that stranded
costs should be verifiable and nonmitigable. Virginia Power stated
that any potential stranded costs that are being recovered in
current regulated rates have already been justified and therefore
are recoverable under a competitive structure.
Essentially all of the proposals
required the SCC to examine mitigation efforts when determining
stranded costs. Virginia Power's proposal submitted to the task
force would result in the utility and the ratepayers sharing equally
in any reduced costs related to purchase power contracts. Many
of the proposals submitted required the SCC to perform periodic
reviews and reconciliation of stranded costs. As discussed above,
AEP-Virginia had proposed that stranded costs be recovered exclusively
through a rate cap or rate freeze. In such a scenario, no front-end
calculation would be required, and thus no subsequent true-up
or reconciliation procedures would be required either. AEP-Virginia
did, however, suggest that any such capped or frozen rates be
adjusted to reflect major environmental costs.
Virginia Power did not propose
a true-up during any period of frozen or capped rates. However,
it did propose an annual true-up of the collection of above-market
NUG costs and nuclear decommissioning fees, via nonbypassable
wires charges.
IV. WORK OF THE TAXATION TASK FORCE
A. OVERVIEW
Restructuring's potential impact on state and local revenue streams
associated with electric utility taxation was examined in 1998
by a special task force of the joint subcommittee chaired by Senator
Watkins. The task force continued its work in 1999, co-chaired
by Senator Watkins and Delegate Woodrum. Other task force members
included Senators Stolle and Holland, and Delegate Cantor.
Under current law, investor-owned electric utilities and the electric
cooperatives and electric energy customers pay a variety of taxes
to the Commonwealth and its localities. Taxes paid directly by
the utilities are "recaptured" from customers through
the utility's regulated rates in which such taxes are embedded.
Revenue received by the Commonwealth directly from utilities
is collected on a gross receipts basis. In 1996, the State Corporation
Commission received approximately 90.2 million dollars in gross
receipts taxes (Virginia Code § 58.1-2626). Utilities currently
benefit from the Virginia Coal Employment and Production Incentive
Tax Credit (Virginia Code § 58.1-2626.1), which provides
a credit against the state gross receipts tax for the purchase
of Virginia coal, a credit of approximately $18.1 million in 1996.
Electric utilities also paid approximately $5.4 million in 1996
as a result of the special regulatory revenue tax (§ 58.1-2660).
This tax is levied for the specific purpose of raising funds
to be expended by the SCC in making independent appraisals and
valuations of utilities' property, and for the regulatory oversight
of such companies.
Localities also receive significant revenues from the taxation
of electric utilities. These sources include local gross receipts
taxes, consumer utility taxes, and revenues from property taxes.
Local gross receipts (Virginia Code § 58.1-3731) are imposed
on utilities' gross receipts and can vary from locality to locality,
although most localities impose this tax at a rate of 0.5 percent
of the gross receipts of the utility derived from within that
locality. The consumer utility tax (Virginia Code § 58.1-3814)
is imposed on the utility customer's monthly gross charges and
the amount may vary from locality to locality.
Property taxes paid by electric utilities also represent a significant source of revenue for localities. Under current law, the State Corporation Commission assesses the property of public utilities. The assessment includes the value of both the real estate and equipment located at each utility facility. The SCC-certified assessment is forwarded to the locality in which the facility is located, and the real estate tax rate is applied to the total assessed value of the facility. Independent power producers, on the other hand, have their property and equipment assessed by the locality. The land is taxed at the real estate rate, and the equipment is taxed separately at a "machinery and tools" rate.
The stakeholders and task force members reviewed legislation developed
by the task force in 1997. The legislation-introduced in the
1998 Session as Senate Bills 619 and 620-was designed to (i) retain
the current level of revenue for the Commonwealth and localities
and (ii) maintain the current apportionment of tax burden among
residential, commercial, and industrial users.
SB 619 and SB 620 collectively established a new utility taxation
regimen, imposing a corporate net income tax on profits derived
from generation. A "declining block" consumption tax,
which also served as a collection vehicle for the special regulatory
revenue tax and the local gross receipts tax, was used to make
up a resulting revenue shortfall. Following their introduction
in the 1998 General Assembly Session, SB 619 and SB 620 were carried
over for further study in 1998 by this joint subcommittee.
B. TASK FORCE REPORT TO THE JOINT SUBCOMMITTEE
Stakeholders and interested parties responded to a questionnaire
that examined key taxation issues. These responses formed the
basis for the task force's report to the full joint subcommittee.
The report is attached as Appendix K.
Modifying the Current Taxation System Generally
The SCC, Consumer Counsel, Virginia Power, AEP, Allegheny, and
the co-ops all agreed that retail competition will require changes
in the current tax scheme. MEPAV suggested that restructuring
will require some modification of the state and local tax code,
but that a modified gross receipts tax should be collected at
the wholesale level from municipal electric systems.
The Virginia Municipal League (VML) and the Virginia Association
of Counties (VACO) filed a joint response to the staff questionnaire.
VML and VACO indicated that the localities' current utility tax
scheme should remain in effect, but that the local consumer utility
tax and the local gross receipts tax should be calculated on a
per-kWh consumption basis rather than on a gross receipts basis.
Taxation of Investor-Owned Utilities, Electric Cooperatives,
and Municipal Electric Power Suppliers in a Restructured Environment
Virtually all stockholders agreed that a corporate income tax
should replace the state gross receipts tax. There was, however,
disagreement about whether the corporate income tax should be
applied to all utility income, or whether it should be limited
in its application to income derived solely from generation.
The SCC, Consumer Counsel, AEP, the co-ops and MEPAV proposed
a corporate income tax on total business income. Virginia Power
and Allegheny, however, supported the application of the corporate
income tax to generation-related income only.
Electric cooperatives also pay the gross receipts tax and the
special regulatory revenue tax. However, unlike investor-owned
utilities, the co-ops pay no federal income tax; they are nonprofit
entities owned by their customers. AEP-Virginia stated that a
modified gross receipts tax should be imposed on the co-ops, an
approach taken in SB 620. However, the co-ops stated that continuing
to subject an electric cooperative to a minimum GRT would cause
an unfair tax burden and inequitable tax treatment, since a co-op's
power transactions in a competitive environment may result in
significant gross receipts, but little or no margin ("profit").
Co-ops are now exempt from federal corporate income tax if they
meet specific requirements and have no profits. The co-ops were,
however, willing to pay a corporate net income tax on federal
taxable income.
Municipal electric utilities or their customers are currently
subject to some of the utility-related taxes described above.
The local consumer utility tax, for example, is collected from
municipal utility customers in the same way that this tax is collected
from the customers of investor-owned utilities and the cooperatives.
Moreover, municipal purchases of electricity from in-state providers
include the embedded cost of gross receipts and special regulatory
revenue taxes. VML stated that electricity purchases (whether
inside or outside the state) should be subject to state taxation
at levels comparable to those under the current state gross receipts
tax. VML also stated that municipal electric systems should continue
to have the authority to set their own electric rates and to be
governed by local governing bodies.
"Declining Block" Consumption Tax; Components
Stakeholders supported the implementation of a consumption tax
based on kWh usage to make up a substantial revenue shortfall
that would likely occur when moving from a gross receipts tax
to a corporate net income tax. The SCC, Virginia Power, AEP,
and Allegheny Power all endorsed a "declining block"
method that would maintain the current tax apportionment among
user categories (residential, commercial, and industrial). Such
a method assigns lower per-kWh tax rates to higher levels of electricity
consumption.
The Attorney General's Office of Consumer Counsel stated that
any consumption tax should equitably allocate the tax burden among
customer classes and prevent further shifting of the tax burden
to smaller customers. MEPAV noted that a consumption tax will
substantially increase the tax burden on the customers of a municipal
electric utility, and that a state gross receipts tax levied on
the wholesale purchase of the municipal utility would be more
revenue neutral. MEPAV and VML believed there should be no direct
taxation of municipal electric customers. MEPAV also stated that
if a consumption tax is enacted, the measure should allow the
municipal electric utility the option of providing the revenue
through their transmission and/or purchase power contracts.
Virginia Power, AEP, Allegheny Power, the co-ops, and VML/VACO
all agreed that the consumption tax should serve as a replacement
method for the revenue currently received from the state gross
receipts tax, local gross receipts taxes and the special revenue
regulatory tax. The co-ops would allow localities the option
of adjusting the minimum consumption tax rates to ensure no loss
of revenue. The SCC proposed limiting any consumption tax to
the state tax portion only.
MEPAV agreed that it might be appropriate to collect the local
gross receipts taxes in the consumption tax, but objected to including
the special revenue regulatory tax, stating that it is inappropriate
for the municipal electric systems to pay for the regulatory functions
of the SCC which do not benefit them; their wholesale power purchases
are regulated entirely by FERC. MEPAV and VML/VACO also suggested
that any consumption tax should be "unbundled" so that
the tax rate for each component included in the consumption tax
could be properly identified and remitted to the locality and
the Commonwealth.
Administration of Replacement Taxation Program
Who should bear the responsibility for administering any new
tax programs designed to replace the current tax scheme? MEPAV,
VML, and Allegheny Power favored oversight by the Department of
Taxation. VACO preferred that the SCC oversee this function.
The co-ops proposed delegating the corporate income tax portion
to the Department of Taxation, with the SCC assuming responsibility
for any consumption tax, and for determining the allocation between
generation and nongeneration business segments.
The SCC's staff said that if new utility taxation schemes are
limited to general fund taxes, the Department of Taxation should
administer the program. However, if the "declining block"
consumption tax as contained in SB 619 were to be implemented,
they believed that the SCC should administer the program. Virginia
Power indicated no preference as to whether the SCC or the Department
of Taxation administers the program, but did encourage an effort
to educate consumers concerning any tax changes.
Real Property; Assessment Methodology; Performance of Assessments
The onset of retail competition could have an effect on the property
tax revenues localities receive from electric utilities. A decline
in the price of electricity could cause a drop in property tax
assessments, a prospect potentially painful to localities with
generation facilities in their jurisdictional boundaries. AEP
felt that projecting future facility values at this time is a
speculative exercise; those values are indeterminate until generation
prices in a restructuring market emerge. AEP believed that the
SCC should have central assessment authority over all generating
facilities within Virginia.
Virginia Power, VML/VACO and MEPAV would give localities authority
to assess and adjust property tax rates on generation facilities.
VACO/VML believed that if localities are charged with assessing
generating facilities, the state should provide guidelines and
assistance, and that the SCC should continue to assess distribution
and transmission lines. The co-ops suggested allowing localities
to make up any loss in property tax revenue by increasing the
consumption tax. The co-ops also believed that all property owned
by electric generators should be subject to uniform central assessment.
Virginia Power and AEP stated that fair market principles in accordance
with the Virginia Constitution (Article X, § 2) must be the
assessment method used when determining the value of property
owned by suppliers of electricity. AEP would require the SCC
to continually review the depreciation factors to assure accuracy
in the assessments. The co-ops proposed assessment at "book
value" (as defined by generally accepted accounting principles),
while Allegheny Power would tax all generation property similarly,
using a uniform and consistent assessment method.
The SCC's proposed assessment formula for real property was original
cost minus depreciation. The SCC also noted that deregulation
may require other appraisal techniques. VML/VACO proposed establishing
uniform, statutory generation facility assessment formulas, provided
that a mechanism for allowing a separate rate classification of
this type of property would be provided also. VML/VACO also felt
that localities must have the flexibility to adjust their tax
rates in the event the assessment method adopted results in a
reduction in revenue.
Consumer Utility Tax; Collection
While Allegheny Power stated that ideally a governmental entity
imposing a tax should have the duty of collection, all respondents
did agree that the local distribution company should serve as
the collector of the consumer utility tax. Virginia Power, AEP,
VML/VACO and MEPAV would protect the revenue from this source
by basing the tax on kWh consumption rather than calculating it
as a percentage of customers' bills. Allegheny Power and the
co-ops would incorporate the consumer utility tax into any consumption
tax. The co-ops and VML/VACO also proposed allowing localities
to adjust the rates charged to ensure revenue neutrality.
A. OVERVIEW
This task force addressed a broad range of issues, including public
benefits programs for low-income households, consumer education,
customer aggregation, consumer protection, environmental protection,
and energy efficiency. The task force also discussed job-related
protections for electric utility workers during the transition
to retail competition. The task force was co-chaired by Delegates
Plum and Jones. Additional task force members included Senator
Norment and Delegates Parrish and Kilgore.
Stakeholders and other interested parties responded to a series
of 45 questions prepared by task force staff, covering the seven
topics addressed by this task force: (i) public benefits charges
for the benefit of low-income households, (ii) consumer education,
(iii) customer aggregation, (iv) consumer protection, (v) environmental
protection, (vi) energy efficiency, and (vii) electric utility
worker protection. These responses formed the basis for the task
force's report to the full joint subcommittee. The report is
attached as Appendix L.
B. REPORT OF THE TASK FORCE TO THE JOINT SUBCOMMITTEE
Public Benefits Charges for the Benefit of Low-Income Households
Virginia currently has no statutory or regulatory programs furnishing
energy assistance to low-income households throughout the Commonwealth.
The task force learned, however, that a number of voluntary
programs-such as Virginia Power's EnergyShare and AEP Virginia's
Neighbor-to-Neighbor-provide emergency energy assistance to low-income
households in need. Additionally, the Weatherization Assistance
Program (WAP) provides weatherization assistance to low-income
households on a statewide basis through a combination of federal
and state funding.
The question put before this task force by consumer group representatives
was whether-as part of Virginia's utility restructuring-the Commonwealth
should formally adopt legislation establishing energy assistance
programs for low-income households. Respondents were asked about
eligibility, funding, and administration criteria for such programs.
Consumer groups such as the Southern Environmental Law Center,
the VCCC, VCAP and others expressed firm support for programs
that would provide rate subsidies, crisis assistance, and weatherization
assistance to low-income households. These programs should be
funded through nonbypassable wires charges paid by all consumers
of electricity, they said. The VCCC and VCAP proposed a specific
eligibility benchmark: households with income at 150 percent
of federal poverty guidelines-an eligibility standard currently
used for both the Weatherization Assistance Program (WAP) and
the Low Income Home Energy Assistance Program (LIHEAP). Other
respondents suggested general support for means-tested eligibility
criteria.
Virginia's utilities and cooperatives provided wide-ranging opinions
about the value and need for such programs. AEP said that mandating
such subsidies is not appropriate. Allegheny Power, on the other
hand, said that such assistance programs are both necessary and
desirable-if there are adequate funding mechanisms. Virginia's
cooperatives emphasized that policymakers recognize the additional
costs of these programs and consider all of the other costs of
restructuring in evaluating whether such programs would be appropriate.
Allegheny Power suggested that any low-income, energy assistance
programs adopted be reviewed periodically to determine their efficiency
and impact.
A group styled the "consensus group" (representing
a group that included a utility and several consumer, labor and
environmental organizations) expressed support for statewide low-income
energy assistance programs and for home weatherization and energy
conservation programs designed to assist low-income citizens.
Consumer Education
The stakeholders and interested parties agreed that consumers
must be prepared for the transition to a restructured electric
utility market. During the course of task force meetings, repeated
references were made to consumer confusion and uncertainty generated
by recent telecommunications market deregulation. There was universal
agreement that restructuring could be comparatively even more
complex to the average consumer. Virtually all stakeholders and
interested parties said that consumer education should be funded
through a nonbypassable wires charge paid by all consumers of
electricity.
Presentations to the task force on this topic suggested several
key questions: (i) the specific focus of such education programs,
(ii) who should conduct consumer education programs, (iii) when
should they be conducted, and (iv) what level of regulatory oversight
is appropriate.
Virtually all respondents agreed that a distinction must be drawn
between marketing and public education. The VCCC's
response was representative: consumer education programs must
(i) prepare consumers for structural changes, (ii) assist consumers
in shopping for electric service, and (iii) inform consumers of
their rights and obligations as customers.
In terms of a consumer education program start date, some, including
the Attorney General's Office of Consumer Counsel, suggested that
such education programs begin at least six months prior to the
availability of retail choice. Virginia Power suggested that
it begin July 1, 1999. Many others, including the VCCC, believe
that such education should continue through the transition, and
for a reasonable period thereafter.
The consensus group recommended that consumer education programs
be implemented to inform consumers, in advance of competition
and on a continuing basis, about changes in the way they may purchase
electric energy and about using electric energy safely, efficiently,
and in an environmentally sound manner.
Several respondents believed that long-term consumer education
programs may be necessary. VCAP, for example, stated that these
programs should continue until such time as retail competition
is determined to be effective. AARP suggested an SCC investigation
to help in this determination five years after the commencement
of retail competition.
Funding and Regulatory Oversight
Virtually all parties responding said that consumer education should be funded through a nonbypassable wires charge paid by all consumers of electricity.
Allegheny Power, Virginia's cooperatives and American Electric
Power envisioned a consumer education program coordinated principally
by the Virginia State Corporation Commission. Other respondents
suggested administrative participation by state agencies with
consumer expertise and contacts, including the Office of Consumer
Affairs, the Department of Housing and Community Development,
the Department for the Aging and others.
According to the consensus group, effective and unbiased consumer
education programs should be conducted, independent of the electric
utilities and other electric energy suppliers, under the supervision
of the State Corporation Commission and in association with other
state governmental agencies. The SCC should contract with appropriate
private, nonprofit organizations and other media, educational,
and consumer organizations to implement such consumer education
programs, the consensus group said.
The VCCC and Virginia Power emphasized that nonprofit, community-based
organizations should play a role-particularly in educating hard-to-reach
populations.
Customer Aggregation
The aggregation issue concerns the development of customer purchasing
groups (aggregates) in a restructured market. Virginia's cooperatives
emphasized their years of experience accomplishing just that.
The task force discovered that virtually no stakeholder or any
other interested party expressed any opposition to customer aggregation,
per se. And study participants agreed that aggregators should
be licensed-with some subject to more stringent requirements than
others.
The task force learned that Massachusetts restructuring legislation
permits localities to shop for the electrical power needs of all
of their residents and businesses, except for those affirmatively
"opting out," or choosing to shop for power on their
own. The "opt out" approach (also called community
choice) proved to be very controversial when taken up by the task
force. The issue pitted incumbent utilities against locality
and certain consumer group representatives. VML, VACO, the VCCC
and asserted that community choice offers residential customers
and small businesses a realistic chance to benefit from utility
restructuring. Incumbents took an opposite view, contending that
community choice would effectively eliminate competition in locality
markets.
Licensing and Regulating Aggregators
All respondents said that aggregators should be licensed by the
Virginia State Corporation Commission. VCAP and Virginia's cooperatives
cautioned, however, that overly-burdensome licensing requirements
could discourage non-profit groups seeking to helping low-income
households from obtaining licenses as aggregators. The consensus
group said local governments, community action agencies, for-profit
entities, and nonprofit organizations should be permitted to aggregate
customers for the purpose of purchasing electric generation service.
VML and Virginia Power urged that the regulation of aggregators
distinguish between those representing electricity suppliers and
those negotiating on behalf of customer aggregates. Virginia
Power suggested that the former should be required to provide
proof of financial responsibility, reliability, and adequate reserve
margins. In the same vein, Allegheny Power stated that aggregators
contracting to provide energy should be licensed as generation
suppliers and subject to all requirements applicable to that license.
"Opt Out" or Community Choice, and Other Aggregations
The investor-owned electrical utilities, electric cooperatives,
and CNG opposed locality aggregation on an opt-out basis. Consumer
and locality representatives favored it. Electric cooperatives
remarked that allowing localities to take over customers by simply
declaring themselves to be aggregators would be tantamount to
"state-supported slamming." VML, on the other hand,
said that opt-out aggregation would result in locality-assembled
load profiles enabling localities to successfully negotiate competitive
electrical rates with generation suppliers.
All parties responding on this issue supported localities aggregating
their load with other localities, and with private companies outside
their jurisdictions. Virginia Power believed that locality aggregation
with private entities, however, should be scrutinized from a tax-equity
viewpoint.
Consumer Protection
When this topic was before the task force, the parties agreed
that some heightened consumer protection would be necessary during
the transition to electric utility restructuring, and in its aftermath.
Here are several of the issues raised by the parties, and then
incorporated into staff matrix questions: (i) whether all generation
suppliers should be required to provide certain information in
their marketing materials, (ii) whether billing information should
be standardized, and in what form, (iii) consumers' rights to
cancel electricity supply contracts within a specified period
of time, (iv) protections against "slamming" as well
as against certain telemarketing practices, and (v) complaint
assistance.
Standardized Marketing Disclosures
While most of the respondents expressed support for certain stipulated
disclosures, Allegheny Power said that marketing materials should
comply with existing laws, but that standardizing information
may have the effect of stifling innovation. CNG also opposes
standardization. Consumer groups, including the VCCC, VCAP, and
the Southern Environmental Law Center, said that, at a minimum,
price, fuel mix, and emissions should be core disclosures. The
VCCC also suggested that such mandatory disclosures include a
description of cancellation rights, and toll-free information
numbers. Virginia's cooperatives recommended that a standardized,
generic formula for rate comparisons be established.
Billing Disclosures
AARP's response was representative: billings should be "unbundled,"
itemizing charges for regulated services (most likely, transmission
and distribution) and the charges for competitive generation.
The VCCC and others also expressed support for uniform billing
formats as well (uniform terms, clear language and visual simplicity).
Virginia's cooperatives recommend that all services that are
subject to competition be identified.
The consensus group said customer bills should be presented in
a clear,, uniform and customer-friendly format. Separate charges
for the various unbundled services should be clearly shown on
customer bills and supplier marketing materials. Additionally,
bills should provide uniform information regarding the supplier's
fuel mix and a meaningful representation of the emissions resulting
from the power generation sold to the customer, they said.
Virginia Power's responses also flagged the taxation and nonbypassable
wires charges issues. This company suggested that taxation charges
be identifiable within bills. The company also stated that bills
should break down customers' nonbypassable wires charges by component
(e.g., stranded costs, low-income energy subsidies, etc.).
Consumer Cancellation Rights
Virginia's Home Solicitation Sales Act (Va. Code § 59.1-21.1
et seq.) currently gives persons solicited at home (in person,
or by telephone) the right to cancel any contract resulting from
such solicitations within three business days. CNG believed that
this statute should be amended to include the sales of energy
products and services. Most respondents felt that similar protections
should also be extended to consumers solicited by energy supply
companies. AARP suggested a one-week "cooling off"
period; Virginia Power would apply such a right to contracts in
which an energy service contract covers a specified period of
time.
Slamming and Certain Telemarketing Practices
The unauthorized switching of energy providers, or "slamming"
should be specifically addressed in restructuring legislation,
according to most respondents. VCAP suggested heavy fines for
slammers, while Virginia's cooperatives, American Electric Power
and VML believed this problem should be addressed through the
registration and certification of energy providers, with the potential
for loss of certification. The VCCC said that changes
in energy suppliers obtained through telemarketing should be confirmed
through third-party verification. This would be consistent with
current FCC regulations governing slamming in the telecommunications
market. The VCCC also believed that slammers should be barred
from collecting payments for services from slammed customers-a
remedy under consideration by the FCC for the telecommunications
market, but not yet adopted.
The consensus group said that consumers should be protected from
unfair and deceptive advertising, marketing, and business practices-including
misrepresentations of so-called "green power" and intrusive
telemarketing tactics. An agreement to obtain service from a
supplier should be made in writing, providing a three-day right
to cancel. Accordingly, any agreement made by telephone or electronically
should be confirmed in writing, the group said.
On the telemarketing issue, most respondents believed that consumers
should be protected against deceptive practices and intrusive
telemarketing. Some, like Allegheny Power, believed that current
law provided sufficient protections. Others, like Virginia's
electric cooperatives, believe that applying the Virginia Consumer
Protection Act to energy solicitations is appropriate.
Consumer Complaints
Most respondents would hand the SCC the job of mediating conflicts
between energy suppliers and customers, although a handful-like
the VCCC-would give that duty to the Attorney General's Office
as well. However, American Electric Power cautioned that the
SCC would undoubtedly require additional resources to carry out
this broad tasking.
Other Consumer Protection Issues
Consumer privacy protections concerning billing, payment history
and consumption patterns were issues of concern to the Southern
Environmental Law Center and the VCCC. The consensus group emphasized
that customer privacy must be protected. Customer-specific information,
such as personal, billing or credit data, should be divulged only
upon consent of the customer, according to the group.
Virginia Power recommended a customer advisory board to review
consumer issues and problems associated with the transition to
retail competition. The proposed board would report annually
to a legislative transition task force.
The consensus group also declared that safe, reliable and affordable
electric services should be available for all consumers. State
law should include a strong prohibition against electric energy
supplier discrimination or supplier or distributor redlining based
on gender, race, or income. Additionally, all suppliers of electric
energy should be licensed by the State Corporation Commission
and be required to meet service quality standards set by the SCC,
the group said
Environmental Protection
For several years, the joint subcommittee-and now this task force-was
encouraged by the Southern Environmental Law Center and others
to support the environment in any restructuring legislation recommended
for adoption. The Center fears that retail competition for generation
(with intensive price competition) will extend the operation lives
of older, less efficient power plants entitled to emit at higher
levels than newer power plants with stricter environmental controls
and emissions restrictions under federal clean air laws.
The Center and others suggested that the General Assembly counter
the effects of this possible development by (i) urging federal
amendments to federal clean air laws, eliminating any and all
emissions-related exemptions older plants currently enjoy, (ii)
requiring all power suppliers in Virginia to disclose fuel mix
and emissions, and (iii) adopting a renewable portfolios standard,
in which a percentage of generation offered for sale in Virginia
by each retail supplier must be generated from renewable resources.
The consensus group said electric utility restructuring should
be implemented so that the competitive market for electric generation
services operates in a manner that protects consumers, maintains
environmental quality, and offers opportunities to enhance the
quality of the environment.
Renewable Portfolio Standard
The Southern Environmental Law Center, the VCCC, and the Maryland-D.C.-Virginia
Solar Energy Industries Association (MDV-SEIA) supported a statutory
renewable portfolio standard. However, Allegheny Power, American
Electric Power and CNG opposed statutory renewable portfolio standards;
Virginia's cooperatives said it was an issue for the General Assembly
to determine, particularly in light of increased costs associated
with such standards. Virginia Power said it supported research
and development in this area, using funds generated by a nonbypassable
wires charge for that purpose.
Air Quality Provisions in Virginia Restructuring Legislation
Allegheny Power, American Electric Power, CNG and Virginia Power
opposed coupling new environmental mandates and restructuring
legislation. They believed that both the federal Environmental
Protection Agency (EPA) and Virginia's Department of Environmental
Quality (DEQ) have sufficient authority under current law to address
all current and future air quality concerns. Ogden Energy-a waste-to-fuels
company-expressed a similar sentiment, while the SCC stated that
it does not recommend any new air quality initiatives as part
of restructuring. Virginia Power also supported a voluntary approach,
stating that it supported restructuring legislation offering the
opportunity to improve air quality indirectly by providing programs
to encourage conservation and the use of renewables. Additionally,
almost all other respondents on this issue emphasized their support
for enforcing existing emissions laws.
Generation Fuels Disclosures
The Attorney General's Office of Consumer Counsel, together with
all consumer groups and the Southern Environmental Law Center,
said that generation suppliers should be required to disclose
their generation fuel mixes and associated emissions. The consensus
group supported this view, stating that this information should
also be furnished on electricity customers' bills in a clear,
uniform and customer-friendly format.
The electric utilities and cooperatives were in disagreement on this issue. American Electric Power and Allegheny Power opposed this requirement, while Virginia Power and Virginia's cooperatives supported it. CNG opposed it.
The Ogden Energy Group (a concern with waste-to-fuel facilities)
said it supported voluntary programs designed to help consumers
identify green, clean electricity products.
Other Issues
MDV-SEIA, a solar energy trade association, proposes that "net
metering" be mandated. Net metering allows self-generators-such
as those using solar power-to receive credit for electricity they
generate in excess of their own usage. In a related vein, the
consensus group said that funding for programs encouraging the
use of renewable energy resources and promoting energy efficiency
and conservation, should be provided by a nonbypassable public
benefits charge imposed on all purchasers of electric energy.
These funds should be administered by an independent entity,
the group said.
Energy Efficiency
Efforts to promote utility energy efficiency fall into
two broad categories: conservation programs and load
management programs. Conservation reduces usage, and load
management shifts usage to promote efficient generation unit utilization.
Collectively these two approaches are called "demand-side
management," or DSM. The overarching purpose of DSM is to
reduce the need for constructing new generation facilities.
The Southern Environmental Law Center and others have expressed
their concern that restructuring will put a premium on short-term
profits, making DSM programs (and their lengthy savings payback
periods) unappealing. To counter that, the Center proposed implementing
a public benefits charge (a usage-based surcharge paid by electricity
customers) to ensure that DSM and renewable technology research
are encouraged and enabled in a post-restructuring energy market.
This proposal prompted two broader policy questions: (i) how
energy efficiency programs should be supported during and after
restructuring and (ii) whether a public benefits surcharge is
an appropriate way to fund energy efficiency and conservation.
Consumer groups (VCCC, VCAP and others), together with the Association
of Energy Conservation Professionals (AECP) and the solar consortium
MDV-SEIA, joined the Southern Environmental Law Center in suggesting
that the best way to promote energy conservation is through a
public benefits charge for energy investments. The consensus
group said that funding for programs that encourage the use of
renewable energy resources and promote energy efficiency and conservation
should be provided by a nonbypassable public benefits charge imposed
on all purchasers of electric energy and administered by an independent
entity.
The electric utilities fell into three camps on this issue: those
who opposed public benefits charges for energy efficiency (Allegheny
and the cooperatives); those who supported them (Virginia Power)
and those who took no position (AEP). Allegheny Power suggested
the use of tax incentives to promote energy efficiency initiatives.
MDV-SEIA said that the Commonwealth should exhibit leadership
on this issue by directly investing in energy efficiency "seed
projects" through its capital outlays for new and renovated
public facilities. The SCC indicated that it did not support
a public benefits charge for energy efficiency programs.
Electric Utility Worker Protection
The International Brotherhood of Electrical Workers (IBEW) appeared
several times before the joint subcommittee and its task forces
to emphasize concerns about restructuring's potential impact on
electric utility workers-both in terms of job retention, and in
terms of easing their transition to new careers in the event of
significant restructuring-related downsizing.
The IBEW recommended statutory protections for utility worker,
such as (i) minimum staffing levels linked to reliability considerations,
(ii) continuing utility worker employment at generation units
or stations, and protecting their wages and terms of employment,
(iii) worker qualifications for purposes of quality, safety and
reliability, (iv) quality, safety and reliability standards applicable
to new market entrants, and (v) mandatory training and skill standards
for all electrical workers responsible for systems and equipment
after restructuring.
The consensus group noted that a well-trained and highly skilled workforce is essential to system reliability in a competitive market for electricity. The group said, however, that programs offering education, retraining and outplacement services should be established to assist electric utility employees directly affected by the implementation of competition in the generation and supply of electric energy.
Statutory Protections, Including Minimum Staffing Levels and Employment Continuation
American Electric Power and Allegheny Power did not support the statutory protections for electric utility workers proposed by the IBEW. However, they joined Virginia's cooperatives and Virginia Power in supporting downsizing-related needs through a nonbypassable wires charge, e.g., covering such costs as severance pay, outplacement services, and retraining.
Virginia's utilities showed no support for any minimum plant or station staffing level requirement. They suggested that reliability is a responsibility all energy suppliers currently have and will have in the future, and that minimum staffing should not be mandated. The utilities also believed that electric utility workers assigned to any incumbent utilities' generation assets sold in restructuring-related sales, should receive no new statutory protections insofar as job protections or wage and benefits guarantees.
Worker Standards for New Market Entrants Relating to Safety and Reliability, and Training and Skill Standards for All Electrical Workers
The utilities emphasized that new market entrants would and should
be subject to current state, federal and industry requirements
governing safety and reliability. These include standards imposed
by the National Electric Safety Code, the North American Reliability
Council and Regional Reliability Council rules, and utility interconnection
requirements.
The utilities also emphasized that utility workers-employed by new entrants and incumbents alike-should continue to be trained in accordance with existing utility practices and standards, and in conformity with requirements imposed by applicable state and federal law. Any new standards generated by restructuring, they said, should be applicable to all.
When the joint subcommittee met in Manassas on November 10 to
receive final reports from the Taxation and the Consumer, Education
and Environment task forces, it established a drafting group-composed
of all task force chairmen, together with the vice chairman-to
begin preparation of a committee restructuring bill for the 1999
Session. This drafting group held it first meeting on December
3, followed by three subsequent meetings. Its final meeting was
convened on January 6.
This group used as its working materials the task forces' reports
which identified the policy alternatives advanced by stakeholders
and interested parties on critical restructuring issues. The
drafting group was also assisted by statutory proposals developed
by stakeholders and interested parties.
Thus, the drafting group developed and employed a work plan in which stakeholders and interested parties with statutory proposals were requested to submit these proposals to the drafting group for consideration. Some drafts addressed all issues associated with restructuring, and others focused on selected issues. The drafts submitted followed the general framework of Senate Bill 688 of 1998, a structure used explicitly by the Structure and Transition task force, and implicitly by the others. This helped the drafting group compare "apples to apples." Most drafts were accompanied by detailed drafting notes summarizing key aspects of the proposed legislation.
The proposed drafts were submitted to the drafting group's staff in electronic format for consideration at the group's December 8 meeting. This allowed the drafts to be (i) promptly distributed to drafting group members and (ii) immediately posted to the joint subcommittee's web site in advance of that meeting. At the December 8 meeting, the stakeholders and interested parties who submitted draft proposals commented on their legislative proposals and offered their views on Virginia's readiness for restructuring.
As part of its process, the drafting group also directed its staff to prepare overviews of key issues and options. These were broadly outlined in staff-generated "decision trees" developed from the task forces' matrixes. The decision trees served as an informational record of the drafting group's work, and as a key part of the group's report to the full joint subcommittee. Most importantly, it illuminated the drafting group's policy choices-choices also available to the joint subcommittee, acting as a body. As the work progressed, the drafting group chose among the policy options outlined in the decision trees, and directed staff to prepare corresponding statutory drafts, frequently integrating language and ideas submitted by stakeholders and interested parties.
At the drafting group's meeting on January 6, Delegate Woodrum requested that stakeholders and interested parties meet with the joint subcommittee's staff to (i) seek consensus on definitions for key terms and phrases in draft language before the drafting group, and (ii) discuss key issues before the drafting group in which the stakeholders are in disagreement-particularly in the critical areas of default providers, stranded costs and transitional ratemaking. It was hoped that frank discussion would settle some of the issues still in dispute between various parties, and clarify the differences on others in order to present clear policy alternatives to the drafting group. Consequently, two such meetings were held on January 8 and 10, and a number of issues were resolved or clarified-particularly as to default providers.
Following a drafting group meeting on January 11, a consolidated draft (Appendix M) incorporating draft legislation developed by the drafting group and staff in all areas except taxation, was prepared and distributed to stakeholders and interested parties via posting to the joint subcommittee's web site. This draft consolidated separate (i) structure and transition, (ii) stranded costs, and (iii) consumer environment and education drafts developed by the drafting group. The draft incorporated all drafting group work through January 11. While capped rate, stranded costs and nonbypassable wires charge sections were included in this draft, the drafting group had not formally reviewed or modified them. Thus, these sections remained as submitted by staff. It was anticipated that they would be taken up by the full joint subcommittee meeting as a "drafting group of the whole."
On January 18, the joint subcommittee met and reviewed the work of the drafting group to date. At that time, the taxation draft incorporating the work of a core drafting group of stakeholders assisting the legislative drafting group was reviewed, amended and then approved. Additionally, a substitute for the main restructuring bill was offered by a coalition of several stakeholders and interested parties (including Virginia Power, the Attorney General's Office of Consumer Counsel, ALERT and the Virginia Committee for Fair Utility Rates). The proposal focused on resolving disagreements among stakeholders and interested parties concerning stranded costs and transitional ratemaking issues. The substitute (in its proposed form prior to amendments by the drafting group) is attached as Appendix N.
Briefly stated, the coalition's proposal established a period of capped rates (spanning the transition to retail competition) in which (and through which) incumbent electric utilities would recover stranded costs. The proposal expressly rejected provision for stranded benefits. Shopping customers choosing to purchase generation from a nonincumbent would be required to pay a nonbypassable wires charge as a surrogate for the stranded cost recovery incumbents would recover from nonshopping customers.
The joint subcommittee adopted the coalition's proposal as well as other amendments to the consolidated draft proposed by other stakeholders and interested parties. Cumulatively, this draft (Appendix O), as amended, became the joint subcommittee's report and recommendation to the 1999 General Assembly for comprehensive legislation restructuring the electric utility industry.
A. SENATE BILL 1269
The draft endorsed by the joint
subcommittee at its January 18 meeting was introduced in both
houses of General Assembly during its 1999 Session as Senate Bill
1269 (Patroned by Senator Norment) and House Bill 2615 (patroned
by Delegate Plum).
Senate Bill 1269 (Appendix F) became the principal vehicle
for restructuring legislation in the 1999 Session of the General
Assembly. Patroned by Senator Thomas Norment, a member of the
SJR 91 joint subcommittee (and co-chairman of its Structure and
Transition task force), SB 1269 was virtually identical to the
draft legislation adopted and recommended by the joint subcommittee.
Following its introduction, the bill was assigned to the Senate
Committee on Commerce and Labor, where it considered at length
by that committee's Utilities Subcommittee. A number of amendments
were recommended by that subcommittee and adopted by the full
committee prior to the bill's passage by the Senate on February
9 (33 ayes, 4 nays and 3 abstentions). However, the bill's principal
provisions concerning capped rates, default service and others,
remained unchanged in the bill.
Following its passage in the Senate, the bill was communicated to the House of Delegates and referred to the Corporations, Insurance and Banking Committee on February 15. A special CIB subcommittee (which included all House members of the SJR 91 joint subcommittee) examined the bill and recommended several noncontroversial amendments to the bill. However, when the bill was heard before the full committee, the committee adopted the amendments recommended by the subcommittee, together with an amendment that was vigorously opposed by the incumbent electric utilities. That amendment (Appendix P) would have permitted the Virginia State Corporation Commission (SCC) to adjust capped rates prior to 2002. This provision was removed from the bill on the House floor prior to the House voting to pass the bill by a vote of 77 to 23. The Senate concurred with the House amendments and sent the bill on to the Governor, who signed the bill into law on March 25.
Overview; Transition Period
Senate Bill 1269 deregulates the generation component of electric service, eventually permitting all Virginia electricity customers to purchase generation service from the provider of their choice. Customer choice of generation suppliers will be phased in beginning in 2002, to be completed by 2004. The Virginia State Corporation Commission (SCC) can delay this schedule's implementation-but not beyond 2005 based on considerations of reliability, safety and market power. Transmission and distribution will remain regulated services, with transmission regulated principally by the Federal Energy Regulatory Commission (FERC) and distribution by the Virginia State Corporation Commission. Electric utilities will retain ownership and control over their current transmission systems and distribution service territories. Additionally, electric utilities are required by 2001 to join or establish regional transmission entities which will manage and control their transmission assets.
Capped Rates
During the transition from fully regulated electricity prices to generation customer choice, capped rates for electricity service will be in effect during the period 2001 through 2007. Capped rates fall into two categories: (i) comprehensive ("bundled") rates for generation, transmission and distribution and (ii) rates for "unbundled" generation services only. The rates will be established on the basis of (i) utilities' rates in effect on July 1, 1999, or (ii) rates established through utility rate cases filed before January 1, 2001, by utilities not currently bound by any rate case settlements with the SCC. During the capped-rate period, the SCC may adjust these rates to reflect changes in fuel costs, taxes, or utilities' financial distress beyond their control. The SCC is also authorized, after 2004, to terminate capped rates in an electric utility's former service territory. Such termination must follow a finding that there is effective competition for generation services within that service territory.
Wires Charges and Stranded Costs
Customers who purchase generation services from alternate generation suppliers (suppliers other than the incumbent electric utilities furnishing electric service to these customers prior to restructuring) during the capped-rate period may be required to pay a usage-based surcharge, or "wires charge." This charge will cover these "shopping customers'" pro rata share of incumbent utilities' potential losses, if any, resulting from market-based generation prices that are lower than the capped generation rates. The wires charge will also cover the shopping customers' pro rata share of any costs incurred by these customers' former electric utilities as part of their transition to a competitive market for generation services (and determined by the SCC to be just and reasonable). However, the combination of wires charges, together with (i) the unbundled charges for transmission and distribution services and (ii) projected market prices for generation, cannot exceed the capped rate for bundled electric service in effect for each utility during the capped-rate period. The bill stipulates that it is through capped rates or wires charges that Virginia's electric utilities will recover their just and reasonable net "stranded costs," if any, that exceed zero value in total.
Default Service and Suppliers
Customers who are either unable or unwilling to shop for alternative generation suppliers are entitled to receive bundled electric service from "default" providers. Default service would be available after customer choice is available for all customers (as early as 2004, but no later than 2005). The bill requires the SCC to designate default service providers in all of the incumbent utilities' former service territories. These providers may be designated from among incumbent utilities or from among other suppliers willing to provide one or more components of default service. Rates charged for default generation service will be established by the SCC. On and after July 1, 2004, the SCC is required to annually determine whether default service can be eliminated for particular customers, customer classes, or in particular geographic areas of the Commonwealth. The SCC's findings are to be reported annually to the Legislative Transition Task Force.
Licensing of Suppliers and Aggregators
The bill establishes licensing procedures for all persons and entities proposing to furnish competitive generation services in Virginia, either as suppliers or as aggregators. The legislation directs the Virginia State Corporation Commission to establish licensing criteria for both suppliers and aggregators, including requirements concerning (i) technical capabilities, (ii) access to generation and generation reserves, and (iii) adherence to market standards. The bill expressly permits public service companies' affiliates or subsidiaries to be licensed as suppliers or aggregators under this act, even if electrical supply or aggregation is not "related or incidental to" these companies' stated public service company businesses. These affiliates and subsidiaries are also permitted to own, manage or control generation plants or equipment. Additionally, the SCC is directed to establish a reasonable period in which retail customers may cancel, without penalty or cost, any contract for services entered into with licensed suppliers or aggregators. The bill permits local governments and other political subdivisions of the Commonwealth to aggregate (i) the electrical load of governmental installations and facilities and (ii) the energy load of residential, commercial and industrial retail customers within their boundaries on a voluntary, opt-in basis. The Commonwealth is also permitted to aggregate its governmental load.
Divestiture and Functional Separation
The bill states that the SCC may not require any incumbent electric utility to divest itself of any generation, transmission or distribution assets as part of the restructuring process. However, these utilities are directed to functionally separate generation, retail transmission and distribution by January 1, 2002, with plans for that purpose to be submitted to the SCC by January 1, 2001. Additionally, the SCC is directed to develop rules and regulations governing conduct between these functionally separate units to prohibit cost-shifting and cross-subsidies between them, and to prohibit them from engaging in discriminatory behavior toward nonaffiliated units. The SCC is also provided review authority concerning any proposed mergers, acquisitions, consolidations or other transfers of control over providers of noncompetitive electric services. However, such authority does not extend to such transactions involving providers of default service. The bill also provides that its provisions are not to be construed as exempting or immunizing from punishment conduct violative of federal or state antitrust laws.
Consumer Education
A customer education program, preparing consumers for the transition to a restructured market, is addressed by the bill. The SCC is directed to develop a comprehensive program addressing such issues as customers' rights and obligations in the purchase of electricity, and marketing and billing information. The SCC will present its findings and recommendations to the Legislative Transition task force on or before December 1, 1999, with particular emphasis on such a program's scope and on its funding. The SCC is also directed to develop regulations governing marketing practices, with particular emphasis on regulations addressing unauthorized switching of suppliers and improper solicitation activities. Standards for marketing and billing information will also be developed by the SCC through regulations.
Complaint Bureau; Consumers' Private Right of Action
The SCC is directed by this bill to establish or maintain a complaint bureau to receive and investigate complaints by retail customers against public service companies, licensed suppliers and aggregators, and other providers of competitive services. The SCC may enjoin or punish any violations of the provisions of this bill, pursuant to its existing authority. The Attorney General is authorized to participate in any such proceedings. Additional remedies available to electricity customers include a private right of action designed to provide compensation for customer losses resulting from (i) violations of the marketing regulations developed by the SCC pursuant to this bill or (ii) other deceptive or fraudulent practices. Customers can initiate civil actions to recover their actual damages or $500, whichever is greater. In the case of willful violations, customers may recover treble damages.
Legislative Transition Task Force
A Legislative Transition task force is established by the bill to monitor the work of the SCC in implementing the restructuring of Virginia's electricity market. The bill also indicates that the task force will be receiving reports from the Commission concerning restructuring programs implemented in other states. During its tenure (July 1, 1999, through July 1, 2005), the task force (composed of 10 legislators-six from the House of Delegates and four from the Senate) will also examine several specific issues, including the potential discounting of capped generation rates, utility worker protection, energy assistance programs for low-income households, energy efficiency and renewable energy programs, and the reliability of generation, transmission and distribution systems. Significantly, the task force is also directed to monitor stranded cost recovery authorized under this bill after the commencement of customer choice. This oversight will be accomplished with the assistance of the SCC, the Office of the Attorney General, incumbent electric utilities, suppliers, and retail customers. The purpose of the monitoring is to determine whether the recovery of stranded costs via capped rates and wires charges has resulted or is likely to result in the over-recovery or under-recovery of just and reasonable net stranded costs. The task force will make annual reports to the Governor and General Assembly, and it will be assisted in its efforts by a 17-member Consumer Advisory Board. The bill also indicates that recommendations of the task force will have at their core the policy of maintaining low electricity costs in Virginia, and ensuring that residential and small business customers will benefit from competition.
Other Provisions
Other provisions in the bill (i) authorize the SCC to conduct retail customer choice pilot programs, (ii) exempt municipal power systems from retail competition unless the municipalities operating them (a) elect to permit it or (b) compete for electric customers outside the service territories currently served by such systems, (iii) permit electric cooperatives to furnish default service in their current service territories unless they seek to provide default service in the former service territories of other electric utilities, (iv) permit the SCC to adjust generation rates within transmission-constrained areas to the extent necessary to protect customers from the effects of market power, (v) eliminate the use of eminent domain in conjunction with generation facilities constructed on and after January 1, 2002, (vi) require the SCC to submit annual reports on the potential for future competition in metering, billing and other electric services not made competitive by this bill, and (vii) permit customer-generators who are self-generating with solar, wind or hydroelectric generating systems to employ "net metering" equipment, subject to capacity restrictions and the provisions of regulations to be developed by the SCC.
B. SENATE BILL 1286
As enacted by the General Assembly, Senate Bill 1286, eliminates the state gross receipts tax, the State Corporation Commission special assessment tax, and the local gross receipts tax on electric suppliers. In place of these taxes, consumers of electricity will pay a declining block consumption tax and corporations will be subject to corporate income tax.
The consumption tax, which contains components for a state gross receipts tax, SCC regulatory tax, and local consumption tax, will be levied at rates of (i) $0.00155 for the first 2,500 kWh consumed; (ii) $0.00099 for between 2,500 and 50,000 kWh; and (iii) $0.00075 for power consumed in excess of 50,000 kWh. These combined rates may be reduced to reflect lower SCC regulatory charges and to omit the local tax component in localities served by municipal-owned electric utilities that opt not to assess the local tax. In addition, most electric suppliers will pay a net corporate income tax. Electric cooperatives are not subject to the corporate income tax except to the extent sales are made to nonmember customers. Electric suppliers will report real and personal property to the State Corporation Commission, which will centrally assess their property. These changes are in anticipation of federal deregulation of the electric utility industry. The effective date of the legislation is January 1, 2001.
Respectfully Submitted,
Jackson E. Reasor, Jr., Chairman
Clifton A. Woodrum, Vice Chairman
Richard J. Holland
Thomas K. Norment, Jr.
Kenneth W. Stolle
John C. Watkins
Eric I. Cantor
Jerrauld C. Jones
Terry G. Kilgore
Harry J. Parrish
Kenneth R. Plum