§ 56-576. Short title.

No response required.

§ 56-577. Definitions.

No response requested at this time.

§ 56-578. Applicability; municipalities.

Basic issue: The treatment of municipally-owned and operated electric utilities under a comprehensive restructuring act.

Representative Issues:

• Retail choice by current customers of municipal power suppliers.
• Retail electric power sales by municipal power suppliers to customers outside their municipal distribution systems.

AEP's Position:

AEP believes that all customers should have the right and opportunity to choose their electric supplier. Municipal power suppliers can be given the choice of granting open access to their current customers. Should a municipal power supplier elect to deny retail choice to its customers, it should not have the opportunity to expand retail sales beyond that which it is permitted to do under current statutes.

§ 56-579. Schedule for transition to retail competition; Commission authority.

Basic issue: The time line and structure of transition to retail competition, including timeliness, SCC oversight, rate cases, linkages to ISO/RPX formation,

Representative Issues:

• Commencement of competition; phase-in (e.g., PA), or concurrent commencement for all customer classes (e.g., CA).
• Relationship between commencement of retail competition and completion of ISOs and RPXs.
• Relationship between commencement of retail competition in Virginia and similar commencement in other states served by ISO's serving Virginia.
• Authority, if any, of Virginia State Corporation Commission to vary time schedule.
• "Baseline" rate cases.
• Rate freezes in mitigation of stranded costs.
• Preliminary wholesale competition.
• Unbundling
• Pilot programs.

AEP's Position:

AEP has proposed for some time a model for movement to competition consisting of several phases. The first phase, called an unbundling phase of 1-2 years provides an opportunity for rates to be evaluated, unbundled and a series of distribution tariffs prepared covering distribution service by the incumbent distribution provider for customers who wish to choose an alternate Energy Service Provider, or ESP. The unbundling phase facilitates development of the necessary market and transition infrastructure.

The next phase, would be a 4-5 year transition phase during which competition begins. During this transition period, rates for electric service would be capped and utilities would be given the opportunity to recover their regulatory assets and stranded commitments. Customers could exercise the right of choice based upon some definitive plan, but would be required to pay a Competitive Transition Charge (CTC) upon a showing by the utility that the customer's choice will leave production related costs stranded. Transition costs other than regulatory assets and impaired assets will be recovered by a separate component of rates until such costs are fully recovered.

At the end of transition, full competition occurs. All customers would choose their Energy Service Provider. Stranded cost recovery ceases but certain other transition costs may continue to be recovered. Generation should be deregulated at the time that the infrastructure and entities exist which permit a viable market to exist.

AEP believes that all customers should be provided with open access to the electricity delivery network at terms and prices which do not differ based on their choice of generation suppliers. In principal, open access and choice should be provided to all customers simultaneously as soon as the required infrastructure and viable transition framework for Virginia's utilities are in place. The target date to commence choice in Virginia is 1/1/02. This date is aggressive, but can be met through intense pursuit of development of ISO's, preferably the same ISO for all of Virginia's utilities.

For practical reasons, a short, nondiscriminatory phase-in of choice may be necessary. Any phase-in of choice should be accomplished in a way which does not advantage or disadvantage one class of customers over another. Nor should any phase-in of choice advantage or disadvantage one supplier over another.

AEP-VA, in response to the Virginia State Corporation Commission order in Case No. PUE980138 is aggressively pursuing development of an open choice pilot program which will provide needed information on the practical aspects of implementation and administration of choice.

Basic Issue: Access by electricity suppliers to transmission and distribution systems currently owned and operated by incumbent electric utilities.

Representative Issues:

• Delineation of jurisdictional limitations of both SCC and FERC.
• Transmission import constraints, and impact on market power.
• Regulation of transmission rates where transmission constrained until constraint relieved.

AEP's Position:

In general all generation should have non-discriminatory access to the utility delivery network, except for municipal service providers who elect to deny choice to their customers.

Transmission service would continue to be regulated by the Federal Energy Regulatory Commission "FERC".

While steps must be taken to reduce transmission and other market power constraints prior to deregulating generation, effectively dealing with transmission constants and constraint pricing on an on-going basis would be the domain of the ISO subject to FERC oversight. Since certification and site approval of lines will likely reside with the states, it will be an absolute necessity that regional/state cooperation exist so as to not interfere with or negate federal approvals of need for facilities.

Basic issue: The role of regional independent system operators (ISOs) in furnishing generation dispatch coordination.

Representative issues:

• ISO governance; board membership composition.
• Conformity of ISOs to a Virginia "public interest" standard, or to any other Virginia-specific standards.
• Extent of Virginia oversight of ISO following formation and approval of electricity dispatch in Virginia through ISO; ceding oversight to FERC.
• Determining ISO responsibility for coordinating with load serving entities, voltage stability, generation reserves and overall generation and transmission upgrades & reliability.
• Identification and obligations of must-run generation units.
• Minimum size requirements.
• Eminent domain and rights of condemnation.
• Dispatch of must-run units.

AEP's Position:

Independent System Operators, ISO's, should truly be independent. Their governance, board membership and operating structure should insure such independence, but must also achieve a balanced representation between transmission owning entities and other stakeholders, all the while permitting flexibility of operations. The current process related to formation and FERC approval of ISO's has and will provide extensive opportunity for all stakeholders, including the State Corporation Commission, to have input to the ultimate outcome so as to protect the public interest of Virginia.

ISO's must be sufficiently large to provide a wide range of supplier options resulting in potential benefits to all participants. A large regional network which deals with interstate commerce would, under existing statutes, be regulated at the Federal level. The FERC has been granted such authority and stated its claim to authority over transmission to retail customers.

The ISO's primary duties are to coordinate and operate a safe, reliable and efficient transmission system. To do so it must deal with short term issues such as scheduling, control and balancing. It must also focus on long term planning of transmission facilities and assist the utilities in obtaining appropriate approvals for new facilities. The ISO will be required to identify and coordinate the generation of any designated "must-run" units within the context of the individual ISO's borders. The ISO must take appropriate steps in facilities planning and pricing to prevent abuse of market power.

The power of eminent domain must be retained by the utilities and the states.

Basic issue: The role of regional power exchanges in providing electricity pricing mechanisms.

Representative issues:

• Conformity of RPXs to a Virginia "public interest" standard.
• Opportunities for bilateral contracts between suppliers and customers.
• Determination of whether all sales must be made through RPX.
• Relationship to electric cooperatives and municipal power suppliers.
• Pricing of generation from must-run units.

AEP's Position:

AEP will continue to actively support the development of independent market institutions that promote a robust competitive marketplace and, thereby, ensure the lowest cost for customers and electricity providers. Those institutions include an Independent System Operator and an RPX. At the same time, AEP believes that competition should determine the needed institutions to support the power markets, as has been the case in every other commodity market. AEP believes that the role of state and federal governments should be minimized in the development of an RPX, due to concerns that a government-imposed power exchange could retard development of new products and services, burden the electricity consumer with unnecessary institutional and bureaucratic costs, and impose unneeded rules and regulations on the market.

Pricing of generation from "must run units" will be addressed by FERC and administered through the ISO. Must run units should be priced on a cost of service basis or in a manner which prevents market power abuse.

§ 56-583. Transmission and distribution of electric energy.

Basic issue: The regulatory and structural framework for electricity's transmission and distribution.

Representative issues:

• Equality of treatment between incumbent utilities and new market entrants.
• Continuation of eminent domain authority under SCC oversight.
• Siting of merchant plants and any other new generation; role for SCC.
• Preservation of current IOU, cooperative and municipal power supply systems' distribution service territories.

AEP's Position:

All ESP's within the state must be subject to a level playing field without discrimination. Non investor owned utilities must be treated the same as investor owned utilities and vice versa. This includes opening up territorial boundaries, service practices and issues related to facilities.

As mentioned, eminent domain, along with SCC oversight of siting of transmission lines should remain with the state and utilities.

Market forces will be the primary driver in determining the need for merchant plants and other new generation in Virginia. Certification authority for such plants will likely continue to be lodged with the SCC.

Basic issue: Transitional and ultimate rate regulation for bundled and unbundled electric service.

Representative issues:

• Determination of services subject to rate regulation, and those subject to competition.

AEP's Position:

Present rates and tariffs should be evaluated for their reasonableness during a transition period and class subsidies must be eliminated. Rates can then be unbundeled and revised to properly reflect the major functions and array of services to be provided. At a minimum, initial unbundling would require separate identification of distribution services and their prices which should be based upon fully embedded costs. This would require elimination or, in the alternative, a separate identification as a component of rates of any subsidies between classes. Rates would be required for each of the services to be provided.

Customers should have the right to choose their supplier for billing, metering and related data management services. This would require related price unbundling for these services.

A company's terms and conditions service as well as other provisions and requirements of the tariff would need to be revised to provide reasonable levels of consumer protection and information.

An unbundled distribution tariff would not stand alone. A customer contemplating selection of an alternate energy service provider for generation services, would compare the standard bundled tariff with the sum of the unbundled distribution tariff; the FERC approved open access tariff for transmission services; and the pricing and supply arrangement with the chosen provider of generation energy services. The SCC would continue to regulate and control provisions and prices of the unbundeled distribution tariff.

Basic issue: Licensing, financial responsibility and customer service requirements imposed on all suppliers of electricity within the Commonwealth.

AEP's Position:

In order to insure reliability of power supply, all ESP's wishing to participate in a competitive energy market in Virginia should be required to register and obtain a certificate from the SCC. The SCC should be granted the authority to establish minimum certification requirements and to monitor and enforce compliance.

Basic Issue: Determining the generation suppliers of electricity customers who (i) are unable to obtain generation supply services, or (ii) do not affirmatively choose generation suppliers.

Representative Issues:

• Backstop providers where contract suppliers fail to delivery generation supply

AEP's Position:

The incumbent local service provider is the natural choice to fill the roles of both last resort and default suppliers. (Default supplier applies when a customer does not elect to choose or cannot obtain generation service from their preferred choice. Last resort supply arises when a customer's chosen generation supplier is immediately unable to meet their supply obligations). Any costs associated with programs or activities which insure provision of service as a default, or "universal service provider", should be recovered from all customers as part of transition costs. Provisions would be necessary in order for the incumbent supplier to recover all costs and appropriate analities from a chosen ESP who is enable to meet their obligations. As part of the ESP certification process, the SCC should monitor all situations involving last resort supplier situations and apply penalty or corrective measures.

Basic Issue: The framework within which individual electricity customers may aggregate demand in negotiating for generation supply.

AEP's Position:

Aggregation of and by customers should be permitted. This is consistent with the structure and nature of efficient markets and should be workable within the context of certification of ESPs.

The Company's proposed pilot is expected to provide information on aggregation related issues. AEP believes that effective education and information efforts will assist customers in being able to take advantage of energy supply options. We further believe that consumer protections can be implemented to provide viable choices for all customer classes.

Basic Issue: How billing, metering and related services will be handled and regulated.

Representative issues:

• Determining whether any of these or any other distribution services should be provided on a competitive basis.

AEP's Position:

Metering, billing and related data management components of distribution services should be permitted to be provided on a competitive basis. AEP-VA contemplates that its proposal for a pilot program may involve an evaluation of such a proposal. As a transition step it may be necessary for the host utility to provide metering, billing and related services as a regulated service until viable alternatives evolve and mature.

Basic issue: Maintenance of customer service functions during and after transition to retail competition, plus consumer information and disclosures during transition.

Representative issues: [No response requested at this time; issue is before the Consumer and Environmental Education and Protection Task Force].

• Antitrust consideration.
• Runaway prices.

Basic issue: The establishment or continuation of public benefit programs, including universal service, energy efficiency and conservation, etc.

[No response requested at this time; issue is before the Consumer and Environmental Education and Protection Task Force].

§ 56-591. Transition costs and benefits.

Basic issue: Allowance for and calculation of stranded costs and benefits,an issue currently before the task force assigned this topic.

Representative issues: No response requested at this time since this issue is currently pending before the Stranded Costs Task Force

§ 56-592. Nonbypassable wires charges.

Basic issue: The extent to which and the methods by which retail customers could be assessed pro rata surcharges for stranded cost recovery, the cost of establishing ISOs and RPXs, the cost of public purpose programs, etc.

AEP's Position:

The issue and methods of recovering stranded costs and other transition charges is before the Stranded Cost Recovery Task Force and will be addressed in that forum.

AEP believes that a non-by passable wires charge would be an appropriate means of recovering costs associated with certain transition issues, including but not limited to, regulatory assets, public purpose programs, increased environmental compliance costs, nuclear decommissioning and changes in state and federal taxes. Such charges can be monitored, evaluated and adjusted by the SCC as conditions changes and situations evolve.

Basic issue: Treatment of incumbent utilities' current vertically integrated structure.

Representative issues:

• Divestiture to sufficient numbers of entities to create a competitive market.
• Separation of generation and distribution.
• Relationships between suppliers or distributors and their affiliates.
• Mergers and acquisitions.

AEP's Position:

These issues arise out of a concern over market power and its prevention or elimination. Utilities should have the right to realign their portfolio of generation assets, but should not be required to divest themselves of such assets. Forced divestiture does not necessarily eliminate any existing market power and may only shift market power to different entities. Only additions to physical generating assets arising out of market forces or, initially, as a result of a proscribed corrective measure, will assist in eliminating any market power. Similarly, overt corrective prescriptions for eliminating transmission constraints, not required divestiture, will prevent market dominance.

There must be adequate separation between a utility's distribution functions and any affiliates. A code of conduct should be proscribed to insure against discriminatory treatment or subsidization between affiliates.

Basic issue: The role of the General Assembly during phase-in to retail competition.

AEP's Position:

HB1172 established target dates for implementation of major steps in the transition to competition for the Commonwealth. The legislature adopted this approach with the recognition that the many details of such transition would be forthcoming only by future legislative action.

Even after sufficient enabling legislation exists to clarify the path Virginia will take, the legislature should continue its review and exercise oversight of the process. This would permit the legislature to adopt appropriately flexible responses to changes in federal law or technological or infrastructure changes which might develop within the utility industry.

Basic issue: Striking a competitive balance between incumbent utilities and new market entrants.

Representative Issues:

• Mitigating market power associated with existing generation.
• Market power impact of existing generation sites as candidates for new, incremental generation.
• Competitive advantages associated with ownership of SO₂ allowances and the ability to generate NO_x offsets necessary to build generation in nonattainment areas.
• Competition for default services.
• Implications of long-term contracts between incumbent utilities and existing customers prior to commencement of retail competition.

AEP's Position:

AEP has expressed its belief that reasonable steps should be taken to mitigate any source of market power prior to deregulation of generation, and that future market power issues relating to transmission would be addressed by the ISO with FERC oversight. In the future, market forces will drive additions to generation supply in response to price signals in the market. No market power advantage is expected to accrue to an incumbent utility associated with ownership of SO₂ allowances and the ability to generate NO_x offsets.

A customer should have the right to choose or not choose an ESP. Those customers who fail to choose or who are unable to obtain services from their chosen energy services provider (default customers) should continue to be served by the incumbent utility. Adequate consumer protection, SCC oversight and information/education programs will exist so that mandatory allocation of default providers by all competing ESP's will not be necessary.

AEP supports the viability of existing contracts. Existing contracts which have terms or provisions which are inconsistent with provisions and terms available from the market will likely come under review and pressure between interested parties as a natural mitigator of market power.