Allegheny Power supports competition and the goal of allowing
customers to have their choice of electricity suppliers. As a
multi-state holding company, Allegheny Power supports federal
legislation to achieve this goal for customers in all states by
a date certain. Action by the federal government is also needed
to ensure that electric utilities are not disadvantaged in a competitive
environment under existing federal statutes. Despite the need
for federal legislation, Allegheny Power supports the right of
states to implement retail choice and is presently conducting
a retail pilot program in Pennsylvania in preparation for full
customer choice in accordance with that state's restructuring
laws and regulations.
Allegheny Power was an active participant in the Virginia
State Corporation Commission's (SCC) investigation into retail
competition last year and actively supports the work of this Joint
Subcommittee on this issue. We submit that the following plan
to implement retail choice in Virginia will ensure that consumers,
utilities and their shareholders are fairly treated in the transition
to more competitive electricity markets.
In order to implement customer choice in Virginia and ensure
a smooth transition from a regulated environment to a competitive
one, the legislature and the SCC must ensure that several critical
steps are taken. These include:
The evolution from the current regulated structure for generation
to a competitive market structure characterized by full customer
choice will require a period of transition during which an alternative
form of regulation will guide the restructuring of utilities and
the development of a competitive market. When seeking to structure
an alternative form of regulation, the future competitive market
must be considered. A fully mature competitive market for generation
will, at a minimum, reflect the following characteristics:
Allegheny Power advocates a transition period during which customers
will be permitted to shop for alternative suppliers of electricity,
non-shopping customers will be protected, and incumbent utilities
will be allowed to recover their transition costs. Prior to implementing
customer choice, utilities will unbundle their retail rates into
separate rates for generation, transmission and distribution functions
and file them with the SCC. Customer choice would be phased-in
to allow for an orderly registration process, avoid disruptions
and minimize transition costs. During the transition period, the
SCC would freeze retail rates at current levels for customers
who do not seek alternative electric suppliers, thus preserving
for retail customers the existing benefits of the state's already
low electricity rates. Utilities would be allowed to charge a
competitive transition charge to recover stranded costs from customers
exercising choice.
Under Allegheny Power's plan, all classes of customers will have
the opportunity to choose alternative electric suppliers during
the phase-in period. Customers could be selected on either a subscription
or lottery basis. All consumers who exercise choice would pay
a non-bypassable competitive transition charge (CTC) to the local
distribution company. The CTC during the transition period would
be structured to recover stranded generation costs, non-utility
generator costs, regulatory assets, and any other transition costs
as they are quantified during the transition period. The CTC for
stranded generation costs would be equal to the excess of the
unbundled, frozen retail rate over the then-current market price.
Customers who exercise choice would pay the distribution rate
of the local distribution company, the CTC of the local distribution
company, any applicable transmission rate(s), and the price offered
for generation by the supplier(s) they have selected. Customers
who do not exercise choice would pay a rate equal to the sum of
the local utility's unbundled rates. After the transition period,
generation will be fully deregulated and any remaining stranded
costs for regulatory assets, nuclear and fossil decommissioning
costs, and other (non-generation) transition costs arising from
prior regulatory decisions could be recovered via a wires charge.
The following discussion examines in greater detail many of the
issues addressed above, as well as many additional issues that
will arise and must be dealt with when Virginia restructures its
electric industry. The ultimate implementation of customer choice
will be dependent upon the successful completion of a series of
complex and interrelated tasks that include the passage of necessary
tax and restructuring legislation and the completion of associated
SCC rulemakings. Failure to complete or address one aspect of
this proposal will have implications for other activities and
may delay the successful implementation of customer choice.
An essential first step in preparing customers to make energy
choices in the future is to unbundle the retail rates they presently
pay into their component parts. Cost-of-service studies have long
been the established and accepted methodology for assignment of
costs, particularly common costs to functions and subsequently
to customer groups. These studies should be used as the basis
for unbundling rates. That process may require some modifications
to obtain the needed information, but the basic allocation process
should remain intact.
The following principles should be incorporated into the unbundling
process:
1. Costs should be functionalized into distribution, transmission and generation functions.
2. Overall revenue neutrality should be maintained - total revenues should neither increase nor decrease due solely to the unbundling process.
Deregulation of Generation
The purpose of introducing competition and customer choice in
generation is to allow the forces of competition to discipline
electricity prices for all customers. Once choice is implemented,
all utility generation in the competitive marketplace must be
fully deregulated. If competition is to be established, existing
utility-owned generation cannot continue to be regulated under
the traditional, cost-of-service framework. This will not promote
competitive markets, nor is it necessary to protect customers.
A transition period should be established during which customers
will be allowed to choose alternative electricity suppliers, non-shopping
customers will be permitted to remain with their incumbent utility
at regulated rates, and certain utility stranded costs will be
recovered from all shopping customers via a non-bypassable wires
charge. Allegheny Power supports a transition period that would
last for five years from the start of customer choice.
During the transition period, incumbent utilities will freeze
rates at existing levels, subject to exception for extraordinary
events, e.g., an increase in state or federal taxes, state or
federal environmental mandates, or maintenance of financial integrity.
This rate will be available to retail customers who are unable
or unwilling to choose an alternate generation supplier. The transition
period should be used to sequentially replace embedded generation
facility service with contractual service that the distribution
utility will place on the customer's behalf with the market. After
the transition period, the price of generation supplies for all
customers, including customers who choose to remain customers
of their local distribution utility, would be market-based. Transmission
and distribution would continue to be regulated.
Any customer that chooses to shop during the transition period
before full competition is implemented should be permitted to
return to the incumbent utility at market-based rates. Virginia
should avoid setting up a system where customers can choose between
regulated (or frozen) cost-of-service generation supply options
and market supply options. This would place regulated distribution
utilities in the untenable position of being obligated to obtain
and/or maintain regulated resources, with their associated expenses,
that their customers (who can still shop) would have no obligation
to buy, possibly leading to future stranded costs. To the extent
a customer leaves the local utility and is permitted to return
to the regulated rate during the transition period, a minimum
stay of one year should be required to avoid cost avoidance and
gaming of the system.
Enrollment Periods and Customer Phase-In
Based on its experience in the pilot programs in Pennsylvania,
Allegheny Power has gained valuable experience in administering
the new concepts involved in customer choice. These concepts include
new and improved customer services, customer education, billing,
supplier interface, ancillary service support and other administrative
responsibilities that need to be worked out with a manageable
volume of customers before proceeding to full-scale operations.
There should be an enrollment period of several months' duration
prior to the time that customers will begin to take service from
alternative energy suppliers. Time will be needed to carry out
customer education efforts and allow interested marketers to qualify
and effectively participate in the state. Providing sufficient
time to accommodate the needs of both customers and suppliers
will serve to minimize potential confusion at the outset of the
process.
Allegheny Power also supports a phase-in of customers to retail
choice in Virginia. This is advisable due to the logistics of
switching large numbers of customers to alternate suppliers and
answering customer questions on a timely basis. A phase-in that
allows an increasing number of customers the right to exercise
choice over a finite period of time will allow for a manageable
and nondisruptive transition period.
Default Service and the Role of the Distribution Utility
At present, there is no need to make major changes to the traditional
regulation of distribution services. All retail customers should
have access to their utility's distribution services in much the
same manner as they do today. Distribution utilities will retain
the obligation to connect all customers to the electric system
and will have the obligation to deliver power from their generation
supplier of choice. Distribution utilities will also continue
to provide metering and billing services to all customers as part
of that distribution service, at least in the first years of customer
choice. While it may be feasible to unbundle certain aspects of
distribution service such as metering and billing as a competitive
option in the future, it is premature to address the further unbundling
of distribution service prior to implementing full retail access.
At the onset of customer choice, all customers should have the
option of remaining with their incumbent utility at regulated
rates for the duration of the transition period. After the transition
period is over, any price caps will be eliminated and the distribution
utility will have the obligation to procure electricity at market
rates for customers who do not choose an alternative supplier.
At the end of the transition period, customers should have the
option of choosing, either directly or by default, their incumbent
distribution utility to supply them with power at market-based
rates in the future. The availability of market alternatives will
be sufficient to protect the customer from concerns about the
prices charged by the local utility for default generation services.
In a competitive market where choice is available to all customers,
customers will only choose to stay with the local utility if it
continues to provide them with service (including price, terms
and conditions) that is equal or superior to the service that
they will be able to get from other competitive suppliers.
Regardless of how choice is implemented, special contracts between
large commercial and/or industrial customers and incumbent utilities
should be honored until their contract terms allow for termination.
Confidential contracts between utilities and their customers should
be kept confidential.
The definition of stranded costs and the criteria for recoverability
should be mandated by statute. For existing utility-owned generation,
projected revenue requirements less market resale values should
define the method of calculating generating asset stranded costs.
This revenue requirement projection should be conducted over a
reasonable period of time, i.e., a three-to-five year transition
period that corresponds to the length of time that any portion
of retail rates are frozen for non-shopping customers. If a longer
time period is used, station decommissioning costs, necessary
capital additions and the costs of complying with new environmental
regulations become legitimate additional components of stranded
costs.
Market revenues should be determined by a market mechanism, such
as a periodic auction of a representative block of power. If an
administratively determined market price projection is used, it
should be done over a reasonable time period where both the revenues
and costs can be reasonably known, and should allow for periodic
true-ups to guard against over or underrecovery. The time period
used for any projection of market prices should match the time
period over which the revenue requirement is projected. Further,
any delay or amortization of stranded cost recovery should recognize
the time value of money to the Company. Additional components
of stranded costs that result from past regulatory decisions include
PURPA contract costs (net of market revenues realizable from energy
resale) and regulatory assets, which should be recovered via a
non-bypassable wires charge. Utilities should be required to undertake
reasonable measures to mitigate stranded costs.
A final component of potentially strandable costs that should
be recoverable in a deregulated environment are those costs incurred
by the incumbent utility as a result of the transition to competition.
These are costs incurred due to state requirements for customer
education, unbundled billing requirements, implementing new universal
service and/or other public interest programs, etc. If the Commonwealth
decides to establish new programs after generation markets are
deregulated, they should be funded by a non-discriminatory, non-bypassable
funding mechanism that applies equally to all suppliers and does
not distort the market for energy services. Any new funding mechanism
would need to be added to existing, unbundled rates and should
not be part of any rate freeze.
Taxes
Because electric utilities are large taxpayers in Virginia, the
state and local tax structure must be carefully reviewed and revised
as appropriate in conjunction with restructuring. Every effort
should be made to avoid a tax advantage or disadvantage to any
supplier or class of suppliers, including municipal and cooperative
systems. The competitive position of Virginia generation in relation
to generation in other states also demands serious consideration.
At the same time, state and local tax revenues must be preserved.
The primary tax that should be targeted for study is the state
gross receipts tax. While this tax has been workable in a regulated
environment, competition will emphasize its regressive nature-as
it is imposed on gross receipts rather than on income, a company
would be liable for it even if it made no money. Problems in collecting
the tax from out-of-state suppliers of electricity could also
arise. A consumption tax, application of the corporate net income
tax, or some combination thereof would significantly mitigate
the undesirable features of the gross receipts tax. The local
gross receipts tax should be reviewed in a similar manner. Any
plan for implementing restructuring should include consideration
of its tax consequences.
Electric Reliability and System Reserves
To ensure system reliability, the operational requirements for
all market participants must conform to all NERC and the appropriate
Regional Reliability Council reliability criteria. The location
of the load to be served, the control area to be traversed by
power destined for that load, and/or the generation sources should
act as the determinant of the appropriate Regional Reliability
Council rules to be followed at any point in time. Further, electric
system reliability should be measured differently in a competitive
generation services procurement era than it is now. In a competitive
market, the required services are contained in the ancillary services
standards and provisions of the FERC open access tariff. FERC
requires that generation service customers procure power delivery
services over the transmission system in a way that comports with
NERC and Regional Reliability Council standards, including the
maintenance of operating reserves. Those reserves, and those reserves
alone, should be recognized as the sole aspect of generation supply
reserves that can be mandated as an index of system reliability.
That is because they serve a real-time function in allowing the
integrated bulk power network to respond instantaneously to inevitable
short-term perturbations in the power supply/demand balance as
generators fail, loads spike or there are combinations of both.
According to the FERC pro forma tariff, the transmission service
provider is the monitor of the customer's compliance with ancillary
service standards regarding the provision of operating reserves.
If an ISO is the transmission service provider, then such allocation
of authority is appropriate. In the future, transmission service
providers (including ISOs) will not have affiliated generation
services at their disposal to allocate automatically to transmission
service customers that cannot or will not provide those operating
reserves themselves. As the market evolves, transmission service
providers should be required to maintain generation reserve purchase
contracts that are competitively and non-discriminately placed
with the generation supply market. Providers can call upon these
contracts from time to time as necessary to supplement for a fee
any shortfalls resulting from insufficient power purchases by
customers or the failure of an alternative supplier to deliver
contracted-for power supplies.
If all customers are to benefit from a competitive market structure,
distribution utilities and non-investor owned utilities must be
subject to the same rules and regulations as investor owned utilities
in the same time frame, including the ability to recover stranded
costs. It is appropriate to treat these utilities like any other
market player at the outset of the restructuring process to ensure
state-wide uniformity. To do otherwise will fragment the retail
access market to the disadvantage of non-IOU customers. To the
extent cooperative and municipal utilities are exempted from state
restructuring plans, they should not be permitted to compete against
investor-owned utilities from such a protected position. If a
cooperative or a municipal utility seeks to compete in the retail
market, full reciprocity and compliance with all state regulatory
requirements must be required.
Universal Service
Allegheny Power supports the concept of a universal service fund
to ensure that low-income customers are able to pay for essential
electric services. In order to protect the customer who is not
able (rather than not willing) to pay, the state should require
that all energy users support an assistance program, with minimum
eligibility requirements, funded by a universal service charge
on all electricity service provided in the state. This fund should
be set up in such a way that utility shareholders are not at risk
for the provision of such publicly desired services.
The distribution utility should not be required to supply customers
who default on their bills to third-party competitive suppliers
without assurance of compensation. Nor should the distribution
utility be responsible for non-payments to third-party energy
suppliers. If partial payment is received, it should first be
applied toward the distribution portion of the bill because of
the distribution utility's continuing obligations to the customer
in a deregulated environment and to ensure continued system reliability.
The state will need to come up with another means of addressing
the problem of customers who refuse to pay for their electric
services, including establishing rules for the disconnection of
service. (Note: Requirements for universal service programs or
customers who default on their payments should not be confused
with the default service discussed above, where a customer fails
to choose an alternative electricity supplier, thus by "default"
chooses to remain with its local distribution utility for generation
services.)
As electricity markets are restructured, energy efficiency services
will be but one part of a larger portfolio of services that will
be packaged and made available to consumers from a wide variety
of suppliers. In the move toward a less regulated environment,
the Commonwealth should not impose the obligation to deliver energy
service programs on incumbent utilities. If Virginia decides to
subsidize such programs in a competitive environment, it should
do so through a competitively neutral mechanism, e.g., tax credits,
and should not become part of the regulated cost of service of
the distribution utility.
Environmental Requirements and the Development of Green Power
All suppliers should comply with existing environmental regulations,
with the understanding that under current law, environmental regulations
are not and need not be identical for all sources. In addition,
some sources may be granted variances to regulations due to site-specific
circumstances. Compliance with existing laws and regulations will
not be impacted by competition. Furthermore, in a competitive
market, utilities should not be required to disclose the emissions
of individual suppliers. Complications include the relative impact
of different pollutants, the location of the emission source,
offsetting actions at other sources, emissions by affiliated companies,
purchased power from other sources, and day to day changes in
the source selection by the energy supplier.
Disclosure of emissions data will not lead to the development
of so-called green power or renewable resources. Energy providers
will develop renewable power based on an evaluation of its cost
effectiveness compared to other power supply options and the demand
evinced by consumers. If suppliers wish to advertise the "green"
nature of their energy, they should be allowed to do so subject
to verification under standard "truth in advertising"
requirements. Customer should be free to choose such suppliers
if they wish. Ideally, the free market should decide the economics
of a supplier's generation mix. To the extent that Virginia chooses
to encourage renewable resources, a separate state-funded mechanism
should be established that does not burden any competitor in the
marketplace.
Customer Education and Safeguards
Customer choice is relatively complex and customer understanding
is the key to successful implementation. There is a fairly bright
line between customer education and marketing. Because the electric
distribution company services will be unbundled from a utility's
generation sales services, the distribution utility is the logical
entity to conduct a customer education program under the direction
of the SCC. However, this activity is expensive and customers
should bear the burden of these added costs, which are determined
to be a necessary part of restructuring the electric industry.
A customer education program should make customers aware of the opportunity to choose, help them understand how to implement choice of an electric generation supplier and to make an informed choice to maximize their value. Surveys should be conducted to benchmark the success of the customer education program and to assist in targeting specific demographic groups. Because of the complexity of electric customer choice and the likely need for customers to refer to educational material over time, brochures and pamphlets should be the primary media for communicating the information. Broadcast media can be used to create awareness and other means such as speakers' bureau, public exhibits, newspaper releases and advertising, cable television and community action groups can be used to augment the pamphlets and brochures.
False and deceptive advertising should be prohibited and existing
state laws governing commercial practices should be sufficient
to control and punish such activities. The SCC and the Attorney
General's Office have the responsibility and authority to monitor
commercial practices and take appropriate steps to sanction illegal
behavior. The Commonwealth must resist the temptation to regulate
business relationships between suppliers and customers. The best
safeguard against consumer fraud and abuse is an informed consumer.
Supplier authorization may be needed to provide public oversight
over the entry of new energy suppliers into Virginia, and registration
requirements for suppliers should be developed. These requirements
should not be overly burdensome on suppliers, but should serve
to ensure that appropriate consumer safeguards are maintained,
including reasonable risk protections, bonding and credit issues.
The SCC should require suppliers to post bonds to protect the
cash flow of the local distribution companies (or responsible
control entity) in the event of energy imbalances that can occur
when a supplier's obligations exceed delivered power.
As a condition to regulatory approval of the pending merger of
Allegheny Energy, Inc. and DQE Inc., the Allegheny companies committed
to join an independent system operator (ISO). In part to carry
out that commitment, Allegheny Power joined the Midwest ISO. It
is believed that regional ISOs will help to promote robust regional
electricity markets while ensuring that system reliability and
stability is maintained.
Allegheny Power does not believe that a regional power exchange
(RPX) is essential to accommodate broad-based retail access. With
open transmission access, a viable wholesale generation market
has developed that is available to alternative suppliers to serve
retail customers, thus, there is no immediate need for an RPX.
To the extent they are formed, ISOs should be permitted to function
for a while before determining if there is a sufficient
market for the services that an RPX would provide. States should
encourage the development of ISOs that are compatible with or
can easily accommodate the free market development of RPXs.
The focus of the legislature and the SCC should be on the prevention
of anti-competitive abuses by companies providing distribution
service in a restructured industry. This can be accomplished through
the development of a code of conduct that governs the relationship
between the distribution entity and affiliated and non-affiliated
electricity suppliers. Allegheny Power recognizes the unique regulated
monopoly status of the electric distribution entity in the delivery
of electricity, and that a properly designed Code of Conduct is
appropriate to prohibit abuse of that status. The code should
require the electric distribution entity to provide impartial
service without regard to the customer's electric generation supplier
and to provide impartial information to the customer.1
Without consent of the customer, the electric distribution entity
should not disclose to its affiliated generation supplier or to
any other supplier, information obtained in connection with providing
delivery service or related utility services. The delivery and
generation functions should be functionally separated to avoid
sharing of information that may create an advantage or conflict
of interest between marketing, generation or delivery of electricity.
This can be achieved through accounting controls, organizational
structure and operating protocols.
States should not attempt to dictate corporate structures of businesses
or the developing marketplace. Mandatory divestiture of corporate
assets is neither necessary nor acceptable. Further, the use of
corporate name and logo by affiliates should not be prohibited
and utilities and their affiliates should not be prohibited from
jointly marketing their services. In other words, the Code of
Conduct should not be used to interfere with normal competitive
processes by, for example, handicapping some participants in the
marketplace so they cannot compete as effectively as others. It
is in the interest of the Commonwealth to prevent predatory conduct
that disrupts the competitive process, not to micromanage competition.
Therefore, Codes of Conduct should not be designed to deny more
efficient operators and their customers the benefit of those efficiencies.
In any competitive arena, the participants bring their own strengths
and weaknesses. What can be assured through a Code of Conduct
is that the monopoly distribution entity cannot engage in conduct
that disrupts the competitive process. That is the goal to be
attained.
1 Allegheny Power is already subject to several codes of conduct. Like other utilities subject to FERC Orders 888 and 889, Allegheny Power's transmission business unit is subject to a FERC-approved Code of Conduct governing its dealings with generation providers, including its affiliated generation business unit. Allegheny Power's marketing affiliates, AYP Energy and Allegheny Energy Solutions, are also subject to a FERC-approved Code of Conduct. West Penn Power Company, Allegheny Power's Pennsylvania operating utility, is subject to a Code of Conduct governing the dealings between electric distribution entities and electric generation suppliers in the customer choice program and, on an interim basis pending adoption of a permanent code, in the phase in of customer choice.