Comments of

Consolidated Natural Gas Company

On Selected Issues Raised By

The Joint Subcommittee Staff Outline

Of Senate Bill 688 Regarding Electric Restructuring Plans for Virginia

Phased transition to retail competition

• Commencement of competition.
  • CNG believes that all customers should receive the option to choose their power supplier at the same time, and that the market is ready for 100% customer choice on a date certain.
  • We do recognize that there may be transition issues -- such as ISO participation, billing limitations, and access to generation -- that might warrant a phased approach similar to that of Pennsylvania. (There, the plan was for choice to become available in three phases, with one-third of each customer class becoming eligible for choice in each phase). However the experience of Pennsylvania demonstrates that resolution of these issues can be expedited. We urge, therefore, that the Commission be authorized to determine whether a phased approach is necessary, and, if so, to expedite that process where possible.
  • If choice is to be made available on a phased-in basis, all customers should have the option to choose until each phase has been fully subscribed. In other words, customers should be permitted to elect to choose on a first-come-first-served basis within each rate class, and not according to selection methods imposed by the utilities. An allocation of participants by rate class may be necessary, so that it is not possible for a single large user to dominate the process.
  • It is not necessary to delay the availability of choice until ISOs and RPXs are fully implemented, but Commission oversight should continue until it can be demonstrated that there is a fully competitive wholesale market.

• Virginia should commence choice as soon as practicable. There is no need to delay until other states have implemented choice programs, but other states are likely to follow, if Virginia moves quickly toward a choice program.

• Commission authority. The Commission should have full authority to vary the time schedule, taking into account the changing marketplace, the benefits of an expeditious process, and the need for each step forward to be predicated on the availability of the competitive factors necessary to protect consumers.

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• Baseline rate cases. As long as a utility fully addresses competitive issues in its restructuring filings, there should be no need for a baseline rate case.

• Rate freezes in mitigation of stranded costs. This approach tends to have a chilling effect on the market, by lowering the energy credit ("shopping credit"), and making it difficult for new suppliers to compete.

• Preliminary wholesale competition.

• There is a robust wholesale market that continues to grow. Certainly there are market power issues that have not been resolved, but the formation of ISOs and RPXs will reduce some of those issues, over time.
• Moreover, it is important to recognize that the retail and wholesale markets are evolving together-that each supports the growth of the other. For now, there is enough wholesale competition to launch the retail market, and that emerging retail market has the potential to lead to further development of wholesale competition.
• We are deeply concerned about the potential for a regulatory gap at the point of interface between the wholesale and retail markets. It is not always clear, for example, whether FERC or the states are authorized to address the impact that transmission regulation may have on the ability of retail suppliers to compete.

• Unbundling.
  • "Unbundling" is the process in which a utility breaks apart its comprehensive package of "bundled" products and services, and offers customers the opportunity to select and pay for only those specific services they want.
  • "Unbundling" should be distinguished from "deregulation," which refers to process of making competitive forces - instead of price regulation - the guiding force in the marketplace.
  • In many situations, unbundling may occur long before the availability of competition warrants the removal of price regulation.
  • Unbundling of various products and services should occur gradually, with the Commission making utility-by-utility determinations about when unbundled generation, or other products or services, should be removed from price regulation.
• Pilot programs. Virginia has the opportunity to take advantage of the knowledge developed in pilot and early choice programs in other states. There is no need for Virginia to now launch its own pilots, and it is unlikely that marketers would elect to sign up for such programs. CNG, for example, does not believe that the benefits from participating in one more pilot would justify the infrastructure development and other costs that such participation would require.

Nondiscriminatory access to transmission and distribution systems

• Jurisdiction. There appears to be a regulatory gap. The Commission should be authorized to work with other bodies to address questions arising from the uncertain interface between FERC and state jurisdiction.

Independent System Operator

• Virginia's role and the regulatory gap. CNG is concerned about the potential for creation of yet another regulatory body, and finds the idea of a new -- perhaps regional -- tier of regulation to be certainly at odds with the proposed move toward competition. Nevertheless, we note the beginnings of regulatory uncertainties, including those flowing from limitations on FERC's authority over state issues, and believe that some sort of effort will be required to address the regulatory gap. We recommend that the Commission be directed to work in collaborative efforts with FERC and other bodies, in order to address regulatory shortfalls, as they may emerge.
• Other market power issues. The creation of ISOs is a critical step in the process of opening the electric market to new entrants. Even if the ISOs operate as truly independent entities, however, they cannot answer all the market power issues that will inevitably arise, particularly during the years of transition toward the competitive market. For example, the regulatory and technical complexity of the electric business will provide numerous opportunities for the formation of barriers to the entry of new power marketers. And the national merger trend could result in the creation of mega-companies, with huge energy resources and the potential for substantial supply side market power. The Commission should be authorized to address market power issues in a flexible manner, as the market continues to evolve.

Regional Power Exchanges

• RPXs should be operated as separate entities from ISOs.
• Suppliers and customers should be permitted to enter into bilateral contracts outside the reach of the RPX.
• The primary role of the RPX is to establish a market clearing price and allow for financial balancing between suppliers, to allow them to avoid balancing fees and penalties.
• Unbundling "must-run" units would facilitate price clarity, enabling customers to make comparisons with other options, like distributed generation. It is important to emphasize, however, that unbundling doesn't necessarily mean the removal of price regulation. Deregulation should not occur until there are competitive options. "Must-run" units are, by definition, facilities for which there are no competitive alternatives, and the Commission should be authorized to continue oversight until there has been a showing of sufficient competition to obviate the need to protect consumers with price regulation.

Transmission and distribution of electric energy

• Equality of treatment between incumbent and new market entrants cannot be achieved as a result of the initial steps of the implementation process. As the market evolves and restructuring goes forward within each utility service territory, the Commission should continue to scrutinize and make necessary adjustments to the specific terms of each restructuring plan. There is potential for inequalities to develop as the result of many types of restructuring plan provisions, from the timing of stranded cost recovery to disposition of utility assets.
• Unbundling, ending perhaps with total deregulation of generation, should be regarded as the start of a long-term trend toward less Commission oversight. If inadequate power supplies lead to higher prices, new market entrants can be expected to assume the risk of siting and building new merchant plants. While environmental, zoning and other review will, of course, continue, there will be no need for the Commission to oversee the business wisdom of any siting decision.

Regulation of rates subject to the Commission's jurisdiction

• Unbundling may occur long before deregulation. Price deregulation of traditional utility functions and services should occur only when there is sufficient competition in a specific situation to protect consumers.

• Initiating deregulation of a specific utility function should occur only upon a petition to the Commission by a third party and an affirmative showing that the forces of competition are in place.

Licensing of suppliers of retail electric energy

• Licensing, bonding and services standards are the three points of the customer protection triangle. The Commission should rely most heavily on licensing and bonding, and seek to avoid re-regulation by the establishment of overly intrusive service standards.

Suppliers of last resort [and default suppliers]

• Typically, states expect the supplier of last resort (SOLR) to serve three classes of consumers: (1) those who simply do not choose a supplier (or "choose not to choose"), (2) those who cannot find a supplier, and (3) those whose supplier fails to deliver as promised.
• All three customer categories should be treated in the same way. Customers who don't make an affirmative choice shouldn't be treated differently from those who can't find a supplier - to draw such distinctions could result in discriminatory pricing.
• Theoretically, the SOLR function could be unbundled into three parts, but, from a practical standpoint, it may be inefficient to separate the 3 functions. To fulfill the "obligation to serve" each of the three classes requires basically the same infrastructure. To deliver the service required by each function, a supplier must obtain relatively high cost, on-demand access to certain types of assets, including generation, transmission and balancing. Dividing these three functions among suppliers may be costly to consumers because of the need for redundant assets.

Voluntary aggregation permitted

• Aggregation is likely to be fundamental to cost savings in the competitive marketplace, and the legislation and regulations should allow for innovative approaches and flexibility in the implementation of aggregation.

Metering and billing and other related distribution services

• Unbundling and possible deregulation of these services should occur gradually, in response to the development of the marketplace. The Commission should be authorized to permit unbundling and deregulation on a case-by-case basis.

Nonbypassable wires charges

• We support the concept of a nonbypassable charge to permit stranded cost recovery, but customers should be permitted a buy-out option, so that innovative alternatives, like distributed generation, can be appropriately valued.

Divestiture not required; functional separation

• We do not support mandatory divestiture, but believe that the legislation and regulation should allow for voluntary divestiture, and provide incentives for utilities that choose to divest.
• Relationships between suppliers or distributors and their affiliates should be regulated by a code of conduct that neither favors nor disfavors the utility affiliate. The code should require only the degree of separation that is necessary to: 1) prevent cross subsidization and 2) prevent the flow of customer information from the utility to its affiliated marketer, unless the same information is available to other marketers.
• Mergers and acquisitions are an inevitable result of the national trend toward a competitive electric market. M&A activity will result in new economies of scale and innovative partnerships but the M&A trend may require the development of new regulatory approaches for addressing both vertical and horizontal market power.

Legislative transition task force

• The SCC should be requested to periodically brief the General Assembly on the progress toward customer choice, unbundling and deregulation.

More on Market Power

• Achieving market access for players other than incumbent utilities is a challenging and delicate task. There is no simple formula and no one regulatory body has authority over all types of market power that may develop. The legislation should specify the policy goals and authorize the SCC to address entry barriers and other market power issues on a continuing basis.
• For example, an ISO has the potential to mitigate vertical market power and provide new entrants with fair access to the transmission grid, but even properly structured ISOs and RPXs are not enough to mitigate horizontal market power.
• Market power questions may arise in many forms particularly during the transition phase. The Commission must have the flexibility to address market power issues in whatever form they may arise. One area requiring ongoing scrutiny is the details in any stranded cost recovery plan. The single biggest barrier to new marketers may be the amount of potential savings that customers see in the first few years because of a high stranded cost surcharge.