| Hon. Clifton A. Woodrum, Co-Chair Structure and Transition Task Force, SJR 91 Post Office Box 1371 Roanoke, VA 24007 | Hon. Thomas K. Norment, Jr., Co-Chair Structure and Transition Task Force, SJR 91 Post Office Box 1697 Williamsburg, VA 23187-1697 |
Dear Messrs. Woodrum and Norment:
MEPAV is pleased to present its narrative outline of restructuring plans for Virginia as invited by the Subcommittee staff's Memorandum of May 29, 1998. MEPAV has previously presented our views on market power, competitive services following restructuring, and suppliers of last resort and default providers in comments submitted on June 3 and June 9. This narrative outline will include those issues as well as others raised in the outline attached to the May 29 staff Memorandum.
§ 56-577. Definitions. It is premature to comment on definitions, but we note that Senate Bill 688 as drafted would not include wholesale entities such as Blue Ridge Power Agency and Virginia Municipal Electric Association No. 1 in the definition of "Electric Utility" and would not include municipal electric systems in the definition of "Incumbent electric utility." Whether these definitions, and perhaps others, are appropriate will depend on the substantive provisions of the bill.
§ 56-578. Applicability; Municipalities. Whether and/or when any individual municipal electric system wishes to permit retail choice should be a decision by the local government. As a practical matter most, if not all, municipal systems will likely opt for retail choice if realistic competition can be achieved, but the timing of that choice will be important to an effective transition, and should remain with each municipality. MEPAV believes that a municipality that elects to serve retail customers outside of its service area can properly be required to open its service area to retail competition at the same time as a matter of reciprocity. MEPAV does not believe that there would be any need for SCC regulation of the price and terms of retail energy sales by municipalities because their customers/citizens/owners and, particularly, the competitive market can be expected to impose necessary discipline. Any complaints about discriminatory terms or prices for use of the municipal systems' distribution facilities (wires, metering, etc.) can be dealt with by local governing bodies or, if necessary, local courts.
§ 56-579. Schedule for transition to retail competition; Commission authority. It is premature to decide whether phase-in of competition or concurrent commencement for all customer classes would be preferable. MEPAV's view, based on the present state of the industry and consumer awareness, is that a phase-in approach would be more appropriate, so that transitional and other problems can be worked out rather than rushing to embrace a competitive model before it can be realistically implemented. In this regard, it is imperative that a functional and truly independent ISO (and perhaps RPX) covering a wide geographic area needs to be in place before effective competition can be achieved. MEPAV is concerned that opening up the market to retail choice before the mechanisms are in place to permit competition will further enhance the market power of those companies that now control transmission. This concern, as stated in earlier comments and as discussed later, is based on MEPAV's own experience with wholesale customer choice. It is imperative that consistent and nondiscriminatory rules and practices be established and followed.
Because consumers in Virginia enjoy relatively low rates, MEPAV perceives no need to rush into retail choice prematurely even if other states served by ISOs serving Virginia have permitted retail choice, but we believe that once a functional and independent ISO is in place retail choice can be implemented. Depending on the state of the industry at the time any bill is enacted, it may be appropriate to allow the SCC to determine the time for retail choice for jurisdictional utilities.
Although MEPAV's members would not be affected directly by "baseline" retail rate cases or retail rate freezes in mitigation of stranded costs, they are concerned that these devices may be used to penalize today's captive customers of regulated utilities by requiring them to subsidize those utilities' future customers by transferring costs that should be recovered from future customers to today's customers, thereby artificially depressing future prices (or alternatively enriching shareholders). Similarly, any unbundling of generation, transmission or distribution will need to be done in a way that does not permit costs to be improperly allocated or transferred between or among those functions.
We do not know what the Subcommittee staff means by "preliminary wholesale competition." If "wholesale" means "sales for resale," competition is emerging as a reality today, except to the extent that market power exists and where long-term requirements contracts are in place. Generally, these are issues that are properly addressed by FERC under the Federal Power Act and the sales for resale issue should not be dealt with in any bill in Virginia, although market power issues may properly be addressed in such legislation. If "wholesale" is intended to mean sales to large retail customers, then it may be appropriate to allow the SCC discretion to delay the implementation of such competition.
Unbundling of generation from transmission and distribution is essential for competitive markets to evolve, and unbundling of transmission and distribution may also be important. For the reasons discussed in MEPAV's June 9 submittal and repeated below, it is premature to consider whether other services should be open to competition and therefore the possible unbundling of such services should not be addressed now.
§ 56-580. Nondiscriminatory access to transmission and distribution systems. These services are now monopoly services and should continue as monopoly services at this time. This means that they need to be regulated; they should continue to be regulated as they are at this time, including respecting current jurisdictional authorization and limitations. The 7factor test established by the FERC in its Order 888 for distinguishing between transmission and distribution facilities should be recognized in any legislation. Transmission rates are currently regulated by FERC and will continue to be so regulated by FERC. Distribution rates charged by investor-owned utilities and cooperatives are regulated by the SCC and should continue to be so regulated. Rates charged by municipal electric systems are determined by their governing bodies without the need for third party regulation. There is no reason to change this form of "regulation," which has proved to be effective.
§ 56-581. Independent system operator. The representative issues listed as bullets in the Subcommittee staff outline are all important, but it is premature to identify needed legislative solutions. MEPAV members are actively participating in the development process of the Alliance ISO in which process both AEP and Virginia Power are also active participants. It is MEPAV's objective to assure that the Alliance ISO is independent, starting with the need for an independent governance structure. Therefore, we are not addressing the individual bullet items in the staff outline at this time because we want to see if the Alliance ISO development prices results in a workable ISO. MEPAV believes that FERC's eleven principles for ISO development enumerated in its Orders 888 and 888A can provide the basis for an essentially self-regulating ISO with the need for only limited oversight by FERC, the SCC and other states' regulatory commissions. If, however, the Alliance ISO that evolves from the present process falls short of the letter or the spirit of these principles in a material way, MEPAV intends to raise its concerns before FERC, as well as before the SCC and the Virginia legislature. At this time, however, MEPAV believes that the voluntary process under way should be permitted to go forward.
§ 56-582. Regional power exchange. The need for, and role of, a regional power exchange will depend on the nature of any ISO (or ISOs) and the area they cover. A properly formed ISO should be sufficiently large in area to constitute the "region" that would be a regional power exchange. If there is a regional power exchange, it will have to deal with many of the issues confronted by an ISO. In addition, any regional power exchange (or ISO) should recognize existing bilateral contracts between and among market participants and should facilitate new bilateral arrangements.
§ 56-583. Transmission and distribution of electric energy. Because transmission and distribution services are now, and are likely to continue over the next several years to be, monopoly services, there is no reason to address issues of "equality of treatment between incumbent utilities and new market entrants" for activities other than generation sales, except to the extent that transmission constraints contribute to market power. FERC is the appropriate agency to regulate the nondiscriminatory availability of transmission service, and the SCC is the appropriate agency to regulate the availability of distribution service from investor-owned utilities.
The current legal structure for eminent domain authority and siting of generation (whether merchant plants or other new generation) and transmission should continue, but regional needs need to be considered in siting of new transmission facilities.
MEPAV believes that current IOU, cooperative and municipal distribution geographic service territories should be preserved, but that once retail choice is offered they will be meaningful only for the distribution functions (and recovering of any permissible stranded costs). New customers requiring the extension of distribution lines would be provided service by the utility serving the geographic area. As noted above in connection with § 56-578, MEPAV believes that for municipal systems whether and/or when to permit retail choice should be a decision left to each individual local government.
§ 56-584. Regulation of rates subject to the Commission's jurisdiction. MEPAV takes no position on this section at this time other than to observe that until such time, if ever, that distribution services are open to effective competition, they will need to be continued to be regulated as monopoly services by the applicable jurisdiction.
§ 56-585. Licensure of suppliers of retail electric energy; license suspension or revocation; penalties. MEPAV has no specific recommendations at this time on how to deal with the issues identified, but recognizes that the issues need to be addressed because they are critically important to the protection of consumers, particularly considering the vital human needs for a reliable and affordable supply of electricity.
§ 56-586. Suppliers of last resort [and default providers]. Local distribution entities should also be the suppliers of last resort and default providers. Because those distribution entities have traditionally served these functions, they are already in a position to continue to serve these functions and should be permitted to continue these roles, receiving appropriate compensation, in a competitive environment. For those customers not wishing, or not able, to select an alternate supplier, the least disruptive approach would be to provide for the existing local distribution service provider to continue to be the supplier when the customer has not elected to obtain service from an alternate supplier. That way, customers that cannot, or elect not to, choose an alternative electricity supplier can continue to have a single local entity with whom they can interface regarding their electricity service.
The role of supplier of last resort is particularly important inasmuch as it provides a safety net in two distinct circumstances: (1) for those customers who are perceived to be credit risks; and (2) for these customers whose power supplier fails to deliver as scheduled. Suppliers of last resort should receive reimbursement from all retail electric suppliers for providing service to customers who are credit risks and they should be permitted to charge a premium to the power suppliers or perhaps the customers in circumstances where the power supplier fails to deliver. Otherwise, the suppliers of last resort would be burdened with a risk and cost for providing a necessary function in assuring that customers' needs for an essential service are met.
There are two principal reasons why distribution service providers should be the default providers as well lack of disruption of existing relationships and regulatory simplicity. Continuity of the preexisting supply relationship where a customer makes no election to change is not only common sense, but obviates the need to develop a new administrative structure to implement an alternative scheme in a manner that is perceived as fair to all, while maintaining reliability.
§ 56-587. Voluntary aggregation permitted. MEPAV has no position on this matter at the present time.
§ 56-588. Metering, billing and other related distribution services. MEPAV believes that the only area that offers significant potential benefits from competition at this time is the generation market (assuming market power problems, including transmission constraints, are resolved). Distribution and related activities, such as billing and metering, should continue to be local distribution services, subject to the same regulation as at present (by the State Corporation Commission or by citizenowners of a municipal local distribution entity). Unlike the generation market, we have not seen a case made for opening up these activities to competition at the inception of retail choice. Indeed, because of issues related to suppliers of last resort and serious safety concerns, a precipitous opening up of these activities to competition is not advisable and will necessarily result in costly duplication of facilities and potentially higher costs to customers.
Specifically, MEPAV is concerned that the extra confusion created by introduction of competition into local distribution services would impact adversely on the public and might undermine the hoped-for benefits of competition in the generation market. Moreover, local distribution entities and their customers would be faced with safety problems if meters are installed incorrectly and are not maintained properly. In addition, they foresee problems if a fire or other emergency were to occur and it is unclear which entity would have the responsibility (or ability) to take corrective measures in connection with meters that may be owned by other entities. Similarly, needless introduction of additional players into local distribution services would impede a customer's ability to look to a single local entity to address concerns about its electric service, and could multiply the number of entities that would need to be afforded rights to ingress and egress customer property. Finally, the distribution utility's independent need to obtain accurate metering information for the billing of distribution services and for planning its distribution system means that opening up this function will often result in duplicate meters and extra costs to consumers.
MEPAV's view that distribution and related activities should continue to be local distribution services would not foreclose local distribution entities, such as MEPAV's members, from contracting with others to provide services, such as meter installation and maintenance, for them. The decision of whether to so contract should remain with the local distribution entity which could make informed decisions as to the benefits of contracting for such services or providing the services themselves, taking into account efficiencies, safety considerations, customer welfare, and reliability.
§ 56-589. Consumer protections and customer services; penalties. MEPAV expresses no position on these issues at this time.
§ 56-590. Public purpose programs. MEPAV expresses no position on these issues at this time.
§ 56-591. Transition costs and benefits. As suggested by the Subcommittee staff outline, MEPAV will present its comments on this issue to the Stranded Cost Task Force.
§ 56-592. Non-bypassable wires charges. The basic issues set forth in the Subcommittee staff outline appear to be dependent on the recommendations of the Stranded Costs Task Force and will not be addressed by MEPAV at this time. Not mentioned, however, is the treatment of any stranded distribution costs. This will become a significant issue if, contrary to MEPAV's recommendation, distribution services are opened up to competition or customers are allowed to build directly to transmission and bypass the local distribution system. MEPAV has not yet developed a position on how to handle the costs that would be stranded under such circumstances.
§ 56-593. Divestiture not required; functional separation [and other corporate relationships]. For there to be an effective competitive market, there needs to be a sufficient number of entities in the market that the market is subject to competitive forces rather than under the control of one or relatively few players. This means that mergers and acquisitions need to be scrutinized and that market power issues need to be addressed (as discussed in the last part of this Narrative Outline). However, it will take more than preventing harmful increases in market power through merger to make competition a reality in the electricity industry. The obstacle to competition posed by the high degree of concentration that exists already, without additional mergers, also needs to be remedied. For this reason, MEPAV respectfully submits that the legislature should not categorically rule out divestiture of generation as a necessary means to achieve real competition in today's highly concentrated electric industry.
Market power may be present and exercisable where a utility (or small group of utilities) controls the bulk of resources with certain operating characteristics and within the same variable cost range. The gaming that is recognized to have occurred in the United Kingdom has frequently involved the withholding of bids on generation on a critical day, with the effect of changing the market clearing price significantly.
Other states that have looked closely at the question have concluded that generation divestiture needs to be a part of a transition to a competitive market. For example, even with an ISO and spot energy market, the California Public Utilities Commission concluded that generation market power could be exercised in California and it therefore provided incentives for divestiture of 50% of the generation resources of the two largest California utilities. See December 20, 1995 Policy Decision in CPUC Docket No. R.94-04-31 and I.94-04-32. In the FERC proceedings associated with the California restructuring effort, economists for two of the California utilities found concentration levels unacceptably high absent very substantial divestiture of generation resources (which neither the FERC nor the California PUC had clear authority to order). Thus, Virginia legislation should include divestiture of generation to multiple unaffiliated entities within the tools available to ensure the retail competition does not result in the worst of all worlds: unregulated monopolists.
In addition to addressing horizontal market power (e.g., through divestiture of generation), vertical market power must also be remedied if competition is to be effective. Transmission is the highway of commerce in the electric industry, and the transmission owner's incentives and ability to use its control over transmission to favor its own electricity sales, and the distorting effect of that control on the market, cannot be overstated, especially when the stakes are raised through introduction of retail competition. Thus, generation needs to be structurally (not just functionally) unbundled from transmission and distribution. If a fully independent ISO is not established, then transmission divestiture would likely be required to prevent market power abuses. MEPAV's experience is that Codes of Conduct dealing with the functional separation within a company have not been effective and are likely to not be effective in the future. If a utility wishes to achieve functional separation by creation of affiliates as contemplated by § 56-593, we agree that there should be SCC oversight to ensure that such separation is effective and to verify that costs are not shifted improperly between functions, an oversight role that needs to be undertaken by the FERC as well.
§ 56-594. Legislative transition task force established. MEPAV supports the establishment of a legislative transition task force to work collaboratively with the SCC. Because of the magnitude of the issues involved in restructuring and the sea changes in the electric industry, it is likely that future legislative action will need to be considered to allow restructuring to accomplish its intended purpose. Moreover, because the SCC lacks jurisdiction over many of the market participants (including MEPAV's members), there is a continuing role for the legislature.
MEPAV members purchase over 98% of their electricity at wholesale and distribute it to their customer-owners (the balance is generated by some individual MEPAV members). The MEPAV members are transmission dependent utilities in that they are completely dependent on the transmission facilities of the vertically integrated IOU, within whose transmission system they are located. In this sense, the MEPAV members are like retail customers who will also be dependent on the IOU transmission systems to gain access to competing generation supplies. Furthermore, the MEPAV members have already begun to experience, in limited measure, the transition to a more competitive wholesale generation market and some of the frustrations associated with their dependence on the transmission systems of others for access to that evolving market.
Therefore, MEPAV members address this issue as both wholesale customers and retail suppliers and based on their experience in the still immature wholesale market, which gives them a significant and perhaps unique perspective on these topics. The following comments are directly applicable to the challenges that will be faced in the contemplated transition to a competitive market when tens, hundreds or perhaps thousands of transactions with suppliers inside and outside of Virginia are expected to occur. MEPAV members on the AEP system have, over the past year, executed only two transactions (six members) with outside suppliers amounting to approximately 450 megawatts. The total load served by AEP in Virginia is approximately 6,000 megawatts.
This subject is of paramount importance to the development of a truly competitive generation market within the Commonwealth of Virginia. It goes without saying that allowing the competitive pricing of a product without having adequate access to numerous, readily available supplies of the product would be harmful to the consumers of the product. In the electric utility industry in Virginia, transmission constraints can and do restrict access to adequate supplies of firm power and energy that would be necessary to provide a truly competitive generation market for the citizens of the Commonwealth. This is an extremely important issue that must be addressed in any plan to allow market-based pricing of electricity in the Commonwealth.
What is a transmission constraint? It is the physical limitation of a certain transmission facility or combination of facilities, such as transmission lines and/or transformers, to carry additional load without endangering the reliability of the network. When transmission constraints foreclose or limit the ability of generators outside a utility's transmission system to reliably supply customers located within that utility's transmission system, it can significantly impact the degree of generation service competition in the area. The measure used to identify the amount of capacity available to import electricity into a transmission system from the outside is known as Available Transfer Capacity ("ATC"). The FERC has required each electric utility subject to its jurisdiction to publicly post to an electronic OASIS web site the ATCs of its various interfaces with adjoining transmission systems. However, the calculation of the ATC of any given interface requires that numerous judgments and assumptions be made and incorporated into complex power flow simulations, and the "art" of making these calculations in an unbiased manner is still evolving. Therefore, even though each utility has to post the ATC of each of its interfaces with other utilities, the utility on the other side of any given interface may calculate and post a completely different ATC value for power flows in the same direction over the exact same interface. (There are examples of this practice occurring today.) With this in mind, the power flow counting against the ATC at any point in time generally consists of prior reservations and a "capacity benefit margin" which is currently reserved by the transmission owner to assure the availability of import capacity to serve both its native load and the load of the transmission owner's other firm customers in the event of emergency conditions. In addition to the obvious issue of how to deal with insufficient transfer capacity, other issues will arise over the proper calculation of ATC for various interfaces and the proper allocation of the "capacity benefit margin" to existing customers who may want access to off-system generation.
How is generation market power exercised or enhanced by transmission system owners? Generation market power is exercised or enhanced by the ability of the transmission owner to benefit itself through the way it plans, constructs (or does not construct), operates and/or maintains its transmission system. Failure to increase transmission capacity through construction/rebuild of its facilities to the detriment of its transmission customers is a way to directly maintain or increase its dominance over the local generation market. Such action or inaction precludes non-discriminatory access. Vertically integrated utilities can also influence the existence of certain constraints by the way they dispatch their individual generating units. In Virginia, the transmission owners also own the bulk of the generation; therefore, there is some capability for the owner to dispatch its generation in such a manner as to create unnecessary constraints, again, to its sole benefit. This is another area that should be examined in moving forward toward creating a competitive generation market in the Commonwealth. We have not investigated these specific issues regarding transmission service provided by Virginia utilities but are concerned that, without appropriate safeguards, they can occur in Virginia and have occurred in other states. There will invariably be problems unless measures are taken to curb the ability to exercise market power.
Import constraints currently exist on at least the AEP and Virginia power systems. In May, 1997, AEP posted on its OASIS the following statement: "Our present outlook is that AEP will not be able to accommodate requests for long-term, firm north-to-south transmission service through this area" for AEP native load and other loads located in the southern West Virginia and southwest Virginia portions of its system. As a part of their responsibility as a wholesale transmission service customer of AEP, MEPAV's members in the AEP service territory began last fall participating in the development of a load shedding plan related to the delay in the construction of additional transmission capacity for that region. AEP's Southern Transmission Emergency Procedures (STEP) program is a comprehensive plan to address capacity shortfalls that may occur due to the delay in construction of the Wyoming, WV-Cloverdale, VA 765 kV Project. These capacity shortfalls would occur at peak times in the summer and/or winter if there were a failure of one or more transmission lines in the area. In such situations, AEP's native load and wholesale customers will each shed or curtail load on an equal-percentage basis. Normally, transmission capacity is planned and operated such that there is the ability to lose one line (which can be out for hours, if not days, depending on the problem) and have the balance of the system handle the load without interruption. Thus, the constraint on the AEP system for the import of electricity from outside suppliers is dependent on whether the power is coming from the north and, if it is, it cannot be currently transacted on a long-term, firm basis (i.e., 24 hours per day, 365 days per year, for one year or more). AEP could exercise market power depending on the way it operates its transmission system, dispatches its generation and/or dispatches generation purchased from other utilities. MEPAV recognizes that AEP has made, and is making, concerted efforts to get the 765 kV line completed.
The Virginia Power system is constrained on a permanent basis as has been pointed out many times in the restructuring discussions. It has approximately 18,000 megawatts of load and 3,000 to 4,000 megawatts of transmission import capacity. Its generation is almost all located in its service area except for some small NUGs in adjacent utility service areas. Like MEPAV's members in the AEP transmission area, its members in the Virginia Power transmission area have in place load curtailment plans, which are to be utilized when the transmission system in a particular area becomes overloaded. However, unlike the AEP area customers, wholesale customers in the Virginia Power transmission service territory are purchasing their power from Virginia Power and, thus, from generation located within this service area. In the future, should those customers wish to purchase from utilities located outside of the Virginia Power area, there may not be enough import capacity by which to access suppliers other than Virginia Power even though such MEPAV members' peak capacity requirements are only approximately 200 megawatts. This is where Virginia Power has market power by virtue of inadequate transmission import capacity and needs to be more proactive in taking all appropriate steps to get a prompt resolution of its pending application to add transmission capacity that would alleviate the constraints, as AEP has done by promptly refiling for approval following authorization in West Virginia.
One member of MEPAV receives its wholesale power service from the Allegheny Power System, which has the same constraint issues as AEP and Virginia Power.
Only the FERC and/or a future ISO will have the ability to see that fair, non-discriminatory and equitably priced access is afforded the non-owner transmission customers, except to the extent that siting decisions may ameliorate market constraints. These customers, whether wholesale, marketers, other utilities or retail, will only have the potential to realize benefits from competition if "open" transmission access to an adequate system is afforded on a basis that is truly comparable to that enjoyed by the owners themselves.
The ability for the transmission owner to have absolute control over, versus significant input to, system expansion decisions and/or the owner's ability to realize profits in excess of a regulated fair rate of return should be minimized. The idea of restructuring the industry is to benefit the consumer. Creating a market-based, profit-motivated highway between the generation and the consumer would have a chilling effect on better prices over time and, perhaps, negatively affect reliability. An analogy might be what the effect on freight costs might have been following trucking deregulation had the federal government sold the interstate highway system to private investors (or worse, to the trucking companies) to run for a profit with market-based pricing and many two-lane highways remaining to be upgraded to four-lane to handle more truck traffic.
It is essential that there be an independent system operator, with all emphasis possible on "independent," to provide fair management and pricing of constraints and maximum effort to minimize constraints.
The wholesale market is small compared to the retail market. The wholesale market is immature. Only a handful of long-term firm transmission transactions have taken place, some of which have taken months to negotiate. During some of those negotiations it was necessary to plow new ground and in several areas: ancillary service provision details/responsibilities; what parts of system should be in transmission; and what charges, in addition to base transmission, and ancillary service charges, such as metering facilities, reading and billing, etc., should apply. These issues need to be ironed out before full-scale retail competition is introduced. If you multiply these complexities by the hundreds or thousands, there is good reason to make sure that the proper mechanisms are in place to handle the details. Effective, fair and efficient competitive wholesale and retail markets are achievable, but the rules need to be more fully developed and made more uniform; however, experience to date has shown that effective, fair, efficient markets seem often to be only empirically obtainable.
MEPAV members are very concerned about the issues of import constraints and market power as they affect our ability to access the lowest cost reliable electricity for our customer-owners which is and has been our goal since our first member began providing service in 1886, over 112 years ago. In addition, as discussed with regard to § 56-593, even in the absence of constraints, the high levels of market concentration in this industry, and particularly in this commonwealth, present significant obstacles to achievement of real competitive choices for retail customers. The major areas that need to be addressed to ensure that constraints and market power are minimized are as follows:
Thank you for the opportunity to comment on these issues. We appreciate the opportunity to work with the Subcommittee Task Forces.
Sincerely
David A. Howe, President
DAH: