The Structure and Transition Task Force of the SJR 91 Joint Subcommittee has requested a narrative outline of stakeholders' views of a restructuring plan best suited for Virginia, using the general structure of SB 688.

The Southern Environmental Law Center (SELC) is a regional environmental advocacy organization headquartered in Charlottesville. We appreciate the opportunity to provide our views on a restructuring model for Virginia.

Overview

SELC believes that it is possible to allow consumers to choose their electricity supplier while maintaining a power system that provides adequate consumer and environmental protection, and that otherwise protects the public interest. Three primary things must occur, however, to achieve this result.

First, there must be open competition among electric power suppliers on a level playing field. Any system biased in favor of existing generation, whether it is due to the operation of the transmission and distribution wires, as a result of market power, or through the preservation of more lenient environmental standards for existing generation, will thwart true competition and promote environmental degradation.

Second, retail access must mean real choice for all consumers, with adequate consumer protections against anti-competitive behavior and unfair or deceptive acts or practices, and with adequate disclosure of emissions data and other information necessary for consumers to make informed choices about their electric power suppliers.

Finally, if we are to reduce the destructive environmental impacts of power production, a restructured electric power system must include policies which preserve and promote investments in energy efficiency and renewable technology research and development.

The Task Force has indicated that comments on two of these elements, which are geared to consumer and environmental protection, are issues before another task force, and thus we will not provide a further response to these issues at this time. As a result, the restructuring model we outline here is only a partial version of a model best suited for Virginia.

I. Schedule for transition to retail competition; Commission authority

The timeline of the transition to retail competition raises numerous critical issues. Retail competition will not be effective if necessary preconditions for true competition are not in place prior to the starting date for retail competition, and retail competition will not be equitable if certain customer classes are left behind in a retail market.

Commencement for different customer classes

Residential customers, particularly those living in rural locations and those living on fixed or low incomes, will be the most difficult to reach in a retail market. The recent decision by Enron to suspend its efforts to serve residential customers in several developing markets dramatically illustrates the potential for residential or small commercial customers to be effectively deprived of real choice in a retail market.

As a result, SELC supports making retail access available to all customers simultaneously, but only with mechanisms in place to ensure that all customers have a realistic opportunity to participate in a competitive market. Industrial customers, who have the leverage to negotiate cheaper rates due to their level of consumption, should not be permitted to go first. It is likely that these customers will receive substantial discounts; if they go first, they may enjoy the benefits of the efficiency gains from restructuring, while homeowners and small businesses may be captive customers who end up paying higher rates to make up for industrial discounts.

Commencement and development of ISOs/RPXs

Truly independent governance and operation of the transmission system by an ISO is fundamental to the creation of a competitive market, and a properly functioning RPX appears to be an effective mechanism for operating a meaningful market open to all electric power suppliers.

If retail competition were allowed to commence before both of these two key structural elements are in place, open competition on a level playing field is unlikely, to the detriment of ratepayers and the environment.

State Corporation Commission authority to vary schedule

The development of a competitive market is an evolving process. Since we will not know all of the answers to the many questions surrounding this complex subject at the outset, it would be imprudent to fail to provide some mechanism to permit necessary adjustments in the time schedule for the transition to retail competition if problems arise or new information develops. This authority should be given to the State Corporation Commission, within parameters defined by the General Assembly.

In addition, as noted above, retail competition should not commence unless mechanisms are in place to ensure that all customers have a realistic opportunity to participate in the market.

Further, the SCC should be directed to review and report to the General Assembly on the impacts and effectiveness of retail competition at prescribed intervals following the completion of the phased transition to retail competition.

Pilot programs

The best way to determine whether retail choice is a real possibility for residential and small commercial customers is to proceed with pilot programs specifically targeting these markets. Consequently, SELC recommends that a move to customer choice be preceded by a pilot program for residential and small commercial customers. This will allow Virginia to decide whether residential and small commercial customers can benefit from competition based on real world experience, and to make necessary adjustments if difficulties in providing choice to these customers emerge.

SELC also recommends that mechanisms to provide adequate disclosure of emissions data and other information necessary for consumers to make informed choices about their electric power suppliers be piloted.

II. Nondiscriminatory access to transmission and distribution systems

Meaningful competition will not develop unless electric power providers are given comparable access to transmission and distribution systems owned and operated by incumbent utilities. As stated above, we believe an ISO is essential to providing nondiscriminatory transmission access. We recognize that transmission import constraints exist in some parts of Virginia, and that these constraints could thwart the goal of comparable access and create potential market power concerns. We believe that a truly independent system operator can use its oversight authority and its ability to secure transmission line enhancements to reduce market power concerns.

Distribution companies will remain monopolies regulated by the State Corporation Commission, which must have the authority to ensure reasonable and nondiscriminatory access to the distribution system.

III. Independent System Operator

As stated above, independent governance and operation of the transmission system is fundamental to the creation of a competitive market.

Governance; board composition

The system should be governed by a publicly accountable board of directors, consisting of representatives of wholesale market participants, all customer classes, and environmental interests. The rules of operation should be determined by the governing board, not by the current owners of the transmission lines. Ongoing operation must be free from the influence of entities with an interest in the competitive generation market.

Conformity to Virginia-specific standards; extent of Virginia oversight

The most efficient Independent System Operator (ISO) will likely cover a geographic region that expands beyond Virginia, and require cooperation among several states. Until this is formed, there is a pressing need for Virginia to be proactive in establishing the rules by which it believes the monopoly transmission system should be governed and operated. In the absence of state action, these rules will be determined in FERC proceedings by monopoly utilities guided by minimal federal criteria established by the FERC, and Virginia will lose its ability to influence the formation of this critical component of a competitive market.

Given the immediate need to act and the likelihood that coordination on a regional basis cannot be easily accomplished in the near term, one of the first actions the Task Force should recommend is the formation of a working group which is, in essence, a prototype governing board of a Virginia ISO. This group should be charged with the responsibility for deciding the rules by which the transmission grid in the state will be governed and operated. The Task Force should recommend that utilities be required to file for FERC approval a proposal for an ISO consistent with the rules established by the prototype board, as a condition of unbundling utility rates or granting other changes to the ratemaking process requested by utilities.

IV. Transmission and distribution of energy

As stated above, we believe that the basic regulatory framework for electricity transmission and distribution in a restructured industry is for the transmission system to be operated by an ISO, with primary regulation by FERC, and for the distribution system to continue to be a monopoly regulated by the SCC. In addition, as discussed more fully below, utilities should not own both generation and distribution assets; divestiture of generation from distribution assets should be required.

The siting of merchant plants and any other new generation has also been raised as an issue under this general topic. The requirement that a generating facility prove that it is needed is no longer necessary in a restructured electric industry, since power plant developers will assume the risk that their projects are not needed by the market. However, the current statutory requirement that the SCC ensure that the siting of generation is in the public interest should be retained.

V. Suppliers of last resort [and default suppliers]

Entities providing distribution services should be charged with the responsibility of maintaining current expectations of universal service. Regulation of the distribution utility must ensure the existence of a provider of last resort for those customers unable to choose (or, perhaps more accurately, those customers unable to be chosen by) an alternative provider, as well as a default provider for those customers unwilling to choose a provider. Moreover, a system must be in place to ensure that these services are provided at affordable rates.

One alternative for providers of last resort would be to subject all power suppliers wishing to participate in Virginia's market to licensing conditions which ensure that all customers have access to reliable and affordable electricity. In addition to licensing requirements and proper regulation of the distribution system to ensure access, a system that allows customer choice must also include programs that ensure electricity remains affordable to the most vulnerable customers. Such programs include weatherization and other energy efficiency programs which will reduce the energy bills for low income customers, and other rate protection programs. These programs can be financed through a public benefits charge imposed on all users of the distribution system.

With regard to default providers, it is instructive to note that in California, the first state to implement full-scale retail competition, the vast majority of customers (including approximately 99% of residential customers) have not chosen an alternate electricity supplier. This cannot be attributed solely to customer loyalty or satisfaction with incumbent utilities. Many customers are confused or apathetic about the choices retail competition offers. As a result, the competitive market will be severely distorted if customers who do not affirmatively choose a power supplier automatically remain with their existing utility. To address this potential market power problem, default providers should be subject to competitive bidding and randomly assigned.

VI. Voluntary aggregation permitted

Members of any customer class must be permitted to voluntarily combine their electricity demand so that they may negotiate their electricity purchases. Aggregation is perhaps the best tool available to give residential and small commercial customers an opportunity to benefit from restructuring, and it should be facilitated, including specific authorization for local governments to act as aggregators.

VII. Metering, billing and other related distribution services

SELC generally believes that distribution services should be opened to greater competition, typically through bidding rather than bilateral contracts, subject to adequate regulation to ensure reliability and consumer protection.

Energy efficiency and renewable energy research, development, and deployment arguably fall under the heading of "other related distribution services." Yet the public policy goals of promoting energy efficiency and renewable resources will not be achieved by market forces in a system that provides customer choice. Therefore, special steps must be taken to achieve these goals, including funding clean energy resources through a public benefits charge assessed upon all users of the retail electric system and administered by an independent board. To the greatest extent practicable, this fund should be allocated using a competitive bidding process.

VIII. Nonbypassable wires charges

Any surcharges for stranded costs, the cost of establishing ISOs and RPXs, or the cost of public purpose programs should be determined by the Commission. It is imperative that these charges be non-bypassable, and imposed on all users of the retail electric system regardless of who their electricity supplier is. Otherwise, certain customers or classes of customers could be able to shift costs to others.

IX. Divestiture

Preventing the abuse of market power will, in part, require clear separation of the continued monopoly functions of the power system --transmission and distribution -- from the competitive generation market. The best way to accomplish this is through the divestiture of generation from distribution assets, and by turning over operational control of transmission to the ISO, as described above. The move toward customer choice in Virginia should be designed to provide utilities strong incentives to do this. Such incentives might include rigorous reporting requirements for utilities owning both generation and transmission and distribution assets, or strict rules barring transactions between affiliated generation and transmission and distribution companies. If it is determined that utilities should be allowed to recover some portion of stranded costs from consumers, the right to recovery should be conditioned on the utility's willingness to divest and to take other steps necessary to achieve a competitive market.

X. Market Power

As we stated more fully in our June 10 comments to the Task Force on this topic, we believe the potential benefits of a competitive power system will not be realized unless there is open competition among electric power suppliers on a level playing field. There are many ways in which market power can be used to thwart the evolution of a competitive market, such as utility manipulation of their control of transmission facilities to advantage their own generation, concentration of control of generation markets, and subsidization of non-regulated commercial ventures with monopoly business lines.

Although we do not purport to have a comprehensive answer to market power issues, we know that five steps, in particular, will be essential to preventing market power and anti-competitive behavior.

1. The independent governance and operation of the transmission system must be established.

2. Reserve capacity must be bid.

3. There must be clear separation of the monopoly functions of the power system from the competitive generation market, through the divestiture of generation from distribution assets and by turning over operational control of transmission to an ISO.

4. There must be comparable environmental standards for all generation sources.

5. If recovery of any portion of stranded investment is allowed, such recovery should not be allowed to subsidize the ongoing operation of uneconomic plants.

In addition, as discussed above, there must be competition for default service.