SJR 259

Joint Subcommittee Studying Electric Utility Restructuring

August 12, 1997, Richmond

The joint subcommittee convened its third meeting in 1997 to receive updates on the positions of individuals and groups with a stake in electric utility restructuring. The joint subcommittee also received an update on the activities of its task force studying the impact of retail restructuring on state and local taxation of public utilities (see preceding article).

The joint subcommittee's July meetings provided a workshop on several key restructuring issues: (i) current Congressional activity, (ii) legislative and regulatory activity in other states, (iii) transmission system reliability, and (iv) current Virginia State Corporation Commission (SCC) activities anticipating the SCC's November report outlining a potential restructuring plan for Virginia's electricity market.

Consumer, Low-Income, and Senior Citizen Groups

Representatives of consumer, low-income, and senior citizen groups expressed reservations about retail competition. A Virginia Council Against Poverty (VCAP) spokesperson noted that the benefits of restructuring to any particular group or individual depend on their situation in terms of geography, consumer protection, economic power and access to understandable information. VCAP, the American Association of Retired Persons (AARP), and the Virginia Poverty Law Center representatives told the joint subcommittee that low-income residential consumers and senior citizens are most at risk in any restructuring scenario because (i) unlike business and industrial customers, they lack the market power to negotiate cheaper rates and (ii) they are unlikely sales prospects for aggressive power marketers offering cheap electricity deals.

These consumer groups advocated that any restructuring legislation adopted in Virginia include (i) a universal electricity service policy, including a guaranty of affordability, (ii) education and outreach programs, targeting low-income individuals, and (iii) continued support—through billing surcharges, if necessary—for low-income weatherization and fuel assistance programs. VMH, Inc., a not-for-profit organization serving as a low-income home weatherization and fuel assistance contractor, urged the joint subcommittee to consider the social and economic benefits that energy efficiency and demand-side management programs have furnished. Utility restructuring should not jeopardize these programs, it said.

Residential electricity consumers, unable to shop large electrical loads like business and industrial customers, simply lack market power. Thus, according to Virginia Citizens Consumer Council (VCCC) and AARP representatives, these consumers will be the hardest to benefit in a competitive market unless long-term electricity costs are reduced for this group. The VCCC urged the joint subcommittee to consider carefully restructuring's implications for this group, and to ensure that any restructuring plan (i) caps utilities' recovery of "stranded costs" (the difference between utility assets' book values and market values) at 50 percent, (ii) requires licensing and bonding of all electricity sellers in Virginia, and (iii) removes utilities' current exemption (as a regulated industry) from the provisions of the Virginia Consumer Protection Act. Additionally, the VCCC recommended statutory provisions protecting customer privacy and imposing time-of-day restrictions on electricity telemarketing.

Organized Labor

Workers, management and regulators in the current electric utility industry have developed an exemplary safety record, according to the International Brotherhood of Electrical Workers' (IBEW) System Council U-1, a labor organization representing 3,500 electrical workers in the Virginia Power system. An IBEW representative told the joint subcommittee that electric power companies are cutting costs, resulting in systems so overstretched they may not be able to operate efficiently in times of peak demand or during storms. Virginia Power, for example, has reduced its workforce by one-third since 1989 in preparation for anticipated retail competition.

The IBEW believes that a sudden shift to mandated retail competition would induce further workforce streamlining, posing a risk to system integrity and public safety. The labor organization is not against a more competitive electricity market but strenuously opposes mandated retail competition. Additionally, the IBEW objects to federal legislation on this issue, believing that state and local policymakers are best equipped to address proposed changes in the sale of electricity.

Environmental Concerns

Despite its complexity, electric utility restructuring done correctly can produce significant consumer and environmental benefits, the Southern Environmental Law Center told the joint subcommittee. The electric power industry, said a center representative, is the leading source of U.S. air pollution. Restructuring, if done correctly, could lead to the retirement of older, more polluting power plants and their replacement with new plants complying with stricter federal emissions standards than those imposed on the older plants. The less rigorous emissions standards imposed on older plants (making them cheaper to operate) is viewed by the center as a significant barrier to environmentally sound competition. The center recommended that the SCC and the General Assembly support federal action correcting competitive and environmental problems caused by these disparate emissions standards.

The center also recommended that any Virginia restructuring plan require generation providers—as a condition of participation in the Virginia market—to furnish emissions-related information in their marketing materials, thus enabling consumers to choose clean energy providers. In a related vein, the center reminded the joint subcommittee that stranded cost recovery strategies affect the environment as well. These costs should be limited to past investments and should not include costs to keep plants operating on an ongoing basis. Otherwise, such recovery could result in a subsidy of uneconomic plants. Finally, the center advocated continued support for investments promoting energy efficiency and renewable energy. Any competitive model should include a public benefits trust, funded by a small surcharge imposed on all electricity users to fund these investments.

Energy Providers and Producers

Independent Power Producers and Power Marketers

Virginia Independent Power Producers, Inc. (VIPP) and ENRON, a nationwide power marketing concern, propose that the transition to retail competition begin on the state level as quickly as possible. A VIPP representative said that states adopting retail competition now may possibly benefit from some grandfathering of existing state plans in future federal legislation. Moreover, he said, VIPP's information from Congress suggests that the House Commerce Committee—where significant federal restructuring legislation is being reviewed—may be preparing to mark up and report to the House floor a restructuring bill within the next year.

An ENRON spokesman advocated a speedy transition to competition and also urged unbundling all competitive services—not just generation—which would include: electric billing, metering, energy audits, conservation and demand-side management investments, customer services and every other service provided today as part of utilities' bundled service. Additionally, he stated that vertically integrated utilities should be required to conduct all unregulated business through separate companies to avert cross-subsidies from transmission and distribution services to affiliated entities in competitive services businesses.

Investor Owned Utilities and Electric Cooperatives

Allegheny Power. On record for retail customer choice and federal legislation making it available nationwide, Allegheny Power Systems advised the joint subcommittee that it supports a two-phase transition to retail competition. In the first phase, an Allegheny representative said, utilities would unbundle retail electric rates into separate rates for generation, transmission and distribution functions and file them with the SCC in preparation for Phase II. During the second phase of the transition, unbundled retail rates would be put into effect and a non-bypassable competitive transition charge (CTC) would be paid to the local distribution company by all consumers who exercise choice.

Under Allegheny's plan, generation would be fully deregulated; transmission would be regulated by the Federal Energy Regulatory Commission (FERC); distribution regulated by the states would be driven by performance-based measures; and remaining stranded costs would be recoverable by a non-bypassable CTC over a longer, specified period, or as incurred. Allegheny emphasized that a competitive Virginia market must ensure that (i) all generators must be subject to the same tax treatment; (ii) existing public service programs are evaluated, and (iii) appropriate consumer protections are developed.

Electric Cooperatives. The electric cooperatives told this joint subcommittee in 1996 that they favored a measured, deliberate course on the road to restructuring. The Virginia, Maryland, and Delaware Association of Electric Cooperatives reiterated their support for this approach, while outlining the components of a restructuring plan that would satisfy many of their concerns. Serving over 750,000 Virginians, the cooperatives produce approximately 50 percent of their power and purchase the remainder—principally from investor-owned utilities.

The coops' recent investment (through the Old Dominion Electric Cooperative, or ODEC) in a $1.2 billion, state-of-the-art coal-fired plant near Clover, Virginia, requires them to substantially reduce long-term debt and reduce costs in preparation for any competitive retail market. Consequently, they favor generation retail competition no earlier than 2003 for 20 percent of customers and transition to 100 percent by 2005. Moreover, the association proposes that all generators participate in a "supplier of last resort" pool. An additional key proviso: distribution territorial boundaries must be maintained and there must be no duplication of facilities and no bypass of a distribution system.

The coop association asserted that the unique structure of coops must be recognized and maintained. These unique features include their capacity to act as power aggregators for their customers. Finally, the association strongly recommended that (i) reliability standards be set by the SCC to ensure that reliability in less populated areas is not significantly different than that in urban and suburban regions and (ii) a pilot be conducted to test any model adopted in Virginia and then for the sole purpose of testing technical aspects and not to demonstrate any level of savings.

Municipal Power Suppliers

According to the American Public Power Association (APPA), about 35 million Americans receive their electricity from more than 2,000 community-owned electric utilities. Here in Virginia, municipals are the smallest segment of the utility industry, serving only five percent of the population. There are 15 municipal systems in Virginia with collective ownership of 104 megawatts of peaking generation. Only about two percent of the electricity sold by municipals is self-generated. An APPA representative told the joint subcommittee that its vision for any potential restructuring would include (i) the absence of any federal mandate and (ii) the easing of current federal tax law restrictions on the use of tax-exempt bond issue proceeds for private use. Among reasons offered for the latter, the APPA spokesman stated that these restrictions hinder the goal of an open transmission system by limiting the economic use of transmission lines financed with tax-exempt bonds.

Natural Gas Producers

The Virginia Oil and Gas Association (VOGA), representing natural gas producers and distributors throughout the Commonwealth, reminded the joint subcommittee that high-efficiency gas-fired power plants have helped pave the way to a restructured market. As such, the natural gas industry is an important stakeholder in the restructuring debate. A VOGA representative presented the components of a VOGA-endorsed restructuring model for the joint subcommittee's consideration. Among its features were a model for stranded cost recovery that was characterized as "competitively neutral." Its provisions would implement a surcharge to collect the difference between a regulated revenue requirement established by the SCC and revenues produced by market-based prices. Other features included provisions for consumer protection, quality of service, customer information, billing and universal access (a responsibility of the local electric distribution company under the proposal).

Business and Industrial Customers

The Virginia Committee for Fair Utility Rates, an organization representing Virginia Power's largest commercial customers, was represented before the joint subcommittee, emphasizing its view that there is a consensus among a significant number of stakeholders in the restructuring debate that retail customers in Virginia should be permitted to choose their generation supplier. The committee proposes that retail competition should start within one year, in a transition period ranging from two to seven years. In their view, 20 percent of all customer classes should have choice in year one, 50 percent in year two, and 100 percent by year three. It views the current transmission system as sufficiently reliable to handle increasing numbers of wholesale electricity transactions and expressed confidence that requisite system improvements will be made as needed to accommodate a retail market.

The committee recommended that (i) the details of transition, (ii) establishment of necessary supporting systems, (iii) recovery of stranded costs, and (iv) supervision of the development of competition during the transition and before generation is completely deregulated be left to the SCC. However, the committee is strenuously opposed to utilities' 100 percent recovery of stranded costs, criticizing Virginia Power's claim, for example, that the uneconomic portions of its current above-market contracts for purchased power with nonutility generators should be fully reimbursed through stranded cost recovery. The committee believes that utilities' shareholders should share in the costs of what the committee characterized as "discretionary management decisions."

Future Activities

The joint subcommittee will convene its next meeting on September 25 in Richmond. The meeting will be focused on restructuring's potential impact on state and local taxation—state gross receipts taxes and local property taxes in particular. The joint subcommittee will conclude its update briefing activities with presentations from several key stakeholders, including Virginia Power, AEP Virginia, the ALERT business and industrial customer coalition, Washington Gas, and the Municipal Electric Association of Virginia.