SB 1269

Legislative Transition Task Force of the Virginia Electric Utility Restructuring Act

October 16 , 2001, Richmond

The Legislative Transition Task Force is directed by SJR 467 (2001) to study the Commonwealth's administrative and regulatory procedures for permitting electricity generation facilities, in furtherance of the goal of facilitating the approval of construction of electricity generation capacity in the Commonwealth. After reviewing the existing procedure for the approval of construction of generation facilities, the task force addressed related issues raised at its previous meeting regarding whether the building of new generation capacity in the Commonwealth will benefit Virginians. An attempt was made to address whether the issuance of permits for new generation facilities could be conditioned upon the permittee's setting aside a portion of its production to serve the Virginia market.

Virginia law currently does not have a single procedure for obtaining all approvals required to build and operate a power plant. Rather, prospective generators must obtain independent approvals from the State Corporation Commission (SCC), environmental regulators, and local governments. Because applicants apply for the necessary approvals simultaneously or in a sequence they select, ascertaining the number and status of facilities in the approval processes can be problematic.

Environmental Permitting

The number and type of environmental protection permits that a power plant developer is required to obtain varies depending on the type of facility, the amount of anticipated emissions, and other factors.

While the Department of Environmental Quality (DEQ) staffs the State Water Control Board, Air Pollution Control Board, and Waste Management boards, it also assists the SCC in its consideration of the environmental impacts of plant siting decisions as required by § 56-46.1 of the Code of Virginia. In coordinating the environmental review for the SCC, the DEQ provides information on the avoidance and minimization of adverse environmental impacts. On average, DEQ's environmental impact review for the SCC takes 57 days.

Facilities with the potential to emit more than 250 tons per day must obtain a Prevention of Serious Degradation (PSD) permit from the Air Pollution Control Board. The potential emission from a power plant must be modeled prior to the issuance of a PSD permit. The average time for issuance of a PSD permit is 50 days from receipt of a completed application, though the period from initial consultation with DEQ to permit issuance typically is 11 or 12 months. The average time for issuance of a state major source permit, required of facilities emitting between 100 and 250 tons per day, is 86 days. Unlike PSD permits, state major source permits do not require review by the EPA or federal land managers.

In response to concerns that the cumulative effect of numerous power plants that individually do not meet the threshold for requiring PSD permitting may nonetheless have a significant impact on air quality has prompted the air board to direct the State Advisory Board on Air Pollution to study the cumulative impacts and to report its recommendations to the board by November 2001. Regardless of whether a PSD permit is required, all new power plants must comply with requirements that they use the best available pollution control technology (BACT), and major facilities must demonstrate compliance with local zoning prior to applying for a permit. DEQ has been conducting in-house modeling of emission of plants that do not meet PSD permit emission thresholds. The most recent model, run October 1 with eight proposed power plants, shows a negligible cumulative increase of about one percent in concentrations of ground level ozone concentrations.

A generator may need to obtain a Virginia Pollution Discharge Elimination System permit if the primary discharge from power plants is cooling water. The average processing time for a VPDES permit, which includes reviews by the Environmental Protection Agency of major facilities, publication and public comment, and public hearing, is 168 days. The issuance of Virginia Water Protection permits requires an average of 180 days if the generating unit involves more than wetland impacts. The maximum period for wetlands impacts permits is 120 days, though general permit coverage is available in less than 45 days for projects affecting less than one-half acre of wetlands.

SCC Permitting

The SCC's process for permitting new generation facilities has recently been substantially streamlined. On June 12, 2001, the commission established a proceeding to develop new filing requirements for entities seeking to construct and operate generating facilities. Though the new regulations have not yet been promulgated, a commission order entered August 3, 2001, provides that applications filed after January 1, 2001, will no longer be required to obtain a certificate of public convenience and necessity or to obtain approval for expenditures. Instead, effective with the commencement of electric industry restructuring, SCC issuance of a certificate to construct and operate a new power generation facility will be conditioned on findings that the facility will not materially adversely affect reliability, is not otherwise contrary to the public interest, and reflects consideration of the facility's effect on the environment.

In accordance with the commission's August order, the SCC staff's proposed regulations omit requirements that applicants show a need for their facilities. In 1998, the General Assembly removed the requirement that merchant plant permitees establish that a need exists for such facilities. The proposed rules address the applicant's technical and financial fitness; the project's impacts on the environment, economic development, and electric system reliability; and other public interest considerations.

A senior utilities analyst at the SCC reported that in the past five years, Virginia has issued permits for five gas-fired plants, of which four are completed and operating (with a capacity of approximately 1,500 MW) and the fifth (a 540 MW gas-fired conversion project) is under construction. Applications for another eight gas-fired power plants, with 7,000 MW of capacity, are now pending before the SCC. In addition, the SCC expects to receive applications from plants that if built will provide another 8,100 MW, of which 1,600 MW would be fueled by coal and the balance by natural gas. To put this additional generating capacity in perspective, Virginia is currently served by plants with 20,000 MW of capacity. Members were cautioned that all of the announced projects may not ultimately be constructed for reasons including zoning disputes and economic considerations.

Local Land Use Permitting

The construction and operation of a power generation facility must comply with local zoning and comprehensive plan requirements. All but a handful of Virginia localities have enacted zoning ordinances, which generally require power plants to be in industrial zones. Requirements that prospective generators obtain approval for property rezoning or use permits have precipitated disputes in some localities. In addition, § 15.2-2232 prohibits the construction of public utility facilities and public service company facilities that are not shown on a locality's master plan unless the project is approved as being in accord with the comprehensive plan.

A representative of the Virginia Association of Counties observed that most counties are anxious to add new, cleaner "peaking" plants to their tax base. He urged the task force not to curtail the land use control powers of local governments with respect to generation facilities. He distinguished the propriety of local zoning controls over power plants from control over transmission lines, over the siting of which localities have no control. The fact that power lines cross multiple jurisdictions justifies giving authority over line siting to the SCC. With regard to power plants, consolidating land use approvals in a state agency would, he contended, require a new, large bureaucracy and would involve the state in many decisions that traditionally have been a local function.

Requiring Supply in Emergencies

In response to Senator Watkins' inquiry at the September meeting regarding requirements that electricity generators provide power during emergency situations, staff reviewed existing Virginia statutes that authorize the commission or the Governor to address extraordinary situations. Section 56-249.1 authorizes the SCC to require a public utility to make emergency spot sales of electricity to another such utility. However, the requirement only applies to public service companies. As many of the planned generation facilities are general-purpose business entities that plan to sell electricity into the wholesale market to meet peak demand requirements, they appear to be beyond the scope of the statute's application.

Chapter 17 of Title 56 authorizes the Governor to take possession of and to operate the plants of providers of electric power if he concludes that there is an imminent threat of substantial curtailment or suspension of service. Moreover, § 44-146.17 empowers the Governor, after declaring a state of emergency, to issue orders necessary to allocate or regulate the use, sale and production of commodities, services and resources.

The Restructuring Act contemplates that if a licensed supplier fails to fulfill an obligation that results in the failure of electricity to be delivered into the control area serving its retail customers, the control area operator will charge the defaulting supplier for the full cost of procuring replacement energy, and may result in revocation of the supplier's license. Section 56-577 acknowledges that this provision applies to the extent not precluded by federal law or the Federal Energy Regulatory Commission. The respective jurisdiction of state and federal authorities to address such situations is central to any attempt to address the issue.

Texas and Ohio have enacted legislation seeking to address emergency situations. The Texas restructuring act requires power generators serving its area to observe scheduling, operating and reliability rules established by the operator of the Electric Reliability Council of Texas (ERCOT). ERCOT, which serves as the reliability council for about 85 percent of Texas, is unique in its exemption from FERC oversight as a result of its lack of interconnection with transmission systems outside of Texas. ERCOT's protocols, which take effect with the advent of customer choice in January 2002, authorize it to issue operating notices if there is an unplanned transmission outage, hurricane, ice storm or other emergency and to require certain units to operate certain resources that are available in the time frame of the emergency.

During the oil embargo crisis of the 1970s, Ohio passed a law that directs any public utility commission to adopt rules empowering the governor, among other things, to order electric companies to sell electricity in order to alleviate hardship or acquire or produce emergency supplies to meet emergency needs. It was amended when Ohio enacted customer choice for the electric industry by adding licensed service providers to the list of entities that the governor could call on to provide power. The law, which has apparently not been utilized to deal with electricity emergencies, also authorizes the governor to declare an energy emergency if health, safety or welfare is imminently and substantially threatened by an energy emergency. The public utility commission's rules provide that the governor may request the secretary of the federal Department of Energy to invoke § 202(c) of the Federal Power Act.

The Federal Power Act provision cited in Ohio's rules authorizes FERC to require temporary connections of facilities and such generation, delivery, interchange or transmission of electricity as in its judgment will meet an emergency attributable to a sudden increase in the demand for electricity or a shortage of electric energy or of facilities for its generation or transmission. Under the authority of this section, the Secretary of Energy ordered, in December 2000, that generators and marketers make electricity available to keep the lights on in California. The order, aimed at addressing rolling blackouts at a time when power suppliers were reluctant to provide electricity to insolvent distribution companies, called on suppliers to make excess power available to the state's independent system operator.

Generation Set-Aside for Virginia

At the September meeting, task force members inquired how they could be assured that the construction of additional power plants in the Commonwealth would provide Virginians with the adequate supply of electricity needed for the development of a robust competitive market. Concerns focused on the prospect that while generation facilities would be located in this state, the power could be shipped to Northeastern markets where the price of electric power is higher than it is in Virginia. Virginia consumers would then pay higher rates as they are forced to match the price paid by residents of other regions.

The extent to which Virginia may regulate the operation of merchant plants depends on the extent of federal preemption of state activity. The Federal Power Act of 1935 applies to the sale of electric energy at wholesale in interstate commerce. FERC does not, however, have jurisdiction over facilities used in local distribution or over the transmission of electricity consumed by the transmitter. Subsequent changes in the act have encouraged the development of the wholesale transmission market and of new competitive generating companies. In its Order 2000, the FERC contemplates that regional transmission organizations will have exclusive authority to maintain short-term reliability, including the right to order redispatch of any generator connected to transmission facilities. The authority for generator redispatch is intended by FERC to be used by the RTO to prevent or manage emergency situations. FERC has announced that it envisions four regional RTOs to serve the continental United States. However, as the Supreme Court has held oral arguments in two cases challenging FERC's rulemaking authority, the respective boundaries of federal and state jurisdiction are uncertain.

The Commerce Clause of the federal Constitution has been construed to limit the ability of states to enact legislation that provides economic protectionism for its own citizens. For example, the U.S. Supreme Court has held that New Hampshire could not prohibit the exportation of inexpensive hydroelectric power to other states and that West Virginia could not prohibit the export of natural gas by pipeline unless in-state needs had been met. The task force was advised that the ability of legislation to withstand Commerce Clause scrutiny may turn on whether it gives less favorable treatment to interstate commerce than to local interests. If it does, it is per se invalid in the absence of a showing that there is no alternative way to advance a legitimate local interest. However, facially neutral regulation would be subject to a balancing test, which is much more deferential to state action. Moreover, federal law authorizes states to regulate certain activities, such as basing decisions to allow the siting of power plants on public need, notwithstanding their interstate effects.

An official with the Office of the Attorney General observed that the question of whether a law that reserves to Virginia a portion of the electricity produced by new merchant plants runs afoul of the dormant Commerce Clause boils down to whether the state's purpose is to favor in-state economic interests. Action may withstand challenge if the state can show a legitimate interest that cannot be served as well by other means. Such an interest may be assuring that power is available to meet needs for capped rate service and default service.

Industry Perspectives

Through their representatives, an industry coalition and four individual power companies advised the task force on a number of issues:

  • A coalition of developers of generation facilities for the wholesale market assured the task force that the construction of new capacity in Virginia will aid the development of Virginia's electric generation market even if their electricity can be sold in other states. Unlike many other commodities, electricity cannot be stored or easily and cheaply shipped out of state. Transmission losses and tariffs reduce the net return on exported power. The ability to send electricity through a transmission grid is subject to physical constraints, and the system's capacity is currently limited. The new producers intend to serve a regional market of which Virginia's viable, robust market is an important part.
  • The task force was also asked to consider that the wholesale electricity transmission grid is designed to serve regional, as well as local, needs, and it is not clear how restrictions on the interstate flow of electrons would operate. In addition, by requiring in the existing law that default service providers have access to adequate capacity to meet their obligations, the question involves supplemental capacity. Having the additional capacity in Virginia will assist Virginians, because marketers will sell their power here when they can. Finally, the siting of the new merchant plants in Virginia should be encouraged. Because the facilities are required to install the current best available control technology, they are cleaner than older plants.
  • Dominion Virginia Power and the Virginia Independent Power Producers observed that transmission system constraints will ensure that all the power generated in the Commonwealth will not be exported. The Restructuring Act's default service provision, which continues until the General Assembly determines that it is no longer necessary, should provide assurance that adequate capacity will exist to serve Virginians.
  • AEP-Virginia offered that Virginia is not the only state adding generating capacity. In the seven-state AEP system, it has been announced that 27,000 MW of new generation capacity will be added between 2001 and 2005. Of this amount, air discharge permits have been issued for 5,000 MW. AEP has 1,740 MW of capacity in Virginia and a peak load of twice that amount. The company imports power from other states to meet the utility's Virginia obligations.
  • Differences exist in the environmental permitting processes among the various states where AEP conducts business. In general, the time required for permit approval depends more on the size and fuel type of a facility than on the state's procedures. While environmental permitting requirements tend to be fairly uniform among the states, the resources available for new source permitting in state regulatory agencies varies. It will be important to ensure that the DEQ has adequate resources to efficiently process applications and issue permits for new generating facilities.
  • Allegheny Energy, which has announced plans to build an 88 MW facility in Buchanan County with CONSOL Energy, observed that the existing restructuring framework provides sufficient safeguards and incentives to ensure adequate electric generation capacity for Virginians. Allegheny Power will by contract provide power to any of Allegheny Power's default service customers under the terms of the utility's approved functional separation plan.
  • On the issue of a generation set-aside requirement, if merchant plants are selling power in wholesale transactions, they are subject to FERC jurisdiction. If a state sought to avoid FERC jurisdiction over wholesale sales by requiring a portion of a plant's output to be limited to the retail sales, the plant operators may balk at doing business in a state where they are obligated to engage in the highly-regulated retail business.
  • Old Mill Power Company asked the task force to consider two additional issues. First, the Tennessee Valley Authority is prohibited by federal law from selling surplus generation to entities that might resell the generation at a profit. Second, Dominion's wholesale power group will be subject to a restriction imposed by FERC that prohibits the company from selling generation for delivery to loads located within Dominion's service territory.

Update on SCC Activities

The director of the SCC's Division of Energy Regulation reported that Dominion Virginia Power's functional separation hearing is underway before the commission. In response to the chairman's inquiry, he affirmed that the commission's decisions will be issued by January 1, 2002. In addition to addressing functional separation, the cases are addressing unbundling rates, wires charges, and capped rates. The director also updated the task force on its activities regarding consolidated billing services.

On October 9, the SCC issued its order establishing minimum stay requirements. Under the rule, local distribution companies may require a 12-month minimum stay period for customers with an annual peak demand of 500 kW or greater. The minimum stay period applies to customers who request service from a local distribution company after a period of receiving service from a competitive service provider. However, the minimum stay requirement does not apply to customers who return to capped rate service provided by the local distribution company as a result of their competitive service provider's abandonment of service in Virginia.

Next Meeting

The task force will continue its study of the generation facility siting process under SJR 467 at its next meeting. The agenda will include reports on the cumulative impact of air emissions, House Bill 2759 from the 2001 Session, and related environmental issues. The task force will also commence its examination of the proposal for electric cooperative regulation by its members rather than by the SCC.

The Honorable Thomas K. Norment, Jr., Chairman
Legislative Services contact: Franklin D. Munyan


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