SD27 - Report of the Legislative Transition Task Force Established under the Virginia Electric Utility Restructuring Act

Executive Summary:

The Virginia Electric Utility Restructuring Act, Chapter 23 (§ 56-576 et seq.) of Title 56 of the Code of Virginia, was enacted by the 1999 Session of the General Assembly. When the Act is fully implemented, consumers in the Commonwealth will be able to purchase electric generation services from the supplier of their choice. The Legislative Transition Task Force was established to work collaboratively with the State Corporation Commission (SCC) in conjunction with the phase-in of retail competition in electric services. The Task Force's creation was an acknowledgement that the General Assembly's responsibilities with respect to implementing retail choice did not end with the passing of the Restructuring Act. The transition from the traditional regulated utility model to a new era of competition for generation services requires constant monitoring, and occasional adjustments, by the General Assembly.

The Task Force continues to view the Restructuring Act as a dynamic document that can be fine-tuned to address evolving circumstances and issues raised during the course of the transition to competition. A measured implementation of electric utility restructuring is expected to allow the Commonwealth to avoid market difficulties experienced by some of the other states that implemented electric utility deregulation on a more rapid schedule.

In its third year of existence, the Legislative Transition Task Force met five times. Major issues examined by the Task Force included the siting of electric generating facilities, functional separation, the status of competition, and regional transmission entities. The Task Force also addressed a dozen proposals for amendments to the Restructuring Act and related legislation.

• Siting of Electricity Generation Facilities

The Task Force was charged, pursuant to Senate Joint Resolution 467 (2001), to study procedures applicable to the construction of new electricity generation facilities in the Commonwealth. The Task Force was directed to recommend amendments to applicable procedures as may be appropriate to facilitate the approval of construction of sufficient electricity generation capacity to provide a competitive market for electricity in the Commonwealth as soon as practical, without lessening necessary environmental considerations.

The Task Force's review of the generation facility siting process produced two legislative recommendations. First, the Task Force was persuaded that the SCC's review of environmental and other issues that had previously been addressed by other governmental agencies could create duplication and uncertainty in the permitting process. As a result, the Task Force recommended legislation, introduced as Senate Bill 554, that directs that requirements for the SCC's consideration of the effect of electric generation plants and associated facilities would be deemed satisfied by the other agency's issuance of permits or approvals regulating environmental and other public interest issues.

The second legislative recommendation of the Task Force with respect to electricity generation facility siting was to request that its study of the issue pursuant to Senate Joint Resolution 467 be extended for a second year. The SCC's decision to review and revise its permitting procedures, which followed from the Restructuring Act's revisions to the role of the SCC in approving new generation facilities, began in June 2001. As the work of the Task Force for this period was nearing an end in December 2001, the SCC adopted revised requirements and published additional proposed rules for comment. The additional proposed rules address the cumulative environmental impacts of proposed new electric generating facilities, market power issues, and expedited permitting procedures for small power plants. The uncertainty regarding the status of facility permitting procedures necessitates an additional year of review by the Task Force.

• Functional Separation Issues

The Restructuring Act requires that incumbent electric utilities effect the separation of their generation, distribution and transmission functions effective with the advent of the phase-in of competition on January 1, 2002. The Commonwealth's two largest incumbent electric utilities - Dominion Virginia Power and American Electric Power-Virginia -- filed functional separation plans with the SCC, which involved transferring generation assets to new, affiliated companies. This "legal separation" approach was criticized in several quarters by advocates of "divisional separation" wherein the utility's functions would remain within the existing corporate entity but be segregated into distinct divisions. The SCC ruled on December 18, 2001, that Dominion Virginia Power's legal separation plan would impose unacceptable risks on the utility's consumers, and would result in a ceding of state oversight over power purchase agreements between the generation company and the distribution company to the Federal Energy Regulatory Commission. The SCC reasoned that the utility's obligation to provide generation services as a default service provider pursuant to the proposed power purchase agreement would be subject solely to federal regulation because the new generation company would be an "exempt wholesale generator" under federal law.

American Electric Power-Virginia's functional separation plan case was placed on hold in December 2001 pursuant to an agreement stipulating that the utility would continue its existing functional separation by corporate divisions. The stipulation further provides that there would be further inquiry into this matter during 2002.

• The Status of Competition in Virginia and Elsewhere

Amendments to the Restructuring Act adopted in the 2001 Session directed the SCC to report annually on the status of the development of regional competitive markets and the status of competition on Virginia, and to make any recommendations to facilitate effective competition in Virginia as soon as practicable.

The analysis presented to the Task Force regarding the development of regional competitive markets compared actual prices with the prices that would be expected in a fully competitive market. Wholesale market prices and volatility have hampered the development of retail markets nationally. Generation owners, it was suggested, have significant market power in some wholesale markets. The transition to competitive retail markets has been more difficult, and is taking longer, than many expected.

With respect to competition in Virginia, the retail choice pilot programs did not attract hoped-for levels of participation either by consumers or by suppliers. The statutory opening of the retail market to new entrants does not ensure that competition will exist overnight. Competition requires competitors who decide to offer services to Virginians. While several new competitive suppliers have been licensed by the SCC, they may elect not to sell power in Virginia if wholesale prices inhibit their inability to sell their services or products at a price that allows them to earn a profit. While Virginia is attempting to build the foundation for a competitive market, a healthy regional wholesale market is a precondition to enticing competitive service providers to operate here.

At the federal level, the Bush Administration's National Energy Policy has recognized electric utility restructuring as the most recent step in the transition from reliance on regulation to reliance on competitive forces. Congress continues its consideration of various legislative proposals aimed at facilitating the growth of competitive electricity markets, principally by addressing issues relating to regional transmission organizations and system reliability.

Several other states have slowed their moves towards restructuring aspects of their electric utilities, largely in response to California's experience. Trends indicate that the economics of the electricity business have not encouraged small customers to switch to new providers in other states that have restructured. While restructuring laws have generated savings for consumers, they have done so primarily via legislative fiat rather than through competition. While some consumers have received savings from access to competitive markets, larger consumers have garnered more savings than have smaller customers.

• Regional Transmission Entities

As 2001 ended, the Federal Energy Regulatory Commission's decision that the Alliance regional transmission organization did not satisfy certain key requirements of FERC Order 2000 has required all parties to reassess their options. In 2002, this issue will be revisited by the Task Force, as the Restructuring Act requires incumbent electric utilities that own, operate, control or have access to transmission capacity to join or establish a regional transmission entity by January 1, 2001. A regional transmission entity, which must be approved by the SCC, will manage and control the utility's transmission system in order to ensure that competitive service providers have unrestricted access to the transmission system for delivering power to customers.

• Legislative Recommendations

The Task Force endorsed seven proposals for legislation pertaining to electric utility restructuring that were enacted by the 2002 Session of the General Assembly:

• House Bill 747 expands the duties of the Department of Social Services to report the extent to which there is unmet need for energy assistance programs within Virginia, and related matters pertaining to the administration of the Home Energy Assistance Program. This was a recommendation of the Consumer Advisory Board.

• House Bill 748 creates an income tax return check-off for voluntary contributions to the Home Energy Assistance Program. This was a recommendation of the Consumer Advisory Board.

• Senate Bill 257 authorizes the Governor to require electricity generators to generate, dispatch or sell electricity for distribution within areas of the Commonwealth that are designated in a declaration of an electric energy emergency.

• Senate Bill 258 reenacts the definition of a "cogenerator" for purposes of public service corporation taxation.

• Senate Bill 259 exempts certain small electric facilities from the definition of an "electric supplier" for purposes of public service corporation taxation.

• Senate Bill 554 seeks to eliminate duplication by the SCC in its environmental and other reviews of proposed electric generating facilities.

• Senate Joint Resolution 116 continues the study by the Task Force, pursuant to Senate Joint Resolution 467 of 2001, regarding the procedures applicable to the permitting of the construction and operation of new electric generation facilities.

The Task Force endorsed two additional legislative proposals that were not enacted by the 2002 Session of the General Assembly:

• House Bill 732 would have authorized the SCC to require a provider of electric distribution services that becomes obligated to provide default service to acquire or build electric energy production facilities.

• House Bill 746 would have provided grants to persons for a portion of the cost of installing certain photovoltaic or solar water heating facilities.

Finally, the Task Force chose not to support several proposals that were offered for its consideration:

• Senate Bill 356, and companion House Bills, would have allowed the City of Martinsville's electric utility system to provide service in the Bassett area of Henry County, while maintaining its exemption from provisions of the Restructuring Act.

• Senate Bill 377 would have provided tax refunds and grants for the use of clean and efficient energy, including grants for power produced from renewable energy resources, sales tax refunds on energy-efficient appliances, and partial refunds of the titling tax for clean fuel vehicles, as well as grants similar to those included in House Bill 746.

• A proposal recommended by a majority of members of the Consumer Advisory Board would have imposed a three-cents-per-month assessment on all Virginia customer accounts, in order to provide a dedicated revenue source for the Home Energy Assistance Fund.

• A proposal recommended by the Consumer Advisory Board would have provided $1 million in tax credits, under the Neighborhood Assistance Act program, to businesses that make contributions to the Home Energy Assistance Program.

• A proposal advanced by AES New Energy and Old Mill Power Company to, among other things, phase out the wires charges that may be assessed against customers who switch from incumbent electric utilities to competitive service providers, by 20 percent each year.

As the first phase of retail competition for electric generation services commences on January 1, 2002, the Task Force is prepared to continue implementing its duty to ensure that the transition to competition is advanced in a manner that harnesses the efficiencies inherent in a market-based system while allowing all Virginians to have the opportunity to realize its advantages without creating undue disruptions.