RD34A - Report to the Commission on Electric Utility Restructuring of the Virginia General Assembly on Stranded Cost - Volume I


Executive Summary:
This report on stranded cost definitions and methodologies is submitted to the Commission on Electric Utility Restructuring, hereinafter referred to as its predecessor organization the Legislative Transition Task Force (“LTTF”), in response to requirements set forth in its Resolution passed January 27, 2003. It is made in response to Requested Action No. 2 of the Resolution which requires that the State Corporation Commission:

By July 1, 2003, present to the Legislative Transition Task Force the work group’s consensus recommendations regarding:

(a) Definitions of “stranded costs” and “just and reasonable net stranded costs.”

(b) A methodology to be applied in calculating each incumbent electric utility’s just and reasonable net stranded costs, amounts recovered, or to be recovered, to offset such costs, and whether such recovery has resulted in or is likely to result in the overrecovery or underrecovery of just and reasonable net stranded costs.

The report also addresses Requested Action No. 8, requiring Commission Staff analysis of differing recommendations in the event consensus recommendations were not reached and Requested Action No. 9, recommendations for legislative or administrative action that the Commission, work group, or both, determine appropriate to address any over- or under-recovery of just and reasonable net stranded costs.

On March 3, 2003, the Commission entered an Order Establishing Proceeding (the “Order”), docketing Case No. PUE-2003-00062. The Order provided guidelines on establishing the work group, and a schedule for work group activities, setting April 1, 2003 as the first meeting date. The Order requested that interested persons respond to a series of six questions posed by the Commission concerning stranded cost issues.

The work group held four sessions where definitions and methodologies were discussed in depth. In addition, work group members provided written responses to issues brought up during the work group sessions. All comments are included in Volume II of this report. Although no consensus was reached, staff commends the work group members for their hard work and dedication to this project.

The work group first attempted to reach consensus definitions for the terms “stranded costs” and “just and reasonable net stranded costs.” In defining stranded costs the differences came down to (1) terminology, for example should such costs be defined as “lost revenues” or “loss in economic value” and (2) whether the definition should include stranded cost components. There were similar differences of opinion regarding the definition of just and reasonable net stranded costs. Additionally, Dominion Virginia Power believes no further definition of just and reasonable net stranded costs is necessary because such costs are defined by the methodology for determining wires charges as set forth in § 56-583 of the Restructuring Act.

Staff does not believe that the definitions need to include stranded cost components. Staff disagrees with the position that just and reasonable net stranded costs are defined by the Restructuring Act. To the contrary, Staff believes the Restructuring Act neither defines just and reasonable net stranded costs nor provides a methodology for calculating them. It defines only the recovery mechanisms, wires charges and capped rates, and a method for calculating wires charges.

Staff recommends the use of the following definitions:

Stranded Costs are a utility’s net loss in economic value arising from electric generation-related costs that become unrecoverable due to restructuring and retail competition.

Just and Reasonable Net Stranded Costs are a utility’s net loss in economic value arising from prudently incurred, verifiable and non-mitagable electric generation-related costs that become unrecoverable due to restructuring and retail competition.

Several methodologies for monitoring and/or measuring the over- or under-recovery of stranded costs were discussed by the work group. Dominion proposed a methodology for monitoring just and reasonable net stranded costs that includes reporting to the LTTF (1) the over- or under-recovery of stranded costs collected through the wires charges from switching customers, (2) actual “above-market” or “potential” stranded costs exposure under capped rates, (3) the amounts expended from funds available under capped rates to mitigate potential stranded costs, and (4) additional expenditures that negatively impact (increase) such costs during the transition period.

Staff presented two methodologies. The first calculates just and reasonable net stranded costs based on an asset valuation methodology. The second is an accounting approach that (1) measures recoveries of stranded costs from capped rates and wires charges, (2) measures potential stranded costs on an annual historic basis, and (3) after July 1, 2007 could be used to calculate actual stranded costs or benefits on an annual historic basis.

The Virginia Committee for Fair Utility Rates and the Old Dominion Committee for Fair Utility Rates (the “Committees”) proposed a methodology for calculating just and reasonable net stranded costs based on an asset valuation methodology for measuring stranded costs and incorporating stranded cost recoveries from both wires charges and capped rates.

Generally, utilities and independent power producers support Dominion’s proposal stating that it is easy to administer and consistent with the Restructuring Act. Consumer groups and competitive service providers offer little support for Dominion’s proposal because it does not calculate stranded costs nor does it quantify stranded cost recoveries from capped rates.

Regarding Staff’s and the Committees’ methodologies, the positions of the work group participants are reversed. The utilities state that these methodologies are not consistent with the Restructuring Act and that the asset valuation methodology is too complex, requiring numerous projections. They further state that calculating stranded cost recoveries from capped rates is tantamount to annual rate cases. Conversely, consumer groups and competitive service providers believe the asset valuation methodology is the best method available for calculating stranded costs. These groups agree that this is a complex calculation but can be done with cooperation of all participants. These groups are not in favor of Staff’s proposal for calculating potential stranded costs.

Staff believes that to monitor the over- or under-recovery of just and reasonable stranded costs one must calculate two numbers: (1) total just and reasonable net stranded costs; and (2) recoveries of stranded costs from capped rates and wires charges. Staff favors using an asset valuation methodology to determine just and reasonable net stranded costs. Although complex, it is the best tool available. To calculate recoveries of stranded costs from wires charges and capped rates, Staff believes information currently filed annually with the Commission should be used. This information is used to measure a utility’s earnings and is much less complex than rate cases.

Should the LTTF determine an asset valuation methodology is not appropriate for calculating just and reasonable net stranded costs, Staff suggests that utilities be required to calculate potential stranded costs annually during the transition period and actual stranded costs annually thereafter. This alternative would also include calculating recoveries from wires charges and capped rates as discussed above.

In regard to Dominion’s proposal, Staff agrees with the comments of the utilities that Dominion’s methodology is easy to administer; however, the fact that it does not calculate just and reasonable net stranded costs and does not quantify stranded cost recoveries from capped rates makes it unacceptable.

The final issue addressed in the report is whether legislative or administrative action by the LTTF is necessary. Several participants suggest that if a company is found to have over-recovered or it is likely that they will over-recover stranded costs then (1) wires charges should be reduced or eliminated, (2) capped rates should be reduced, or (3) both. Currently, the Restructuring Act does not provide for any of these actions. Legislation would be necessary should the General Assembly desire to take action on the findings made as a result of its stranded costs monitoring. On the other hand, Staff does not believe legislation is necessary to determine any of the stranded cost methodologies identified by the work group.

Staff requests further direction from the LTTF prior to submission of its next stranded cost report currently scheduled to be filed November 1, 2003. Requested Action No. 3 of the Resolution provides that the Commission present to the LTTF the work group’s consensus recommendations regarding each utility’s just and reasonable net stranded costs and stranded cost recoveries, using the work group’s consensus methodology. Because the work group was unable to reach consensus on a methodology it is unable to move forward with the calculations. The Commission requests that the LTTF provide guidance on the appropriate methodology or instruct the Commission to make such determination. Further, the LTTF should instruct the Commission to begin proceedings to implement the chosen methodology.