RD35 - Report to the Commission on Electric Utility Restructuring - Energy Infrastructure Data Collection

Executive Summary:
This report is submitted to the Commission on Electric Utility Restructuring in response to a resolution requesting that the Commission collect the data necessary to monitor the dedication of generating facilities to the provision of electric bulk power supply in the Commonwealth. As this report indicates, electric utilities providing service in the Commonwealth have historically served retail load and provided necessary reserves via a combination of company owned generation, purchased power from non-utility generation facilities and purchases from the wholesale market. With the advent of the restructuring of our electric utility industry, our utilities have reduced planned reserve margins and expect to rely largely on the market for the provision of capacity to serve load growth and to provide adequate reserves. This response to the restructuring process is not surprising for a number of reasons.

First, when customers have the legal right to purchase power from the market, incumbent utilities’ ability to project load is impacted. In addition to historical variables such as economic conditions and weather, utilities must now contend with the possibility that some load, perhaps significant, may be lost to competitive suppliers. In such an environment, despite the incumbent’s potential default service obligations, it is unlikely that they will provide the same level of reserves from hard assets that have been historically available. Should significant investment in new generation be made and customers take advantage of retail access, the implications from a stranded cost perspective are obvious.

With regard to stranded costs, such costs are recoverable during the rate cap period via capped rates and wires charges. Inasmuch as there has been little retail activity, the primary mechanism for stranded costs recovery is capped rates. If a utility makes significant investment in generation plant, earnings produced by capped rates are diminished. Revenues collected and allocated to stranded cost recovery are reduced. In short, capped rates provide a disincentive for utilities to make generation plant investments, especially more capital intensive non-gas alternatives. As a result, reserve margins tend to shrink and/or the wholesale market may be increasingly relied upon to service load growth and to provide adequate reserves in the future.

The existence of a fuel factor in combination with capped rates also incents our utilities to rely on the market rather than construct additional facilities. Inasmuch as the market largely prices power on an energy basis, the bulk of purchased power expenses could flow through the fuel factor, (*1) thereby allowing utilities to maintain or increase earnings under capped rates while recovering the cost associated with serving load growth through continued operation of the fuel factor and deferred fuel accounting.

The reliability of the service to Virginians will likely be a long-term issue as the Commonwealth evolves toward the ultimate provision of generation services by the market. The “Energy Infrastructure Data Collection” resolution states: “Given the critical importance of a reliable electric infrastructure to Virginia, the Commonwealth must continue to maintain oversight over the reliability of that infrastructure.” It is obvious from our utilities’ responses offered during the energy infrastructure workgroup sessions that they envision the competitive market addressing reliability concerns. However, the Federal Energy Regulatory Commission (“FERC”) in its Standard Market Design Notice of Proposed Rulemaking (“NOPR”) acknowledged that the market cannot be relied upon to provide an adequate generation resource base. In fact, in that NOPR the FERC envisions Regional Transmission entities establishing resource adequacy requirements subject to federal jurisdiction.

In a recently issued white paper, the FERC indicated that Regional State Committees will be responsible for resource adequacy oversight. This concept was not developed in that document and the FERC proposal relative to state jurisdiction in this regard is unclear. In any event, if the Commonwealth is to maintain oversight over energy infrastructure reliability, it may have to take aggressive actions to do so. While the Restructuring Statute addresses reliability in a number of sections, the most explicit reference to generation reliability is in Section 56-595 which states that the Legislative Transition Task Force shall examine generation, transmission, and distribution system reliability concerns.
(*1) This issue arose recently in Virginia Power’s fuel factor proceeding, Case No. PUE-2002-00377, and, as a result, the Staff is in the process of studying the appropriate recovery of the fuel costs associated with certain purchase power contracts.