SD17 - The Virginia Electric Utility Restructuring Act


Executive Summary:
The Virginia Electric Utility Restructuring Act establishes the statutory framework for Virginia's transition from traditional regulation of the generation component of electric service to a market-based system in which competitive market forces will be relied upon to determine its rates and ensure adequate capacity. Even under the deregulation model, however, the State Corporation Commission (SCC) and the Federal Energy Regulatory Commission (FERC) will continue to regulate the distribution and transmission components of electric service, respectively.

The Legislative Transition Task Force was established to work collaboratively with the SCC in conjunction with the phase-in of retail competition. The establishment of the Task Force is an acknowledgement that the General Assembly's responsibilities with respect to implementing retail choice did not end with the enactment of the Restructuring Act. The Task Force has actively monitored developments relating to the implementation of the Restructuring Act. When appropriate, the Task Force has not been reluctant to modify the provisions of the original Restructuring Act in order to address evolving circumstances and issues raised during the course of the transition to competition.

As Virginia delves further into issues relating to competition for electric utility service, the members of the Task Force endeavor to become educated in a variety of complicated engineering, economic and legal disciplines. As the Task Force has developed familiarity with these complex issues over the past several years, other members of the General Assembly have deferred to the body with respect to issues relating to electric utility deregulation. Consequently, the Task Force has been placed in the role of a gatekeeping forum before which any proposals for legislation affecting electric utilities are scrutinized.

The Task Force met six times during its fourth year of existence, during which it received testimony on numerous issues, including:

• The status of competition in Virginia and across the nation.

There has been a decline in retail market activity in Virginia and nearby states that are considered to be part of Virginia's regional market. Virginia has no residential competitive offers below the price-to-compare of any incumbent utility in the state. Since last year there has been a slight increase in residential offers nationwide, due to the advent of restructuring in Texas.

Barriers to the development of a workable retail electricity market include risks of the exercise of market power in wholesale markets and reductions in new power plant construction. Recent disclosures of wholesale market improprieties and the "credit crunch" have contributed to a reduction in efforts by energy marketers to market electricity nationally.

As of September 1, 2002, 2.2 million of the 3.1 million customers in Virginia had the right to pick their electricity provider. All customers of utilities subject to the Restructuring Act will have retail choice by January 1, 2004. However, the right to choose does not mean the ability to choose. Only 2,375 residential customers and 23 commercial customers are buying electricity from an alternative supplier.

The SCC is concerned that FERC's proposed rules for a standard market design (SMD) create substantial risks that Virginia's electric utility industry may face increased retail prices and loss of jurisdiction over elements of electric system reliability. The SCC cautioned the Task Force that if Virginia allows the transfer of control of transmission assets to a FERC-regulated regional transmission entity (RTE) or allows components of electricity rates to remain unbundled, the FERC would gain jurisdiction over matters now within the SCC's purview, which shift may have a significant impact on retail electric rates and reliability. The SCC contended that in order to avoid the application of FERC's SMD rules, Virginia must rebundle components of electricity rates and defer the requirements that Virginia's electric utilities join an RTE and transfer control of their transmission systems to the RTE.

Several electric utilities countered that there is no need to rebundle the components of electric rates and urged the Task Force not to delay the RTE development process. Rebundling rates was characterized as a premature and drastic measure that would strike at the heart of the Restructuring Act. Rather, the Task Force was told that Virginia can safeguard reliable service to native load by maintaining control over utility membership in regional transmission entities. The Attorney General's Office observed that postponing the ability of utilities to join RTEs was an adequate step, and observed that while Virginia may need to rebundle the components of electric rates at some point, it is not necessary today. If Virginia can rebundle rates today, then it can do so in the future if the FERC's final SMD rules make such a step appropriate.

• The Status of Regional Transmission Entities

RTEs are intended to provide a more efficient and fairly priced means of transmitting wholesale electric energy. RTEs are entities created to operate transmission grids and ensure short-term system reliability, independent of control by incumbent utilities and other market participants. The Restructuring Act recognizes that the development of a competitive retail market for electric generation requires incumbent utilities to transfer ownership or control of their electric transmission assets to an RTE. The requirement of RTE independence is intended to ensure that incumbent utilities, which traditionally controlled the generation, distribution and transmission of electricity, do not use the control of transmission assets to favor their generation arms over competing suppliers. The ability to attract competitive suppliers to Virginia's market depends to a large extent on the development of a competitive regional wholesale market. The Restructuring Act requires incumbent electric utilities owning, operating, controlling or having an entitlement to transmission capacity shall join or establish a regional transmission entity by January 1, 2001.

Both AEP and DVP have announced their intent to follow Allegheny Power in joining PJM Interconnection, LLC, a Pennsylvania-based RTE. The Task Force heard several concerns regarding the implications of the utilities' memberships in PJM. The PJM structure, which complies with aspects of the SMD model being considered by FERC, is alleged to cede elements of control over generation facilities and some long-term resource adequacy planning to the RTE. PJM's locational marginal pricing provisions (LMP) were said to pose the risk of increased costs and to expose market participants to price uncertainty for congestion cost charges and the possibility of market manipulation. Under LMP, the unit that provides the increment of electricity that meets the load sets the price that all of the providers will receive, even if the price they would otherwise have charged is less than the price bid by the supplier of the last increment. As a result, the price of power is based on prices that are bid, and not on the actual cost of the electricity.

• Data on Energy Infrastructure and Reliability

Pursuant to Senate Bill 684 of the 2002 Session, the SCC convened a work group to study the feasibility, effectiveness, and value of collecting data pertaining to Virginia's electric and natural gas infrastructure. The SCC concluded that while collecting the data identified in the legislation is feasible, the value and effectiveness of collecting the information is more difficult to ascertain. The restructuring of Virginia's natural gas and electricity industries means the Commonwealth will rely on the competitive market to meet consumer demand for electric and natural gas service. Electric utility industry restructuring may shift jurisdiction for overseeing generation and transmission service reliability from state regulators to the FERC. The FERC's SMD rules may place significant new federal regulation over the pricing and reliability of electricity. In addition, if Virginia's utilities join regional transmission organizations that operate a regional electricity market, state regulators may lose jurisdiction over generation and transmission reliability. These shifts in oversight jurisdiction cast doubt over the value of collecting data about Virginia's electrical infrastructure. In addition, stakeholders have split on the issue of whether state regulators will be able to require incumbent utilities to build generation facilities to meet the needs of Virginians. Once Virginia's electric utility industry is regionalized, the concept of monitoring the dedication of facilities to the service of Virginia's native load becomes problematic.

• Implications of Capped Rates

A study of capped rate savings commissioned by Dominion Virginia Power (DVP) compared the base rates charged its residential customers with the base rates that would likely have been in effect had the caps not been imposed. The report concludes that the Restructuring Act's cap on base rates will produce total savings for its residential customers of between $780 million and $871 million from 1998 through 2007. Average annual savings per residential customer ranged from $45 to $50. The study assumes that base residential rates would have risen between 7.9 and 9.2 percent between 2001 and 2007 had the rate cap not been imposed.

An SCC report on changes in residential electric rates in northern and southern states for investor-owned electric utilities during the period 1998 through 2002 concludes that northern states, many of which have deregulated their electricity markets, continue to have higher rates than southern states, most of which have not deregulated. The average residential cost of electricity is 10.463 cents/kWh in northern states and 7.110 cents/kWh in southern states. In Virginia, average rates declined over this period from 7.021 cents/kWh to 6.967 cents/kWh, while the average residential rate in all southern states increased from 6.967 cents/kWh to 7.11 cents/kWh, or about one-half of one percent per year. Northern states, on the other hand, experienced a decline of about one percent over this period, from 10.572 cents/kWh to 10.463 cents/kWh. Moreover, from 1998 through 2002, the base rate (which excludes fuel cost adjustments) in southern states declined at 10 of the electric utilities; increased at five; and did not change at two.

• Stranded Costs Recovery

The Restructuring Act provides that incumbent electric utilities will recover any stranded costs by July 1, 2007, through a portion of the capped rates (for customers who do not switch to a competitive supplier) or wires charges (assessed on customers who switch to a competitor). However, the Restructuring Act neither defines stranded costs nor provides any formula or statutory framework for their calculation. The Restructuring Act directs the Task Force, after the commencement of customer choice, to monitor whether the recovery of stranded costs has resulted or is likely to result in the overrecovery or underrecovery of just and reasonable net stranded costs.

The Task Force has requested the see to convene a work group comprised of Commission staff and representatives of persons representing the Office of the Attorney General, incumbent electric utilities, suppliers, and retail customers, to develop consensus recommendations on issues relating to stranded cost recovery. By July 1, 2003, the work group is to present its consensus recommendations regarding (i) definitions of "stranded costs" and "just and reasonable net stranded costs" and (ii) 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. By November 1, 2003, the work group is to present its recommendations on the amount of each incumbent electric utility's just and reasonable net stranded costs and the amount that it has received, and is expected to receive, to offset just and reasonable net stranded costs from capped rates and from wires charges.

• Revenue From Taxes on Electric Utilities

The electricity consumption tax rates were set in 1999 at levels expected to generate $66 million, which is the difference between the revenue-neutral goal of $87 million and the expected $21 million of corporate income tax receipts. For fiscal year 2002, the consumption tax is expected to generate an amount very near the $66 million that was expected. However, the distribution of tax collections among rate classes varies significantly from the anticipated distribution. For the 2001 taxable year, Virginia electric suppliers paid $3.8 million in corporate income taxes. The corporate income tax on electric utilities was expected to generate $21 million annually.

• Other Issues Examined

The Task Force received information during the past year addressing activities of the Consumer Advisory Board, the status of the sec's consumer education program, DVP's plans for three aggregation pilot programs, the siting of electricity generating facilities, the propriety of suspending application of the Restructuring Act to Kentucky Utilities, local taxation issues, and activities of the SCC in implementing the Act.

The Task Force endorsed eight proposals for legislation pertaining to the Restructuring Act that were enacted by the 2003 Session of the General Assembly:

• House Bill 2453 delays the date by which incumbent electric utilities with transmission capacity must join an RTE. This measure provides that utilities shall not join an RTE prior to July 1, 2004. Utilities are required to file an application to join an RTE by July 1, 2003, and to transfer management and control of transmission assets to the RTE by January 1, 2005, subject to SCC approval. Prior to approving a request to join an RTE, the Commission must determine that the action will (i) ensure that consumers' needs for economic and reliable transmission are met and (ii) meet the transmission needs of electric generation suppliers that do not own, operate, control or have an entitlement to transmission capacity.

• House Bill 2637 provides that application of the Restructuring Act shall be suspended effective July 1, 2003, for Kentucky Utilities, so long as such utility does not provide retail electric services in any other service territory in any jurisdiction to customers who have the right to receive retail electric energy from another supplier.

• House Bill 2319 authorizes the SCC to conduct pilot programs for aggregation efforts encompassing retail customer choice of electricity energy suppliers for certain incumbent electric utilities. Upon application of an incumbent electric utility, the Commission may establish opt-in and opt-out municipal aggregation pilot programs and any other pilot programs that the SCC deems to be in the public interest. The SCC shall report to the Task Force on the status of such pilots by November of each year through 2006.

• House Bill 2318 extends the term of the Task Force to July 1, 2008. The existence of the Task Force had been scheduled to cease on July 1, 2005.

The Task Force endorsed two additional legislative proposals that were not enacted by the 2003 Session of the General Assembly:

• House Bill 2317 would have required each distributor of electric energy to collect from each residential distribution account $.03 per month, or $.36 per year, to be credited to the Home Energy Assistance Fund. Up to three percent of moneys collected may be used to pay the distributor's costs of collecting and transmitting such funds. The measure was defeated in the House Committee on Commerce and Labor by a vote of 10-12.

• House Bill 2046 would have made it a violation of the Virginia Antitrust Act for the operator of an electric power generation facility who generates electricity for sale to manipulate electricity prices by withholding power that has been committed to satisfy reserve requirements from the relevant market. The was stricken from the docket of the House Commerce and Labor Committee at the patron's request.

The Task Force endorsed a proposal that was not considered by the General Assembly. The measure, which was intended to have been added to the legislation introduced as House Bill 2453 rather than being introduced as a separate bill, would have amended § 56-579 to prohibit the SCC from approving an application to transfer control over transmission assets to an RTE if it would result in the direct or indirect transfer of jurisdiction over the reliability or price of generation serving current or future load in the Commonwealth from the Commonwealth to the FERC or any other entity, or if the transfer would negatively affect the reliability or pricing of such generation.

Finally, the Task Force did not endorse three proposals that were offered for its consideration:

• A proposal recommended by Old Mill Power Company to eliminate the existing provision that allows municipal electric utilities and utility consumer services cooperatives to prevent competitive energy services providers from billing willing customers directly, rather than having its billing information included in a consolidated bill. Direct invoicing was lauded as enabling suppliers to be responsible for their own invoicing and bill collection and to establish brand identities.

• A proposal that would allow a staged transition to competition by rate class. The proposal provided that if a large commercial or industrial customer is willing to commit to market-based pricing should it ever return to its local distribution company, that customer should be allowed to switch to a competitive service provider without paying a wires charge. Legislation that would have enacted this proposal was introduced as Senate Bill 891. Following Senator Watkins' statement that he would introduce the bill with the intention of asking that they be referred by the standing General Assembly committee to the Task Force for further consideration, the Task Force took no vote on the proposal. The measure was referred to the Task Force by the Senate Committee on Commerce and Labor.

• A proposal that would allow large commercial or industrial customers who return to the incumbent utility after switching to a competitive provider to have the option of paying market-based prices as an alternative to complying with the current 12-month minimum stay requirement. The measure was identified by the SCC as being worthwhile for Task Force consideration. Legislation that would have enacted this proposal was introduced as Senate Bill 892. Following Senator Watkins' statement that he would introduce the bill with the intention of asking that it be referred by the standing General Assembly committee to the Task Force for further consideration, the Task Force took no vote on the proposal. The measure was referred to the Task Force by the Senate Committee on Commerce and Labor.

The Task Force recognizes that the successful implementation of the Restructuring Act is of vital importance to all Virginians. Potential pitfalls to the transition to a vibrant competitive market include elements of the FERC's proposed rules on standard market design, the threats to continued state jurisdiction over issues related to rates and reliability, the lack of unqualified success in implementing retail competition in other states that have deregulated their electric utilities, and a credit crunch that has affected the development of new generating facilities and the financial well-being of several electric utilities. However, the successful implementation of the Restructuring Act offers the prospect for greater efficiencies that will provide tangible benefits to all Virginians.

The Task Force remains committed to fine-tuning the Restructuring Act in order to provide a legislative framework for the effective deregulation of the electric utility industry. In its efforts, it will endeavor to ensure that all Virginia consumers have the opportunity to realize the greater efficiencies inherent in a market-based system, without subjecting them to unnecessary risks that may threaten the Commonwealth's long-standing status as a state with reliable and low-cost electric service.

The next year will be vital in the implementation of retail competition for electricity. Task Force members will attempt to identify ways to surmount barriers to the development of a vibrant market for the generation component of electric service. At the same time, the Task Force will continue to monitor federal and regional developments to ensure that Virginia does not cede its authority to protect electricity consumers in the Commonwealth.