SD12 - Report of the Commission on Electric Utility Restructuring

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

The Commission on Electric Utility Restructuring, formerly the Legislative Transition Task Force, was established to work collaboratively with the SCC in conjunction with the phase-in of retail electric competition. The Restructuring Commission has actively monitored developments relating to the implementation of the Restructuring Act, and has acted as a gatekeeper to examine any proposals for legislation affecting electric utilities.

The Restructuring Commission met five times during the 2003-2004 interim. During these meetings it received testimony on numerous issues, including:

• The SCC's Report on the Development of a Competitive Retail Market for Electric Generation within the Commonwealth;
• Stranded costs;
• The status of federal legislation and FERC activity;
• The damage caused by Hurricane Isabel;
• The Blackout of 2003 and why Virginia's systems were not negatively impacted;
• The integrity of Virginia's transmission systems; and
• Proposed changes to the Restructuring Act.

The Restructuring Commission adopted a resolution establishing a methodology to address the issue of monitoring incumbent electric utilities' stranded costs. The resolution requests the Division of Consumer Counsel of the Office of the Attorney General:

1. On or before September 1, 2004, and annually thereafter, to report to the Restructuring Commission (i) the cost of service of each incumbent electric utility's generation; and (ii) the market prices for generation as calculated for wires charge purposes immediately prior to the reporting date. However, the first such report is to cover the period beginning July 1,1999, and ending December 31, 2003.

2. In determining generation cost of service, to take into account factors such as the incumbent electric utility's applicable Annual Informational Filing to the SCC, any adjustments to such Filing made by the SCC, example ranges of returns on common equity, and such other factors as the Division deems relevant.

3. In determining market prices for generation, to take into account market prices as determined by the SCC and such other factors as the Division may deem relevant.

4. To continue to make such reports for each incumbent electric utility until the capped rates for such utility expire or are terminated pursuant to the provisions of § 56-582 of the Code of Virginia.

At its meeting on January 15, 2004, the Restructuring Commission endorsed six legislative proposals:

• Extension of capped rates: The Office of the Attorney General and the Secretary of Commerce and Trade recommended legislation that would extend, until December 31, 2010, the rate caps currently in place for incumbent electric utilities unless terminated sooner by the SCC upon a finding of an effectively competitive market for generation services in the service territory of an incumbent utility. Utilities not bound by a rate case settlement may petition the SCC for a change in rates after January 1, 2004. Current law limits such petition for a change in only the non-generation components of rates. If capped rates are continued after July 1, 2007, an incumbent electric utility may at any time after July 1, 2007, petition the SCC for approval of a one-time change in its rates. If a majority of electric cooperatives elect to be exempt from certain provisions of the Act, then all cooperatives will be exempt, and if such election is made, the cooperatives will revert back to cost-of-service regulation. The bill provides for an extension of the fuel costs recovery tariff provisions (fuel factors) in effect on January 1, 2004, for any electric utility that purchases fuel for the generation of electricity and that was, as of July 1, 1999, bound by a rate case settlement adopted by the SCC that extended in its application beyond January 1, 2002. The fuel factors shall remain in effect until the earlier of (i) July 1, 2007, (ii) the termination of capped rates, or (iii) the establishment of tariff provisions as directed by the SCC.

• Minimum stay requirements; wires charges: Senator Watkins proposed changes to the Restructuring Act to authorize any large industrial or commercial customer who is returning to its incumbent electric utility or default provider after purchasing power from a competitive supplier to elect to accept market-based pricing as an alternative to being bound by the minimum stay period prescribed by the SCC. Customers exempted from minimum stay periods will not be entitled to purchase retail electric energy from their incumbent electric utilities thereafter at the capped rates unless such customers agree to satisfy any minimum stay period then applicable. This proposal also authorizes industrial and commercial customers, as well as aggregated customers in all rate classes, to switch to a competitive service provider without paying a wires charge if they agree to pay market-based prices if they ever return to the incumbent electric utility. Customers who make this commitment and obtain power from suppliers without paying wires charges are not entitled to obtain power from their incumbent utility at its capped rates.

• Municipal and state aggregation: Senator Watkins also advanced a proposal that would authorize a municipality or other political subdivision to aggregate the electric energy load of residential, commercial, and industrial retail customers within its boundaries on either an opt-in or opt-out basis, eliminate the requirement that customers must opt in to select such aggregation, and eliminate the requirement that such municipality or other political subdivision may not earn a profit from such

• Electrical generating facility certificates: Delegate Parrish recommended extending by two years the expiration date of certain certificates granted by the SCC to construct and operate electrical generating facilities. Only those certificates for which applications were filed with the SCC prior to July 1, 2002, will receive an extension.

• Net Metering: The MDV-Solar Energy Industries Association recommended a proposal to change the net metering maximum from 25 KW to 500 KW. The net metering provisions give customer-generators the opportunity to sell excess generated electricity to electric utilities. "Net energy metering" means measuring the difference, over the net metering period, between (i) electricity supplied to an eligible customer-generator from the electric grid and (ii) the electricity generated and fed back to the electric grid by the eligible customer-generator.

• Air emissions trading: The Restructuring Commission also endorsed a proposal that would prohibit the Commonwealth from selling, by auction or other manner, the set asides allocated to new sources of air emissions.

The Restructuring Commission remains committed to fine-tuning the Restructuring Act in order to provide for the effective deregulation of the generation component of retail electric service. However, if competition does not materialize as expected during the next few years, the Restructuring Commission will take whatever steps are necessary to maintain the Commonwealth's long-standing status as a state with reliable and low-cost electric service. Furthermore, the Restructuring Commission will continue to monitor federal and regional developments to ensure that Virginia does not cede to the federal government its authority to protect Virginia electricity consumers.