RD7 - Annual Executive Summary on the Activity and Work of the Commission on Electric Utility Restructuring


    Executive Summary:
    COMMISSION ON ELECTRIC UTILITY RESTRUCTURING

    The Commission on Electric Utility Restructuring was established by Chapter 31 (§ 30-201 et seq.) of Title 30 of the Code of Virginia. The Restructuring Commission's purpose is to work collaboratively with the State Corporation Commission (SCC) in conjunction with the phase-in of retail electric competition in Virginia. Its primary duty is to monitor the work of the SCC in implementing the Virginia Electric Utility Restructuring Act (Restructuring Act), which is set out at Chapter 23 (§ 56-576 et seq.) of Title 56 of the Virginia Code.

    Retail electric competition is being introduced in the Commonwealth pursuant to the provisions of the Restructuring Act, which 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 SCC and the Federal Energy Regulatory Commission (FERC) will continue to regulate the distribution and transmission of electric service, respectively.

    Since its establishment (as the Legislative Transition Task Force) in 1999, the Restructuring Commission has actively monitored developments relating to the implementation of the Restructuring Act. The Restructuring Commission met four times during the 2004-2005 interim. During these meetings it received testimony on numerous issues, including:

    • The efforts of Appalachian Power and Dominion Virginia Power to obtain the approvals required to complete the transfer of control of their transmission assets to the PJM Interconnection regional transmission organization (RTO). RTOs are entities created to operate transmission grids and ensure short-term system reliability, independent of control by incumbent utilities and other market participants. Functioning RTOs are viewed as necessary to the development of a competitive retail market for electric generation. The Restructuring Act requires incumbent utilities to transfer ownership or control of their electric transmission assets to an RTO between July 1, 2004, and January 1, 2005, subject to the approval of the SCC. In 2004, both utilities obtained SCC approval of applications to join PJM.

    • The likely effect of the provision of Senate Bill 651 of 2004 that established an incentive for the construction of a coal-fired generation facility in Southwest Virginia. The Restructuring Act provides that an investor-owned distributor that has been designated a default service provider and that constructs a coal-fired generation facility that utilizes Virginia coal in the coal field region in order to meet its native load and default service obligations will be allowed to recover the costs of the facility, plus a fair rate of return on its investment, through its default service rates.

    • The role of renewable energy resources (including wind, landfill gas, wood waste, and solar power) in meeting Virginia's future electric energy needs.

    • The SCC's Report on the Development of a Competitive Retail Market for Electric Generation within the Commonwealth. As was stated in previous years' reports, retail competition is legally permitted in Virginia, but (aside from a few thousand customers purchasing green power in Northern Virginia) there is no actual competition, as competitive providers are not marketing power to retail customers in Virginia. In other states that have restructured their electric utilities, little competitive activity is occurring, particularly among residential customers.

    • The Office of the Attorney General's report on electric utilities' recovery of stranded costs. The report compared average annual stranded cost recoveries for 2001-2003 to potential stranded cost exposure for 2003. Scott Norwood, the consultant who prepared the report, observed that higher market prices equate to lower potential stranded costs, and that estimates of potential stranded costs are inherently uncertain, due to volatility in generation market prices and other factors. Under the "base case" scenario (assuming a market price of 4.53 cents/kWh with a 10 percent return on equity for investor-owned utilities and 2.0 times interest earned ratio for cooperatives), the potential stranded cost exposure for 2003 ($157.4 million) is estimated to be about half the average annual stranded cost recovery over 2001-2003 ($350.4 million). The potential stranded cost exposure for the post-transition period, without capped rates and wires charges, remains significant if market prices fall below 4 cents/kWh. Assuming market prices stay high, as they have for the past 18 months, significant additional mitigation of stranded costs should be achieved through the extension of capped rates beyond 2007, and there would be the potential for over-recovery of stranded costs.

    • The perspective of Virginia's electric cooperatives on the restructuring of Virginia's system of regulating the provision of electric utility service to introduce retail competition for generation.

    • The activities of the Consumer Advisory Board, established by § 30-208 of the Virginia Code.

    At the September 8, 2004, meeting, August Wallmeyer agreed to work with interested persons to develop consensus legislation on ways to increase the use of renewable energy in Virginia. At the November 23, 2004, meeting of the Restructuring Commission, Mr. Wallmeyer reported that there was general agreement among members of the working group that they would recommend that an independent, unbiased study be conducted of the purported benefits and costs of renewable energy, including health, economic, employment and other benefits arising from increased use of renewable energy sources. The purpose of the proposed study was to measure these externalities in comparison to the generally higher production costs of renewable energy. The study would seek to determine if, on balance, the purported benefits outweigh the increased costs of renewables, by monetizing the purported benefits and comparing the value of the benefits to the financial costs.

    At the Restructuring Commission's December 20, 2004, meeting, it was reported that several utilities do not favor a study which would consider environmental externalities. The Restructuring Commission agreed to ask the Virginia Center for Coal and Energy Research at Virginia Tech if it would be willing to conduct such a study that excluded any consideration of environmental externalities and did not address a renewable portfolio standard. If the Center expressed an interest in doing such a study, the Restructuring Commission would revise the scope of the proposed study accordingly.

    At its meeting on December 20, 2004, the Restructuring Commission was prepared to receive and discuss proposals for legislative action affecting the Restructuring Act. No legislative proposals were offered, and therefore the Restructuring Commission, for the first time since its inception, is not endorsing any legislative proposals for the 2005 Session. The Restructuring Commission will continue working to identify and remove any barriers to the development of a competitive retail market for the generation component of electric service in Virginia.

    The Restructuring Commission does not intend to submit a further report of its findings and recommendations for publication.