RD289 - Assessing the Rates and Terms and Conditions of Incumbent Electric Utilities in the Commonwealth Pursuant to the Seventh Enactment Clause of Chapter 933 (SB 1416) of the 2007 Acts of Assembly - November 1, 2012

Executive Summary:
On April 4, 2007, the General Assembly of Virginia enacted Chapter 933 of the 2007 Acts of Assembly ("Chapter 933") which, among other things, directs the State Corporation Commission (“Commission”), in consultation with the Office of Attorney General, to conduct a five-year assessment of “the rates and terms and conditions of incumbent electric utilities in the Commonwealth” and “the amount, reliability and type of generation facilities” used to serve Virginia native load. The following report describes the various provisions of Chapter 933 that potentially could influence Virginia’s electric utility rates and service reliability and relates those provisions to numerous Commission proceedings and decisions involving Dominion Virginia Power (“Dominion” or “DVP”), Appalachian Power Company (“APCo”), and the electric cooperatives.

Since the 2007 enactment of Chapter 933, DVP, APCo, and the electric cooperatives have requested numerous rate changes or have undergone extensive rate reviews pursuant to various provisions of the chapter. During this period, Dominion has been authorized net revenue increases totaling approximately $1.3 billion (*1) and on an annual basis currently has pending requests that would produce additional increases of approximately $120.1 million. It should be noted that many of the cost drivers that contributed to this increase may have existed in the absence of Chapter 933, and the level of increases otherwise that would have occurred simply cannot be determined. Certain increases likely would have occurred under other regulatory paradigms. For example, the $1.3 billion increase includes fuel-related increases of $589.6 million, much of which would have occurred with the previously scheduled expiration of capped rates. The combined effect of the approved increases for Dominion has been to increase the monthly bill for a residential customer using 1,000 kilowatt-hours (“kWh”) by $16.63, or approximately 18%, since July 1, 2007. The $16.63 increase is comprised of a fuel cost increase of $4.74, transmission cost-related increases totaling $4.25, new generation rate riders totaling $6.94, and demand-side management (“DSM”) rate adjustments totaling $0.70. The incremental changes in rates occurring since July 1, 2007, currently reflected in Dominion’s monthly bill for residential customers using 1,000 kWh, and the associated statutory provision through which each increment was authorized, are detailed in Appendix 2 to this report.

APCo also has requested and has received a number of rate increases since July 1, 2007. While APCo has been authorized revenue increases totaling approximately $627.7 million on an annual basis, portions of those increases were approved for limited periods of time and have since expired. As such, the level of net revenue increases now reflected in APCo’s rates is approximately $481.2 million. The combined effect of these net increases has been to increase the monthly bill for a residential customer using 1,000 kWh by $45.98, or approximately 69%, since July 1, 2007. Incremental changes occurring since July 1, 2007, that are currently reflected in APCo’s monthly bill for residential customers using 1,000 kWh, and the associated statutory provisions, are detailed in Appendix 3 to this report.

The Seventh Enactment Clause of Chapter 933 specifically requires that this assessment report “include an analysis of, among other matters, the amount, reliability and type of generation facilities needed to serve Virginia native load compared to that available to serve such load.” Dominion, APCo, and the electric cooperatives are either directly or indirectly, through purchased power arrangements, members of PJM Interconnection, LLC (“PJM”). (*2) PJM’s primary mission is to ensure the safety, reliability, and security of the bulk electric power system located in a 13-state area that encompasses portions of the United States’ Midwest, Southeast and Northeast regions. As such, PJM analyzes, forecasts, and plans for the future electricity needs of the region to assure that the bulk power grid is sufficient for delivering power from available generation resources to loads within the PJM region. PJM also imposes generating capacity obligations on its load serving members, including APCo, DVP, and the electric cooperatives, and requires that those members make forward commitments for meeting those obligations. Consequently, the “amount and reliability” of generation needed to serve Virginia load is directly impacted by PJM planning activities and membership requirements.

It also should be noted that the Virginia General Assembly enacted Chapters 476 and 903 of the 2008 Acts of Assembly during its 2008 Session. These duplicate enactments added Chapter 24 (§ 56-597 et seq.) of Title 56 of the Code of Virginia. Chapter 24 directs Virginia’s investor-owned electric utilities (“IOUs”) to file integrated resource plans (“IRPs”) with the Commission at least every two years. These IRPs effectively work in conjunction with the PJM processes by examining each IOU’s existing and projected portfolio of supply- and demand-side resources necessary to meet projected demand over a 15-year planning period.

Dominion relies on its generating resources, purchased power contracts, DSM initiatives, and short-term capacity purchases for satisfying its load serving obligations. Dominion’s internal capacity (i.e., its owned capacity, capacity acquired through long-term non-utility generation purchased power agreements, and DSM reductions) has in recent years provided less than the total amount of generation capacity required to meet 100% of its load obligations at all times—principally during periods of peak demand; e.g., the summer cooling season. This deficit typically has been covered through short-term purchases, including purchases from the PJM capacity market. This capacity deficit is expected to average around 1,100 MW for the period 2012-2015. Dominion’s recent construction of the Bear Garden and Virginia City Hybrid Energy Center generating facilities has reduced this internal capacity deficit. Moreover, the Warren County facility that now is under construction and planned to be operational in 2015 essentially will eliminate this deficit in the near term.

APCo is a member of the American Electric Power (“AEP”) system and historically has relied on its installed generation and an AEP Interconnection Agreement with other AEP affiliates to satisfy its load obligations. APCo’s internal capacity historically has been insufficient to satisfy its load obligations, as determined under that interconnection agreement. However, the AEP system historically has had sufficient capacity to satisfy the needs of its affiliated members, thus making – in some respects – APCo’s capacity deficit a function of AEP planning. Consequently, APCo’s interconnection agreement related deficit has not posed a reliability concern for Virginia. APCo recently constructed the Dresden facility in Ohio which helps to eliminate a portion of APCo’s shortfall.

APCo and other participants in the AEP Interconnection Agreement have provided notice of their intention to dissolve that agreement effective December 31, 2013. In lieu thereof, APCo’s current plans envision that it will become a stand-alone entity within PJM, with some limited pooling arrangements with other AEP affiliates. Conceptually, APCo would be responsible for satisfying its internal capacity requirements on a stand-alone basis going forward, and APCo’s capacity obligations would be determined through the PJM process. Under such a scenario, APCo expects that it would have sufficient capacity until 2014 based on its existing resources and expected capacity changes. Further, APCo anticipates purchasing existing generating capacity from other AEP pool members in conjunction with the dissolution of the AEP Interconnection Agreement.

Chapter 933 also requires that Virginia electric utilities be compared to “those in the peer group of such utilities that meet the criteria enumerated in subdivision A 2 of § 56-585.1 of the Code of Virginia.” (*3) The peer group utilities for APCo and Dominion currently include: Duke Energy Carolinas (“Duke”), Entergy Mississippi (“Entergy”), Florida Power & Light Company (“FP&L”), Georgia Power, Gulf Power, Mississippi Power, Progress Energy Carolinas, Progress Energy Florida, South Carolina Electric & Gas (“SCE&G”), and Tampa Electric Company. In response to the directive to conduct peer group comparisons, this report contrasts typical bill information for the peer group utilities with that of APCo and Dominion.

Dominion’s January 1, 2012 residential rates produce typical bills that rank DVP 11th lowest out of the 17 companies examined and are below the U.S. averages and slightly above Edison Electric Institute’s (“EEI”) averages for the South Atlantic region. DVP’s typical residential bill rankings have slipped five places since July 1, 2007, sliding from the upper to the lower half of the peer group; that is, Dominion’s rates have become less competitive. Dominion’s commercial rates still seem competitive despite some decline in rankings since July 1, 2007. Dominion’s January 1, 2012 commercial rates produce typical bills that range from 7th to 11th lowest out of the 17 companies examined and are below the U.S. and South Atlantic region averages. Dominion’s industrial rates still appear competitive with the rates of the peer group despite a continued decline in ranking. Dominion’s January 1, 2012 industrial rates produce bills that range from 6th to 13th lowest out of the 17 companies examined and are below the U.S. average and, for the most part, are below the South Atlantic region average.

APCo’s residential typical bill rankings for 2012 and July 1, 2007, are the same. APCo’s January 1, 2012 residential rates produced typical bills that ranked 2nd lowest out of the 17 companies examined and are below the U.S. and South Atlantic region averages. APCo’s commercial rates also continue to be competitive despite some decline in ranking for larger, higher load factor customers. APCo’s January 1, 2012 commercial rates produced typical bills that range from 2nd to 4th lowest out of the 17 companies examined and are below the U.S. and South Atlantic regional averages. APCo’s January 1, 2012 industrial typical bills are ranked 1st to 4th lowest out of the 17 companies examined and are below the U.S. and South Atlantic region averages. APCo’s industrial bill rankings have slipped only slightly since July 1, 2007, and in some cases improved, which seems to indicate that APCo’s industrial rates are still competitive.

A review of generating capacity reliability-related information for the peer group utilities did not show any discernible trends in reliability or any indication that Dominion’s or APCo’s overall ability to serve native load was notably different from that of the peer group. It should be noted that publicly available reliability-related information for the peer group is limited. As such, reliability differences only could be developed on a somewhat superficial level.
(*1) This increase reflects the level of ongoing increases that currently are reflected in rates and excludes temporary base rate credits and certain increases or decreases that may have been in effect during a portion of this five-year review period. For example, the current fuel factor and transmission-related charges were at times higher or lower during the review period than they currently are.
(*2)PJM is the regional transmission entity that, among other things, controls transmission facilities owned by DVP and APCo.
(*3) Chapter 933 does not require peer group analysis of rates for electric cooperatives.