- Report Published -
|Report Document No. 36|
PUBLICATION YEAR 2007
|Annual Executive Summary of the Electric Utility Restructuring Commission|
|Commission on Electric Utility Restructuring|
COMMISSION ON ELECTRIC UTILITY RESTRUCTURING
The Commission on Electric Utility Restructuring (Restructuring Commission) is established pursuant to Chapter 31 (§ 30-201 et seq.) of Title 30 of the Code of Virginia. The powers and duties of the Restructuring Commission include:
• Monitoring the work of the State Corporation Commission (SCC) in implementing the Virginia Electric Utility Restructuring Act (Restructuring Act), Chapter 23 (§ 56-576 et seq.) of Title 56, receiving such reports as the SCC may be required to make pursuant thereto, including reviews, analyses, and impact on consumers of electric utility restructuring programs in other states;
• Monitoring, after the commencement of customer choice and with the assistance of the SCC and the Office of the Attorney General, the incumbent electric utilities, suppliers, and retail customers, whether the recovery of stranded costs, as provided in § 56-584, has resulted or is likely to result in the overrecovery or underrecovery of just and reasonable net stranded costs; and
• Examining (i) utility worker protection during the transition to retail competition, (ii) generation, transmission, and distribution systems reliability concerns, and (iii) energy assistance programs for low-income households.
The 2006 Session of the General Assembly also gave the Restructuring Commission the task of evaluating and assessing the implications of the scheduled expiration of the capped rates established pursuant to § 56-582.
The Restructuring Commission is chaired by Senator Thomas K. Norment, Jr. The other members are Senator Kenneth W. Stolle, Senator John C. Watkins, Senator Richard L. Saslaw, Delegate Robert Tata, Delegate Terry G. Kilgore, Delegate James M. Scott, Delegate Allen W. Dudley, and Delegate Kenneth R. Plum. Delegate Clarke Hogan was appointed to the Restructuring Commission in 2006 to fill the vacancy created by the death of Delegate Harry Parrish.
Since its establishment (as the Legislative Transition Task Force) in 1999, the Restructuring Commission has monitored the implementation of the Restructuring Act. In 2006, the prospects for the successful implementation of a market-based system where competition effectively regulates the price for electricity dimmed considerably. The experiences of other restructuring states when electricity rates became subject to wholesale market-based prices upon the expiration of transition periods, including Maryland, Delaware, and Illinois, have generally been cited as grounds for a reevaluation of Virginia's scheduled end of capped rates on December 31, 2010.
The Restructuring Commission met four times after submitting its previous Executive Summary in January 2006. The first meeting was convened on February 6, 2006, to consider four pieces of legislation pending in the General Assembly:
• House Bill 700, introduced by Delegate Clarke Hogan, would have prohibited any electric utility from seeking an increase in its tariffs to reflect changes in its fuel costs, including the cost of purchased power other than through a comprehensive rate case to establish reasonable and just rates for the service of the utility. Under this measure, the electric utility's capped rates would be adjusted to the levels established through the rate case. Delegate Hogan contended that a full rate case would provide the SCC with the opportunity to review the rate of return that a utility is currently earning under its capped base rates, which may mitigate any increase in the utility's fuel factor. Delegate Hogan offered an amendment in the nature of a substitute to House Bill 700 that would limit its effect to any electric utility that was bound by a rate case settlement that extends in application beyond January 1, 2002 (Dominion Virginia Power). Dominion objected to the bill on grounds that it would combine a fuel factor case with a base rate case. The Restructuring Commission unanimously voted not to support the bill.
• House Bill 1187, introduced by Delegate Landes, would have amended the Electric Authorities Act to provide for the establishment of authorities having a governmental unit as its single member. Such a single-member authority would be exempt from the Virginia Electric Utility Restructuring Act. The measure was intended to allow the town of Elkton, which operates a municipal electric utility, to convert the form of the utility to an authority while retaining the existing exemption from the Act that exists for municipal electric utilities. The Restructuring Commission agreed to support the legislation on the condition that it be limited to Elkton.
• House Bill 1541, introduced by Delegate Toscano, would have expanded the definition of an eligible customer-generator to include a customer who contracts with other persons to own, operate, or both, an eligible electrical generating facility. Currently, the customer must own and operate the generating facility. The measure also would have allowed such facilities to have any renewable energy as their total source of fuel; currently, only facilities that use solar, wind, or hydro energy are eligible. It also would have allowed a facility that is located on the customer's premises and is connected to the wiring on the customer's side of its interconnection with the distributor to qualify for net energy metering; currently, the facility must be located on the customer's premises. While Dominion had no concern with the bill, AEP did not support the measure. The Restructuring Commission agreed that the bill could proceed without any recommendation.
• Senate Bill 711, introduced by Senator Norment, would have authorized the Restructuring Commission to appoint persons who are not members of the Restructuring Commission to any subcommittee that the Restructuring Commission may establish. The powers of the Restructuring Commission are amended to specifically authorize it to evaluate and assess the implications of the scheduled expiration of capped rates. The measure was endorsed unanimously by the members of the Restructuring Commission.
The Restructuring Commission also considered a resolution that proposed that the Restructuring Commission conduct a two-year study of the provision of electric generation service in the Commonwealth following the termination of the rate cap period. The resolution stated that, pursuant to Senate Bill 711, the chairman of the Restructuring Commission would be authorized to establish a subcommittee to conduct the study. The Restructuring Commission unanimously endorsed the resolution.
The Restructuring Commission met for a second time on the morning of the April 19, 2006, reconvened session, to consider an amendment, proposed by the Governor, to Senate Bill 262. The proposed amendment addressed the ability of Dominion Virginia Power to recover its costs for fuel and purchased power during the balance of the capped rate period. Dominion's fuel factor had been frozen at the level set in 2003, subject to a one-time adjustment in July 2007. The fuel factor to be set in July 2007 was to be set at a level to allow the utility to recover the projected fuel costs for the 42-month period ending December 31, 2010. Dominion did not anticipate the substantial fluctuations and escalations in fuel costs that have occurred since the enactment of Senate Bill 651. The Governor's amendment requires Dominion to apply for annual fuel factor adjustments commencing July 1, 2007. In addition, up to 40% of any increase in the fuel tariff that the SCC approves for 2007-2008 may be deferred and recovered during the period July 2008 through December 2010. At the close of the meeting, the Restructuring Commission unanimously passed a motion endorsing the Governor's proposed amendment to Senate Bill 262.
Pursuant to the authority to appoint a subcommittee that could include nonmembers to study relevant issues, the chairman named an eight-member subcommittee to conduct a two-year study of the provision of electric generation service in the Commonwealth following the termination of the rate cap period, as outlined in the resolution adopted at the Restructuring Commission's February 6 meeting. The members of the subcommittee are Senator Norment, Senator Watkins, Delegate Kilgore, and Delegate Plum, in addition to four persons not on the Restructuring Commission: SCC Commissioner Theodore V. Morrison, Dr. Irene Leech of Virginia Tech and the VCCC, Delegate Harvey Morgan, and Michael Toalson of the Homebuilders Association. The subcommittee met for the first time on September 28, 2006, at which time representatives of several interested groups took advantage of the opportunity to identify issues they wanted the subcommittee to examine during its study.
The subcommittee met next on November 2, 2006. The meeting was used to address matters relating to the scope of the subcommittee's work and to prioritize the issues that participants at its preceding meeting had suggested be considered. The meeting focused on consideration of items to be incorporated into the subcommittee's work plan. The subcommittee members agreed that their work should begin with a consideration of whether the objectives of the Restructuring Act could be accomplished in light of the changes that had transpired in wholesale electricity markets since the Act was enacted in 1999. Senator Watkins observed that the unleashing of an unregulated monopoly appears possible if the Restructuring Act were not amended. The chairman concurred that it would be appropriate to revisit the issue of current wholesale market conditions, including the contrast between what was contemplated at the outset of the restructuring process and today's reality.
The third meeting of the Restructuring Commission during the interim was convened on December 19, 2006. At that meeting, it received reports on the status of the implementation of electric utility restructuring and reviewed proposals for legislation that may affect the electric utility industry.
Reports received at the meeting included:
• The SCC's report on the development of a competitive retail market for electric generation within the Commonwealth;
• The Office of the Attorney General's report on electric utilities' recovery of stranded costs;
• PJM Interconnection's state-of-the-market report; and
• The Department of Mines, Minerals and Energy's report on the status of preparation of the Virginia Energy Plan.
The implications of restructuring described in the report on the status of competition include the likelihood that, after capped rates end, the prices paid by Virginia's electricity consumers will rise precipitously. While post-2010 market conditions cannot be known with certainty, prices could be significantly higher than current capped rate levels. These higher prices are likely to yield extraordinarily high returns to base load coal and nuclear generating resources. However, to the extent that base load resources remain inside the incumbent utility, the units remain subject to state jurisdiction and the Commonwealth's policymakers could mitigate, in a non-confiscatory manner, potentially high retail rate levels.
Dr. Ken Rose identified concerns with a wholesale market structure that he described as having characteristics of an oligopoly. Markets are concentrated regionally, and are highly concentrated locally. Significant entry barriers still exist, due to barriers for new generation capacity and from transmission constraints. Continuous interaction of suppliers increases the likelihood of strategic bidding and tacit collusion. These factors and other unique features of electricity as a commodity, including the inelasticity of demand and the inability to store electric power, in addition to the high societal costs of "getting it wrong," have led to the conclusion that competition (or deintegration) may not produce better outcomes than regulation for this industry.
The Restructuring Commission received presentations from four members who are planning to introduce bills in the 2007 Session affecting electric utilities. The Restructuring Commission announced that it would not take any action regarding the proposals at this meeting.
• Senator Mary Margaret Whipple presented legislation that would institute a renewable portfolio standard for investor-owned utilities. It would require that by June 1, 2020, and through May 31, 2021, and in subsequent years, 12% of the electric energy sold by utilities to retail customers in the Commonwealth be generated from renewable generation sources. The affected utilities would also be required to achieve reductions in the consumption of electric energy by their customers through the implementation of energy efficiency programs, in an amount equal to 5% of the amount of electric energy consumed in 2006. The requirements would be phased in through increasing annual steps over a period commencing June 1, 2008, though Senator Whipple is considering other approaches. Generators of renewable energy would receive renewable energy credits for power generated through eligible renewable sources or conserved through energy efficiency programs. Suppliers who do not comply with the minimum percentage requirements are required to make alternative compliance payments into a new Virginia Sustainable Energy, Energy Efficiency, and Energy Conservation Fund. Distributors are authorized to recover incremental costs of compliance incurred during the capped rate period under the procedure for recovery of the costs of purchased power.
• Senator Roscoe Reynolds presented draft legislation that attempts to address concerns of economic development officials and manufacturers in Southside and Southwest Virginia that looming rate increases in Virginia will cost the region jobs when rate caps end in 2010. North Carolina, which has not restructured its electric utility industry, may see this as a tool in efforts to lure businesses from this state. Reynolds' proposal seeks to address these concerns by extending the period during which rates for electric service are capped from December 31, 2010, until July 1, 2013. The measure also provides that, upon the end of the capped rate period, rates for default service provided by distributors will be based on prudently incurred costs, rather than on prices in competitive regional electricity markets. Other provisions clarify that the capped rates and default service rates for utilities that have divested their generation assets will be determined in a manner consistent with the terms of the orders of the SCC approving the transfer of such assets. The measure revises the criteria for adjustments to capped rates to provide that after July 1, 2007, certain utilities may seek to recover increased costs through annual full rate cases, rather than through single-issue proceedings.
• Delegate Harvey Morgan presented a bill that attempts to address concerns that competition will not develop in a way that will provide benefits to ratepayers in Virginia. His proposal provides that effective January 1, 2008, the rates for customers receiving default service will be determined by the SCC based on the cost of service under the provisions of Chapter 10 of Title 56. The measure also clarifies that the Restructuring Act's provisions do not modify or impair the terms of orders approving the divestiture of an electric utility's generation assets.
• Delegate Clarke Hogan agreed with Delegate Morgan's remarks that going to market rates will be detrimental to Virginians. His proposal focuses on default service rates, on grounds that without the development of beneficial competition all Virginians will be paying default service rates. The proposal he presented provides that if the SCC is unable to identify regional electricity markets where competition is an effective regulator of rates, it will establish the post-capped rate period rates for a distributor's generation component of default service at rates that are in the public interest, do not prejudice or disadvantage any class of customers, provide incentives for improved performance, are not excessive, and are adequate and seek to ensure the safe and reliable provision of default service. If a distributor asserts that these default service generation rates do not allow it to recover its prudently incurred costs and an adequate return, the SCC will establish the rates in a cost-of-service rate case. He added that inexpensive power must be generated from coal and nuclear generation, both of which require much capital investment. The capital markets, in turn, require an assuredness of the rate of return that the current law does not provide. Given the length of time required to plan and build base load generation facilities, he urged that the Commonwealth move forward without delay.
At the close of the meeting, a spokesman for Dominion introduced a plan that would end the scheduled restructuring of Virginia's electric utilities. The plan has three main elements. Capped rates would end in December 2008. Retail choice would cease for all but large industrial customers with a load of at least five megawatts. When capped rates end, rates of investor-owned utilities will be set under a new cost-of-service model that provides, among other features, that a return on equity will be set by adding 6% to the yields on investment grade long-term utility bonds, subject to adjustments of up to 0.5% based on generation performance, operations and efficiency.
The fourth meeting of the Restructuring Commission prior to the convening of the 2007 Session was held on January 8, 2007. At this meeting, Dominion presented draft legislation to implement a proposed "hybrid regulatory model." Key elements of the proposal include:
• Advancing the scheduled expiration of the capped rate period from December 31, 2010, to December 31, 2008;
• Establishing a new methodology for determining electric rates for investor-owned electric utilities after the expiration or termination of capped rates;
• Providing that after the capped rate period, only customers whose annual demand exceeds 5 megawatts will be permitted to purchase electricity from a competing provider of generation services;
• Requiring the SCC to conduct biennial reviews of the rates, terms and conditions for generation, distribution, and transmission services, on an unbundled basis, by each investor-owned incumbent electric utility. The reviews shall be conducted to determine, for a 12-month test period, whether the utility’s earnings have produced a fair combined rate of return on the utility’s common equity for its generation and distribution services;
:: If a utility is earning less than a fair rate of return, its rates will be adjusted to provide such a return;
:: If the utility is earning more than 100 basis points above a fair rate of return, one-half of such excess will be credited to customers;
• Defining a "fair rates of return" on common equity as six percentage points above the latest available three month average bond yield of investment-grade bonds using Moody’s Long Term Baa Utility Bonds;
• Allowing the SCC to increase or decrease the rate of return by up to 0.5 percentage points under a Performance Incentive; and
• Allowing the recovery of certain expenses under an automatic rate adjustment clause
The Restructuring Commission took no action on the proposal. A number of members questioned provisions of the proposal. The chair asked the Office of the Attorney General to facilitate discussions among interested parties aimed at developing a consensus on legislation for consideration during the 2007 Session.
Additional information on the activities of the Restructuring Commission, and links to presentations, are on its website at http://dls.state.va.us/GROUPS/elecutil/MEET2006.HTM.
The Restructuring Commission does not intend to submit a further report of its findings and recommendations for publication.