Remarks of T.F. Farrell II to Senate Commerce and Labor Committee

Executive Speech

Remarks of T.F. Farrell II
to the
Senate Commerce and Labor Committee

January 26, 2004

Good afternoon, Mr. Chairman and members of the committee.

I am Tom Farrell, president and chief operating officer of Dominion.

We strongly support Senate Bill 651 sponsored by Senator Norment.

This bill incorporates all the measures endorsed by the Commission on Electric Utility Restructuring on January 15. It includes a very important proposal from the offices of the Governor and the Attorney General. This proposal caps Dominion Virginia Power's base rates for an additional three and a half years, through 2010—while providing flexibility for the cooperatives and other utilities that need it.

Earlier this month, the Commission on Electric Utility Restructuring recognized that the bipartisan plan submitted by the Governor and the Attorney General is a sensible, well-thought-out compromise. It will benefit electric customers across the Commonwealth and keep Virginia's restructuring effort on track.

We agree.

Major Strengths of SB 651

Here are a few of the reasons we support SB 651and its proposed extension of the Act's capped rate period.

SB 651 is a strong pro-consumer bill because it restricts rate cases and rate increases. The Restructuring Act capped our base rates essentially at 1993 levels. Due in large measure to the rate caps, Dominion Virginia Power residential customers are paying 25 percent less for electricity—adjusted for inflation—than they were a decade ago. The bill before you today continues those capped rates for another three and a half years. Capped rates have already saved our customers hundreds of millions of dollars—and the extension should provide up to $700 million in additional savings from 2007 through 2010, according to a recent study.
The bill provides more time for the competitive markets envisioned by the Act to mature—especially since the wires charge will be removed on schedule in 2007. Meanwhile, consumers will have additional years of the "safety net" of capped rates to protect them against price volatility as the markets develop.
The bill gives our company the chance to continue preparing for the competitive markets to come. As it did for the banks we used to have in Virginia, the world has changed for investor-owned utilities. The Restructuring Act helps our company remain strong while saving money for our customers. I believe the Act has made us a much better company. With base rate increases no longer an option, we've become more efficient. We've developed a culture of working harder and smarter, much to the benefit of our customers and our shareholders.
The bill will allow our retail pilot programs to move forward. So far, Dominion has had almost 85,000 volunteers—from all customer classes—for the programs approved by the State Corporation Commission last year. The number of volunteers is double the number of participants these programs can accommodate. They will do much to boost the development of the competitive market in Virginia.
Senate Bill 651 is consistent with the spirit of the Restructuring Act. One of the Act's strong points has always been its careful, deliberate approach - with a long transition. Change takes time. We are still in the middle of the Act's transition period. Our pilot programs are just starting. The phase-in of customer choice has just been completed: the last group of customers received the right to shop for power less than four weeks ago, on January 1. Why turn back now?
And the bill, like the Act itself, avoids the "one size fits all" approach to industry change. This is reflected in the language that gives Virginia's electric cooperatives the flexibility to follow their own business needs. The Act already recognizes the special nature of the cooperatives and contains many provisions that specifically apply only to them.

SB 651 - An Appropriate Response

Senate Bill 651 is vastly preferable to the rash, premature and drastic suggestions offered by some to repeal the Act. Suggestions that we turn back the clock to some non-existent "good old days" would be a very damaging public policy decision. It would harm the interests of more than 2 million Dominion customers here in Virginia. Even a temporary suspension of the Act would call into serious question the future of the Commonwealth's restructuring program. Competitive suppliers, developers of new generating units and other participants in the process need a steady signal that Virginia is committed to competition. Abrupt shifts in policy would disrupt that signal. The suppliers and developers would take their business elsewhere.

Extending the rate caps harms no one. It provides more time for market development…and additional savings for consumers. And it allows the co-ops to return to regulation if they want it.

SB 651 Preserves Shift of Risk - from Consumers to Shareholders

Senate Bill 651 preserves the profound change the Restructuring Act has produced in the assignment of risk in Virginia's electric industry.

The Act has shifted the financial burden from the customer to our shareholders. The old days of "cost of service" rate making for generation are gone. Under that system, there was no incentive for improved efficiency. Instead, there was a steady stream of rate cases—and rate increases—as utilities operated under the assumption that the more they spent, the more they earned. Utility customers paid ever-increasing rates for investments such as new power plants, the maintenance and upgrade of existing plants, and the expensive equipment needed to protect the environment. Under this system, Dominion Virginia Power's average residential base rate rose by more than 40 percent from 1980 to 1994.

All that has changed. Here are some of the additional costs and investments Dominion will have to cover during the capped rate period…with no opportunity to pay for them through higher customer base rates.

More than $600 million for generation projects to keep up with Virginia's growth.
More than $700 million for advanced environmental controls, including new emissions control equipment for our coal-fired power stations.
Approximately $780 million for transmission and distribution projects, and for connecting new customers, especially in high growth urban and suburban areas.
Approximately $200 million for projects to ensure the continued safe and efficient operation of our nuclear units, which continue to supply much of Virginia's low-cost energy.
And the cost - now approaching $200 million - of the massive restoration effort we launched in the wake of Hurricane Isabel. The damage inflicted by Isabel was many times greater than any other storm in our corporate history.

These costs add up to a total of about $2.5 billion. It's a staggering number. But it will not lead to higher base rates.

Capped Rates Produce Big Savings

What has this meant for consumers?

Back in 2002, we commissioned the respected Richmond consulting firm of Chmura Economics and Analytics to compare the capped rates to what rates likely would have been in the absence of restructuring. The results were impressive. CEA found that our residential customers will save as much as $871 million from capped rates.

CEA updated the study earlier this month, and found an extension of the capped rate period would provide even more consumer savings. With the caps in place through 2010, capped rates are now forecast to produce total savings of $1.5 billion to $1.8 billion for Dominion's residential customers. Up to $700 million of those savings would come during the extension alone. And on average, each customer would save as much as $1,000 over the entire capped rate period of 1998 through 2010.

These savings represent a huge contribution to Virginia's economy - and will help fuel the Commonwealth's continued growth.

No Valid Reasons for Turning Back

Before I conclude, please allow me to take a few moments to address the assertion that the Act has somehow resulted in "over-earnings" for Dominion.

Taking into account the requirement that we write off regulatory assets, we have exceeded the old target rate of return of 11.4 percent only one year since the Act went into effect. That was 2002—a year marked by several extraordinary factors, including an extremely hot summer and a very cold winter. Almost certainly, they won't happen again—and indeed they did not in 2003. I did not stand here, hat in hand, in 1999, 2000 or 2001—nor do I now in 2004—asking to scrap the Act because I did not earn what I could have in those years.

We have also spent hundreds of millions of dollars to lower our long-term costs and enable our generation to compete in the market. That is exactly what we're supposed to do with our so-called "over-earnings" between now and 2007. But the SCC staff—consistently and incorrectly, even under the outmoded cost-of-service theory—has overlooked these measures in calculating our Return on Equity.

In short, the "over-earnings" allegation is misleading and is no reason to suspend the Act or re-impose cost of service regulation.

SB 651 Keeps Virginia Restructuring Moving Forward

Frankly, we recognize that SB 651 carries considerable risk for us, through the elimination of the wires charge and the new limitations on fuel rate adjustments.

But we also recognize that SB 651 is sound public policy that benefits Virginia consumers and keeps the Commonwealth moving in the right direction.

A return to the so-called "good old days" is not an option. For Dominion, our competitiveness as a company and our ability to remain strong would be harmed, putting our employees and our customers in jeopardy.

Thank you. I'd be happy to answer any questions you may have.

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