Article by Thomas F. Farrell II
President & CEO - Dominion
Richmond Times-Dispatch
Richmond, Va.
February 5, 2007
"Electricity Re-Regulation:
New Model Provides Direction Virginia
Requires"
Virginia stands at an important crossroads on the issue of electric utility
regulation. It is time to take a new direction — one that combines the oversight
of traditional regulation with incentives for efficiency and excellent customer
service.
At stake are the future of electric reliability in Virginia and the long-term
stability of electricity prices.
But how did the commonwealth arrive at this crossroads, at this time?
Over the past decade, the General Assembly has carefully charted a course
for introducing market discipline into the world of electric utilities. This
plan, although successful in keeping rates low and providing incentives for
efficiencies, did not attract competition into the retail market or allow for
building adequate new generation.
Dominion's customers have enjoyed stable rates for many years, even as utility
costs for fuel soared. In fact, our residential base rates have been virtually
unchanged since 1993; nationally, prices at other electric utilities have jumped
an average of 26 percent. As a result, our customers have saved billions of
dollars. Dominion became significantly more efficient. The program even led
to more than $1 billion in major environmental improvements at our coal-fired
power stations at no additional cost to customers.
But restructuring has not been as successful elsewhere. In Maryland and some
other states, completing the transition from rate caps to market prices did
not go as anticipated. To the contrary, dramatic rate increases were implemented
or proposed.
THE HYBRID regulatory model that was presented this
past Tuesday to the Commission on Electric Utility Restructuring was the
result of careful analysis and debate directed by the attorney general's
office, which worked closely with all stakeholders who have an interest in
re-regulation. This proposal provides the new direction Virginia urgently
requires. It would protect consumers from potential "rate
shock" while establishing the certainty that the state's utilities need
to attract capital for new generation to serve Virginia and keep electricity
prices low.
We believe this hybrid model — combining the best elements
of what we learned during restructuring with traditional regulation — resolves
three critical concerns:
The State Corporation Commission (SCC) should have oversight of rates and
prudence of costs incurred by utilities, including construction of new generation.
The state's utilities need to build more baseload generation — primarily
nuclear and clean coal-fired units in Virginia to serve Virginians.
The strong incentives for utility efficiency that were achieved through
restructuring should be kept in place so that customers' rates can remain
low.
On the first point, the proposed legislation would give the SCC oversight
of all rates, including the power to reduce rates, if warranted.
The legislation also would make it possible to move ahead with the construction
of badly needed new baseload generation, which is one of Virginia's most pressing
needs.
The state's population and economy are growing rapidly. This translates into
a huge and expanding appetite for energy. Dominion has been identified as having
the fastest-growing electricity market in a 13-state region. While conservation
and renewable power sources are addressed in the legislation, even the best
energy efficiency programs cannot come close to meeting Virginia's additional
energy needs.
Dominion's customers will require 4,000 additional megawatts
of electricity over the next decade — enough energy to power about 1
million new homes — along with improvements in and additions to our
transmission system. Construction of additional facilities is important to
maintaining the balance between Virginia-based generation and low-cost power
brought in from elsewhere that has helped to keep prices low and reliability
high.
To meet this growing demand, the state now must establish a new regulatory
structure to guarantee that vital new projects are there when the commonwealth
needs them. Significantly, the proposed regulatory model ensures the availability
of outside capital required for critical projects. The model provides additional
financial incentives for major infrastructure improvements, including new generating
units and major environmental programs. Under this system, Virginia utilities
would be able to compete for capital with their peers in the Southeast.
North Carolina Commissioner Jim Kerr, president of the National Association
of Regulatory Utility Commissioners, has expressed concern that traditional
rate-making may not be the best way for utilities to pursue new advanced coal-fired
and nuclear generation. The model under consideration at the Virginia General
Assembly solves that problem and ensures long-term rate stability.
ON THE FINAL concern, the proposed model would allow both the customer and
utility to share in any earnings above the authorized level. This provides
strong financial incentives for utilities to maintain and improve upon the
efficiencies that they have made in recent years. From the customers' perspective,
efficient operations will result in lower rates. From the utility's standpoint,
the new model provides incentives for excellent customer service.
A political consensus for changing the direction on deregulation has been
building for at least two years. The time to complete that process and make
the appropriate changes is now. If we act in a timely way, the commonwealth's
electric reliability, reasonable rates, and continued economic leadership will
be maintained for many decades to come.
