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Executive Article

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.

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