Dominion Power 2003 Annual Report Download - page 47

45.Dominion 2003
Other bills were introduced in the Virginia House of Delegates
that would repeal the Virginia Restructuring Act, suspend most
of the Virginia Restructuring Act, suspend customer choice, and
re-impose “cost of service” rate making. Legislation calling for
suspension of the Virginia Restructuring Act’s key provisions
and a return to the cost-of-service regulatory methodology was
defeated in a House committee in early February. Other mea-
sures have been deferred to 2005 by a House committee. Until
the legislative process is concluded, no assessment can be made
concerning future developments.
RTO
The Virginia Restructuring Act requires that Dominion join an
RTO subject to Virginia Commission approval. FERC requires
each public utility that owns or operates transmission facilities to
make certain filings with respect to RTO formation, but relies on
voluntary formation of RTOs to advance its energy policies. By
joining an RTO, Dominion’s regulated electric utility subsidiary,
Virginia Power, would transfer functional control of its transmis-
sion assets to a third-party RTO.
In September 2002, Dominion and PJM Interconnection, LLC
(PJM) entered into the PJM South Implementation Agreement. The
agreement provides that, subject to regulatory approval and cer-
tain provisions, Dominion will become a member of PJM, transfer
functional control of its electric transmission facilities to PJM for
inclusion in a new PJM South Region and integrate its control
area into the PJM energy markets. The agreement also allocates
costs of implementation of the agreement among the parties.
In June 2003, Dominion made a filing as required by the
Virginia Restructuring Act requesting authorization from the Vir-
ginia Commission to become a member of PJM on November 1,
2004. In September 2003, the Virginia Commission issued an
order directing Dominion to provide additional information con-
cerning the application. Hearings on Dominion’s application are
scheduled to begin in October 2004. Dominion intends to file for
FERC and North Carolina Commission approval to join PJM in
the future.
Dominion has incurred and will continue to incur integration
and operating costs associated with joining an RTO. Dominion
has deferred certain of these costs for future recovery and is giv-
ing further consideration to seeking regulatory approval to defer
the balance of such costs.
Recovery of Stranded Costs
Stranded costs are those generation-related costs incurred or
commitments made by utilities under cost-based regulation that
may not be reasonably expected to be recovered in a competi-
tive market. At December 31, 2003, Dominion’s exposure to
potentially stranded costs consisted of long-term purchased
power contracts that could ultimately be determined to be above
market; generating plants that could possibly become uneconomi-
cal in a deregulated environment; and unfunded obligations for
nuclear plant decommissioning and postretirement benefits not
yet recognized in the financial statements. Dominion believes
capped electric retail rates and, where applicable, wires charges
will provide an opportunity to recover a portion of its potentially
stranded costs, depending on market prices of electricity and
other factors. Recovery of Dominion’s potentially stranded costs
remains subject to numerous risks even in the capped-rate envi-
ronment. These include, among others, exposure to long-term
power purchase commitment losses, future environmental compli-
ance requirements, changes in tax laws, nuclear decommission-
ing costs, inflation, increased capital costs, and recovery of
certain other items.
The enactment of deregulation legislation in 1999 not
only caused the discontinuance of SFAS No. 71 for Dominion’s
Virginia jurisdictional utility generation-related operations but
also caused Dominion to review its utility generation assets for
impairment and long-term power purchase contracts for potential
losses at that time. Significant assumptions considered in that
review included possible future market prices for fuel and electric-
ity, load growth, generating unit availability and future capacity
additions in Dominion’s market, capital expenditures, including
those related to environmental improvements, and decommission-
ing activities. Based on those analyses, no recognition of plant
impairments or contract losses was appropriate at that time. In
response to future events resulting from the development of a com-
petitive market structure in Virginia and the expiration or termina-
tion of capped rates and wires charges, Dominion may have to
reevaluate its utility generation assets for impairment and long-
term power purchase contracts for potential losses. Assumptions
about future market prices for electricity represent a critical factor
that affects the results of such evaluations. Since 1999, market
prices for electricity have fluctuated significantly and will con-
tinue to be subject to volatility. Any such review in the future,
which would be highly dependent on assumptions considered
appropriate at the time, could possibly result in the recognition of
plant impairment or contract losses that would be material to
Dominion’s results of operations or its financial position.
In January 2004, the Commission on Electric Utility
Restructuring adopted a resolution related to the monitoring of
stranded costs.