Dominion Power 2003 Annual Report Download - page 48

46.Dominion 2003
Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
Changes to Cost Structure While the Virginia Restructuring
Act did not define specific generation-related costs to be recov-
ered, it did provide for generation-related cash flows (through the
combination of capped rates and wires charges billed to cus-
tomers) through July 1, 2007, unless terminated earlier pursuant to
the Virginia Restructuring Act (the transition period). The genera-
tion-related cash flows provided by the Virginia Restructuring Act
are intended to compensate Dominion for continuing to provide
generation services and to allow Dominion management to incur
costs to restructure such operations during the transition period.
As a result, during the transition period, Dominion may increase
earnings to the extent that management can reduce operating
costs for its utility generation-related operations. Conversely, the
same risks affecting the recovery of Dominion’s stranded costs,
discussed above, may also adversely impact its cost structure dur-
ing the transition period. Accordingly, Dominion could realize the
negative economic impact of any such adverse event. In addition
to managing the cost of its generation-related operations,
Dominion may also seek opportunities to sell available electric
energy and capacity to customers beyond its electric utility ser-
vice territory. Using cash flows from operations during the transi-
tion period, Dominion may further alter its cost structure or
choose to make additional investment in its business.
The capped rates were derived from rates established as part
of the 1998 Virginia rate settlement and do not provide for spe-
cific recovery of particular generation-related expenditures,
except for certain regulatory assets. To the extent that Dominion
manages its operations to reduce its overall operating costs
below those levels included in the capped rates, Dominion’s
earnings may increase. Since the enactment of the Virginia
Restructuring Act, Dominion has been reviewing its cost structure
to identify opportunities to reduce the annual operating expenses
of its generation-related operations. For example, the reduction in
future fixed capacity payments, resulting from the termination of
certain long-term power purchase agreements during 2001 and
2003, is expected to increase annual after
— tax earnings by
approximately $48 million during the transition period.
Also in 2002 and 2001, Dominion revised the estimated
useful lives of its electric generation assets. The changes in esti-
mates were based upon expected life-extensions of nuclear
plants and new engineering studies of the other assets. As a
result of these changes, annual after-tax earnings will increase
by approximately $67 million during the transition period, as
a result of lower depreciation expense for these assets.
FERC Standard Market Design Proposal
In 2002, FERC issued proposed rules that would establish a stan-
dardized transmission service and wholesale electric market
design for entities participating in wholesale electric markets.
FERC proposed to exercise jurisdiction over the transmission com-
ponent of bundled retail transactions, modify the existing electric
transmission tariff to include a single tariff service applicable to
all transmission customers and provide a standard market design
for wholesale electric markets. FERC also proposed that transmis-
sion owners that have not yet joined an RTO must contract with a
separate entity, an independent transmission provider, to operate
their transmission facilities. FERC scheduled a number of techni-
cal conferences and meetings with interested parties and has
indicated that the market design and timing of the rule is subject
to change.
In April 2003, FERC issued a discussion document addressing
several issues raised by state regulatory commissions and market
participants in FERC’s proposed Standard Market Design. The
document proposes certain changes to Standard Market Design
and to work with the states and market participants to develop
reasonable timetables for moving forward on the formation of
RTOs. FERC also stated that it would not use the Standard Market
Design rulemaking to overturn prior RTO orders where there is an
overlap. It is uncertain what impact, if any, these matters may
have on Dominion’s efforts to join PJM or on the design of whole-
sale electric markets.
Environmental Matters
Dominion is subject to costs resulting from a number of federal,
state and local laws and regulations designed to protect human
health and the environment. These laws and regulations affect
future planning and existing operations. They can result in
increased capital, operating and other costs as a result of compli-
ance, remediation, containment and monitoring obligations. His-
torically, Dominion recovered such costs arising from regulated
electric operations through utility rates. However, to the extent
that environmental costs are incurred in connection with opera-
tions regulated by the Virginia Commission, during the period
ending June 30, 2007, in excess of the level currently included in
the Virginia jurisdictional electric retail rates, Dominion’s results
of operations will decrease. After that date, recovery through reg-
ulated rates may be sought for only those environmental costs
related to regulated electric transmission and distribution opera-
tions. Dominion also may seek recovery through regulated rates
for environmental expenditures related to regulated gas transmis-
sion and distribution operations.