Dominion Power 2007 Annual Report Download - page 104

Notes to Consolidated Financial Statements, Continued
Additionally, as of December 31, 2007, we had purchased $56
million of surety bonds and authorized the issuance of standby
letters of credit by financial institutions of $230 million to facili-
tate commercial transactions by our subsidiaries with third parties.
Indemnifications
As part of commercial contract negotiations in the normal course
of business, we may sometimes agree to make payments to
compensate or indemnify other parties for possible future
unfavorable financial consequences resulting from specified events.
The specified events may involve an adverse judgment in a lawsuit
or the imposition of additional taxes due to a change in tax law or
interpretation of the tax law. We are unable to develop an estimate
of the maximum potential amount of future payments under these
contracts because events that would obligate us have not yet
occurred or, if any such event has occurred, we have not been noti-
fied of its occurrence. However, at December 31, 2007, we believe
future payments, if any, that could ultimately become payable
under these contract provisions, would not have a material impact
on our results of operations, cash flows or financial position.
We have entered into other types of contracts that require
indemnifications, such as purchase and sale agreements and
financing agreements. These agreements may include, but are not
limited to, indemnifications around certain title, tax, contractual
and environmental matters. With respect to sale agreements, our
exposure generally does not exceed the sale price and is typically
limited in duration depending on the nature of the indemnified
matter. Since January 1, 2005, we have entered into sale agree-
ments with maximum exposure related to the collective purchase
prices of approximately $15 billion. We believe that it is improb-
able that we would be required to perform under these
indemnifications and have not recognized any significant
liabilities related to these arrangements.
Status of Electric Regulation in Virginia
2007 V IRGINIA R ESTRUCTURING A CT AND
F UEL F ACTOR A MENDMENTS
On July 1, 2007, legislation amending the Virginia Electric
Utility Restructuring Act (the Restructuring Act) and the fuel
factor became effective, which significantly changes electricity
regulation in Virginia. Prior to the Restructuring Act, our base
rates in Virginia were capped at 1999 levels until December 31,
2010. The Restructuring Act ends capped rates two years early,
on December 31, 2008. After capped rates end, retail choice will
be eliminated for all but individual retail customers with a
demand of more than 5 Mw and non-residential retail customers
who obtain Virginia Commission approval to aggregate their load
to reach the 5 Mw threshold. Individual retail customers will be
permitted to purchase renewable energy from competitive suppli-
ers if the incumbent electric utility does not offer a renewable
energy tariff. Also after the end of capped rates, the Virginia
Commission will set our base rates under a modified
cost-of-service model. Among other features, the new model pro-
vides for the Virginia Commission to:
‰Initiate a base rate case during the first six months of 2009,
reviewing the 2008 test year, as a result of which the Virginia
Commission:
‰shall establish a return on equity (ROE) no lower than
that reported by at least a majority of a group of utilities
within the southeastern U.S., with certain limitations, as
described in the legislation;
‰may increase or decrease the ROE by up to 100 basis
points based on generating plant performance, customer
service and operating efficiency, if appropriate;
‰shall increase base rates, if needed, to allow the Company
the opportunity to recover its costs and earn a fair rate of
return if we are found to have earnings more than 50 basis
points below the established ROE; or
‰may reduce rates prospectively upon completion of the
2009 review or, alternatively, order a credit to customers if
we are found to have test year earnings of more than 50
basis points above the established ROE.
‰After the initial rate case, review base rates biennially, as a
result of which the Virginia Commission:
‰shall establish an ROE no lower than that reported by at
least a majority of a group of utilities within the south-
eastern U.S., with certain limitations, as described in the
legislation;
‰may increase or decrease the ROE by up to 100 basis
points based on generating plant performance, customer
service and operating efficiency, if appropriate;
‰after 2010, authorize an increased ROE on overall rate
base upon achieving the goals established for the renew-
able energy portfolio standard programs. Such increased
ROE would be in lieu of any increased or decreased ROE
from the preceding paragraph, unless there has been an
increase to the ROE awarded under the preceding para-
graph that is higher than the renewable energy portfolio
standard increase; and
‰shall increase base rates, if needed, to allow the Company
the opportunity to recover its costs and earn a fair rate of
return if we are found to have earned, during the test
period, more than 50 basis points below the then cur-
rently established ROE; or
‰may order a credit to customers if we are found to have
earned, during the test period, more than 50 basis points
above the then currently established ROE, and reduce
rates if we are found to have such excess earnings during
two consecutive biennial review periods.
‰Authorize stand-alone rate adjustments for recovery of certain
costs, including new generation projects, major generating
unit modifications, environmental compliance projects,
FERC-approved costs for transmission service and energy
efficiency, conservation, and renewable energy programs; and
‰Authorize an enhanced ROE on new capital expenditures as a
financial incentive for construction of certain major gen-
eration projects.
The legislation also continues statutory provisions directing us
to file annual fuel cost recovery cases with the Virginia Commis-
sion beginning in 2007 and continuing thereafter, as discussed in
Virginia Fuel Expenses.
As discussed previously, the legislation provides for the
Virginia Commission to initiate a base rate case during the first
six months of 2009, as a result of which the Virginia Commission
may reduce rates or alternatively, order a credit to customers if we
are found to have earnings more than 50 basis points above the
established ROE. We are unable to predict the outcome of future
102 Dominion 2007 Annual Report