Dominion Power 2001 Annual Report Download - page 46

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
service provided by Dominion will be based upon competitive
market prices for electric generation services.
Dominion began the phase-in of retail choice on January 1,
2002. The phase-in will be completed on January 1, 2003.
Dominion is able to accommodate this schedule as a result of
experience gained during its retail access pilot program, as well
as extensive testing of its processes and systems to support cus-
tomers switching to retail access. Additionally, the pilot demon-
strated Dominion’s ability to sell energy displaced by shopping
customers in the wholesale market.
During the capped rate period, Dominion may require a
12-month minimum stay period for electricity customers with
an annual peak demand of 500 kilowatts or greater who request
electricity supply service after receiving electricity supply service
from a competitive service provider. This measure will mitigate
the practice of large commercial and industrial customers
returning to Dominion’s capped rate service during periods of
higher market prices and leaving during periods of lower market
prices—a practice known as “seasonal gaming.”
As discussed in the Separation of Generation and Delivery
Operations in Virginia and Alliance RTO sections below, the
Virginia Restructuring Act also calls for the functional separa-
tion of generation, transmission and distribution.
North Carolina — The North Carolina General Assembly is
exploring the future of electric service in North Carolina, the
development of a competitive wholesale market and retail com-
petition. However, there has been little recent activity.
Separation of Generation and Delivery Operations in Virginia
The Virginia Restructuring Act addressed divestiture, functional
separation and other corporate relationships. The Act required
Virginia’s electric utilities to file with the Virginia Commission
their plans to separate generation from transmission and distri-
bution operations.
Dominion’s proposed separation plan included transferring
the generation assets and operations, including its non-utility
power purchase contracts, from its regulated electric utility,
Virginia Power, to a separate affiliated company. In December
2001, the Virginia Commission directed Dominion to separate
its generation, distribution, and transmission functions through
creation of divisions within Virginia Power, rather than through
transfer of generation assets to a separate affiliate. The Virginia
Commission’s December 2001 order did not preclude further
consideration of Dominion’s proposed corporate reorganization
and asset transfer, pending, in the Virginia Commission’s view,
further developments in needed market structures and
competitive retail electric generation markets. Dominion has
filed a notice of appeal of the Virginia Commission’s order.
No assessment can be made at this time concerning future
developments.
Because Virginia Power’s operations were largely functionally
separated in its existing corporate structure, implementation of
the plan ordered by the Virginia Commission will require few
changes in Virginia Power’s operations. Virginia Power will con-
tinue to provide electric service to its customers at capped rates
until July 1, 2007, unless capped rates are terminated after
January 1, 2004, as provided in the Virginia Restructuring Act.
Virginia Power will continue serving customers who select alter-
native energy suppliers by delivering the electric energy and will
collect a wires charge, if applicable, as discussed above. Virginia
Power will also be permitted to continue its activities in wholesale
energy markets. However, effective January 1, 2002, Virginia
codes of conduct became effective, governing certain transactions
and communications between Virginia Power’s electric distribu-
tion and transmission operations and its generation division.
These codes of conduct are designed to prevent cross-subsidies
between the generation and other divisions and to ensure that the
generation and other divisions operate independently.
Alliance RTO
Both the Virginia Restructuring Act and the Federal Energy
Regulatory Commission (FERC) merger conditions require that
Dominion join a regional transmission organization (RTO). By
joining an RTO, Dominion’s regulated electric utility subsidiary,
Virginia Power, would transfer operational control of its trans-
mission assets to the RTO, a separate entity. Dominion, together
with eight other member companies (Alliance Companies), filed
with FERC for approval of the proposed “Alliance RTO.”
Dominion also filed an application to transfer control of its
transmission facilities to the Alliance RTO with the Virginia
Commission and North Carolina Utilities Commission. In
December 2001, FERC concluded the Alliance Companies lack
sufficient scope as an RTO and also ordered the Alliance Com-
panies to determine how they could fit within the Midwest
Independent System Operator. Dominion will examine the pos-
sibility of joining RTOs other than those representing Midwest
utilities, as directed by FERC. As a result of the FERC decision,
the North Carolina application was dismissed and the Virginia
application was stayed. Dominion expects to refile or amend the
state applications.
Despite these delays, Dominion remains committed to sup-
porting electric deregulation by becoming a member of an RTO.
The formation of RTOs is important to enhancing wholesale
electric competition through the creation of standardized mar-
ket rules, tariffs, and interconnection agreements. RTOs will put
all suppliers on an equal footing and enhance access to non-
discriminatory delivery services. Membership in an RTO and
regionalization of electric markets will provide opportunities
for Dominion to expand its business by providing generation
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