Dominion Power 2002 Annual Report Download - page 49

Virginia Commission Report on the Status of Competition in Virginia
In August 2002, the Virginia Commission submitted to the
Governor and the Legislative Transition Task Force (Task Force)
its status report on the development of a competitive retail mar-
ket for electric generation within Virginia.
In an addendum to the report, the Virginia Commission
recommended that state policymakers should decide promptly
whether to proceed with or delay implementation of the Vir-
ginia Restructuring Act, in light of recent developments impact-
ing electric industry restructuring in Virginia, including the
Federal Energy Regulatory Commission’s (FERC) issuance of a
notice of proposed rule making on Standard Market Design.
No assessment can be made at this time concerning future
developments.
Legislation that would delay entry into a regional transmis-
sion organization (RTO) until on or after July 1, 2004 was
approved by the Virginia General Assembly in February 2003
and is now awaiting action by the Governor. The proposed leg-
islation also would require Dominion to file an application with
the Virginia Commission by July 1, 2003 to join a RTO. Subject
to Virginia Commission approval, Dominion would be required
to transfer management and control of its transmission assets to
a RTO by January 1, 2005.
Separation of Generation and Delivery Operations in Virginia
Under the Virginia Restructuring Act, Virginia Power separated
its generation, distribution, and transmission functions through
creation of divisions within Virginia Power. Virginia codes of
conduct ensure that Virginia Power’s generation and other
divisions operate independently and prevent cross-subsidies
between the generation and other divisions.
Economic Risks and Benefits During the Transition to a
Competitive Electric Marketplace in Virginia
As previously discussed, Dominion will recover generation-
related costs through capped rates and wires charges, where
applicable, assessed to those customers opting for alternative
suppliers during the transition period, which extends until July
2007, unless modified or terminated earlier under the Virginia
Restructuring Act. Under the Act, Dominion may request a ter-
mination of the capped rates at any time after January 1, 2004,
and the Virginia Commission may grant Dominion’s request to
terminate the capped rates, if it finds that a competitive genera-
tion services market exists in Dominion’s service area. While
Dominion is exposed to certain risks as a result of the deregula-
tion of its utility operations, it also has the opportunity to realize
potential benefits during this transition period, if management
is successful in preparing for the change in the environment in
which its generation-related business operates.
Stranded Costs—Stranded costs are those costs incurred or
commitments made by utilities under cost-based regulation that
may not be reasonably expected to be recovered in a competitive
market. At December 31, 2002, Dominion’s exposure to poten-
tially stranded costs consisted of long-term purchased power
contracts that could ultimately be determined to be above mar-
ket; generating plants that could possibly become uneconomical
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 poten-
tially 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
environment. These include, among others, exposure to long-
term power purchase commitment losses, future environmental
compliance requirements, changes in tax laws, nuclear decom-
missioning costs, inflation, increased capital costs, and recovery
of certain other items. These items are discussed in Notes 16, 26
and 27 to the Consolidated Financial Statements.
The enactment of deregulation legislation in 1999 not only
caused the discontinuance of SFAS No. 71, Accounting for the
Effects of Certain Types of Regulation, for Dominion’s utility
generation-related operations but also caused Dominion to
review its utility generation assets for impairment and long-term
power purchase contracts for potential loss at that time. Signifi-
cant assumptions considered in that review included possible
future market prices for fuel and electricity, load growth, gener-
ating unit availability and future capacity additions in Domin-
ion’s market, capital expenditures, including those related to
environmental improvements, and decommissioning 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 competitive
market structure in Virginia and the expiration or termination
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 continue 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.
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Dominion ’02 Annual Report