Dominion Power 2002 Annual Report Download - page 52

Management’s Discussion and Analysis of Financial Condition
and Results of Operations, Continued
a code of conduct between utilities and their marketing affili-
ates, as well as Consumer Protection regulations and Marketer
Licensing Rules. In 2002, the West Virginia Commission pro-
posed rules that require that competitive gas service providers be
licensed in West Virginia.
Rate Matters—Gas Distribution
When necessary, Dominion’s gas distribution subsidiaries in
Ohio, Pennsylvania and West Virginia seek general rate
increases on a timely basis to recover increased operating costs
and to ensure that rates of return are compatible with the cost of
raising capital. In addition to general rate increases, certain gas
distribution subsidiaries make routine separate filings with their
respective state regulatory commissions to reflect changes in the
costs of purchased gas. These purchased gas costs are recovered
through a mechanism that ensures dollar for dollar recovery of
prudently incurred costs. Costs incurred that are expected to be
recovered in future rates are deferred as regulatory assets.
Interstate Gas Transmission Operations
FERC Policy Developments
In October 2002, FERC hosted a public policy conference
regarding various short- and long-term issues that impact fed-
eral regulation of the natural gas industry. Among other issues,
FERC examined supply and demand forecasts, the adequacy of
natural gas infrastructure, regulatory policies applicable to liq-
uefied natural gas facilities, offshore gathering policies, and the
flexibility of interstate pipeline operations. As a result, FERC is
considering adjustments to its future regulatory policies con-
cerning the natural gas industry, including modification of its
approach to regulation of liquefied natural gas (LNG) projects.
The policy change is intended to encourage additional develop-
ment of LNG terminals and to increase the availability of
imported gas supplies.
FERC also continues to pursue rulemaking that will elimi-
nate separate standards of conduct regulations for natural gas
pipelines and electric transmission utilities, and replace these
requirements with uniform standards applicable to interstate
“Transmission Providers.” The proposed standards would rede-
fine the scope of affiliates covered by standards of conduct for
most FERC-regulated companies. If the proposed policy is
adopted, it will supersede the existing standards, that are applic-
able to Dominion. Dominion supports the policy goal to ensure
competitive interstate energy markets; however, Dominion has
advocated adjustments to the proposed rules.
Dominion anticipates further action by FERC in early
2003. While Dominion expects the outcome of a final rule to
improve its ability to compete with similarly-situated transmis-
sion providers, it does not expect a final rule to have a short-
term material impact on its results of operations, financial
position or cash flows.
Rate Matters—Gas Transmission
Dominion implemented various rate filings, tariff changes and
negotiated rate service agreements for its FERC-regulated busi-
nesses during 2002. In all material respects, these filings were
approved by FERC in the form requested by Dominion and
were subject to only minor modifications. Dominion has no
significant rate matters pending before FERC at this time.
Merchant Generation Operations
Dominion’s focus in its power generation business is to partici-
pate in power generation projects in the MAIN-to-Maine
region, with the focus on a balanced portfolio of generation
assets, while maintaining fuel and regional diversity. The region
begins at the Mid-America Interconnected Network (MAIN)
that includes electric service territories of the upper Midwest
and is home to Dominion’s Kincaid, State Line, and Elwood
generating facilities. The target region extends east to Virginia
Power’s service territory and north to New England, where
Dominion operates its Millstone power station. Dominion is
benefiting from the CNG acquisition, as it is developing and
operating natural gas-fired power generation facilities along its
natural gas pipeline system. Dominion is in various stages of
development for new natural gas-fired power generation facili-
ties throughout the MAIN-to-Maine region with estimated
completion dates from 2003 and beyond.
Exploration and Production Operations
Dominion continues to focus on increasing earnings from gas
and oil properties primarily through acquisition and develop-
ment activities, exploration, and operating efficiencies. The
November 2001 acquisition of Louis Dreyfus represented the
addition of significant, long-lived natural gas reserves located in
several onshore United States regions serving northeast markets.
This addition also provided significant new development
drilling opportunities, complementing Dominion’s existing
development and exploration activities. The emphasis toward
increased acquisition and development activities, as a comple-
ment to the higher risk exploration program, was further
supported by the 2002 purchase of several onshore properties
having additional development drilling and production
enhancement potential.
Pipeline Operations
Dominion plans to expand its natural gas transmission system
with a $497 million, 279-mile interstate pipeline. The Green-
brier Pipeline will originate in Kanawha County, West Virginia,
and extend through southwest Virginia into Granville County,
North Carolina. Piedmont Natural Gas is a 33 percent owner in
the pipeline project.
50 Dominion ’02 Annual Report