Dominion Power 2003 Annual Report Download - page 52

50.Dominion 2003
Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
transmission organization; political and economic conditions
(including inflation and deflation); and completing the divestiture
of investments held by DCI, CNG International Corporation and
DFV. Other more specific risk factors are as follows:
Dominion’s operations are weather sensitive. Dominion’s
results of operations can be affected by changes in the weather.
Weather conditions directly influence the demand for electricity
and natural gas and affect the price of energy commodities. In
addition, severe weather, including hurricanes, winter storms
and droughts, can be destructive, causing outages, production
delays and property damage that require Dominion to incur
additional expenses.
Dominion is subject to complex governmental regulation
that could adversely affect its operations. Dominion’s opera-
tions are subject to extensive regulation and require numerous
permits, approvals and certificates from federal, state and local
governmental agencies. Dominion must also comply with environ-
mental legislation and associated regulations. Management
believes the necessary approvals have been obtained for
Dominion’s existing operations and that its business is conducted
in accordance with applicable laws. However, new laws or regu-
lations, or the revision or reinterpretation of existing laws or regu-
lations, may require Dominion to incur additional expenses.
Costs of environmental compliance, liabilities and litigation
could exceed Dominion’s estimates. Compliance with federal,
state and local environmental laws and regulations may result in
increased capital, operating and other costs, including remedia-
tion and containment expenses and monitoring obligations. In
addition, Dominion may be a responsible party for environmen-
tal clean-up at a site identified by a regulatory body. Manage-
ment cannot predict with certainty the amount and timing of all
future expenditures related to environmental matters because of
the difficulty of estimating clean-up and compliance costs, and
the possibility that changes will be made to the current environ-
mental laws and regulations. There is also uncertainty in quantify-
ing liabilities under environmental laws that impose joint and
several liability on all potentially responsible parties.
Dominion is exposed to cost-recovery shortfalls because of
capped base rates in effect in Virginia through mid-2007 for
its regulated electric utility. Under the Virginia Restructuring
Act, the generation portion of Dominion’s electric utility opera-
tions is open to competition and resulting uncertainty. Under
the Virginia Restructuring Act, Dominion’s base rates (excluding,
generally, fuel costs and certain other allowable adjustments)
remain unchanged until July 2007 unless modified or terminated
consistent with the Virginia Restructuring Act. Although the Vir-
ginia Restructuring Act allows for the recovery of certain genera-
tion-related costs during the capped rates period, Dominion
remains exposed to numerous risks of cost-recovery shortfalls.
These include exposure to potentially stranded costs, future envi-
ronmental compliance requirements, tax law changes, costs
related to hurricanes or other weather events, inflation and
increased capital costs. In addition, under the Virginia Restructur-
ing Act, the generation portion of Dominion’s electric utility oper-
ations is open to competition and is no longer subject to
cost-based regulation. To date, the competitive market has been
slow to develop and it is difficult to predict the pace at which the
competitive environment will evolve and the extent to which
Dominion will face increased competition and be able to operate
profitably within this competitive environment. Additional uncer-
tainty arises from several legislative proposals currently under
consideration by the 2004 Virginia General Assembly. These
proposals range from extending for three and a half years the
period during which capped rates are in effect but with certain
limitations on changes in the fuel factor, to suspending customer
choice and returning to cost-based regulation. See Future Issues
and Other Matters
— Status of Deregulation in Virginia in MD&A
and Note 23 to the Consolidated Financial Statements for addi-
tional information.
Dominion’s merchant power business is operating in a
challenging market. The success of Dominion’s merchant power
business depends upon its ability to find buyers willing to enter
into power purchase agreements at prices sufficient to cover its
operating costs. Depressed spot and forward wholesale power
prices and excess capacity in the industry could result in lower
than expected revenues in Dominion’s merchant power business.
There are inherent risks in the operation of nuclear facili-
ties. These risks include the cost of and Dominion’s ability to
maintain adequate reserves for decommissioning, plant mainte-
nance costs, threat of terrorism, spent nuclear fuel disposal costs
and exposure to potential liabilities arising out of the operation of
these facilities. Dominion maintains decommissioning trusts and
external insurance coverage to minimize the financial exposure
to these risks. However, it is possible that costs arising from
claims could exceed the amount of any insurance coverage.
The use of derivative instruments could result in financial
losses. Dominion uses derivative instruments, including futures,
forwards, options and swaps, to manage its commodity and
financial market risks. In addition, Dominion purchases and sells
commodity-based contracts in the natural gas, electricity and oil
markets for trading purposes. In the future, Dominion could recog-
nize financial losses on these contracts as a result of volatility in
the market values of the underlying commodities or if a counter-
party fails to perform under a contract. In the absence of actively
quoted market prices and pricing information from external
sources, the valuation of these contracts involves management’s
judgment or use of estimates. As a result, changes in the underly-
ing assumptions or use of alternative valuation methods could
affect the reported fair value of these contracts. For additional
information concerning derivatives and commodity-based trading
contracts, see Market Rate Sensitive Instruments and Risk
Management and Notes 2 and 8 to the Consolidated Finan-
cial Statements.