Dominion Power 2004 Annual Report Download - page 49

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Other amendments to the Virginia Restructuring Act were also enacted
with respect to a minimum stay exemption program, a wires charges
exemption program and allowing the development of a coal-fired generat-
ing plant in southwest Virginia for serving default service needs. Under
the minimum stay exemption program, large customers with a load of
500 kW or greater would be exempt from the twelve-month minimum stay
obligation under capped rates if they return to supply service from the
incumbent utility at market-based pricing after they have switched to sup-
ply service with a competitive service provider. The wires charge exemp-
tion program would allow large industrial and commercial customers, as
well as aggregated customers in all rate classes, to avoid paying wires
charges by agreeing to market-based pricing upon return to the incumbent
electric utility. In January 2005, Dominion filed compliance plans for both
of these programs.
RTO
In September 2002, Dominion and PJM Interconnection, LLC (PJM) entered
into an agreement that provides for, subject to regulatory approval and cer-
tain provisions, Dominion to become a member of PJM, transfer functional
control of its electric transmission facilities to PJM for inclusion in a new
PJM South Region and integrate its control area into the PJM energy
markets. The agreement also allocates costs of implementation of the
agreement among the parties.
In October 2004, the FERC issued an order conditionally approving
Dominion’s application to join PJM. In its order, FERC determined that: (i)
Dominion’s proposed transmission rate treatment must conform to a
regional transmission rate design, and (ii) Dominion must assess all avail-
able evidence and determine whether the requested deferral of expendi-
tures related to the establishment and operation of an RTO should be
recorded as a regulatory asset until the end of the Virginia retail rate cap
period. In a separate order issued in September 2004, FERC granted author-
ity to Dominion subsidiaries with market based rate authority to charge
market based rates for sales of electric energy and capacity to loads
located within Dominion’s service territory upon its integration into PJM.
Dominion has made filings with both the Virginia Commission and
North Carolina Utilities Commission (North Carolina Commission) request-
ing authorization to become a member of PJM. In October 2004, Dominion
filed a settlement agreement with the Virginia Commission resolving most
of the issues raised by interested parties in the proceeding, and hearings
were held to address the remaining issues. The Virginia Commission
approved Dominion’s application to join PJM in November 2004 subject to
the terms and conditions of the settlement agreement. The North Carolina
Commission evidentiary hearing was held in January 2005. Dominion can-
not predict the outcome of this matter at this time.
North Carolina Rate Matter
In connection with the North Carolina Commission’s approval of the CNG
acquisition, Dominion agreed not to request an increase in North Carolina
retail electric base rates before 2006, except for certain events that would
have a significant financial impact on Dominion’s electric utility operations.
Fuel rates are still subject to change under the annual fuel cost adjustment
proceedings. However, in April 2004, the North Carolina Commission com-
menced an investigation into Dominion’s North Carolina base rates and
subsequently ordered Dominion to file a general rate case to show cause
why its North Carolina base rates should not be reduced. The rate case
was filed in September 2004 and in February 2005, Dominion reached a
tentative settlement with parties in the case that is subject to North
Carolina Commission approval before becoming effective.
Dominion Transmission, Inc. (DTI) Rate Matter
At the request of the Public Service Commission of the State of New York
(PSCNY), DTI has engaged in negotiations with PSCNY regarding the
potential for a prospective reduction of DTI ‘s transportation and storage
service rates to address concerns about the level of DTI’s earnings. As a
result of these negotiations, DTI and PSCNY have reached an agreement in
principle that establishes parameters for a potential rate settlement, which
must be finalized by DTI and its customers. DTI is negotiating with its cus-
tomers to reach a possible settlement agreement. The settlement parame-
ters envision reduced rates to DTI’s customers and a five-year moratorium
on future changes to DTI’s transportation and storage service rates. If DTI is
able to reach an agreement with its customers in the first quarter of 2005,
FERC approval of a filed settlement could be obtained in the second quarter
of 2005.
Recovery of Stranded Costs
Stranded costs are those generation-related costs incurred or commit-
ments made by utilities under cost-based regulation that may not reason-
ably be expected to be recovered in a competitive market. At December 31,
2004, Dominion’s exposure to potentially stranded costs included long-term
power purchase contracts that could ultimately be determined to be above
market; 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 potentially 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 environ-
ment. These include, among others, exposure to long-term power purchase
commitment losses, future environmental compliance requirements,
changes in tax laws, nuclear decommissioning costs, inflation, increased
capital costs and recovery of certain other items.
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 Virginia jurisdictional utility generation-
related operations but also caused Dominion to review its utility genera-
tion assets for impairment and long-term power purchase contracts for
potential losses at that time. Significant assumptions considered in that
review included possible future market prices for fuel and electricity, load
growth, generating unit availability and future capacity additions in
Dominion’s market, capital expenditures, including those related to envi-
ronmental 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 expira-
tion 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