Dominion Power 2006 Annual Report Download - page 97

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Stranded Costs
Stranded costs are generation-related costs incurred or commit-
ments made by utilities under cost-based regulation that maynot
be reasonably expected to be recovered in acompetitive market.
At December 31, 2006, our exposure to potential stranded costs
included long-term power purchasecontracts that could ulti-
mately be determined to be above marketprices; generating plants
that could possibly become uneconomical in aderegulated envi-
ronment;and unfundedobligationsfor nuclear plant decom-
missioning and postretirement benefits. Webelieve capped
electric retail rates will provide an opportunity to recover our
potential stranded costs, depending on market prices of electricity
and other factors. Recovery of our potential stranded costs
remains subject tonumerous risks even in the capped-rate
environment.These risks include, among others, exposure to
long-term power purchasecommitment losses, future environ-
mental compliance requirements, changes in certain taxlaws,
nuclear decommissioning costs, increased fuel costs, inflation,
increased capital costs and recovery of certain other items.
The Virginia Electric Utility Restructuring Act was enacted in
1999 (1999 VirginiaRestructuring Act) and established aplan to
restructure the electric utility industry in Virginia. Under the
1999 VirginiaRestructuring Act, the generation portionof our
Virginiajurisdictionaloperations is no longer subject to cost-
based regulation. The legislation’s deregulation of generation was
an eventthat required us to discontinue the application of SFAS
No. 71, AccountingfortheEffectsof CertainTypes ofRegulation,
to the Virginiajurisdictionalportion of our generation operations
in 1999. The 1999 VirginiaRestructuring Act also permits wires
charges to be collected by utilities until July 1, 2007. Our wires
charges are set at zero in 2007 for all rate classes, andas such,
Virginiacustomers will not payafeeif they switch from us to a
differentcompetitive service provider.
Virginia Fuel Expenses
In May 2006, Virginialawwas amended to modify theway our
Virginiajurisdictionalfuel factor is set during the threeand
one-half year period beginning July 1, 2007. The bill became law
effective July 1, 2006 and:
Allows annual fuel rate adjustments forthree twelve-month
periods beginning July 1, 2007 and onesix-month period
beginning July 1, 2010 (unless capped rates are terminated
earlier under the 1999 VirginiaRestructuring Act);
Allows an adjustment at the end of each of the twelve-month
periods to account fordifferences between projections and
actual recovery of fuelcosts duringthe prior twelve months;
and
Authorizes the VirginiaCommission to defer up to 40% of
any fuel factor increase approved for the first twelve-month
period, with recovery of the deferred amount over the two and
one-half year period beginning July 1, 2008 (under prior law,
such a deferral was not possible).
Fuel prices have increased considerably since our Virginia fuel
factor provisions were frozen in 2004, which has resulted in our
fuel expenses being significantly in excess of our rate recovery. We
expect that fuel expenses will continue to exceed rate recovery
until our fuel factor is adjusted in July 2007.
While the 2006 amendments do notallowusto collect any
unrecovered fuel expenses that were incurred prior to July 1,
2007, once our fuel factor is adjusted, the risk of under-recovery
of prudently incurred fuel costs until July1, 2010 is greatly
diminished.
2007 Virginia Restructuring Act Amendments
In February 2007, both houses of the VirginiaGeneralAssembly
passed identical bills that would significantly change electricity
restructuring in Virginia. The bills would end capped rates two
years early, on December 31, 2008. After capped rates end, retail
choice would be eliminated for all but individual retail customers
with ademand of more than 5Mw and alimited number of non-
residential retail customers whose aggregated loadwould exceed
5Mw.Also, after the end of capped rates, the Virginia Commis-
sion would set the base rates of investor-owned electric utilities
under a modified cost-of-service model. Among other features,
the currently proposed model wouldprovide for the Virginia
Commission to:
Initiate a base rate case for each utility duringthe first six
months of 2009, as aresult of which the Virginia Commis-
sion:
establishes areturn on equity (ROE) no lower than that
reported by agroup of utilities within the southeastern
U.S.,with certain limitations on earnings and rate adjust-
ments;
shall increase base rates, if needed, to allow the utility the
opportunity to recover its costs and earn afair rate of
return, if the utility is foundto have earnings more than 50
basis points below the established ROE;
mayreduce rates or,alternatively, order acredit tocustom-
ers if the utility is foundto have earnings more than 50
basis points above the established ROE; and
mayauthorize performance incentives, if appropriate.
After the initial rate case, review base ratesbiennially, as a
result of which the Virginia Commission:
establishes an ROE no lower than that reported by agroup
of utilitieswithin thesoutheastern U.S.,with certainlimi-
tations on earnings and rate adjustments; however, if the
VirginiaCommission finds that such ROE limit at that
time exceeds the ROE set at the time of the initial base rate
case in 2009 by more than the percentage increase in the
CPI in the interim, it mayreduce that lower ROE limit to
alevelthat increases the initial ROE by only as much as the
change in the CPI;
shall increase base rates, if needed, to allow the utility the
opportunity to recover its costs and earn afair rate of
return if the utility is foundto have earnings more than 50
basis points below the established ROE;
mayorder acredit tocustomers if the utility is foundto
have earnings more than50basis points above the estab-
lished ROE, and reduce ratesif the utility is foundto have
such excess earnings duringtwo consecutive biennial review
periods; and
mayauthorize performance incentives if appropriate.
Authorize stand-alone rate adjustments for recovery of certain
costs, including new generation projects, major generating
unit modifications, environmental compliance projects,
FERC-approved costs fortransmission service, energy effi-
ciency and conservation programs, and renewable energy pro-
grams;and
96 DOMINION2006 Annual Report