Dominion Power 2007 Annual Report Download - page 105

rate actions at this time, however an unfavorable outcome could
adversely affect our results of operations.
V
IRGINIA F UEL E XPENSES
Under amendments to the Virginia fuel cost recovery statute
passed in 2004, our fuel factor provisions were frozen until July 1,
2007. Fuel prices have increased considerably since 2004, which
resulted in our fuel expenses being significantly in excess of our
fuel cost recovery. Pursuant to the 2007 amendments to the fuel
cost recovery statute, annual fuel rate adjustments, with deferred
fuel accounting for over- or under-recoveries of fuel costs, were
re-instituted on July 1, 2007. While the 2007 amendments did
not allow us to collect any unrecovered fuel expenses that were
incurred prior to July 1, 2007, once our fuel factor was adjusted,
this mechanism ensures dollar-for-dollar recovery for prudently
incurred fuel costs.
In April 2007, we filed a Virginia fuel factor application with
the Virginia Commission. The application showed a need for an
annual increase in fuel expense recovery for the period July 1,
2007 through June 30, 2008 of approximately $662 million;
however, the requested increase was limited to $219 million
under the 2007 amendments to the fuel cost recovery statute.
Under these amendments, our fuel factor increase as of July 1,
2007 was limited to an amount that results in the residential
customer class not receiving an increase of more than 4% of total
rates in effect as of June 30, 2007. The Virginia Commission
approved the fuel factor increase for Virginia jurisdictional cus-
tomers of approximately $219 million, effective July 1, 2007,
with the balance of approximately $443 million to be deferred
and subsequently recovered subject to Virginia Commission
approval, without interest, during the period commencing July 1,
2008 and ending June 30, 2011.
S
TRANDED C OSTS
Stranded costs are generation-related costs incurred or commit-
ments made by utilities under cost-based regulation that may not
be reasonably expected to be recovered in a competitive market.
In the past, our exposure to potential stranded costs included
long-term power purchase contracts that could ultimately be
determined to be above market prices; generating plants that
could possibly become uneconomical in a deregulated environ-
ment; and unfunded obligations for nuclear plant decommission-
ing and postretirement benefits. Capped electric retail rates
provided an opportunity to recover our potential stranded costs,
depending on market prices of electricity and other factors.
Recovery of our potential stranded costs was subject to numerous
risks even in the capped-rate environment. Those risks included,
among others, exposure to long-term power purchase commit-
ment losses, future environmental compliance requirements,
changes in certain tax laws, nuclear decommissioning costs,
increased fuel costs, inflation, increased capital costs and recovery
of certain other items. However, with the return to a modified
cost-of-service rate model under the 2007 Virginia Restructuring
Act Amendments, our exposure to potential stranded costs and
the risk of non-recovery will be eliminated.
North Carolina Regulation
In 2004, the North Carolina Commission commenced an inves-
tigation into our North Carolina base rates and subsequently
ordered us to file a general rate case to show cause why our North
Carolina jurisdictional base rates should not be reduced. The rate
case was filed in September 2004, and in March 2005 the North
Carolina Commission approved a settlement that included a
prospective $12 million annual reduction in current base rates
and a five-year base rate moratorium, effective as of April 2005.
Fuel rates are still subject to change under annual fuel cost
adjustment proceedings.
Dominion Transmission Rates
In May 2005, FERC approved a comprehensive rate settlement
with our subsidiary, DTI, and its customers and interested state
commissions. The settlement, which became effective July 1,
2005, revised our natural gas transmission rates and reduced fuel
retention levels for storage service customers. As part of the
settlement, DTI and all signatory parties agreed to a rate mor-
atorium until 2010.
In December 2007, DTI and the Independent Oil and Gas
Association of West Virginia, Inc. reached a settlement agreement
on DTI’s gathering and processing rates for the period January 1,
2009 through December 31, 2011. This settlement maintains the
gas retainage fee structure that DTI has had since 2001. Under
the settlement, the gathering retainage rate increases from 9.25%
to 10.5% and the processing retainage rate—in recognition of the
increased market value of natural gas liquids—decreases from
3.25% to 0.5%.
This reduction in the combined retainage, from 12.5% to
11%, should provide a lower overall cost for most producers. Due
to the increase in natural gas prices from three years ago, the
consolidated impact of these rate changes is expected to increase
DTI’s gathering and processing revenues. In addition, DTI will
continue to retain all revenues from its liquids sales, thus main-
taining its cash flow from this activity.
In connection with the settlement, DTI also agreed to invest
at least $20 million annually in Appalachian gathering-related
assets. The new rates are subject to FERC approval.
Dominion Cove Point Rates
In June 2006, we filed a general rate proceeding for Dominion
Cove Point LNG, LP (DCP). The rates established in this case
took effect on January 1, 2007. This rate proceeding enabled
DCP to update the cost of service underlying its rates, including
recovery of costs associated with the 2002 to 2003 reactivation of
the LNG import terminal. The FERC-approved settlement estab-
lished a rate moratorium that ends in mid-2011.
Litigation
In 2006, Gary P. Jones and others filed suit against DTI, DEPI
and Dominion Resources Services, Inc. (DRS). The plaintiffs are
royalty owners, seeking to recover damages as a result of the
Dominion defendants allegedly underpaying royalties by improp-
erly deducting post-production costs and not paying fair market
value for the gas produced from their leases. The plaintiffs seek
class action status on behalf of all West Virginia residents and
others who are parties to or beneficiaries of oil and gas leases with
the Dominion defendants. DRS is erroneously named as a
defendant as the parent company of DTI and DEPI. During
2007, we established a litigation reserve representing our best
estimate of the probable loss related to this matter. We do not
Dominion 2007 Annual Report 103