Dominion Power 2007 Annual Report Download - page 32

Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
segments: Dominion Delivery, Dominion Energy, Dominion
Generation and Dominion Exploration and Production (E&P).
During the fourth quarter of 2007, we realigned our business
units to reflect our strategic refocusing and began managing our
daily operations through three primary operating segments:
Dominion Virginia Power (DVP), Dominion Generation and
Dominion Energy. We also report a Corporate and Other seg-
ment that includes our corporate, service company and other
functions and the net impact of certain operations disposed of or
to be disposed of. While we manage our daily operations through
our operating segments as described below, our assets remain
wholly-owned by our legal subsidiaries.
The contributions to net income by our primary operating
segments are determined based on a measure of profit that we
believe represents the segments’ core earnings. As a result, certain
specific items attributable to those segments are not included in
profit measures evaluated by executive management in assessing
the segment’s performance or allocating resources among the
segments. Those specific items are reported in the Corporate and
Other segment.
DVP includes our regulated electric transmission, distribution
and customer service operations, as well as our nonregulated retail
energy marketing operations. Electric transmission and dis-
tribution operations serve residential, commercial, industrial and
governmental customers in Virginia and northeastern North
Carolina. Retail energy marketing operations include the market-
ing of gas, electricity and related products and services to resi-
dential and small commercial customers in the Northeast,
mid-Atlantic and Midwest.
Revenue provided by our electric transmission operations is
based primarily on rates approved by the Federal Energy Regu-
latory Commission (FERC). The profitability of this business is
dependent on its ability, through the rates it is permitted to
charge, to recover costs and earn a reasonable return on its capital
investments. Variability results from changes in rates, the demand
for services, which is primarily weather dependent, and operating
and maintenance expenditures. We are a member of PJM Inter-
connection, LLC (PJM), an RTO, and our electric transmission
facilities are integrated into PJM wholesale electricity markets.
Consistent with the increased authority given to the North
American Electric Reliability Corporation (NERC) by the Energy
Policy Act of 2005, we are committed to meeting NERC stan-
dards, modernizing our infrastructure and maintaining superior
system reliability. We will continue to focus on safety, operational
performance and execution of PJM’s Regional Transmission
Expansion Plan (RTEP) as we move toward the future.
Revenue provided by our electric distribution operations is
based primarily on rates established by state regulatory authorities
and state law. Actual revenues are driven primarily by weather,
customer growth and usage per customer. Operationally, electric
distribution continues to focus on improving service levels while
striving to reduce costs and link capital investments to operational
results. As part of this continued focus, we have implemented an
asset management process to ensure that we are optimizing our
investments to balance cost, performance and risk. We are also
using technology to enhance customer service options. As we
move toward the future, safety, operational performance and
customer relationships will remain as key focal areas.
In our electric transmission and distribution operations, we are
seeing continued strong growth in new customers and increased
usage per customer on a weather-normalized basis. Growth is par-
ticularly strong in the major metropolitan areas of Virginia. The
combination of higher energy usage and efficient operations and
maintenance spending has been critical to our performance.
Operationally, we continue to enhance the customer experience
through solid reliability performance and by completing the
automation of all of our electric residential meters.
Our retail energy marketing operations compete in non-
regulated energy markets and have experienced strong growth
during the past few years. The retail business requires limited capi-
tal investment and currently employs fewer than 100 people. The
retail customer base is diversified across three product lines—
natural gas, electricity and home warranty services. In natural gas,
we have a heavy concentration of customers in markets where util-
ities have a long-standing commitment to customer choice. In
electricity, we pursue markets where utilities have divested gen-
eration and where customers are permitted and have opted to
purchase from the market. Major growth drivers are customer
additions, new markets/products and sales channels, and supply
optimization.
Dominion Energy includes our regulated Ohio natural gas dis-
tribution company, regulated gas transmission pipeline and stor-
age operations, regulated liquefied natural gas (LNG) operations
and our Appalachian natural gas E&P business. Dominion
Energy also includes our producer services business, which
aggregates gas supply, provides market-based services related to
gas transportation and storage and engages in associated gas trad-
ing and marketing.
The gas transmission pipeline and storage business serves
Dominion’s gas distribution businesses and other customers in
the Northeast, mid-Atlantic and Midwest. Included in our gas
transmission pipeline and storage businesses is our gas gathering
and extraction activity, which sells extracted products at market
rates. Revenue provided by our regulated gas transmission and
storage, and LNG operations is based primarily on rates estab-
lished by FERC. The profitability of these businesses is dependent
on our ability, through the rates we are permitted to charge, to
recover costs and earn a reasonable return on our capital invest-
ments. Variability in earnings results from changes in rates and
the demand for services, which can be dependent upon weather,
changes in commodity prices, and changes in the cost of routine
maintenance and repairs (including labor and benefits).
Our gas distribution operations serve residential, commercial
and industrial gas sales and transportation customers in Ohio.
Revenue provided by our gas distribution operations is based
primarily on rates established by the Public Utilities Commission
of Ohio (Ohio Commission). The profitability of this business is
dependent on its ability, through the rates we are permitted to
charge, to recover costs and earn a reasonable return on our capi-
tal investments. Variability in earnings relates largely to changes
in volumes of natural gas transported, which are primarily
weather sensitive, and changes in the cost of routine maintenance
and repairs (including labor and benefits).
Our Appalachian natural gas E&P business generates income
from the sale of natural gas and oil we produce from our reserves,
including fixed-term overriding royalty interests formerly
30 Dominion 2007 Annual Report