Dominion Power 2007 Annual Report Download - page 52

Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued
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.
North Carolina Regulation
In 2004, the North Carolina Utilities Commission (North Caro-
lina Commission) commenced an investigation 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 Sep-
tember 2004, and in March 2005 the North Carolina Commis-
sion 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 the annual fuel cost adjustment
proceedings.
Dominion Transmission Inc. (DTI) 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.
Regional Transmission Expansion Plan
Each year, as part of PJM’s RTEP process, reliability projects are
authorized. In June 2006, PJM authorized construction of
numerous electric transmission upgrades through 2011. We are
involved in two of the major construction projects. The first proj-
ect is an approximately 270-mile 500-kilovolt (kV) transmission
line from southwestern Pennsylvania to northern Virginia, of
which we will construct approximately 65 miles in Virginia and a
subsidiary of Allegheny Energy, Inc. (Trans-Allegheny Interstate
Line Company) will construct the remainder. This project is
expected to cost approximately $243 million and is expected to be
completed in June 2011. The second project is an approximately
60-mile 500-kV transmission line that we will construct in south-
eastern Virginia. This project is estimated to cost $180 million
and is expected to be completed in June 2011. These transmission
upgrades are designed to improve the reliability of service to our
customers and the region. The siting and construction of these
transmission lines will be subject to applicable state and federal
permits and approvals. In April 2007, we, along with Trans-
Allegheny Interstate Line Company, filed an application with the
Virginia Commission requesting approval of the proposed con-
struction of the 65-mile transmission line in northern Virginia. In
May 2007, we filed an application with the Virginia Commission
requesting approval of the proposed construction of the 60-mile
transmission line in southeastern Virginia. Evidentiary hearings
on these applications commenced in February 2008.
Utility Generation Expansion
Based on available generation capacity and current estimates of
growth in customer demand in our utility service area, we will
need additional generation capacity over the next ten years. We
have announced a comprehensive generation growth program,
referred to as Powering Virginia, which involves the development,
financing, construction and operation of new multi-fuel, multi-
technology generation capacity to meet the growing demand in
our core market in Virginia. As part of this program, the follow-
ing projects are in various stages of development:
50 Dominion 2007 Annual Report