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Regulators Forum: Restructuring Rollback

State-policy turmoil reshapes utility markets.

Fortnightly Magazine - November 2007

new legislation allows for pre-recovery of construction costs and yearly prudence reviews. Is the Virginia SCC getting many requests for cost recovery of new utility infrastructure?

Morrison: It’s no surprise we’re now a popular place to build generation. Within two months after the effective date of the legislation we have several billion dollars worth of baseload generation proposed and we anticipate receiving the filing for a new nuclear unit in the foreseeable future.

Pre-construction cost recovery requires a return on investment or projected investment. These returns are allowed from the point of initial expenditures, which may have been made well before the new statute. There are no yearly prudence reviews.

It’s interesting to note AEP Appalachian announced with considerable fanfare its plan to build an IGCC baseload coal plant in West Virginia over two years ago. The Virginia SCC had no knowledge any part of the plant was allocated to serve Virginia load. After the passage of the new Virginia statute, company officials informed the commission that 40 percent of the new capacity would be allocated to Virginia. The application has since been filed.

This legislation is a bombshell. When securities analysts read this, Virginia utilities will be hot stocks.

Texas: Retail Frontier

Fortnightly: Is the regulatory compact changing in Texas to accommodate increased market risk?

Hudson: Not really. To accommodate the need for more transmission construction, the Texas PUC has procedures for quick placement of capital projects into transmission rates without requiring a full rate case. We think this provides stability without overextending the provider’s cash flow.

Remember, much of Texas has been deconstructed from vertically integrated utilities to a wide-ranging group of retail-electric providers, generators and transmission/distribution providers—some with and without affiliations. In this environment, ratepayers are insulated from some of the market risk to which you are referring.

Fortnightly: Will time-of-use metering help stabilize energy prices, and is Texas adopting the advanced metering policies advocated in EPAct?

Hudson: In Texas, a voluntary program to install advanced meters has begun. While Texas law does not mandate advanced-meter deployment, the voluntary program does permit a transmission and distribution company to request a rate rider to recover costs of such a deployment outside the context of a rate case.

The statute does require the commission to offset additional costs with corresponding reduced or avoided costs. A rule that specifies meter features necessary for the special cost recovery, which includes the ability to capture 15-minute consumption data, should allow for special pricing that could help stabilize prices.

What’s unclear is the level of customer demand for, and ultimately adoption of, retail plans that exploit these features. We hope advanced meters will be the catalyst for tremendous technological innovation.

Fortnightly: Will Texas consider decoupling utility returns from sales volume?

Hudson: About 85 percent of load in Texas operates in a restructured area. In those areas, generation and retail rates and products are subject to limited regulation and only the transmission and distribution utilities remain rate regulated. The regulated utility provides only a delivery service for all retailers; they have no direct relationship with customers.