Coming Soon to Virginia: Electric Rates Just Like Maryland's

In 1999 the Virginia General Assembly restructured the electric industry to rely on competition. The promise was that Virginia's electric rates, already below the national average, would decrease further. This hasn't happened, and legislators should correct this serious mistake.

Before the restructuring was enacted, the State Corporation Commission (SCC), Virginia's utility regulatory agency, advised against the move. It said that rates were unlikely to come down, that the change could cause them to rise and that a proposed rate freeze would not adequately protect utility customers. The SCC told legislators that they should wait and see how competition worked in other states.

But, at the utilities' urging, the General Assembly ignored that advice and mandated retail competition, freezing electric rates (except for fuel costs) until 2007. SCC rate regulation was effectively abandoned, except for adjustments for fuel costs. Virginia's attorney general reported in late 2004 that the state's utilities' earnings above what should have been allowed under traditional regulation topped $1 billion from 2001 to 2003, led by Dominion Virginia Power's excess earnings of more than $860 million.

By 2004 it was evident that competition would not develop in Virginia by 2007. In response, the General Assembly allowed Virginia's second-largest utility, Apco, to continue to adjust its rates to recover fuel costs and have its base rates increased as needed to recover some other costs incurred after July 1, 2004.

At the same time, the legislature extended the freeze of Dominion's base rates through 2010 and froze that utility's fuel rates from 2005 until 2007, when the SCC is to set revised rates to run through 2010. This action locked in excess base-rate profits for Dominion while limiting the utility's risk of fuel costs to just a few years. The fuel-rate freeze meant Dominion did not recover all its 2005 fuel costs through its fuel charge, but much of that shortfall may have been made up by its high base rates. Now Dominion wants legislators to unfreeze the fuel rates to eliminate its risk from July 1, 2007, through 2010 and to continue the freeze on base rates to keep those excess profits locked in.

To date, the only constant in Virginia's constantly changing restructuring plan is to give the utilities what they want -- unfreeze rates where costs might go up and maintain the freeze where costs come down. Instead, at its veto session Wednesday, the General Assembly should unfreeze all rates and return to cost-of-service pricing. The utilities still would recover their costs and make a fair return, and Virginia ratepayers would be charged based on the actual cost to generate and deliver electricity.

Without that, the future looks dim for Virginia's electricity customers. As required by state law, the utilities have joined a regional organization, PJM, which manages the wholesale electricity market for the Mid-Atlantic. PJM's market will set Virginia retail electric rates when the rate freeze ends after 2010.

Under PJM's "day-ahead" market system, generators make offers to supply electricity for the region for each hour of the next day. These offers do not have to be based on cost and are accepted, in ascending order of price, until the projected demand is met.

Customers do not benefit from any low offers, however, because under this system, every provider whose offer is accepted is paid the amount of the highest accepted offer. For example, most of the electricity for a given period might be generated by low-cost coal, offered at pennies a kilowatt hour. But this electricity nevertheless would be priced at, say, 15 cents because the highest accepted offer, providing only a fraction of the power, might come from a seller using expensive natural gas or from a generator whose offer was simply well above cost. Thus, large increases in prices are often caused by PJM's system rather than by the cost to produce and deliver electricity.

Virginia's neighbors already are feeling the effects of the PJM system. Delaware residential customers face a 59 percent rate increase in electric bills this spring, and industrial rates will double. In Maryland, residential rates could increase by as much as 72 percent for Baltimore Gas & Electric customers. Eastern Shore Virginians may feel the effects of the PJM market this summer, too. Delmarva Power recently filed to raise rates by as much as 65 percent after buying power from an affiliate through PJM's market.

When it meets Wednesday, the General Assembly must focus on the real goal for the electric industry: reliable service at just and reasonable rates with electricity produced and delivered in an environmentally responsible manner. If a plan including competition meets this goal better than traditional regulation based on actual cost, then such a plan should be implemented. Meanwhile, let Virginia return to just and reasonable, cost-based regulated rates for electricity.