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THOMAS F. FARRELL II

Doing Power Regulation Right

Monday, March 31, 2008

Last year, the Virginia General Assembly walked away from a nine-year experiment with a deregulated electricity market and reimposed a regulatory structure on the power business. In so doing, Virginia's lawmakers squarely confronted the realities of deregulation. Although power prices had been stable and supplies adequate, the future appeared bleak, as it did in many states: too much demand, not enough supply and extreme price volatility.

It was a future no one in the commonwealth wanted.

The reason for re-regulation was clear. In the absence of robust competition among suppliers, a market system inevitably yields unbalanced outcomes and a fragile basis for meeting current and future consumer demand. It became apparent that a new regulatory framework incorporating the protections of traditional regulation with the benefits of deregulation would provide a firm foundation for a secure and reliable energy future.

To be sure, Virginia reaped some undeniable benefits the past nine years, thanks largely to its cautious approach to deregulation.

First, the typical residential customer saved more than $1,000. Nearly a decade of capped rates -- a key legislative condition for the transition to deregulation -- contributed more than $800 of that savings. In addition, Dominion's fuel rate -- historically a cost passed through to customers -- was frozen for some of that time, saving the average household another $260.

Second, and highly significant for the long term, Virginia did not require utilities to divest their power stations. Had Virginia done so, its utilities would have been forced to buy electricity at high prices on the open market. Then, upon re-regulation, the same utilities would have to spend billions of dollars to reacquire or build a fleet of stations. (To work effectively, a regulated marketplace requires utility ownership of generation.)

Third, Virginia never fully cut the ties between the electricity business and regulatory oversight. The commonwealth's long-ingrained instinct for restraint produced a carefully thought-out transition to a deregulated marketplace, with both the State Corporation Commission and a special legislative panel closely monitoring developments.

All of those factors made Virginia's deregulation experience far less traumatic and left it in a stronger position to confront the realities of tomorrow. A look at the grim situation in Maryland shows just how much better Virginia has fared.

"Unless steps are taken now," the Maryland Public Service Commission bluntly warned in December, the state "faces a critical shortage of electricity capacity that could force mandatory usage restrictions, such as rolling blackouts, by 2011 or 2012. . . . We can add more capacity, either through new generation or transmission, or we can reduce the amount of electricity we use. . . . We cannot, however, do nothing."

Because Virginia handled deregulation -- and now re-regulation -- as it did, it is ready to meet expected demand growth. Dominion's service area, for example, will require about 4,000 additional megawatts over the next decade, or roughly the amount of power used by 1 million homes.

The re-regulation law provides the proper balance of oversight and incentives to ensure that needed generation gets built in a cost-effective and responsible manner. To help Virginia's utilities attract billions of dollars in capital, the new regulatory framework allows enhanced rates of return for investments in new generation projects, especially those using nuclear, clean-coal and renewable energy technologies.

At the same time, the law requires utilities to meet Virginia's future needs in an environmentally sound manner. The new framework promotes the use of renewable energy sources -- such as solar, wind and water -- and grants retail customers the right to buy "green" power.


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