Virginia Power plans to announce today that it will turn to outside companies to supply virtually all the new electricity capacity it will need in the next six years, a move that the utility says will save consumers hundreds of millions of dollars.
Virginia Power plans to auction off the right to build 1,750 megawatts of new capacity in its service territory to outsiders by 1994 -- an amount of generating capacity equal to Virginia Power's North Anna nuclear generating station.
The Richmond-based utility anticipates that about 30 percent of its overall generating capacity will come from outside sources by 1994, including 1,181 megawatts of power the utility already agreed to buy from outsiders last year.
The outside companies, which would build and operate the plants and sell power to Virginia Power, would range from entrepreneurs to other utilities to industrial companies or municipalities that produce electricity for their own needs or as a byproduct of waste disposal. The utility expects to get between 100 and 150 proposals to build the additional 1,750 megawatts.
The plan would be the boldest attempt yet by a utility to ask outside sources to supply a significant chunk of power, and will all but remove Virginia Power from the financially risky business of building power plants for its own needs. "We're certainly disengaging ourselves from the construction of large-scale generating facilities," said William N. Curry, a spokesman for the company.
The plan has been approved in principle by the Virginia State Corporation Commission, and any contracts signed with entrepreneurs to build plants would be monitored by the SCC staff. Rates charged consumers for electricity produced by the outside plants would be regulated by the SCC just like power the utility generates itself for its 1.6 million customers.
By looking to outsiders for the construction and ownership of generating facilities, Virginia Power is attempting to turn to its advantage a 1978 federal law that requires utilities to purchase power from qualified independent power producers and industrial customers that produce electricity for industrial purposes.
An overabundance of such power in some states has led utilities and regulators to craft new rules that allow the auctioning of new capacity. In some states, the utilities compete against the entrepreneurs to provide the new power. Dominion Resources Inc., Virginia Power's corporate parent, has become a supplier of electricity to other utilities through a partly owned subsidiary that builds small generating plants.
According to Larry W. Ellis, manager of system planning and power supply at Virginia Power, the utility would only consider constructing new power plants if it could build them more cheaply than entrepreneurs could supply the power. Company Chairman William W. Berry has said on a number of occasions that regulation is a substitute for competition if no market exists, Ellis said. "But we believe a market exists and we can use that market," Ellis said.
Experts who follow the industry yesterday said the most significant thing about Virginia Power's strategy is the utility's reduced role in building its own future plants.
"Auctioning off the right to build new generating facilities is not new, but the Virginia Power objective, if it really holds to that, is quite unique," said Douglas Bohi, director of the office of economic policy at the Federal Energy Regulatory Commission. "The utility is saying that it really doesn't want to build any new generating units in the foreseeable future and that is pretty much a trend setter. Indeed, it is a logical way for the industry to go."
However, Mark D. Luftig, an analyst at Salomon Brothers in New York who follows the electric utility industry, said he views the trend with caution. "I would rather see the utilities build the plant because there is greater reliability," he said. "I think you need to have both and to some extent it's good, but you need to make sure you are letting both sides compete fairly."
Jack H. Ferguson, president of Virginia Power, said in written remarks prepared for today's announcement that the utility industry has few economic incentives to build new power plants and thus must rely on outsiders to meet rising demand for electricity created by a robust economy.
"We believe that this will be the largest block of capacity yet purchased by a utility under competitive bidding," he said. "Virginia Power is on the leading edge of an important and beneficial change to major reliance on competition and market forces to protect the interests of electricity customers."
Ferguson said that the electricity business has shifted from a natural monopoly where utilities built large power plants to one in which "economies of scale have vanished and building new units has become expensive and risky." Many utilities that built large nuclear power plants in the 1970s, for example, saw demand for electricity fall and were not allowed to charge customers for these plants when they were ready to bring them into service.
Under the plan to be announced today, the utility will sign 25-year contracts with a wide variety of electricity producers, Ferguson said.
Each bidder's price will be measured against what customers would pay for electricity generated by Chesterfield Seven, a small 185-megawatt plant that Virginia Power plans to bring into service by 1990. As part of its strategy, Virginia Power will allow entrepreneurs to use its transmission system to ship power to other utilities in the area.
"We do believe it's reliable," said Ellis of the power that will be generated by others. Contracts will financially penalize electricity suppliers that fail to provide power on a reliable basis, he said. If one of the outside suppliers went out of business, "We have the right to take over and operate it and pay fair market value," Ellis said. "We are going to monitor the engineering, the technology, their financing capabilities."