COMMONWEALTH OF VIRGINIA

STATE CORPORATION COMMISSION

AT RICHMOND, JANUARY 15,2004

COMMONWEALTH OF VIRGINIA, ex &.

STATE CORPORATION COMMISSION c

CASE NO. PUE-2000-00550:

Ex Parte: In the matter concerning the application of Appalachian Power Company d/b/a American Electric Power-Virginia for approval of a plan to transfer functional and operational control of certain transmission facilities to a regional transmission entity

? . ~ . , . , .. ... i'3

ORDER ON MOTION

On December 19,2002, Appalachian Power Company d/b/a American Electric Power-

Virginia ("AEP" or "Company") filed with the State Corporation Commission ("Commission"),

pursuant to the requirements of 5 56-579 A 1 of the Code of Virginia ("Code"), a Substitute

Application ("Application") in this proceeding requesting approval to transfer functional control

of its transmission facilities located in Virginia to PJM Interconnection, L.L.C. ("PJM"), a

regional transmission entity.'

On March 7, 2003, the Commission entered its Order for Notice ("March 7 Order"),

pursuant to which the Company was directed to file supplemental information and an

examination of the costs and benefits of the Company's proposal. Such information was to be

submitted no later than 90 days after the Federal Energy Regulatory Commission ("FERC")

issues a final rule regarding its Standard Market Design ("SMD") rulemaking proceeding.

On November 7,2003, the Commission entered its Order ("November 7 Order"), which

amended the March 7 Order to require the Company to file certain information by January 9,

' As used in this order, the terms "regional transmission entity" or "RTE" are deemed to be synonymous with "regional transmission organization" or ' "RTO.

2004. Pursuant to the requirements of 5 56-579 of the Code that applications include a study of

the comparative costs and benefits of a proposed transfer, the November 7 Order required the

Company to provide quantifications of relevant information under six scenarios: (1) AEP

joining a reconfigured PJM that includes Dominion Virginia Power ("DVP); (2) AEP not

joining an RTO, (3) AEP joining PJM but assuming DVP does not join PJM, (4) AEP, under

traditional cost of service regulation (rate base, rate of return) over the period that the

quantification is performed, joining PJM and assuming that DVP also joins PJM; (5) AEP, under

traditional cost of service regulation (rate base, rate of return) over the period that the

quantification is performed, joining PJM and assuming that DVP does not join PJM; and

(6) AEP, under traditional cost of service regulation (rate base, rate of return) over the period that

the quantification is performed, not joining an RTO. The November 7 Order also affirmed the

provision of the March 7 Order finding that the Commission could not fully consider the

Company's Application until the FERC issues its final rule on SMD.

On December 4,2003, the Company filed with the Commission a Motion for

Amendments to Commission Orders of March 7 and of November 7,2003 ("Motion"). In Part I1

of the Motion, the Company states that the additional information required by the November 7

Order goes well beyond the information necessary to study the "economic effects of the transfer

on consumers" as authorized by 5 56-579 of the Code. AEP requests that the information

requirement be narrowed to be consistent with the language of 5 56-579 of the Code and the

Commission's jurisdiction. In Part IU of its Motion, the Company states that its obligation to

conduct analyses under scenarios 4,5, and 6 should be eliminated because they are based on a

"traditional cost of service analysis." The Company seems to contend that because the Virginia

Electric Utility Restructuring Act, Chapter 23 (5 56-576 s.) of the Code (the "Act") does not

2

sanction traditional cost-of-service regulation for generation, studies that consider what rates

might be under cost-of-service regulation are inconsistent with the Act. AEP also states that its

obligation to conduct an analysis under scenario 6 should be eliminated because there is no

realistic basis on which to conclude that it will not join an RTO, and the scenario is based upon

an unreasonable assumption. In Part IV of its Motion, the Company objects to the provision that

consideration of the Application must await the FERC's decision on SMD rules and requests the

establishment of a full procedural schedule. The Company also requested the Commission to

expedite its ruling on the Motion because the information required by the March 7 Order and the

November 7 Order was due by January 9,2004.

On December 23,2003, responses to the Motion were filed by the Office of the Attorney

General, Division of Consumer Counsel ("Consumer Counsel") and Commission Staff.

Consumer Counsel states that it supports the Commission's authority to request whatever

information it deems necessary to make a reasoned decision in any proceeding before it.

Consumer Counsel added that to require any less from an applicant would inhibit the

Commission's ability to protect the public interest.

In its response, Staff denies that the additional filing requirements are inconsistent with

§ 56-579 of the Code and the Commission's authority and jurisdiction. Staff states that the

required costlbenefit studies are relevant to this proceeding. Staff disputes AEPs contention that

it is unreasonable to provide infomation based on scenario 6 because there is no realistic basis

on which to conclude that AEP will not join an RTO.

On December 30,2003, the Commission entered its Interim Order on Motion for

Amendments ("Interim Order"). In the Interim Order, the Commission amended the March 7

Order and the November 7 Order to provide that the Commission will move forward with respect

to the Application and will establish a procedural schedule in this case at such time as the

Commission issues an order addressing the Company's requests set forth in Part III of the

Motion.

On January 7,2004, AEP filed a reply to the responses of Consumer Counsel and Staff.

In its reply, the Company reiterated its contentions that certain information requirements in the

March 7 Order and the November 7 Order are not consistent with statutory authority, and that the

"cost of service" information is not required for purposes of the cost-benefit study.

On January 7,2004, AEP also filed a Motion for Extension of Time in which the

Company requests that the current January 9,2004, date by which the Company is required to

file certain information with the Commission, as required by the March 7 Order and the

November 7 Order, be extended to January 20,2004.

On January 8, 2004, the Commission entered an order granting the Company's Motion for

Extension of Time. The March 7 Order and the November 7 Order, as amended by the Interim

Order and the January 8,2004, order granting the Company's Motion for Extension of Time, are

collectively referred to as the "Procedural Orders."

NOW UPON CONSIDERATION of this matter, the Commission is of the opinion and

finds that the Company's Motion should be denied in part and granted in part.

The portions of the Motion on which the Commission has not yet ruled are AEP's

requests that the Commission amend the Procedural Orders to limit the information required in

the Company's cost-benefit study to that necessary to study the impact of the Company's

4

proposed transfer on consumers under scenarios 1 and 3, as compared to scenario 2, and that the

Commission establish a full procedural schedule for this proceeding.'

As AEP observes in its reply, the Commission ruled on similar issues in its Order on

Motion for Modification ("DVP RTE Order") in DVPs RTE case.3 We remain convinced that

the rationale for our decision in the DVP RTE Order is correct, and we will apply the same

rationale in this case.

AEP raises three objections to the information requirements of the Procedural Orders:

(i) the additional information requirements in the November 7 Order are not authorized by

5 56-579; (ii) the requirements in the November 7 Order that AEP provide information based on

three scenarios (scenarios 4,5, and 6) that use costs determined under traditional cost of service

regulation are inconsistent with the Act; and (iii) the requirement in the November 7 Order that

AEP provide information based on scenario 6 (under which AEP, under traditional cost of

service regulation, does not join an RTO) should be deleted on grounds that it is based on an

unreasonable assumption and there is no realistic basis on which to conclude that AEP will not

join an RTO.

Statutory Language

The Company contends in Part II of the Motion that the additional information

requirements in the November 7 Order are not authorized by 5 56-579. Subsection F of 5 56-579

states:

' In our Interim Order we addressed the issue, raised in Part IV of the Motion, of whether the Commission would consider the case prior to the issuance by the FERC of a final rule in the SMD proceeding. This issue will not be addressed further in this order.

Commonwealth of Virginia, ex rel. State Corporation Commission Ex Parte: In the matter concerning the application of Virginia Electric and Power Company d/b/a Dominion Virginia Power for approval of a plan to transfer functional and operational control of certain transmission facilities to a regional transmission entity, Case No. PUE-2000-0055 1, Order on Motion for Modification (Dec. 22,2003).

5

Any request to the Commission for approval of such transfer of ownership or control of or responsibility for transmission facilities shall include a study of the comparative costs and benefits thereof, which study shall analyze the economic effects of the transfer on consumers, including the effects of transmission congestion costs. The Commission may approve such a transfer if it finds, after notice and hearing, that the transfer satisfies the conditions contained in this section.

AEP contends that the directive in the November 7 Order, by requiring AEP to include

information regarding the impact of the proposed transfer on non-jurisdictional retail customers,

in-state and out-of-state wholesale customers, shareholders, and other groups to the extent they

might affect total service obligations, improperly broadens the statutory information requirement.

We disagree. The Commission is granted broad authority under the Act to ensure that a

proposed transfer is in the public interest. The Commission is obligated to examine fully the

costs and benefits of the proposed transfer. Making a fair and equitable decision on the

Application requires the Commission to have all pertinent information before it.

Subsection F of § 56-579 does not limit the types of information that the Commission

may rely upon in determining whether the approval of a proposed transfer is appropriate. Rather,

5 56-579 F establishes the requirement that at a minimum the application for transfer include a

study of the comparative costs and benefits thereof, which study shall analyze the economic

effects of the transfer on consumers. As Staff notes its response, the Commission may gather

information pertinent to evaluating the numerous impacts of the proposed transfer to PJM, and

that the cost and benefit impacts on all of the Company's customers and its shareholders are

relevant in evaluating the total costs and benefits of the proposed transfer. Cost information

relative to other stakeholder groups is necessary to verify cost and benefit impacts on consumers.

Such information is also relevant to the requirement of § 56-596 that the Commission consider

the goals of the advancement of competition and economic development in the Commonwealth.

6

In summary, we find that AEPs position is not persuasive. Requiring the additional

information is not, as the Company asserts, the product of an unreasonable broadening of the

requirement in 5 56-579 F that the Commission study the economic effects of the proposed

transfer on consumers. Rather, the Commission is gathering the data it finds are necessary to

comply with all aspects of the Act's requirements. In addition, the Act does not limit the

Commission's authority, in carrying out its public interest obligations, to require the applicant to

provide important and relevant information regarding the implications of the proposed transfer.

Analyses Based on Cost-of-Service Based Rates

In Part III A of the Motion, AEP argues that scenarios 4,5, and 6 required pursuant to the

November 7 Order should be eliminated. In support of this request, AEP states that these

scenarios involve a traditional cost of service analysis and thus are inconsistent with the Act.

AEP asserts that there is no reason for the Commission to require any cost of service analyses

related to the statutorily-required cost-benefit study.

AEPs Motion states that the Act anticipates that the Commission will recognize the

FERC's broad jurisdiction over interstate transmission. To the extent that AEP is arguing that

federal requirements for RTOs must define the Commission's evaluation of the Application, we

do not agree. We are not aware of any federal requirement that bars the Commission from

conducting its statutorily-required analysis of the transfer proposed in the Application.

A E P s second line of argument in opposition to the requirement that it provide

information under scenarios 4,5, and 6 involves the issues of default service rates and the

relevance of cost-based rates. AEP states that default service rates are not an issue in this case?

- See DVP RTE Order at 10-1 I

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and even if they were an issue, the Act does not contemplate that default service rates for

generation will be based upon cost-of-service regulation.

AEP correctly states that the Act does not sanction traditional cost-based, rate of return

regulation for the generation component of default service. Default service rates under the Act

are not to be set by this Commission based on traditional cost-of-service ratemaking principles.

As stated in $56-585 C, after the capped rate period, prices for default service are to be based

upon what prices are, or would be, in competitive regional electricity markets.

AEP, however, tries to extrapolate from the fact that default service rates are not to be

established based on traditional cost-based, rate of return regulation, that it is improper to request

information addressing the effects of rates that are equal to those that would be set under

traditional cost-based, rate of return regulation. Such a leap misses the mark. As we found in

the DVP RTE Order:

The Commission is not seeking to use the requested cost-benefit analysis information to set rates. The information will not be used for any purpose other than to assist the Commission in determining whether to approve the Application's proposal to transfer control over transmission assets to PJM. Comparisons among options . . . cannot be made in a vacuum, particularly when $ 56-579 F requires an analysis of the economic effects of the transfer on consumers. The critical point that the Company does not address is that the methodology used to gauge what electricity rates will be in the future may impact the respective costs and benefits of each scenario for which the costs and benefits are compared.'

In its reply, AEP states that the DVP RTE Order "could be read to mean that the

Commission would truncate market-based default service rates at the point at which they would

DVP RTE Order at 6-7.

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fall below some contemporaneously-determined cost of service rate."6 Such would be a

misreading of the DVP RTE Order, which states that:

[Tlhis level may serve as a lower limit below which we cannot set default service rates without creating a risk that setting rates at such a level will result in a taking of a utility's prope~ty.~ (Emphasis added.)

We stated that a comparison of the costs and benefits of approving or denying a proposed

transfer of control of transmission facilities should therefore examine what comparative costs

and benefits are likely to exist under scenarios that assume that rates are at the lowest

constitutionally-permissible level.

AEP also misreads footnote 5 of the November 7 Order. We did not state there that cost-

of-service studies are required to avoid unconstitutionally confiscatory rates. Rather, we wrote

that the Commission's authority to determine the rates for default service provided by a

distributor "may" be limited by constitutional requirements, and added:

[I]t appears that rates established by this Commission may not be set at a level that would constitute an unconstitutional taking. This level has historically been one that allows the utility, on a traditional cost-of-service, rate base, rate of return basis, to recover expenses and an adequate return to the equity owners.'

In its Motion, AEP contends that Federal Power Commission v. Hope Natural Gas,

320 U.S. 591 (1944), and its progeny do not establish that traditional cost-of-service ratemaking

is the only constitutionally valid method of determining whether rates are confiscatory? We

have not found that traditional cost-of-service ratemaking is the only method of determining

AEP Reply at 4.

DVP RTE Order at 8.

' November 7 Order at 5, note 5.

Motion at 6, note 5.

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what constitutes confiscatory ratemaking, and have not said that it should or will be the method

for making such determinations at such time as the Commission may be required to set default

service rates. However, until the Supreme Court of the United States rejects the test established

by

confiscatory, the Commission finds that it is reasonable to examine cost-based rates and other

factors that courts have considered in the Commission's analysis of the Application."

and its progeny and articulates a new standard for determining whether rates are

AEPs reply also cites the Staffs response stating that "post-2007 default service rates

must be the higher of market or incumbent costs.'t11 Contrary to Staffs statement, the

Commission has not said that it will set default service rates on the traditional cost-of-service,

rate basehate of return basis if market rates are lower than rates determined on such basis. We

have said that rates set on such a basis are relevant because they "may" be a limiting factor.

Regardless of what the General Assembly or this Commission does, and regardless of the

method used to set rates in the future, such rates may be subject to attack based on a claim that

such rates are unconstitutionally confiscatory. If market-based rates are lower than cost-based

rates, and if cost-based rates are determined to be the standard for determining what constitutes

confiscatory rates, rates could be forced to a cost-based level.

AEPs contention that the absence of statutory authority to set default service rates on a

traditional cost-of-service basis effectively bars the use of information derived from traditional

cost-of-service ratemaking principles ignores the point that a study of comparative costs and

l o In u, the Supreme Court made clear that "[ilt is not theory but the impact of the rate order which counts." Federal Power Commission v. HoDe Natural Gas, 320 US. 591,602 (1944). In examining the "impact" of the rate order, the Court in focused on revenues, costs, earnings, dividends and return on investments, all of which tie to costs and rates being sufficient to give the utility the opportunity to recover its prudently incurred costs and earn a return that allows the utility to maintain its financial integrity, to attract capital, and to compensate its investors for the risk assumed. See also, e.&, Duauesne Liaht Co. v. Barasch, 488 US. 299 (1989).

AEP Reply at 4, citing Staff Response at 6-7 I I

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benefits must include information that allows the Commission to consider rates that customers

may pay in the future and what might influence such rates. Considering the impact cost-based

rates could have on consumers and utilities is reasonable. As we noted in the DVP RTE Order:

It is not unreasonable to assume that rates based on the market price of power may be at or below the levels that would be established under the traditional cost-based, rate of return regulated system. If rates based on the market price of power are less than rates that would be established under the traditional cost-based, rate of return regulated system, constitutional requirements may require this Commission to set the rates at such higher level. Therefore, estimating what future rates would be if determined by the traditional cost-based, rate of return regulated system is at least as reasonable as, if not more reasonable than, any other method for estimating future electricity costs." (Emphasis added.)

Section 56-579 F of the Code specifically requires the cost-benefit comparison to analyze

the economic effects of the transfer on consumers. Economic effects are manifested through the

rates paid by consumers. A comprehensive cost-benefit analysis requires looking beyond July 1,

2007. After this scheduled end of the capped rate period, many consumers may receive default

service, which may be set by the Commission based on market prices or based on rates that

"approximate those likely to be produced in a competitive regional electricity market."I3 As

noted above, however, such rates may be subject to constitutional constraints on confiscatory

ratemaking. Such constraints have traditionally been tied to costs and cost-based rates.

Therefore, the Commission must have for consideration information based on scenarios that

assume cost-based rates may be a constraint.

Any true cost and benefit analysis requires consideration of all of the costs and all of the

benefits of the Company's proposed action, as well as those of reasonably viable and attainable

" DVP RTE Order at 14.

l 3 Va. Code 5 56-585 C 4 b.

alternatives. We need to ensure that we have the necessary information before us to examine the

overall impact of the Application. We must evaluate specific net costhenefit outcomes of the

proposal against net costhenefit outcomes under a variety of alternate assumptions and

scenarios. The results of this analysis are likely to be affected by the assumed rates that are used.

All parties may agree that it is not possible to state with certainty what the market price of power

will be ten years hence. AEP should, however, be able to conduct an analysis that addresses

what rates will be after the end of the capped rate period using cost-based, rate of return

ratemaking principles with at least the same degree of certainty as an analysis that uses other

assumptions regarding future rates.

Analvses Based on AEP not in PJM

In Part III B of the Motion, AEP argues that the requirement of the November 7 Order

that it file information based on scenario 6 should be eliminated because it is based on an

unreasonable assumption that AEP, as part of the American Electric Power System ("AEP-East

System"), would not join any RTO.

AEP observes that scenario 2 also assumes that AEP would not join an RTO, and states

that this scenario "merely states the existing situation -the base case for the cost-benefit study -

since AEP is not currently a member of PJM."14 AEP then states that to the extent scenario 2 is

intended to state a possibility that AEP will never join an RTO, it is inconsistent with the Act.

In essence, AEP is asking that, for purposes of our analysis, we assume that AEP

transfers control of its transmission system to PJM under each alternative scenario. However,

the Act requires the Commission to determine "whether to authorize transfer of ownership or

l 4 Motion at 7, note I .

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control from an incumbent electric utility to a regional transmission entity."" Our analysis must

not assume that the approval of the requested action is the only possible conclusion we can

reach. To do so would prejudge both the analysis and this case. This we will not do. AEP is not

currently a member of PJM, and it would be reckless to assume that approval of the transfer of

AEPs transmission assets to PJM is inevitable.

In addition, in the DVP RTE Order the Commission noted that the Kentucky Public

Service Commission has denied the application of an affiliate of AEP, Kentucky Power

Company d/b/a American Electric Power, for approval to transfer control of its transmission

facilities to PJM.I6 We added that:

While we do not know what the ultimate outcome of such proceeding will be, it illustrates that this Commission has a legitimate basis for considering the possibility that AEP may not complete its current plan to transfer control of its transmission assets to PJM but may choose to join another FERC-approved ~ ~ 0 . l ~

We observe that the FERC has instituted a proceeding in which it has made a preliminary

finding that it may exempt AEP from provisions of Kentucky and Virginia law or rule or

regulation that pertain to AEP joining PJM, pursuant to Section 205(a) of the Public Utility

Regulatory Policies Act.I8 This matter is pending and does not affect this proceeding.

13

~

l5 Va. Code $ 56-579 B (emphasis added.)

'' In the Matter of: ADplication of Kentuckv Power Companv d/b/a American Electric Power for Approval. to the Extent Necessarv, to Transfer Functional Control of Transmission Facilities Located in Kentuckv to PJM Interconnection. L.L.C.. Pursuant to KRS 278.218, Case No. 2002-00475, Order (Jul. 17,2003). We note that an order on rehearing was issued in this proceeding on August 25,2003.

DVP RTE Order at 16.

See Order Makin. Preliminarv Findines and Giving Public Notice and Setting. Matter for Public Hearing under P G A Section 205(A), 105 WRC 161,251 issued November 25,2003, in Docket No. ER03-262-009.

Information based on a scenario under which AEP does not join PJM is relevant in

evaluating the status quo. In addition, if the Commission finds following the hearing that the

applicant has not satisfied the standards for approval of the transfer, the Commission may be

required to withhold its approval of the proposed transfer. In such event, the applicant could

submit an application for the transfer of ownership or control of or responsibility for its

transmission facilities to another RTE or to the same RTE under different circumstances.

As stated above, the Commission must interpret and implement 5 56-579 F of the Code.

This section requires that we compare the costs and benefits of alternatives, and does not bind us

to examine only those alternatives that the applicant chooses to file. We will require the

information required under scenarios 2 and 6 that addresses the possibility that AEP will not be

permitted to transfer control of its transmission assets to PJM.

Finally, we will establish a procedural schedule for this proceeding.

Accordingly, IT IS ORDERED THAT

(1)

(2)

The Motion is denied except as provided below.

As provided in our order of January 8,2004, the Company shall file with the

Clerk of the Commission the additional relevant information required pursuant to the Procedural

Orders on or before January 20,2004.

(3) On or before March 1, 2004, AEP shall file with the Clerk of the Commission an

original and twenty (20) copies of any direct testimony and exhibits, in addition to or in lieu of

information submitted by the Company with its Application and other pleadings that the

Company intends to present in support of its Application and other pleadings.

(4) On or before May 24, 2004, any person who expects to participate in the hearing

in this proceeding as a Respondent shall file an original and twenty (20) copies of the prepared

14

testimony and exhibits the Respondent expects to present at the hearing, with the Clerk of the

State Corporation Commission, referring to Case No. PIE-2000-00550, and shall

simultaneously send a copy thereof to the Company, the Company's counsel, all other

Respondents, and to Staff. Any corporate entity that wishes to submit evidence, cross-examine

witnesses, or otherwise participate as a Respondent must be represented by legal counsel in

accordance with the requirement of Rule 5 VAC 5-20-30 of the Commission's Rules of Practice

and Procedure.

(5) The Staff shall present its findings and recommendations in prepared testimony

and exhibits which shall be filed on or before June 22,2004, in an original and twenty (20)

copies. Staff counsel shall simultaneously serve a copy of Staffs testimony and exhibits on AEP

and each Respondent.

(6) On or before July 6,2004, AEP shall file with the Clerk of the Commission an

original and twenty (20) copies of the any testimony and exhibits it expects to introduce in

rebuttal to the direct prefiled testimony of the Staff and Respondents. Additional rebuttal

evidence may be presented by AEP without prefiling, provided it is in response to evidence

which was not prefiled but was elicited at the time of the hearing and, provided further, the need

for additional rebuttal evidence is timely addressed by motion during the hearing and leave to

present said evidence is granted. A copy of the prefiled rebuttal evidence shall be served upon

the Commission Staff and all other parties to the proceeding on or before July 6,2004.

(7) A public hearing shall be held beginning at 1O:OO a.m., July 27,2004, in the

Commission's Courtroom, Second Floor, Tyler Building, 1300 East Main Street, Richmond,

Virginia, to receive evidence on the Application.

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.

(8)

remain in effect.

(9)

AN ATTESTED COPY hereof shall be sent by the Clerk of the Commission to all

persons on the official Service List in this matter. The Service List is available from the Clerk of

the State Corporation Commission, c/o Document Control Center, 1300 East Main Street, First

Floor, Tyler Building, Richmond, Virginia 23219.

Except as modified herein, all other provisions of the Procedural Orders shall

This matter is continued for further Order of the Commission.