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Askew's forces did well in Richmond this year. A provision in the deregulation bill awaiting the governor's signature guarantees Virginia Power steady income for about six years to help pay for investments made based on the old rules. "This [legislation] is really giving us the opportunity to succeed, but no guarantee," he says.
Virginia Power's Norman Askew won a big victory in this year's General Assembly.	photo by Mark Rhodes	The legislation is another step in the slow march from controlled monopolies to competition in the electric industry. The machinations in Richmond are only part of the picture, however. Virginia is moving in the direction taken by other states, and even by government-owned utilities overseas. Deregulation is opening markets around the world, and the competition is creating new players. Electric companies are buying into the natural gas business, and vice versa, so they can position themselves as one-stop energy providers.

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Askew says Virginia Power will face a kind of cultural upheaval in the next few years. It has to separate its generating capacity from its transmission and distribution business and set up ways to handle electricity that other power companies sell here and transmit over Virginia Power lines. "There's a stack of work to do, which is going to make the next few years very interesting," he says.

One thing Virginia Power won't do is sell its power plants. That's what some utilities in other states have done, often under pressure from regulators. But the idea has never taken hold here. "To make Virginia Power divest would actually just play into the hands of people who want to defeat us in the marketplace," Askew says.

While it's likely that Virginia Power will lose customers when competition starts in the commonwealth, Askew thinks recent rate reductions will help the company protect its market share. In August, the State Corporation Commission announced the settlement of a pending rate case that called for a $150 million refund to Virginia Power customers for 1997, plus a $100 million refund and rate reduction for 1998. In addition, another $50 million rate reduction began last month.

"That was really us putting our money where our mouths are in terms of deregulation," Askew says. "Customers look at us and say, ÔWhat's in it for me?' Basically, it's a huge rate reduction in 1998 and held through 2007. We felt that was the deal of a lifetime."

Industry and consumer critics, though, say the plan is too generous to Virginia Power and will delay the benefits of competition to consumers. Virginia Power customers who switch to another power provider before mid-2007 would still have to pay a fee to their old provider, which critics say wipes out any incentive to switch.

"We think what they have done here is extremely dangerous," says Jean Ann Fox, vice president of the Virginia Citizens Consumer Council. There's no guarantee that deregulation will bring rates down, she says, and the plan lets Virginia Power collect fees it may not deserve. The worst part of the plan, she says, is the provision to let Virginia Power recover "stranded costs" -- long-term investments the company made, based on the old rules, that will become less valuable in a deregulated market. Fox and others say the utility can't know for sure what costs are "stranded" until it starts selling power on the open market.

Still, many parties to the debate support the proposal, which was largely drafted during three years of study by a joint subcommittee of the General Assembly. "We are comfortable with [it], I guess is the best way to put it," says Dan Carson, president of AEP Virginia, which serves Southwest Virginia.

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Some critics says the transition is too slow. The General Assembly last year agreed to start retail competition in 2002 and have it in full swing by 2004. Carson says the state should move much faster. The Virginia Committee for Fair Utility Rates, a coalition of large industries, also wants to charge ahead.

Like Virginia Power, AEP Virginia -- the state's second largest electricity provider -- is cutting its rates. Under an agreement in January with the SCC, it proposes a $6 million cut in base rates through 2000 and a refund of approximately $50 million.

The company also plans to stay involved in the three main facets of the business -- generation, transmission and distribution. "We have a lot of experience in all three," Carson says. "There's really no good reason to reverse course."

AEP Virginia is owned by Columbus, Ohio-based American Electric Power, which has 3 million customers in seven states plus investments around the world. An AEP subsidiary, AEP Resources, last year announced the opening of an office in Reston to pursue business in Latin America. And last fall the company announced plans to buy CitiPower, an Australian electric retailer.

While AEP is expanding, it is not joining other companies in the bidding war for power plants being sold off by other utilities around the country. "We think a lot of these assets have been overpriced," says company spokesman Tom Ayres.

In 1997, however, AEP did announce plans to acquire Central and South West Corp., a public utility holding company based in Texas. It also bought Louisiana Intrastate Gas to gain a foothold in that industry, Ayres says. "We think there's going to be a lot of convergence. You're seeing a trend toward energy companies rather than just gas or electricity."

Virginia Power's parent company, Dominion Resources Inc., followed suit in February when it announced plans to acquire Pittsburgh-based Consolidated Natural Gas. The combined company would have 17,000 employees and nearly 4 million customers in five mid-Atlantic states.

The new company "will have the scale, scope and skills to be successful in the competitive energy marketplace," said Dominion Resources President and CEO Thos. E. Capps in a statement. The company plans to target customers in the deregulated markets in the Midwest, mid-Atlantic and Northeast regions, which it says comprise 40 percent of the nation's energy demand.

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AES Corp. turned itself into a multibillion-dollar generator of electricity by being faithful to the idea that energy should be sold in a competitive market, says co-founder Ken Woodcock.

The growth of AES has been astonishing, says Scott & Stringfellow analyst Adam Bergman. Eight years ago it was a relatively small company with investments in the United States and $334 million in revenue. But the company's leaders recognized the start of a global trend toward privatization and began buying power plants abroad. Today, AES operates 100 facilities in 19 countries, and last year the company netted a $311 million profit on revenues of $2.4 billion. Last year alone the company bought Illinois-based Cilcorp, six power plants in New York, a 49 percent stake in a coal plant in India, and two hydroelectric plants in Panama. AES also is building a 180-megawatt coal-fired plant in Cumberland, Md.

"They're constantly looking to add," Bergman says. "Their whole reason they exist is to participate in a deregulated environment."

The company, which has grown to 10,000 employees from 600 in 1991, has a corporate structure like no other. Its legal and finance departments are both one-person operations. Deals are negotiated, not by senior management, but by 300 team leaders scattered around the world. Woodcock describes the company as "radically decentralized."

"People say what makes us competitive is that we don't have big committees. It allows us to be flexible," he says. "We're unlike many who have been there for a long time, who are defensively reconfiguring themselves. Our business is an old game under new rules."

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One of the new rules of the game is that large electricity users will need help navigating the new market, says Mary Beth Tighe, vice president of regulatory affairs for Statoil Energy in Alexandria. The company pitches its "total energy solution" to big customers such as manufacturers, hospitals and schools. It'll sell the power and then show the customer how best to use it. "That's our vision of the way customers want to purchase energy," Tighe says.

The company was formerly known as The Eastern Group and is now a subsidiary of the Statoil Group of Norway. In 1993 Statoil became interested in U.S. markets, and it looked for a company with retail experience. The Eastern Group was a major retailer of natural gas. Statoil started with a small investment and today is the majority stockholder, Tighe says.

The Statoil Group builds power plants, trades electricity and gas on the wholesale market and explores for natural gas. The Alexandria office works with retail customers in states where deregulation allows it, and also sells commodities wholesale to utilities, such as Washington Gas. Its target market is the mid-Atlantic, the Northeast and west to the Ohio Valley. The company is watching the progress of legislation in New Jersey, Delaware and in Maryland, which could initiate retail electric competition in July 2000.

Tighe says Statoil worked for several years to encourage deregulation in Pennsylvania, which began letting customers choose electricity providers in January. The results so far show people are willing to switch. Almost a third of customers signed up for the state choice program, and 22 percent of those chose a different supplier.

When Virginia opens competition, Statoil will move in. "We'd very much like to see competition in our home state," Tighe says. "We have gas customers here, and we would like the opportunity to sell electricity as well."

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Fox, the consumer advocate, says that so far, the parties controlling the move to competition haven't answered the central question: Will this mean lower rates?

In Virginia, at least, she believes it won't. Rates here are lower than the national average, so going to the open market will likely mean paying more. Fox also says there isn't enough transmission capacity to bring in power from other suppliers to compete with incumbents like Virginia Power. Without that, she says, "we run the risk of creating an unregulated monopoly." Residential and small-business customers aren't as appealing to power companies as large commercial energy users and won't get a decent rate, Fox says.

A lot of details surrounding the transition are being left to the State Corporation Commission. "The commission basically wants to make sure that nobody makes promises that may not be delivered. We don't know what the market will do," says spokesman Ken Schrad. About 18 states have taken steps to deregulate, but only two of those -- Montana and Oklahoma -- have rates below the national average, he says. "There are many unknowns, especially for a low-cost state." Utilities here will have the incentive to sell their electricity elsewhere for a higher price, he says.

Askew of Virginia Power says there's little risk. "I think people are going to be surprised" about prices, he says. Once consumers understand their options, they'll shop for a better price and find it, he says.

The Virginia Committee for Fair Utility Rates expects lower rates and has been pushing for competitive pricing for years. Its members, big industrial companies like Newport News Shipbuilding and DuPont, have been buying natural gas that way since the mid-1980s, says Louis R. Monacell, a partner with Christian & Barton, the Richmond law firm that represents the group. "Electricity was the last product they were still buying on a regulated basis. They have a fundamental belief that competition works better than regulation."

While big businesses may gain, residential and small-business users will have to adopt the collective approach that cooperatives have used for decades to get affordable power, says Richard Johnstone, spokesman for the Virginia, Maryland and Delaware Association of Electric Cooperatives.

The state's 12 cooperatives will enter competition trying to do the same thing they do now -- get a good price for their customers. They're not looking for a profit, he says. The cooperatives have been involved in developing the transition plan and are comfortable with the current version, Johnstone says. "Our concern is that restructuring create a level playing field so everyone can enjoy its benefits, not just the large industrial user."

A crucial step in the transition comes this fall with the start of two-year pilot programs by AEP and Virginia Power. The programs should help the utilities and the regulators figure out how to handle such issues as sharing billing information and solving technical problems created by having multiple suppliers on a single transmission system.

"It's important to design the program so it can really be a test of [whether] consumers want competition and whether they'll see the savings," says Statoil's Tighe, who is on the state task force developing rules for the pilot programs.

A legislative task force is monitoring the process, and could come back next year to propose changes. Carson of AEP expects that to happen. "This is a comprehensive [plan], but it doesn't provide all the answers," he says. "I'm sure we'll continue to learn as we go."

© April 1999, Media General Business Publications Inc.,
publisher of Virginia Business Magazine