THE VIRGINIAN-PILOT Copyright (c) 1995, Landmark Communications, Inc. DATE: Sunday, March 12, 1995 TAG: 9503110289 SECTION: BUSINESS PAGE: D1 EDITION: FINAL SOURCE: BY TOM SHEAN, STAFF WRITER LENGTH: Long : 122 lines
For four days in February, state regulators from around the country gathered in Washington to talk about such topics as gas-pipeline safety laws, telephone deregulation and energy conservation.
But many of those attending the winter meeting of the National Association of Regulatory Utility Commissioners were curious about a matter not on the agenda.
``There was a great deal of interest in what was going on in Virginia,'' where utility regulators had to contend with warring factions at Virginia Power and its parent company, said Charles D. Gray, assistant general counsel of the Washington-based association.
``I've been at this job for 15 years, and I don't remember anything like this,'' Gray said of the boardroom battles involving Richmond-based Virginia Power and Dominion Resources Inc.
The regulators' interest in the rancorous dispute between directors of Virginia's largest electric utility and its holding company was due partly to the battle's visibility. For two months last summer, Virginia Power and Dominion Resources jousted in the courtroom and in the media.
But state regulators had other reasons for watching the maneuvering by Virginia Power and Dominion directors and the responses of Virginia's State Corporation Commission.
One was the size of Virginia Power, which has 10,000 employees and 1.9 million customers in Virginia and northeastern North Carolina. Another was the changing regulatory environment. The long-accepted rules for regulating electric utilities have been strained in recent years by mounting competition in the power industry.
Since the early decades of the century, most electric utilities have enjoyed monopoly status in their service territories. They were authorized by regulators to earn a certain level of profitability. In return, they were obligated to provide reliable service to ratepayers at prices approved by regulators.
But faced with slow earnings growth, many utilities and utility holding companies have sought to bolster their profitability by diversifying into unregulated activities, including the development of power plants in other states and even overseas. In the process, the regulators' task of protecting ratepayers from bearing the costs of unregulated activities has become more difficult.
One issue facing state regulators, including those at Virginia's SCC, is whether the barriers they have imposed between a utility and unregulated activities are still adequate.
With the utilities' rapid pursuit of unregulated lines of business, ``at what point do the risks of diversification spill over the wall and harm the regulated utility?'' asked Gray of the National Association of Regulatory Utility Commissioners.
For ratepayers, the question could become crucial if an unregulated project threatens a utility's financial strength and prompts higher rates.
The dispute that embroiled the boards of Virginia Power and Dominion last spring and summer stemmed partly from their CEOs' clashing personalities and different management styles.
But Virginia's SCC acknowledged last August that bigger issues were at stake. When Dominion and Virginia Power announced a truce Aug. 16 and restructured their boards of directors, the SCC gave its blessing to the new arrangement.
But the commission also ordered a sweeping investigation into ``every aspect of the holding company structure,'' including benefits, risks and possible changes in the way it regulated the Dominion-Virginia Power relationship.
The results of that investigation will be delivered to the SCC's three commissioners later this month. Some indications of what the report will contain appeared last December in a preliminary report.
One part of the report, compiled by the Baltimore consulting firm Liberty Consulting Group, recommended that:
Virginia Power have a full-time chairman. Like his predecessors, Chairman John B. Adams Jr. serves only part time.
``An outside chairman of a utility board is unusual, as is a chairman who has material outside professional responsibilities,'' Liberty Consulting said. ``The industry now, more than ever, requires dedicated focus and attention.''
Virginia Power's CEO should not report directly to any Dominion officer.
``The preferred model is to have the Virginia Power CEO report directly and solely to the Virginia Power board and for Dominion Resources to exercise its authorities primarily through election of the Virginia Power board of directors,'' Liberty Consulting said.
Virginia Power improve its controls over services provided to Dominion's nonutility activities.
Virginia Power provided Dominion and Dominion's nonutility units with an array of lodging, transportation and technical services without prior approval from the SCC, something required by the state regulators in a 1986 order. Dominion was not billed for some of the services that Virginia Power provided, Liberty Consulting said.
Another part of the preliminary report, written by an economist and consultant specializing in electric utility issues, recommended that the SCC consider restricting the percentage of Virginia Power dividends that could be paid to its parent.
Virginia Power has not paid unreasonably high dividends to Dominion, economist J. Robert Malko said in the report. Still, it would be prudent for the SCC to have the authority to restrict Virginia Power's dividend payout ratio as a way of insulating the utility, he said.
``If Dominion Resources' nonutility activities incur significant losses causing Virginia Power's dividend payout ratio to exceed 100 percent, the financial integrity of Virginia Power could be harmed by suffering weakened cash flow and a potential downgrade in bond rating,'' Malko said.
And a downgrade in the utility's bond rating, he said, would harm bondholders and ratepayers.
To better protect Virginia Power from diversification risks, Malko recommended that the SCC require the utility to make five-year or 10-year financial forecasts a regular part of its rate requests to the commission. As another precaution, Malko said, a ceiling should be imposed on the percentage of assets that Dominion could allocate to unregulated activities.
If diversification grew to the point where Virginia Power was no longer a substantial part of Dominion, there could be increased risk to Virginia Power and increased complexity of financial and accounting transactions, Malko said.
``Based on preliminary analysis, an asset cap of 25 percent of Virginia Power's total assets could be appropriate as an upper limit for Dominion Resources' nonutility diversification assets,'' the consultant said. by CNB