Virginia Mercury: October 4, 2021

A 2020 law could decide whether Dominion customers get zero or $372 million in refunds

Dominion Energy’s Virginia customers could see as much as $372 million in refunds if state regulators agree with public utility commission staff and Virginia’s attorney general about how the utility’s hundreds of millions of dollars related to coal plant closures over the past four years should be handled. 

The decision, which will be made by the State Corporation Commission in early 2022, will be handed down as part of Virginia’s first review of the electric utility’s rates and earnings in six years. 

Serving roughly 5 million of Virginia’s 8.5 million residents, Dominion is the state’s largest electric utility and is both a major player and campaign donor in Richmond, where it has close ties with lawmakers on both sides of the aisle.

While Dominion says that between 2017 and 2020, it didn’t earn more than what state law allows, the commission staff and Virginia’s attorney general, contend the utility raked in almost $1 billion in excess profits.  

Which argument regulators accept will be heavily influenced by their interpretation of a wonky 2020 state law that governs how the utility can recover the costs of fossil fuel plants that have been shut down early. 

Hanging in the balance are not only potential customer refunds — which SCC staff say total $312 million and the Attorney General’s Office pegs at $372 million — but also the possibility of regulators cutting electric rates in the future. Base rates have remained around the level established in a 1992 case, with most of the increases in customer bills since then coming from riders.

The State Corporation Commission’s decision on the retirement costs is “the whole ballgame,” said Southern Environmental Law Center attorney Will Cleveland, who is representing nonprofit Appalachian Voices in the rate case. 

The 2020 state law, House Bill 528, “imposes upon the commission an obligation to set the payoff period in the way that best serves the customers,” said Cleveland. “And Virginia utility law since 2007 has never prioritized the customer.” 

Though the law went into effect on July 1, 2020, Dominion said in a legal memo filed Friday that it would be unconstitutional to apply it to the current case because the company had already made the decision to retire the relevant plants prior to passage of the bill, when it thought all of the costs could be recovered at once.

“The General Assembly can certainly change the ‘rules of the game’ prospectively within the confines of constitutional protections. It cannot, however, establish a ground rule … have the utility act and rely upon that ground rule; and then change the rule to apply it retroactively; impacting how over a billion dollars of costs are recovered, what obligations the company has for refunds, and how its rates will be set prospectively,” the utility argued. “Such retroactive action would impermissibly impact the company’s rights and responsibilities.”

Calculating earnings

Virginia law establishes a complicated framework for handling any earnings taken in by Dominion and the state’s other large electric utility, Appalachian Power Company, that exceed the utilities’ costs of providing service and granting returns to shareholders. 

By statute, both utilities are allowed to keep a generous share of any excess earnings they take in. Not only do they retain all earnings up to 0.7 percent above their state-set return on equity, but state law explicitly allows the utilities to keep 30 percent of all earnings above that upper limit. The remaining 70 percent is returned to customers. 

Dominion’s current return on equity is 9.2 percent. In practice, that means it will keep all earnings up to a 9.9 percent ceiling as well as 30 percent of all additional over-earnings. 

Kevin O’Donnell, a consultant retained by the U.S. Department of the Navy to represent the interests of the federal executive agencies in the rate case, said in testimony that “such overearnings are not to be taken lightly as the amount of dollars involved is in the millions.” 

The Department of the Navy estimated that Dominion had taken in “at least $243 million” and “perhaps as much as $500 million” in excess earnings between 2017 and 2020. The Office of the Attorney General has put the number at $994 million, while SCC staff estimate it at $961 million. 

“The Virginia economy, particularly in light of the COVID-19 pandemic of the past two years, could use a multi-million dollar infusion related to the (Dominion) over-earnings as opposed to these overearnings generally flowing out of Virginia in the form of potentially higher dividends paid to stockholders,” wrote O’Donnell. 

Power plant retirement costs

While several factors will play a role in determining exactly how much Dominion earned over the past four years and how much — if anything — it may owe customers, the costs of retiring fossil fuel plants early may be the most consequential. 

Those costs, linked to the early retirement of plants in 2019 and 2020, are equal to roughly $686 million in SCC staff’s estimation. 

How that money is accounted for will have big implications for customers.

Prior to 2018, the SCC had the authority to determine the number of years over which Dominion and Appalachian Power could recover from ratepayers the costs of early power plant retirements. That year, however, a provision of the Grid Transformation and Security Act passed by the General Assembly gave the utilities the right to recover all of those costs in a single year — allowing them to offset any overearnings that might otherwise have to be returned to customers. 

In 2020, with both utilities’ first rate reviews in years looming, lawmakers from both parties balked at the prospect. 

In a surprise vote that went against the wishes of not only Dominion, but two of its most reliable allies in the Senate, Majority Leader Dick Saslaw, D-Fairfax, and Minority Leader Tommy Norment, R-James City, both chambers of the General Assembly passed HB528, which was aimed at protecting ratepayers. 

The bill, carried by Del. Suhas Subramanyam, D-Loudoun, explicitly gave the SCC the authority to independently assess the costs of prematurely closed power plants and set a recovery period for those costs “that best serves ratepayers.” 

“The utility has an obligation to the shareholders. We have an obligation to the ratepayers. They are the folks who elect us,” said Sen. Richard Stuart, R-Stafford, during a floor debate on the bill. “Regardless of whether anybody made a mistake or thinks they made a mistake in that grid transformation bill, our obligation and responsibility remains to the ratepayer.” 

All at once or over 25 years?

Dominion says recovering all of the early retirement costs during the 2017-2020 period being evaluated by regulators is in customers’ best interests. 

“Under this accounting, customers are protected,” wrote Dominion Energy Virginia President Edward Baine in testimony. 

“Spreading those costs in the future does just that — it requires customers to continue to fund those investments, including any applicable financing costs, even though there were sufficient revenues to fully recover them during a prior period,” added utility consultant John Reed. “This would result in increased costs during those future periods, reducing available earnings and even potentially necessitating a rate increase depending on the length of the recovery period.” 

But SCC staff firmly disagreed, arguing for a 25-year recovery period for the $686 million in costs it calculates are linked to the closures.

“Twenty-five years best serves ratepayers, or customers, because it results in significant, immediate and known benefits to customers,” testified SCC Division of Utility Accounting and Finance Deputy Director Patrick Carr. 

While Carr acknowledged recovering costs over a longer period of time would mean ratepayers will pay a higher dollar figure due to financing, he said other benefits would outweigh those costs. 

Specifically, setting a 25-year recovery period would “reduce expense in the current triennial period by an amount sufficient to provide for refunds and, thus, trigger the opportunity to reduce going-forward rates,” he wrote. 

Under state law, the SCC cannot order a rate reduction if refunds are not issued. 

Another provision of the 2018 Grid Transformation and Security Act capped any reduction of Dominion’s rates during the current review at $50 million annually. 

With both SCC staff and the Office of the Attorney General recommending that the early retirement costs be recovered over a 25-year period, both also say that not only should customers get a refund, but that Dominion’s rates should be reduced by the maximum amount of $50 million. 

Calculations of the refunds due ratepayers differ, however. The Attorney General’s Office puts the figure at roughly $372 million, while SCC staff say the amount due is closer to $312 million. A separate proposal from  Appalachian Voices, a frequent intervenor in utility cases before the SCC, would set the recovery period at 20 years and also puts refunds at $372 million. 

Under Dominion’s proposal, customers would receive no refunds. 

In rebuttal testimony filed with the SCC Friday, Dominion said it did not believe that HB528 applied to its rate case because the retirement decisions were made prior to the July 1 date when the new law went into effect. 

At the time Dominion decided to close the power plants in question, the answer of how the remaining costs should be recovered “was clear and directed by statute,” said Baine. “They were to be recovered immediately through any available earnings, and not pushed forward into the future.”

But even if the new law does apply, the company made it clear that it still considers longer-term cost recovery to be not in customers’ best interests. 

Dominion Director of Regulatory Accounting John Ingram wrote that “it is clear” that SCC staff, the Office of the Attorney General and Appalachian Voices were attempting “to engineer a result that emphasizes short-term bill credits and a rate reduction, without consideration for the impacts that such treatment will have on future customers.”

In earlier testimony, however, Appalachian Voices consultant Heather Bailey said years of Dominion overcharging customers for electricity necessitates action by regulators. 

“When a utility consistently overcharges customers by hundreds of millions of dollars, we can reasonably assume the cause is that rates are too high,” she wrote. “Under that rule, Dominion’s rates have clearly been too high for many years, and the Commission should exercise every tool in its discretion to set fair and balanced rates going forward.”

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