Battle lines forming over Appalachian Power’s bid to increase rates
August 10, 2020

In deciding whether to approve the request, the State Corporation Commission must navigate new laws on utility regulation while considering questions and objections from businesses, environmental groups, advocates for low-income customers and others.

Some are questioning the accounting practice used by Appalachian to justify raising the price of its electricity.

In a legal memorandum filed with the SCC late last month, the Virginia Attorney General’s Division of Consumer Counsel said the increase is “neither appropriate from an accounting perspective nor in the interest of APCo’s ratepayers.”

Attorney General Mark Herring went further in a written statement to The Roanoke Times, saying he opposes the “unconscionable” request by Appalachian that would “lead to an unjustified increase for ratepayers.”

Appalachian has yet to file a response with the SCC. In a written statement last week, company spokeswoman Teresa Hall said: “We respectfully disagree with the Attorney General’s position; however, it would be inappropriate to comment further on a legal issue.”

The accounting practice in question stems from a convoluted regulatory process that has been repeatedly revised by the General Assembly.Under a law passed in 2018, whether a utility is entitled to raise its base rates is determined by its earnings over a three-year period immediately prior to the request. If earnings fall below a return on equity authorized by the SCC — 9.4% for Appalachian — the commission can approve a rate increase.

If, on the other hand, earnings over the triennial period exceeded the allowed rate, the utility could be prohibited from collecting even more revenue through a rate increase.

Appalachian’s return on equity was 11.3% in 2017 and 9.8% in 2018, which exceeded its allowed rate, according to an SCC filing by the Virginia Poverty Law center, one of nearly a dozen participants in the case.

In 2019, the utility’s rate dropped to 3.8%, bringing the average return on equity over the triennial to 8.2% — low enough for an increase to be requested, the poverty law center said in its filing.

In an assertion backed by the attorney general’s office, the filing states that Appalachian’s low rate in 2019 was due to its decision to offset earnings that year with the costs of the early retirement of fossil fuel-fired power plants.

That expense, which includes the shutdown of the Glen Lyn plant in Giles County and the partial closing and conversion of the Clinch River plant in Russell County, was nearly $90 million.

The problem with that, the attorney general’s office argues, is that the early retirements happened in 2015 and 2016, before the three-year period used to determine whether a rate increase is justified.

Only after Appalachian’s management realized that the company would nearly exceed its authorized rate of return did it adjust its accounting books in December 2019 — the final month of the triennial — in a way that allowed it to seek an increase, the attorney general maintains.

“The statute does not permit APCo to reach and snag out-of-period costs and expense them as if they were part of this Triennial Review period,” the legal memorandum states.

“Such a reading of the statute would permit an absurd result.”

‘A big test’

To fully understand what is happening, a bit of recent history is helpful.

In 2015, the General Assembly approved a rate freeze for Appalachian and Dominion, the state’s largest electricity utilities. Among other things, the law halted the ability of the SCC to lower base rates and issue refunds. Critics said it also locked in rates that were already too high.

Three years later, the freeze was lifted when legislators passed the Grid Transformation Security Act, which supporters said gave regulators more power over the electricity monopolies.

One of the many things the new law did was switch from a two-year period to the current triennial period to determine rates. Appalachian is the first to use the process; Dominion’s turn will come next year.

Critics of the 2018 law say it still deprived regulators of their full authority, allowing bookkeeping tactics that shortchanged customers. “They can fudge the accounting and make it look like they need to raise rates,” said Del. Sam Rasoul, D-Roanoke.

Rasoul co-patroned a bill that became law this year, giving the SCC the power to determine how to best handle the long-term recovery of costs associated with the early retirement of power plants.

The attorney general’s office contends that the law should prevent Appalachian from lumping all of the expenses into a single year. “But for this extraordinary earnings test adjustment,” its legal memorandum states, “the Company would be unable to justify its request to increase the rates paid by its customers.”

How Appalachian’s case plays out before the SCC will be “a big test of this bill, that’s for sure,” Rasoul said.

“It’s clear that we must have the SCC at full power to oversee these regulated monopolies,” he said. Otherwise, the utilities “are going to act in their best interests, at the expense of the ratepayers.”

However, it should come as no surprise that Appalachian is seeking to raise its base rates, which have remained the same for some years because of the freeze, said Greg Habeeb, a former member of the House of Delegates who heads the regulatory and government affairs practice group for the Roanoke-based law firm of Gentry Locke.

“The real question is whether the 2018 legislation and anything passed in 2020 changes the paradigm at all,” Habeeb wrote in an email.

For years, investor-owned utilities have fully depreciated a generation asset in a single year to offset earnings. The accounting practice has been “historically legal but is a controversial topic,” he wrote.

According to Habeeb, the law passed this year “was an under the radar screen bill, but many insiders think this bill alone would result in hundreds of millions of dollars in ‘overearnings’ being returned to ratepayers.”

It isn’t that the utilities have exceeded what they’re entitled to earn, Habeeb said, but rather that they are using the retirement of an expensive asset all in one year to offset earnings, which means they don’t have to make refunds to customers.

Not all of Appalachian’s rate request is connected to the early retirements of coal plants, Hall said.

“The increase is primarily tied to recovering the cost of ongoing investments in the company’s generating plants and distribution network to increase and enhance reliability, and to respond to customer demands for cleaner energy resources,” her written statement read. “The company continuously makes such investments, but has not had an increase in its base rates since 2011.”

An SCC hearing examiner is scheduled to take public comments Sept. 14 and hear testimony for several days. Michael Thomas will then make a recommendation to the full commission, which must decide by Nov. 30 on a rate increase that would take effect early next year.

In a motion filed last month, the Virginia Poverty Law Center asked Thomas to rule before the hearing on whether the 2020 law will apply to Appalachian’s rate request.

“Simply put, the case participants — and the public — have a right to know what kind of case this is,” the motion stated.

A matter of timing

News that Appalachian’s residential customers could face an increase of about $10 a month for every 1,000 kilowatts of electricity they use came at perhaps the worst possible time.

A press release from the utility was issued March 31, when it was becoming clear that the outbreak of the novel coronavirus was both a public health and financial crisis.

“Submitting a rate case during a pandemic is certainly not ideal, but we weren’t at liberty to change the date,” Appalachian spokeswoman Hall wrote in a statement last week.

The Grid Transformation and Security Act, passed three years before the word coronavirus became part of the country’s daily vernacular, required Appalachian to make the filing when it did.

But “nobody was holding a gun to the utility’s head, saying you must ask for more money,” said Dana Wiggins, director of the Center for Community Outreach at the poverty law center.

Appalachian is doing all it can to help customers during this difficult time, Hall said. It stopped disconnecting accounts for nonpayment on March 13 — several days before the SCC ordered most utilities to take that action — and has encouraged customers to make flexible payment arrangements while they regain their financial footing.

The utility is also proposing, as part of its request to the SCC, a new rate discount that will be available December through February of every year, Hall said.

Under the plan, customers with higher winter usage, such as those with electric heat, may see little or no increase, or even a decrease in their annual bills, she said. About 66% of the utility’s low-income customers heat with electricity.

But even more people may be defined as low-income before the virus’s financial damage wanes. “To some extent, yes, the pool of people we advocate for has increased,” Wiggins said.

“We’re all in a new normal, and the ground is shifting beneath us,” she said. If others can adjust to those changes, she asked, why can’t Appalachian?