As Dominion’s rate review gears up, a broader fight about regulatory balance resurges
April 9, 2021
As regulators prepare for the first review of Dominion Energy’s earnings in six years, the state’s largest electric utility is pushing back against the idea that Virginia’s regulatory framework is tilted in favor of the utility to the detriment of captive ratepayers.
“I have never seen such a robust level of consumer protection in a multi-year rate plan,” wrote John Reed, a consultant with Concentric Energy Advisors and former chief economist for Southern California Gas, in testimony for the utility.
A regulatory system, he contended elsewhere, “must be implemented in a way that is not, in appearance or reality, skewed toward the perceived interests of either customers or the utility and its shareholders. The Virginia construct has, intrinsically and by design, robust customer protections, more so than in traditional cost of service regulation jurisdictions, and even more so than in many more progressive jurisdictions.”
Consumer advocates, though, say years of legislative interference with regulatory oversight have produced big windfalls for utilities and their shareholders and stacked the deck against the company’s 2.5 million Virginia customers.
“We believe current law governing the rates and earnings of both Dominion and APCo are tilted unfairly in favor of the utility companies at the expense of consumers,” said Charlotte Gomer, a spokesperson for Attorney General Mark Herring’s office. “We anticipate this will be illustrated over the course of Dominion’s triennial review proceedings.”
Will Reisinger, an energy attorney who has argued numerous cases involving Dominion before the Virginia State Corporation Commission, said “there’s no question that the playing field is slanted in favor of the energy monopolies.”
“This regulatory structure has allowed them to overearn by hundreds of millions of dollars year after year, and during that time regulators have not had the power to reduce those excessive rates,” he said. “So in my opinion that’s certainly not a robust level of consumer protection.”
The rate case comes amid an increasingly contentious climate for Virginia’s two major electric utilities, Dominion and Appalachian Power Company. While Dominion has emphasized its low rates — which it says are more than 8 percent below the national average according to the U.S. Energy Information Administration data — opponents have pointed instead to Virginians’ actual electric bills, which EIA also says are the sixth-highest in the nation.
As regulators weight rate hike for Appalachian Power, years of legislative intervention have complicated the task
Since Democrats took control of both chambers of the legislature in 2020, criticism of the state’s relationship with its monopoly electric utilities, which are regulated differently in Virginia than other utilities, has heightened.
Catalyzed by the emergence of Clean Virginia, an advocacy group and PAC created by Charlottesville millionaire Michael Bills explicitly to counter Dominion’s influence in the Capitol, an emerging progressive faction of Democrats in the House of Delegates has taken aim at the utility’s traditionally cozy relationship with lawmakers. In both the 2020 and 2021 sessions the group pushed for reforms largely centered on transferring more regulatory authority over Dominion and Appalachian to the State Corporation Commission but efforts foundered in the Senate.
These forces are set to collide this year in Dominion’s first triennial review, an extensive audit of the utility’s earnings, profits and rates between 2017 and 2020 that will be litigated before the SCC.
Six years in the making
While the electric utilities once underwent such reviews every two years, Dominion hasn’t come under the microscope since 2015, thanks to a base rate freeze passed by the General Assembly that year. The utility-backed freeze, which was later upheld by the Supreme Court of Virginia, was justified as a necessary way to promote stability in the face of the uncertainties then-President Barack Obama’s Clean Power Plan was expected to produce.
The Clean Power Plan was never implemented, but the freeze remained in place until 2018, when the General Assembly restored reviews — now slated to occur every three years instead of two — under the Grid Transformation and Security Act. To cover the “lost years” of 2015 and 2016, Dominion agreed to refund $200 million to customers.
While allowing reviews to resume, the same legislation also put limits on Dominion’s first triennial review. Base rates are prohibited from being increased, and customer refunds cannot exceed $50 million.
Annual reports by the State Corporation Commission in the intervening time have tracked a growing pot of excess earnings by the utility. The most recent August 2020 report calculated more than $502 million in overearnings between 2017 and 2019 alone. In a January 2020 letter to legislators, SCC Director of Utility Accounting and Finance Kimberly Pate estimated that since 1994 the utility had overearned by roughly $3.4 billion, of which only $1.3 billion had been returned to customers as refunds or credits.
Big costs, big revenues
Dominion, however, has consistently disputed those figures and this year is attaching a dramatically lower number to its excess profits: $37 million, of which customers would be entitled to be compensated for approximately $26 million.
Much of that final calculation is due to the subtraction from revenues of costs associated with the early retirement of fossil fuel plants that had become uneconomic in what Dominion Energy Virginia President Edward Baine described as “an emerging carbon-reduced world.”
At $688 million, the early retirement costs for the 15 fossil fuel units are the largest chunk of expenses Dominion is seeking to recover during the triennial period. Other costs it wants to count against the period’s revenues are $100 million associated with the phaseout of automated meters, which the company is replacing with “smart” meters, $8 million related to coal ash cleanup, $47 million related to severe weather and $206 million in bill forgiveness for customers due to the COVID-19 pandemic.
Together, the costs reduce the utility’s earnings pool by more than $1 billion.
Many are likely to be hotly contested during review proceedings. Dominion has argued that it is “in the best interests of customers” to expense all of the costs during the triennial period.
“The alternative of spreading the costs out into the future requires the customers to bear the expense of recovering those costs, along with any associated prudently incurred financing costs, in those future periods, even though there were prior revenues provided by them sufficient to recover the costs,” wrote Dominion Director of Regulatory Accounting John Ingram in testimony.
One reform measure that squeaked through the General Assembly in 2020, however, may play a large role in that debate. House Bill 528 restored the SCC’s authority to determine the period of time over which early retirement costs should be recovered instead of leaving the decision solely in the utility’s hands. The legislation, which sparked disagreement during Appalachian Power’s triennial review, opens the door for debate over whether those costs are best recovered during the current period or spread out over a longer one.
Refunds and reinvestments
Whatever the SCC determines the utility’s excess earnings to have been, they are unlikely to be returned to customers as refunds.
In its triennial review application, Dominion has said that in lieu of refunds, it intends to reinvest the overearnings under a provision of the 2018 Grid Transformation and Security Act.
That law established a mechanism called the customer credit reinvestment offset, or CCRO, which allows the utility to use such earnings to offset future costs for new wind and solar generation or distribution grid transformation projects.
The CCRO approach is “an even more favorable alternative (to refunds) over the long term to the extent it avoids future financing costs for qualifying investments, which otherwise could extend out for several decades,” wrote Baine in testimony.
Dominion is asking to put the $26 million it would otherwise return to customers toward the costs of the Coastal Virginia Offshore Wind pilot, a two-turbine experimental wind installation 27 miles off the coast of Virginia Beach. But should regulators determine its excess earnings are greater, the utility has announced it has identified $309 million in investments as eligible to be designated as CCROs.
Will Cleveland, an attorney with the Southern Environmental Law Center who has advocated for regulatory reform and participated in numerous cases involving Dominion before the SCC, called the banked offsets “a $309 million insurance policy against a rate cut.”
What Wall Street wants
In its final major ask, Dominion is requesting that the SCC approve a major bump in its return on equity for investors, from its current rate of 9.2 percent to 10.8 percent.
Dominion says the increase is necessary due to not only increased market volatility related to the COVID-19 pandemic but also the sweeping investments the utility expects to make to transition from a fossil fuel-fired grid to one reliant on renewables, in line with the 2020 Virginia Clean Economy Act. That legislation requires Dominion to become 100 percent carbon free by 2045, and the company says to meet its mandates it will need to make more than $28 billion in capital investments over the next five years.
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“This is not a ‘typical’ rate proceeding,” argued James Coyne, another consultant with Concentric Energy Advisors, in testimony supporting the increase. “Given the magnitude of the required investments and the important public policy goals at hand, the stakes are higher for the company, customers and the commission.”
Among the evidence the company has marshaled are a downgrade in investors’ perception of regulatory support for Dominion in the wake of the SCC setting the return on equity at 9.2 percent and a March 2021 report by investment service Moody’s warning that the “emergence of political or regulatory contentiousness in Virginia” could lead to a future decline in Dominion’s credit rating.
Cleveland characterized the requested 10.8 percent return as unnecessary and burdensome for customers.
“I have seen nothing to suggest that a vertically integrated regulated monopoly utility needs a 10.8 percent rate of return to attract capital and conduct its operations effectively,” he said. And, he added, “the higher the rate of return, the more customers have to pay.”
Further raising the stakes of the return on equity decision is the fact that whatever rate the SCC grants Dominion in the current triennial review will also apply to the company’s riders going forward. In a February earnings call, former executive chairman Tom Farrell, who died last week, said the company intends to recover the costs of much of its renewables buildout through riders.
“We expect highly disproportionate rider investment spending across our segment,” he said.
Reisinger pointed to riders in particular as an attraction for investors.
“Wall Street analysts are certainly aware of the monopoly-friendly regulatory environment we have in Virginia,” he said.
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