Federal and state agencies, Walmart and a group advocating on behalf of low-income Virginians have emerged as unlikely bedfellows in an effort to push back against a proposal by Dominion Energy Virginia to increase the profits that its shareholders can reap.
The U.S. Navy, testifying on behalf of the federal executive agencies, called the proposal “excessive and unwarranted.” The Virginia Office of the Attorney General’s Division of Consumer Counsel declared that it was based on “highly unrealistic assumptions.” The Virginia Poverty Law Center described it as “unjustified and unreasonable.” And Walmart, while taking a less strident stance, called it “counter to broader electric industry trends.”
The proposal in question was put forward by Dominion this spring, when the investor-owned utility asked the State Corporation Commission to increase its allowable return on equity from 9.2 percent to 10.75 percent.
Return on equity, in its most basic sense, is the profit that shareholders receive for investing in a company. The higher the rate of the return, the more that shareholders are paid.
In the private market, these rates fluctuate freely depending on how a business is doing. For monopoly electric utilities, however, returns on equity are capped in recognition of the fact that customers — ratepayers — are “captive”: they generally cannot choose to get their electricity from another source if they are dissatisfied with their supplier.
For Virginians, the State Corporation Commission is in charge of setting that cap for electric utilities. In November 2017, the commission approved a return on equity of 9.2 percent for projects paid for through rate adjustment clauses, or riders, which are used to help recoup the costs of activities such as the construction of new power plants or specific environmental cleanup efforts.
Now, however, the utility says that this rate should be increased because of changes in the market and its plans to spend $11 billion in capital expenditures between 2019 and 2021. According to a March presentation by Dominion to Wall Street investors, that number is expected to increase to $17 billion by 2023, including investments of $1.2 billion in license extensions for its Surry nuclear plant, $1.1 billion in offshore wind development projects and $800 million on the undergrounding of distribution lines.
The immediate planned $11 billion capital spending is “above average,” company witness Robert Hevert wrote in his testimony to the commission, “and will place additional pressure on [Dominion’s] cash flows, making regulatory support more important in terms of [the company’s] ability to finance these expenditures and earn a reasonable return on its planned investments.”
According to Dominion, the 10.75 percent rate it is requesting “reasonably represents the return required to invest in a company with a risk profile comparable to” its own.
But four of the five other participants in the case either outright dispute or cast doubt on that argument. (The fifth participant, the Virginia Committee for Fair Utility Rates, has not filed any testimony on the issue.)
“The requested ROE is excessive and unwarranted given the current financial market conditions, and simply does not comport with the current economic reality facing investor-owned utilities,” wrote Kevin W. O’Donnell, testifying on behalf of the U.S. Navy and federal executive agencies.
Testifying for the Office of the Attorney General’s Division of Consumer Counsel, J. Randall Woolridge expressed bemusement at Dominion’s ask, writing, “It is very difficult to see exactly how [Hevert] gets to his 10.75 percent ROE recommendation.”
Much of the testimony filed in response to Dominion’s application disputes the methodology used by Hevert to arrive at the 10.75 percent figure. O’Donnell’s testimony notably devotes 11 pages to arguing that over the years, Hevert has repeatedly changed the methodologies he uses to calculate returns on equity in order to arrive at higher figures for his clients.
“When it comes to the models Mr. Hevert uses to power his own arguments, his only consistency is inconsistency,” O’Donnell wrote.
Virginia Poverty Law Center witness Karl Rabago contended that if the commission accepted the 10.75 percent rate, it “would cause serious economic and social harm” to ratepayers.
“For the many Virginia customers living with excessively high household energy burdens, the increased bills resulting from unreasonably inflated ROE levels can mean the difference between energy to meet basic needs and unaffordability and electric rationing,” Rabago wrote.
In response to a question from the Virginia Poverty Law Center, Dominion stated that it had not calculated the impact that the increased return on equity would have on residential rates.
The State Corporation Commission this June estimated that Dominion residential customers could see their monthly bills increase by an average of $29.37 by Dec. 31, 2023.
All of the recommendations for a revised return on equity rate put forward by participants were considerably lower than Dominion’s figure. The Virginia Poverty Law suggested a 9.32 percent rate and the U.S. Navy 9.36 percent, while the Office of the Attorney General said that it should be no higher than 9.38 percent.
“For at least the last decade, returns on common equity have been … more than necessary to meet investors’ required returns,” Woolridge wrote. “This also means that customers have been paying more than necessary to support an appropriate profit level for regulated utilities.”
Last August, the State Corporation Commission reported that Dominion had overearned by about $365 million on its base electric rates, which make up the biggest portion of customers’ bills. Those actual returns amounted to a rate of return of 13.84 percent, far above the authorized 9.2 percent rate.
At the same time, the commission reported that average residential bills rose from $90.59 in 2007 to $115 in 2018, with the largest part of the increase due to riders.
Dominion will have a chance to file rebuttals to participants’ testimonies, and the case will be heard by the State Corporation Commission Sept. 10.