Is Dominion Generating Millions in Excess Profits? It Depends on Who’s Doing the Accounting.

The SCC says Dominion generated up to $395 million in excess revenue in 2016 under the electric rate freeze. Dominion says the SCC is inflating the numbers.

Depending on how you crunch the numbers, Dominion Energy Virginia (DEV) is earning between $221 million and $252 million in excess profits. Had the company not expensed nearly $174 million in coal ash clean-up costs, excess earnings would have amounted to $395 million. That’s the analysis of the State Corporation Commission in a report released last week.

The report supports the narrative that Dominion and its counterpart in western Virginia, Appalachian Power Co., negotiated a lopsided deal for themselves when they pushed for a base-rate freeze in 2015. Invoking the uncertainty created by the Obama administration’s Clean Power Plan, which would have compelled a major re-engineering of the electric power industry, power companies persuaded the General Assembly that a rate freeze would provide stability for the companies and their customers.

Now that the Clean Power Plan appears to be a dead letter under the Trump administration, critics argue, it’s time to roll back the freeze. Sen. J. Chapman Petersen, D-Fairfax, who had sought in the 2017 General Assembly session to overturn the freeze, said the SCC report confirms his claims. “It simply proves what we suspected all along,” he told the Richmond Times-Dispatch. “Everything I filed last year that was even mildly controversial will be coming back.”

I wanted perspective on the SCC numbers, so I reached out to Dominion as well as Edward L. Petrini at Christian Barton LLP, who represents large industrial and commercial electricity customers in Virginia, and to Michael Kelly, director of communications for the Virginia Attorney General’s Office. Only Dominion responded to my interview request.

I spoke with Thomas P. Wohlfarth, senior vice president of regulatory affairs. Not surprisingly, he says there is a lot less to the SCC excess-earnings numbers than meets the eye.

Accounting for coal ash expenditures. It is “ridiculous,” Wohlfarth says, to remove expenses tied to coal ash removal from the excess-earnings estimates. Dominion incurred a large liability when the Environmental Protection Agency ordered it to develop a permanent storage solution for millions of tons of coal combustion revenue accumulated over the decades. While about half the coal ash expenses qualify for recovery under a “rider” request not included in the base rate, about half of it does, he says.

“There are no circumstances under which it would be appropriate other than to record those expenses when the liability occurred,” Wohlfarth says. Referring to the SCC presentation of the excess-earnings data, he adds, “That’s the game they kind of play, trying to inflate the numbers worse than they are.”

Accounting for Return on Equity. Other accounting issues are more complicated to explain. First some background…. The key determinant in how much money electric utilities are allowed to earn before returning the surplus to ratepayers is Return on Equity (ROE), a ratio expressing earnings as a percentage of shareholder equity. The goal is to set the ROE at a level high enough to encourage power companies to invest in their utility operations — but no higher. Dominion Energy, DEV’s parent company, typically earns a corporation-wide ROE of about 14% to 15%. That includes the return on non-regulated business operations. Because regulated utilities are perceived as less risky, the SCC sets DEV’s ROE significantly lower.

The SCC calculates separate ROEs for Dominion’s generation business and its distribution business, which have different risk profiles. Here are the results based on SCC accounting:

“The combined generation and distribution earned ROE of 11.94% is above the 9.60% ROE approved by the Commission for DEV’s RACs (Rate Adjustment Clauses) during 2016 by 2.34 percentage points, or $358.2 million in revenues,” states the SCC report, “and is above the 10.0% ROE approved by the Commission in DEV’s last biennial review by 1.94 percentage points, or $297 million in revenues.”

Wohlfarth says that the SCC inflated the appearance of excess earnings by using the 9.6% ROE as the basis for its calculations. The SCC allows the company to earn a 10.7% ROE for the base rate, which applies to ongoing operations and are subject to the freeze. Why would the SCC pick the high ROE used for rate adjustment clauses rather than the low ROE used for the base rate when the freeze applies to the base rate?

An exceptional year. Another thing to consider, says Wohlfarth, is that “2016 was an anomalously good year for us.” Dominion benefited from a spike in revenue relating to the way PJM Interconnection, the regional transmission organization of which Virginia is a part, calculated its “capacity” payments. (PJM pays power companies separately for making generating capacity available, whether it is used or not, and for the electricity they actually generated.) That non-recurring revenue added $150 million in revenue.

“If you normalize for capacity revenue, we were down around 11% ROE, which doesn’t give us much of a buffer at all,” says Wohlfarth.

That leaves Dominion somewhat ahead of the game in 2016, concedes Wohlfarth, but that’s only one year. The company is still exposed to considerable downside risk in future years.

Future risks. Coal ash remains a potential liability. While Dominion has endeavored to pursue a “cap in place” strategy, environmental groups have pushed hard for Dominion to remove the coal ash and place it in synthetically lined landfills, which could be significantly more expensive. Dominion is expected to issue a report on the economics of coal ash disposal to the General Assembly later this fall.

Also, Dominion remains at risk for major weather events. In 2016, the company experienced only one hurricane remnant, but it was not an expensive one. A superstorm like Hurricane Harvey or Hurricane Irma could incur hundreds of millions of dollars in repair costs.

Yet another risk Dominion faces is plant “impairment.” The company still operates a handful of coal-burning power plants, but in an era of increased electric generation by wind, solar and gas, they are increasingly relegated to the sidelines. When natural gas is cheap and gas plants are more economical to run, coal plants are dispatched less frequently, which means they produce less revenue.

“We’ve got units that are not being dispatched very much at all,” says Wohlfarth. “It becomes difficult to keep them on the books at value. We’re not at that point right now. But it’s something we’re always reviewing.”

Impairment resulting from changing economic or regulatory conditions could result in write-downs of hundreds of millions of dollars, he says. That was one of the concerns about the Clean Power Plan, which, if implemented would have put some of Dominion’s remaining coal-generating assets in jeopardy. While the Clean Power Plan is on the back burner under the Trump administration, it is not dead. The initiative is tied up in the courts. Meanwhile, the McAuliffe administration is pursuing its own restrictions on carbon-dioxide emissions.

All things considered, says Wohlfarth, and Dominion’s ROE is about where it ought to be. Revenues might be a little high in 2016, but they could well be lower in the years ahead. “It’s part of the balanced equation. … Look under the hood, and you’ll see that our rates are adequate to deal with the risks we take.”

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16 responses to “Is Dominion Generating Millions in Excess Profits? It Depends on Who’s Doing the Accounting.

  1. A few obvious points:

    You called the AG’s office, Christian Barton and Dominion and only Dominion responded. Big surprise there.

    Dominion insists that it had to freeze everything because of the proposed Clean Power Plan which hadn’t taken effect yet and whose goals Virginia had already pretty much met. Dominion had already planned on closing its badly antiquated plants anyway. Pull my other leg, Bacon, it squirts whisky not rate refunds..

    Things would have been so much better if they hadn’t had to pay FOR THOSE DANG COAL ASH PITS. Why didn’t they plan for them before?

    I guess the old teletype went chattering away in the middle of the night again.

  2. I accept the SCC’s accounting, mainly because it is based on Dominion’s own reported information. I also now have more than ten years of personal observation and involvement in this issue to back that up. I was part of the group that wrote the 2007 statute, and I’ve looked at every bill that has piece by piece dismantled that compromise legislation over the intervening decade.

    There is absolutely no question in my mind that absent the 2015 legislation, a 2017 rate review would have concluded that Dominion’s rates were producing profits above its authorized ROE. That would have allowed the SCC to actually lower their base rates. In 2007 that was the goal for consumers – an honest assessment of the base rates. Ten years later by various methods the base rates have been protected from that review. The real headline in the SCC report is that base rates might be lower in the range of $400 million per year. That, as they say, is real money.

    Telling this story would take a book as long as Ms. Thomson’s but it would be a very interesting read.

  3. geeze…. has anyone else noticed the standard for Dominion “profits” seems pretty laissez faire compared to the standard for tuition costs?

    Lordy.

    UVA and Company is accused of hiding it’s financials and accumulating slush funds and Dominion.. poor old Dominion… they’re just trying to make a buck here and there and the SCC is telling lies about their financials!

    I’ve got an idea.. UVA should try to hire the “spokesman” for Dominion.. why I bet after a few “explanations” .. we’ll be passing a tin cup around for the poor old Higher Ed folks!

    😉

  4. This reads like the testimony Dominion gives at regulatory hearings in its attempt to keep as much money as possible. It then, and sometimes prior to regulatory hearings, spins things for legislators to get what it wants.

    I , too, was part of the process of rewriting the legislation in 2007. The standard for returning over earnings to customers had been return it all to customers but the legislation “compromised” to give customers part of it and “incentivize” the company to manage well by also allowing it a share of the excess. It also changed the rules so overearning is only returned if it happens two reviews in a row instead of with every review.

    Even without understanding every detail of this complex description of the situation, folks should realize that Dominion controls what happens and is skilled at spinning the story so they get as much as possible. Remember, there is always another way of looking at things. This is an example of one very carefully calculated and delivered perspective.

  5. Jim- I thought you might cover the pause in the NA3 project, mentioned yesterday in the news ” Dominion Energy has paused the development of a nuclear reactor in Virginia, as plans for other nuclear projects in the country have been scrapped. (Southeast Energy News)” by Jim Pierobon.

    “Virginia ranks third among all states for the amount of electricity it imports from other states, according to Rod Adams, a retired nuclear engineer and blogger in Lynchburg, Virginia. Much of that capacity comes from coal plants in the Midwest, many of which are slated to shut down over the next decade.”

    “All of this comes despite the Southeast– dominated by investor-owned utilities that enjoy monopoly access to ratepayers – having long been considered the only region in the U.S. hospitable to building new reactors.”

    We are susceptible to nukes and over-charges due to the monopoly structure means that Dominion is guaranteed a wonderful profit no matter what they do, and our elected officials guaranteed wonderful donations as long as they support what Dominion wants. But I’ll say I am not quite as upset about it as I used to be when it was coal plants getting shoved down our throats all the time for no good reason.

  6. instead of burying the coal ash– why aren’t they selling it to some of those companies that are importing coal ash from other countries to use in the products they are already producing and selling– even in the state of Virginia
    won’t that reduce the cost to virginia power– that could be passed down to the consumer?– or is that out of the question– mustn’t rock the established boat?

    • Dominion is selling a considerable volume of coal ash, although it appears not to be supplying as much as the market demands.

      Bear in mind that coal ash is not an undifferentiated product. Different sources of coal ash have different chemical compositions and characteristics that might be suitable for some uses and not others. Sometimes, an extra processing step can make it suitable for certain markets, sometimes not. Dominion is paying an outside consultant to take a closer look. We should know soon if it’s possible for Dominion to recycle more ash than it has been doing.

    • I’ve covered this in the past, but certain dry fly ash has cement value. But what we have in the ponds is a waste product blend of wastes slurried with very little cement value. Having said that, cement is one of those products which just about anything can and probably is blended in, but that does not mean it is an environmentally sound idea to do so.

  7. I don’t have the long-term history with rate reviews that the rest of you have, but I have attended recent IRP hearings. Dominion’s testimony was that any new power plants would be handled through RACs not adjustments to base rates. So any costs associated with the CPP would be recovered when and if they were incurred. There never was any need to store up a pile of excess earnings in order to respond to the CPP.

    Dominion has experienced several years of anomalous good fortune, not just 2016. Falling gas prices in 2015 and 2016 reduced the price of generation and purchased power well below the prices that are likely built into the base rate. Dominion has been allowed to keep this windfall rather than return all or most of it as is common with utilities in other states.

    Rather then being an “impairment” this has made the old coal plants a profit center as well. They did not have to run much because prices were cheaper for other units because of cheap natural gas. Yet they were still in the rate base earning a full return even though they contributed little value to ratepayers.

    I have been advocating a new scheme that allows our utilities to earn more when they serve customers better, so they don’t have to build unnecessary projects to increase revenues. But there is no give and take in the current process for Dominion. It is a “heads I win, tails you lose” scenario for the utility.

    The normal SCC review process allows for an examination of the actual return versus the allowed return. Appropriate adjustments are made through refunds or rate adjustments if the the actual results are over or under the established targets. The GA should let the SCC do its job.

    Families and businesses in Virginia are paying hundreds of millions more per year to Dominion and receiving no benefit in return. The $300 million already charged to the ratepayers for North Anna will not return any value. And ratepayers are about to be asked to pay $2 billion extra for the ACP over the next 20 years compared to what they would pay for the same service from existing pipelines.

    I believe that companies should prosper when they serve their customers well, not just because they are skilled at pulling levers at the GA.

    Our lawmakers are also responsible for this multi-million dollar drain on Virginia’s economy. Let’s create win-win opportunities, instead of a one way flow to a single company.

    • Tom, I agree with much of what you write here but as for this part, you are mistaken:

      “Dominion has experienced several years of anomalous good fortune, not just 2016. Falling gas prices in 2015 and 2016 reduced the price of generation and purchased power well below the prices that are likely built into the base rate. Dominion has been allowed to keep this windfall rather than return all or most of it as is common with utilities in other states.”

      One part of the needlessly opaque ratemaking scheme in Virginia that is not “frozen” is the fuel factor, and savings realized from lower gas and purchased power costs ARE being flowed back to customers. This ameliorates a good part of the several annual increases in the various generation plant “rider” cases.

      • Rowinguy1,

        I should have been more specific in what I said. You are right about how the Fuel Factor works. What I was talking about is how the low cost of natural gas reduced the wholesale price of energy purchased through PJM. For the past several years, this price was considerably lower than what is probably baked into the base rates. Normally, this good fortune or unexpected extra costs are accounted for and balanced with regular rate reviews. This has not occurred recently in Virginia. During a time of mostly good news for utilities, the benefit has gone to the shareholders and not returned to the ratepayers as is usually the case with utility regulation.

  8. Oh please. Fuel goes up, fuel goes down. When fuel is stable or dropping, utilities want you to focus on the annual cost and ignore the cost of the the three individual elements of the monthly bill: the fuel, the base rates and now this army of rate adjustment clauses (RACs). Only if all three elements are properly priced does the consumer get treated correctly. The fluctuations of the fuel factor have zero relationship to the excessive base rates which the SCC has routinely pointed to (this latest report is just the first of several – but the number is starting to get really, really big.)

    Now if the utilities want to go back to the old Chapter 10 method of computing cost of service, and roll all of those RACS into one combined rate structure – that is worth discussing. Because that is how we’ve gotten to this point over the past ten years – each RAC created is something that in the old days would have been paid for with base rates, but as the new RACs replace those costs, the base rates are not adjusted downward accordingly to reflect the change. It wouldn’t matter if the base rates had been properly adjusted in 2009 as they should have been, but……didn’t happen.

  9. This whole matter makes me laugh. Let’s see … Dominion spent years piling up coal ash full of heavy metals in open pits by rivers because … nobody told them not to do that. After the inevitable ecological disaster elsewhere Dominion was told to clean up its coal ash and given an absolutely sweetheart deal involving dumping the ash into rivers. Now, of course, the costs of cleaning up this absolutely foreseeable mess need to be passed onto the ratepayers.

    Meanwhile, Dominion is a supposedly-regulated monopoly which is not only permitted to make campaign contributions but is the largest corporate contributor in Virginia. If that isn’t a conflict of interest then what is? It is especially a conflict in Virginia – one of only 4 states with no campaign contribution limits at the state level.

    Back at the ranch, the members of the Imperial Clown Show in Richmond took time out from stuffing Dominion’s money into their pockets to let Dominion overcharge because a perhaps, could’ve, might’ve problem was possibly on the horizon, maybe.

    Damn I wish I were an executive at Dominion. Guaranteed ROE, stuff money into the pockets of those who supposedly regulate me, overcharge the supposedly protected ratepayer with impunity and get paid like an executive at a real competitive market private sector company.

    The only good news in this graftathon is Chap Petersen continuing to actually represent the voter-taxpayer-ratepayers of Virginia. One can only hope that his newly established law firm does well and he can consider running for Attorney General or Governor in the not too distant future.

    As an aside, where was faux populist, faux liberal Terry “veto pen” McAuliffe when this monstrosity came across his desk?

    • Don, Point of accuracy: Dominion is not “dumping the ash into rivers.” Dominion is de-watering the coal ash, cleaning the water, and doing a controlled release of the water into rivers. After extensive negotiation with environmental groups and the DEQ, pretty much everyone has bought into the waste-water permits. This is the least controversial aspect of the controversy — although it sounds like you have absorbed the inaccurate sound bites of the leftist protest marchers.

      The issue now is what to do with the coal ash now that it has been de-watered. Dominion wants to cap in place. Environmentalists want to transport it to synthetically lined landfills away from rivers and streams. The debate now centers on the trade-offs between cost and safety of the two alternatives.

  10. If Dominion is setting aside cash to be able to handle future weather-related disasters, it should do so in a formal reserve fund. And since those funds were generated from service rates, Dominion should be required to remove that fund from its rate base. It should not be permitted to earn on the reserve fund.

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