Roll Back Rate Freeze, Says Haner

Steve Haner, a frequent contributor to this blog, says it is time for the General Assembly to un-do the freeze on base electric rates in Virginia.

A lobbyist representing the Southern Poverty Law Center, Haner lays out the case in a Richmond Times-Dispatch op-ed:  Return to the regulatory approach before the 2015 rate freeze, put the State Corporation Commission back in charge of reviewing rates and setting profit (return on equity), and order power companies to return excess profits on a timely basis to rate payers.

According to a 2017 SCC staff review of Dominion Energy Virginia’s books, the utility would have had to return between $133 million and $177 million to rate payers, Haner says. On top of that, the public likely would be paying lower bills today. Dominion disputes the numbers, but argues that only a full evidentiary hearing before the SCC’s three judges would settle the issue.

Dominion acknowledges that its return on equity has been higher than normally allowed and that the time for ending the freeze has come. The utility proposes a measure — still vague at this point — that would plow back excess earnings into modernizing the electric grid in order to advance the goals of increased renewable energy and improved cyber-security.

Writes Haner:

The costs of modernizing the grid, of dealing with coal ash, of encouraging energy efficiency and meeting any new state air regulations are actually very strong reasons to return to the SCC-managed process.

Those are all future costs, irrelevant to whether Dominion earned excess profits in the past. The decisions over how to pay for those, over how many years, and with what profit margin for the company — all of those decisions can and should be made by the State Corporation Commission as well.

Bacon’s bottom line: General Assembly debate will take place against a political backdrop far more hostile to the power companies than in the past, as many new elected senators and delegates refused to take campaign contributions from Dominion and, indeed, have expressed hostility to the corporation.

Haner has traditionally represented electricity consumers, and his main focus has been on rates. We also can expect a push from environmentalists and progressives to set tighter standards for coal ash clean-up and to topple obstacles to rooftop and community solar generation, among other issues.

It remains to be seen whether Virginia’s other utilities, primarily Appalachian Power Co., and the state’s electric cooperatives, will present a unified front with Dominion. For utility watchers, 2018 will be an interesting legislative session.

Update: I have amended this post to clarify a statement that read, “Dominion acknowledges that its rates have been high.” What I meant to convey is that Dominion has repeatedly acknowledged that the base rate freeze allowed it to generate profits above its allowed Return on Equity over the past two years (although always in the context that it was still at risk of reversing those gains should a hurricane or other major weather event strike). Spokesman Rayhan Daudani reminds me that Dominion’s typical bill is 14.9% below the national average. I have posted his full response in the comments.

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19 responses to “Roll Back Rate Freeze, Says Haner

  1. I’d quibble with the”hostile” viewpoint. I don’t think they’re “hostile” toward Dominion as a utility. They’re “hostile” to the money and the fact that Dominion has far more than it’s legitimate share of the process…

    they don’t want to hurt Dominion as a corporation nor even it’s shareholders. It’s in everyone’s interest that Dominion remain a fiscally strong utility and does have the wherewithal to evolve, adapt and modernize – to the benefit of it’s ratepayers and really all Virginians no matter what utility they get their electricity from since all of them are in the same boat as Dominion and Dominion does directly affect them.

    People are actually un-hostile to the idea of a more modern grid that more readily accommodates renewables, continues to lower pollution levels and does the right thing on coal ash cleanup.

    Dominion also needs to show that there is more than one way to cross the James.. than their current our-way-or -the highway belligerent turns people against them that otherwise would support them.

    Between that and the pipeline it’s almost like some sort of a “_issing” contest when there are things that can be done – in both cases to win over more and calm down opposition.

  2. Two major actions need to take place:

    1. Get back to a fully SCC regulated rate structure.
    2. Move towards a modern regulatory scheme that allows utilities to prosper without always having to build something new and that opens up the energy system to innovation and energy efficiency coming from many different sources, in addition to utilities.

    Regarding the first point. Many different states have effective regulatory oversight over utility activities in a way that results in reasonable rates and a a reasonable return to shareholders. I suspect Virginia once had a system that worked in this way, before it became distorted by political interference. Bills from the GA such as the rate freeze and saying that a pumped storage plant in the coal region “serves the public interest” do not protect the public interest. The GA does not have the same objective fact finding process available to it as does the SCC. The GA should make sure we have laws that protect the SCC from undue outside influence, but that all opinions should have a chance to be expressed to the SCC in ways that are open to scrutiny. The utility’s point of view should not be accepted without evaluation, nor should the opinion of any special interest group.

    A new law that ends the rate freeze should require that the profit based on the established rate of return that should have accrued to Dominion during the freeze should be kept by the company. The $300 million for NA3 should be reviewed by the SCC to determine if it all should be paid by ratepayers or shared with stockholders. Any surplus should either be returned to ratepayers or held in escrow to be spent for grid development or ash disposal.

    Modernizing the grid is a typical ongoing project that is more necessary now because fundamental shifts in grid design have been postponed. The SCC can determine if adjustments in base rates are required for this or if a RAC is more suitable. It’s possible that Dominion’s expected annual expenditures for this could be covered by the present base rates. The surplus in escrow should be used first before any rate adjustments are required.

    The coal ash disposal is a bit more complicated. Dominion should not be able to claim that all costs should be borne by the ratepayers without some evaluation. Back in the late 70s and early 80s, the best practice for coal ash disposal (at least in the northeast) was for “bottom” ash to be disposed of in lined waste disposal ponds that were capped when full. Dominion claims that this was not required in Virginia, but given Dominion’s significant influence over the regulatory process in Virginia, this might not exempt Dominion from having had a role in avoiding the proper handling of the coal ash all these years. A thorough investigation (not a witch hunt) would reveal whether Dominion shareholders should bear some of the expenses because of actions taken by Dominion executives.

    Regarding the second point, our utilities will remain as central players in a modern energy system, just not the only ones. We need a new way of paying them that allows them to support, or at least be neutral to, the type of changes the must take place to develop a 21st century energy system (it’s more than just grid improvement). This requires a shift in viewpoint on the part of our utilities which is not easy for tradition-bound companies that have experienced much slower rates of change compared to unregulated businesses.

    The pipeline is a separate issue, since its cost is borne through the Fuel Factor and not directly in rates. I would still encourage the SCC to rule on whether the high cost of the ACP will be fully passed on to customers or not. Either ratepayers or investors will suffer a huge economic cost if the ACP is built. That is something that should be determined before billions are invested and land and water affected for generations.

  3. I am inclined to agree with Steve.

  4. Tom is correct, the GA should take its rate handcuffs off the SCC entirely while placing energy efficiency and grid purchases and customer demand-side management (including self-generation) on an equal footing with new utility generation. That isn’t inconsistent with what Steve says, it just goes further.

    When it comes to specific costs like coal ash disposal, just remember that imposing those costs on the utility is a form of taxation, but one that falls only on that utility’s customers. Yet the utility did nothing wrong when it burned that coal; on the contrary, it was best practice at the time to do just what it did do: generate with coal, and store the ash in unlined ponds. This is a change in State policy, not the correction of the utility’s past abuse of discretion. The cost of that change ought to fall on all taxpayers and be kept out of utility rates.

    • It was a pleasure to read your last exchange with Rowinguy1 on Solar Projects Progress in Orange, Campbell. More enlightened education.

      It’s also a pleasure to read your 1.23 am comment above. On more than a few occasions, I have felt that Dominion was not fairly characterized on the blog. Most particularly the lack of appreciation and recognition of the company’s obvious competence over the years in the performance of its mission overall, given the critical nature and complexity of its public service, and the controversy that comes inevitably with the performance of its tasks. Dominion’s obvious competence in its roll in the public arena is an increasingly rare commodity today generally. This important fact should not so easily be taken for granted, and deserves respect. Its been earned. That’s does not suggest that Dominion gets a free ride, pass, or special treatment.

  5. As noted, I was at the table for the 2007 negotiation (14 people, 14 days as I recall) and burning the utility was never our goal, nor has it been our goal in subsequent disputes. I do understand more clearly now that the incentives in place put undue pressure on utilities to make huge capital investments and provide little impetus to innovate or moderate demand. While I advocate a return to that 2007 model in the short term, I agree other options should be explored. But they must be explored openly with all the players present and telling the truth. The chaos of a 60-day session is not the venue. And there is no reason to let them hold onto all that cash while we work on something new.

    Reed, you are right, it is a great company and I know many fine people who work there. They provide excellent service and of course superior shareholder value. But their behavior in the public arena to protect that shareholder value better fits what Don Rippert has to say. I wish it were not true. Rippert has characterized that particular example of our political process 100 percent correctly. Absolute power has corrupted the process to a level that would make John D Rockefeller or JP Morgan smile with recognition. A regulated utility known to be earning excess profits and ripe for a base rate reduction promotes a bill based on a major falsehood that gives it seven years without regulation – the stuff of legends.

    I was recently reviewing some papers from 2014, the year Dominion pushed a bill to allow it to recover hundreds of millions from ratepayers for North Anna 3, and their claims how essential this advance and speculative payment – a complete abandonment of traditional rate regulation – was to building that plant. Well, four years later the plant is dead and our money is gone and their shareholders’ outstanding risk has been reduced. I suspected then, and I still suspect, that at the highest level of the company they knew at the time that NA3 was dead. But they told legislator after legislator, pay us now and we will build it later!

    Letting them collect that money up front had the additional benefit of changing the accounting for the 2015 rate review and reducing their requirement for making any refunds (not enough, it turned out, and there were still small refunds.) Hmm. Gee, they could give the excess dollars back to consumers, or they could use the money to reduce shareholder risk…guess which one they asked the GA to do?

  6. re: ” I suspect Virginia once had a system that worked in this way, before it became distorted by political interference.”

    Those who “interfered” believe or say they do that Dominion is a well run company that deserves to earn good profits and high dividends that attract investors. It’s twofer – the American Way and the Virginia Way!

  7. I don’t blame Dominion. They are doing just what I’d do if I were an executive at the company. These regulated monopolies have a pretty simple equation – the regulator protects the ratepayer from the shareholder. The problem comes when the regulator allows themselves to become corrupted. In Virginia the real regulator is the General Assembly. That regulator has succumbed to the temptation to be corrupted by Dominion.

    How hard is it to understand that allowing the state’s largest electrical utility to be the largest private political contributor in the state creates an issue?

    • Yes, exactly. A regulatory/legislative process that invites political interference is going to get it. Dominion would be remiss if it didn’t respond. Don’t blame Dominion for being a good player; fix the rules of the game.

  8. I am posting here a response to this blog post from Dominion spokesman Rayhan Daudani:

    I saw your write up of Steve Haner’s op-ed and wanted to correct the record on one minor point: “Dominion acknowledges that its rates have been high and that the time for ending the freeze has come.”

    I don’t think we’ve ever said our rates are high, largely because they aren’t. I’ve attached a graph showing our rates compared to the latest available averages. Here’s more detail.

    In fact, Dominion Energy Virginia’s typical monthly residential bill for 1,000 kWh of service (annualized) as of October 1 is $115.74. The DEV typical bill is:

    o 4.7 percent below the VA statewide average (as found by the SCC in its September 1, 2016 re-reg report).
    o 14.9 percent below the national average (as reported in the latest EEI book).
    o 15.1 percent below the DC regional average (based on October 2017 rates for DEV, July 2017 rates for BGE, Pepco (DC), Pepco (Mont. Co.) and Pepco (PG Co.) as reported in the latest EEI book
    o 21.8 percent below the East Coast average (based on reports in the latest EEI book)
    o 32.4 percent below the rates for Regional Greenhouse Gas Initiative (RGGI) states in the Mid-Atlantic and Northeast (based on reports in the latest EEI book)

    Since July 2008, Dominion Energy’s typical residential bill has risen by approximately 8 percent, well below inflation. Over the same period, the national average for the typical monthly residential bill (1,000 kWh of usage) has risen approximately 13.6 percent, a rate of increase significantly above ours.

    The news is even better on the industrial front. Since July 2008, Dominion Energy’s average industrial rate has actually decreased about 8 percent, dropping from 6.2 cents/kWh to 5.7 cents/kWh. Dominion Energy’s average industrial rate is now approximately 31 percent below the EEI-reported national average of 8.3 cents/kWh.

    I appreciate your continued coverage of the utility industry and wanted to share these particulars as rates will likely be covered in the future.

    • It would be helpful if the rates could be compared with states in a similar climate such as KY, TN, NC (maybe MD). I believe that we would be comparable or perhaps a bit higher.

      It is also a bit misleading to compare rates for just a 1000 kWh of of service. This masks the fact that Virginia has the 10th highest electric utility bills in the country. This is partly because we use a significant amount of electric heat pumps in Virginia, where colder climates rely more on gas and oil for heating. However, it does point out that although our rates are a bit lower than the national average (mostly because of an advantageous climate), our bills are pretty high. For example, even though rates are much higher in California, residential electricity bills are lower than in Virginia.

      This is because we are near the bottom in terms of energy efficiency in Virginia. We need to find ways of reducing the amount of electricity we consume, but do it in a way that keeps Dominion financially healthy.

    • Virginia is a cost of service state. That means the utility should collect its legitimate cost of service plus a profit margin/ROE that is set by the SCC and applied to its capital rate base. The cost of service in some other state is completely irrelevant to the issue at hand.

      I don’t have the data handy, but an interesting comparison is the price in the Dominion territory in VA compared to the Dominion territory in NC, where the utility commission retains its oversight authority. When last checked the rates in VA were significantly higher. Hmmm. Same company, same generation….always miss that point in their press releases. They pull the stats that work and ignore the ones that don’t.

  9. I appreciate Rowinguy’s explanation about the Virginia rate structure in the Orange solar article. I had assumed that before the freeze Virginia had a process that was similar to other states. For the utilities in the states where I worked, a rate base was established using a set rate of return. At each rate review, the regulator would review the actual performance against what the stated ROE would yield. Adjustments would be made, up or down, to keep profits and rates on target.

    Special circumstances such as severe storms, CWIP for nuclear plants, cost recovery for a canceled plant, etc. would be reviewed to determine how the costs should be shared among customers and shareholders. The main gripe I had was there was no incentive for innovation and cost control. If you did something that benefited the ratepayers , you would end up with the same profit than if you hadn’t done anything. You didn’t lose, but you didn’t gain either. If you tried something new and it didn’t work as well as you had hoped, usually the shareholders had to pay for it. Not a great incentive to improve.

    Two big differences exist today. 1) Demand and revenues are no longer increasing year after year. 2) Utilities are no longer running the show. Their unregulated utility holding companies are making the decisions. The holding company CEOs see that their sole duty is to increase shareholder value. Utility subsidiaries are one of the vehicles to achieve that end.

    If Rowinguy’s numbers represent what was in the 2007 deal, a rate of return of 12.7% before any excess profit is returned to ratepayers is exorbitant in a period of low single digit interest rates. No wonder Dominion’s CEO said to financial analysts that Virginia is a good place to be in the utility business.

    The North Carolina Utility Commission allows Duke’s utility subsidiaries (Progress and Carolinas) a rate of return of 10.2%. The SCC granted Dominion an ROE of 9.6% for the Greensville RAC.

    I support performance-based rates in appropriate circumstances, so that utilities can earn more when they provide extra value to their customers. I applaud innovation and skilled management that also includes the well-being of customers in the equation.

    That is what I am most disappointed about here in Virginia. Dominion Energy’s executives are skilled financial managers. We admire their ability to produce profits and maintain a high share price, but ignore that a significant reason for it is because of successful manipulation of the legislative process that has significantly added to those profits.

    The utility executives that I worked with felt that because they managed a regulated monopoly they were responsible to produce a fair outcome for both shareholders and ratepayers. Did they push harder for the shareholders? Yes, but that was because they knew the regulators were working equally hard to represent the ratepayers.

    I don’t get that same sense here. Dominion’s CEO has boasted that he can get Dominion’s investment in the ACP back in 3-4 years, not the typical 40 years. That is skilled financial management. But it ignores the fact that the project itself is good only for the holding company owners of the project. The utilities come out even, but the ratepayers and the state economy will pay dearly for something that gives them no benefit.

    I’m sure you all are tired of hearing me go on about this. But it is based on a false narrative. It is designed to extract billions from captive ratepayers to transfer to shareholders. I am all for companies doing well when they provide something of value in return.

    Unless we deal with this now, the table will tilt more and more in the favor of one company to the detriment of the rest of us. Instead, let’s create a way for Dominion to express its talents in a way that continues to benefit its shareholders – but that also benefits the rest of us. Virginia, could be a leader, at least in the Mid-Atlantic. North Carolina is far ahead of us with renewables and Maryland is further along in exploring a modern regulatory scheme. I don’t enjoy pointing out where I think Dominion has gotten off track. I would rather help design a structure where they can achieve their shareholder goals through serving their customers.

    We need to get on with this now. Not in a way that demonizes Dominion, but in a way that re-orients their mindset to finding ways to profit through benefiting customers.

  10. I don’t get tired of listening to TOm… or Rowinguy or Acbar.. or the responses

    some folks like myself have pretty thick skulls and actually need repeated discussion to finally start to really better understand.

    Listening here lately -it’s become obvious that the whole concept of how Dominion does business in Virginia as a monopoly is not for the faint of heart!

    I totally agree with Tom’s bottom line assessments : ” We need to get on with this now. Not in a way that demonizes Dominion, but in a way that re-orients their mindset to finding ways to profit through benefiting customers.”

    I’m not quite as all forgiving when Dominion did willingly make the decision to push a lot of money into the GA… it does not look good and it undermines those who might give a benefit of the doubt otherwise.

    Money in our politics is seriously harming people’s trust in government and Dominion is a player and they do legitimately own the blowback from the rate freeze that they did indeed pursue … and feels wrong.

    • Agreed — but you can say that about a lot more than Dominion, or utilities, or even Virginia. There’s no way that any candidate can raise $$millions for a political campaign without selling his/ her future objectivity. And there’s no way any interest group can profit blatantly from the result without owning the public reaction.

  11. Also.. it sounds like listening to you guys that seem to know that any costs that Dominion might have incurred as a result of the CPP – the would have been able to recover from ratepayers either through rate adjustments or the other tariffs / add ons..


    Was Dominion already protected from potential losses from the CPP?

    • Since there is no CPP, Dominion has incurred no cost as a result of it. Employees of Dominion testified to the SCC that all new generation would be covered by RACs not base rates. So even if the CPP was passed, Dominion had planned a way to recover costs.

      In any case, if legislation passes that requires carbon reduction, new zero carbon emitting generation (renewables) is cheaper than conventional units anyway. If more coal units need to be retired, most are already fully depreciated and are not in the rate base. Mt. Storm was built back in the 70s, I believe. The Hybrid Energy Center might be the only coal-fired unit that still has a significant portion of depreciation left. The higher energy cost of coal units leaves them dispatched less often than nukes and gas-fired units.

      Proper functioning of the SCC process would have kept Dominion financially whole, if any costs were incurred. The CPP was an easy target to blame, and many people were willing to believe the phony story that sold the concept of a rate freeze.

  12. I agree with Steve that although our Va. elec rates are in the range of national average, they could conceivably be lower than average if we were not paying such a high profit margin. Lower rates would help the state attract jobs.

    If Dominion wants to keep us out of RGGI, show us the benefit. 30% lower rates than RGGI, ho hum, OK but how about really make my day?

    • The chart above that shows the rates of the RGGI states is misleading. The utilities in the nine-states that are members don’t have higher rates because of RGGI. The energy efficiency and added renewables that have been added as a result of RGGI have saved customers over $2 billion since RGGI began in 2009. In that same period, rates in Virginia have gone up, especially as a result of new RACs. Dominion plans to continue on the path to increase rates and increase carbon emissions by building more gas-fired generation. RGGI states will continue to reduce their energy costs.

      Rates in the northeast are higher for several reasons. A major one is that the winter usage is much higher and longer lasting than the summer usage. So units built to meet those loads sit idle much of the year. In Virginia, we are the beneficiaries of our climate, not-too-hot and not-too-cold. Our summer and winter peaks are very similar, so generating plants earn their keep year-round. This keeps rates lower.

      Dominion has effective management and cost control. But they take a lot of credit for something that they have no control over – our moderate climate. That is why I suggest that the most appropriate rate comparison is with the four or five states that surround us.

      As Steve Haner suggested, perhaps the best comparison is for Dominion in Virginia versus Dominion in North Carolina. Dom’s Virginia rates are higher, suggesting that it has a greater ability to influence the rate-making process in Virginia using the GA.

      There is a pathway to lower energy costs in Virginia, but we are not on it.

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