Will Grid Transformation Allow Utility Double Dipping?

Dominion says the Grid Transformation Act will provide stable electric rates and a clean, reliable grid. Foes fear that the legislation will rip off customers and fatten utility profits.

As the Grid Transformation and Security Act of 2018 wends its way through the General Assembly, lawmakers and lobbyists are focusing on a key question: Will the bill allow Dominion and Appalachian Power Co. to engage in “double dipping” — effectively charging rate payers twice — or will it provide a mechanism to pay for potentially billions of dollars in upgrades while keeping electricity rates stable?

The public is receiving wildly conflicting messages.

“There is no double-dip, but there is a single-scoop with whipped cream and a cherry on top for our customers, who will have stable rates and a modern, clean infrastructure improving the reliability of the energy they use,” says Dominion spokesman David Botkins. “The only thing that will be dipping from the GTSA of 2018 will be our customers’ electric bills and the amount of time they’ll lose power.”

Stephen D. Haner, a lobbyist representing the Virginia Poverty Law Center, forcefully disagrees. “Frankly, I have stopped calling it double dipping and just call it taking away our refunds,” he says. “Customer refunds are being taken away in exchange for… nothing.”

The controversy arises because in the proposed “reinvestment” regulatory model of the Grid Transformation Act, Dominion Energy Virginia would not have to reimburse rate payers for hundreds of millions of dollars earned in excess of its allowed 9% return on investment as long as it reinvested the money in approved grid upgrades. Once that investment became baked into Dominion’s cost structure, the utility would be allowed to generate a return on it, in effect, a second payment.

Haner provides an analogy:

Imagine if you were going to buy a house valued at $400,000 dollars and paid $75,000 in cash. If you then took out a loan, you would expect to pay the bank $325,000 plus interest on your mortgage. Well, if Dominion were the bank, you’d pay $75,000 in cash up front, but then pay $400,000 plus interest on your mortgage. You’d be out of pocket $475,000 plus interest for your $400,000 house.

Dominion counters that the analogy is inappropriate. In the real world of electric rate setting, if the company didn’t pay for the grid upgrades through the reinvestment model, it would seek reimbursements, project by project, through riders (also referred to as a Rate Adjustment Clauses). Either way, the customer pays the up-front cost and a return on investment. The approach outlined in the Grid Transformation Act is more convoluted — necessary to provide the financial predictability that Dominion needs to sell the bonds that fund the improvements — but the company says rate payers won’t be any worse off.

Dominion’s Botkins says the bill has been structured to ensure that ratepayers are not subjected to rate increases attributable to the grid modernization. “Reinvestments of excess earnings authorized by this legislation cannot be used to raise customer rates in any fashion during the 10-year life of the Act,” he writes.

Under Virginia’s regulatory structure, there only two other ways to raise electricity rates: through fuel adjustment clauses and rate adjustment clauses. Because Dominion will be investing in solar, wind and energy efficiency, there will be no fuel expenditures to be reimbursed. As for rate adjustment clauses, the whole point of the Act, says Botkins, is to avoid them. The legislation specifically states that grid modernization investments cannot be recouped through rate adjustment clauses.

Ergo, says Botkins, “an investment that is not a rate adjustment clause, that is prohibited from being used to justify a base rate increase, and that has no fuel cost cannot cause a rate increase.”

Haner retorts that the issue isn’t raising rates — it’s reducing rates. “Promises not to raise base rates are polar bear insurance. Since my involvement in 2007 it has been clear the base rates are too high,” he says. While Dominion does promise to reimburse rate payers some $1 billion — including a rebate for lower federal taxes, which would have been due anyway — the legislation short-circuits any proper rate reckoning by the SCC.

The investments in grid modernization will reduce operating costs, which under a normal regulatory environment would benefit customers in the form of lower base rates, Haner says. “But as long as the SCC is encumbered … base rates will not go down and only stockholders will benefit from the efficiency.”

Bacon’s bottom line: Grid modernization is not solely a Dominion preoccupation. Duke Energy Carolinas also has proposed a grid modernization program — $13.8 billion over the next ten years to upgrade its transmission and distribution grid, including many of the same priorities that Dominion has identified such as smart meters and buried power lines. The company has requested a $13.4% rate hike, which numerous electricity consumer groups are pushing back against, reports the Charlotte Business Journal.

It’s not clear how many billions of dollars Dominion’s grid-upgrade plan would entail; the company has not provided an estimate. But the Tarheel plan makes a useful point of comparison. If Virginia wants solar power, offshore wind power, energy-efficiency programs, and a more hardened, resilient grid, it’s going to require potentially billions of dollars in investment. One way or another, rate payers will have to pay for it.

My question all along has been: Why such a convoluted method? Why not stick with the old regulatory system that provides a biennial accounting of earnings and rebates to customers along with project-by-project rate adjustments to cover the cost of big capital expenditures? There are hidden costs that have yet to be revealed in the public discussion of grid transformation. I hope to address that issue later this week.

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7 responses to “Will Grid Transformation Allow Utility Double Dipping?

  1. Is anybody asking North Carolinians to surrender refunds they are owed to pay for it, and then pay for it in full again? I’ve got the SCC staff, the Attorney General’s Office, and three very experienced rate case attorneys reading the statute and seeing the same thing I am. I appreciate Jim giving me the forum.

  2. There is skulduggery going on.. why does this have to be so convoluted to start with?

    Steve Haner has the truth… what’s so surprising is how many folks are going around their elbow to find some other “innocent” explanation for this.

  3. Pulled up a simple mortgage calculator. Using my scenario above, that $75,000 which is not a down payment but is instead fully financed, requires a payback of $161,951 over 20 years at the 9 percent return allowed to Dominion. Add in the $75,000 itself and I’m actually out of pocket almost $237,000. Add three more zeros and you can see why the utility is throwing so much sand in people’s eyes. If they are going to finance the full amount of the project, then I should keep the $75,000 and enjoy the time value. If they take away my refund, it should at least directly pay down the balance on the project.

  4. I get the idea that every dollar spent on a smart grid that is reasonable and prudent could reduce consumer refunds. But going forward it must be treated as “zero cost capital.” Dominion cannot calculate its earnings on its rate base that includes the zero cost capital. It cannot earn a rate of return on this amount. Nor can it apply depreciation or amortization to the amount of the zero-cost capital.

    Simplified, let’s assume Dominion has a rate base of $1 million and can earn 9%. Dominion is entitled to earnings of $90,000 excluding consideration of depreciation. That is the rate base on 1/1/19 is the same as it was on 1/1/18. So if Dominion were to invest $100,000 in a smart grid, it’s 1/1/19 rate base would be $1,100.000, again ignoring capital recovery. So Dominion would be entitled to earn $99,000. But if $100,000 of consumer refunds are retained and invested in the smart grid, Dominion’s 1/1/19 rate base remains at $1,000,000 (ignoring capital recovery) and its earnings remain at $90,000.

    Any legislation that passes must be preceded by a showing that the regulatory scheme includes zero cost capital that does not increase Dominion’s earnings or capital recovery. The showing should be reviewed by the VSCC and be subject to public participation.

  5. TMT,

    That is a good idea, but it is not how the current bill works. For illustration, let’s assume that the amount of the past overcharge that would be returned to ratepayers is $200 million, as the Governor has suggested. This amount is hundreds of millions less than the amount Dominion has collected in profits in excess of the amount authorized by the current rate structure, but it was negotiated by the Governor up from the much lower amount that Dominion offered.

    If Dominion invested this $200 million instead of returning it to the ratepayers, the current bill says that the ratepayers’ refund has now been canceled out. Dominion can now invest this “free money” in grid improvements or solar, etc. Once the project is complete, $200 million is added to the rate base, which allows Dominion to recover the $200 million, plus interest on any money borrowed for the project, plus profit. If you don’t think Dominion will borrow money for future projects in order to recover all of that interest (and the extra profit that it provides) from the ratepayers you either believe in the tooth fairy or are a member of the General Assembly. There is no way to track how the money due to ratepayers is spent once it disappears into Dominions bank account. There is no provision in the current bill to consider these funds “interest free”, as TMT suggests.
    I don’t know where Dominion is getting the 9% return on equity (ROE) they are using in the examples they promote. By Dominion’s own admission their authorized ROE that is in the base rates is as follows:

    10% – base ROE
    .7% overshoot allowance included in the 2015 rate freeze legislation before any refund is required.
    ROE adders – these add an amount to the authorized ROE for the construction of new generation:
    2% – nuclear 12-25 years duration
    2% – renewables 5-15 years
    2% – biomass
    1% – combined cycle (simple cycle peaking units do not qualify) 10-20 years

    .5% adder for meeting the RPS standards.

    For years Dominion has been meeting this goal by buying RECs from old out-of-state solar projects. If this continued in the same fashion as in the past, Dominion would recover $616 million by 2025 from ratepayers for something they paid a net present value of $7.9 million for.

    Dominion’s authorized ROE for a new solar project (in the 2015 and current legislation) would be:

    10% + 0.7% + 2% (for a solar project) + 0.5% (RPS adder) = 13.2%

    Is it any wonder why Dominion says 9% in its public pronouncements on this deal?

    The RAC for Greensville started with a 9.6% ROE, but even that project would actually return 11.8% (9.6+0.7+1+0.5).

    The investments that Dominion is contemplating can all be covered in the base rates. That is why Dominion is promoting that this new “deal” will keep rates stable and won’t result in any “rate” increases. As they keep adding equity using “free” money from the ratepayers they keep piling up profits without regulatory review. As long as Dominion keeps spending money they would never trigger the requirement for a ratepayer refund over the life of this bill (10 years).

    Here is a simple calculation of Dominion’s gain from the example above:

    $200 million they don’t have to refund to ratepayers

    $200 million returned to them through base rates for the $200 million solar investment

    The ROE on this project:

    $200 million investment
    $140 million in total interest expenses – assumes 50% debt (about average for Dominion) at 7% interest for 30 years.

    The ROE calculation gets a little complicated. I depreciated the $200 million investment over 30 years. To that I added the interest accrued each year, plus the depreciated value of the interest to-date. The ROE was reduced by 2% after 10 years assuming the adder for solar was no longer active.

    So here is Dominion’s total return from avoiding refunding money to ratepayers and investing it as they choose. Remember this entire amount is generated without any cash being put up by Dominion – it entirely uses other people’s money.

    $ 200,000,000 refund to ratepayers avoided
    $ 200,000,000 return via base rates of ratepayers’ money to Dominion
    $ 267,000,000 profit (ROE) over the ten years the law is effective – $ 583 million over 30 years

    $ 667,000,000 benefit to Dominion in 10 years

    $ 983,000,000 benefit to Dominion over the 30 year life of the project
    (these are not a net present value figures)

    So this is not a double dip it is more than a triple dip (or potentially a 5x dip over the life of the project). Do you understand now why they are trying to tell you what a good deal this is?

  6. This is just the beginning of the story regarding the proposed legislation. It is important to remember that the 2015 “rate freeze” bill only really “froze” customer refunds. A great deal of extra money headed Dominion’s way since that time.

    In the period 2009-2015, the SCC ordered $824 million in refunds from Dominion (just $5.8 million from APCo during this period). There is a systemic problem with the base rate that consistently provided over-earning on the part of Dominion that was not corrected in 2015. In fact, it is now proposed to be locked in stone for the next ten years by new legislation.

    The 2015 law allowed that when refunds were made, Dominion would be required to pay only 70% of what was overcharged, keeping 30% for itself. That sounds like a legislative incentive to constantly overcharge customers. Imagine if you had purchased something and discovered that the company overcharged you by $100. Would you feel it was fair if they only returned $70 to you? Would you suspect that they might intentionally overcharge other customers too?

    Without an appropriate reevaluation of what a proper base rate would be, overcharges have continued, except without any refunds to customers. The overcharges became especially severe during 2015 and 2016. Because of a surplus of natural gas (due to the financial bubble, as I have described) the price of wholesale power in the PJM system was substantially reduced from what was built-in to the base rate calculation. Normally, this good fortune would have been returned to the customers who paid extra to the utility. Not so in Virginia.

    About $300 million spent to obtain a combined operating license for North Anna 3 was given to Dominion by the GA in 2015, without regulatory approval. You saw from my post above that a $200 million investment could yield at least $583 million in profit (over 30 years) plus the return of the original investment. But the ratepayers receive nothing in return for this money. It did not result in anything being built that would generate electricity. The North Anna 3 project is no longer in the 15-year plan for future generation. It is much too expensive to be of value and demand for electricity in Virginia is not growing to make it necessary in any reasonable scenario. But by legislation, the General Assembly granted Dominion a nearly $1 billion revenue stream at their customers’ expense.

    It is dangerous to make rate decisions through the legislature. The regulators had no opportunity to evaluate whether all or a portion of this investment was prudent. Perhaps, since it will have no value to customers, all or at least a portion of the amount should have been covered by the shareholders.

    The same thing is happening in this new bill. The SCC estimates that Dominion overcharged customers by $395 million in 2016. This bill assumes that $174 million for coal ash cleanup expense should be automatically removed from that amount and removes it from regulatory evaluation. As I have commented on before, it was considered “best practice” 35-40 years ago in the Northeast to line the bottom of these ponds, then cap them as sections are closed. This would have avoided the leaks that have occurred over the years and the significant expense today. If Dominion made a management decision not to do this, or used its political power to reduce regulatory requirements, the shareholders should bear some of this expense.
    By further reducing the SCC’s oversight, all the burden of payment falls on the ratepayers (the constituents of those legislators who think this is a good idea).

    Under the rate freeze, this payment would have been Dominion’ to swallow. Suddenly, the rate freeze wasn’t needed anymore. It never was. The SCC had a fully functioning system to pass on to ratepayers any prudent and necessary expenses required to deal with the Clean Power Plan.

    The new bill extends the SCC review to every 3 years, and only after Dominion has over-earned for two consecutive 3-year periods would a refund be due. As long as Dominion continued to spend enough on new projects to offset the amount overcharged, the requirement for a refund would never be triggered over the 10-year life of the law.

    The typical regulatory scheme in other states is an annual review of profit by a utility compared to the authorized amount. One hundred percent of overcharges are refunded to customers. Under-recovery is handled with a rate adjustment to get the utility where it is supposed to be.

    Why are our elected representatives so eager to add costs to families and businesses in Virginia to benefit a few utilities? This hampers our economy, increases costs to businesses, takes money out of our citizen’s pockets, and lowers the opportunity for more jobs. It produces exactly the opposite effect that the supporters of the bill claim it will.

    There is a way to have profitable utilities that lower our energy costs, but this legislation will not lead to that.

  7. The new legislation also includes a list of projects that in exchange for “giving up” some of the refunds due (but not really) Dominion will be “required” to undertake some projects that are in the “public interest”.

    Income tax reduction – sponsors of the bill say all of the savings from the new tax law will be refunded. The SCC says that their reading of the bill does not convince them that all of the tax savings will come back to ratepayers.

    Haymarket Transmission Undergrounding

    It costs 10-15 times more to place this transmission line underground than overhead.

    The description in the deal for the new law says that this project is intended to “ensure development of a modern and resilient energy grid.” But Dominion has stated that above-ground transmission lines provide more reliable service and cost less to maintain. Underground lines have a 40 year life expectancy compared to 80 years for overhead lines.

    Considerable clearing and grading would be necessary and construction activity could last 3-6 times longer than for overhead lines.
    Large vaults are needed every 2000-2500 feet and would require permanent access roads to make repairs when necessary.

    https://www.xcelenergy.com/staticfiles/xe/Corporate/Corporate%20PDFs/OverheadVsUnderground_FactSheet.pdf

    If the line is primarily for Amazon, they should pay for all or most of it. Other customers have to pay to connect to the grid if such a connection does not already exist.

    Whatever amount that Amazon pays cannot be included in the rate base. Dominion wants all of the other customers to pay for this underground line so that it can earn 10-15 times higher profit from it and offset any customer refunds that are due.

    It seems that our elected representatives are eager to serve a few special interests but not the citizens of Virginia.

    Residential Undergrounding of Distribution Lines

    Dominion wants to add a second phase to the pilot project for undergrounding distribution lines that would cost over $1 million per mile.
    Dominion has not considered costs and seems to have estimates that are six times higher than typical costs for undergrounding distribution lines.

    One customer’s proposed installation would cost ratepayers over $476,000 over the life of the project.

    The SCC and the Attorney General’s office said that these charges do not provide a cost-benefit to ratepayers and should not be approved.

    The $270 million estimate for this 244-mile project could end up costing ratepayers over $810 million.

    Solar Development

    Solar is already the current lowest cost source of substantial new generation in Virginia. There is no need for any General Assembly interference in its development other than to encourage the removal of obstacles to third-party development of solar.

    By prescribing that 5000 MW of new solar be developed by Dominion, the GA adds to its costs.

    If public money is being used to promote solar (by avoiding refunds to customers) at least half of the 5000 MW should be required to be installed by third-parties at customer locations. This avoids the 10.7 to 13.2 percent profit that will go to Dominion. And avoids the extra charges that Dominion will add to bills for new transmission to connect these utility-scale facilities to the grid.

    Smaller-scale units sited at customer locations and connected to the distribution system will avoid these costs and add to the reliability and resiliency of the grid in ways that the utility-built solar facilities cannot.

    Grid Improvements

    Utilities throughout the country are improving the aging electro-mechanically controlled grid and bringing it into the digital age.

    We are a bit behind in Virginia, but Dominion has a skilled subsidiary that can do this work.

    There is no reason to avoid returning overcharges to fund this work. It should go through the normal regulatory review and receive the existing rate of return, or better yet, a revised rate of return that accurately reflects current conditions and costs.

    Pumped Storage

    The $2 billion pumped storage project in Southwest Virginia deemed in the “public interest” by the General Assembly is not founded on any objective analysis.

    In 8 to 10 years, about the time this pumped storage project might be available, batteries will cost ¼ of what they do today, and they are currently cost-effective in many applications in today’s grid.

    Locating storage in distributed locations throughout the grid will add to its reliability and resiliency. A single large pumped storage facility located far from Dominion’s service territory will be much more expensive and significantly less useful than modern storage alternatives.

    If the desire is to improve the economy and job creation in Southwest Virginia, that could be done much cheaper and more effectively than draining perhaps $6 billion from Virginia families and businesses for this project.

    Energy Efficiency

    Utilities are not very good at energy efficiency, partly because it is currently against their interest to reduce the use of electricity. Dominion is especially ineffective at energy efficiency. For the past several years, Dominion has placed last in a national survey of energy efficiency improvements achieved by major utility companies.

    If public money is being used to encourage energy efficiency (by avoiding refunds and increasing customer costs due to this new bill) it would be better invested to develop programs that hire third-parties highly skilled at implementing the types of projects that would lower all of our energy bills.
    Reducing the energy use in public buildings and substandard housing would benefit everyone. When peak usage is reduced, everyone saves money. Energy efficiency projects are significant job producers. Energy efficiency can offer long-term employment for numerous building trades and other skilled positions. The employment created is much greater than for other types of energy projects.

    Energy Share

    It does not makes sense to take money from ratepayers and give it back to Dominion to give money to people who cannot pay their electric bill. This only gives the corporation a tax deduction for providing money to its customers so that they can pay Dominion the money that they owe. The ratepayers lose, the customers having difficulty paying break even, and Dominion wins in a big way through a tax deduction and higher revenues.

    Promoting energy efficiency or higher efficiency requirements for substandard housing would be a greater benefit to Virginians than giving them ratepayer money to pay high utility bills that they cannot afford. Let’s invest in reducing their cost of living by putting more Virginians back to work improving our building stock.

    A lower cost of occupancy would make Virginia a more attractive place to live rather than funneling more money through Dominion’s profit machine.

    The reduced SCC oversight created by the new law could expose ratepayers to paying for all of these non-effective projects. Returning to frequent, full and effective regulatory oversight founded on an appropriate base rate would achieve all of the ends intended by the new bill except for continuing the substantial over-recovery of profit by Dominion.

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