Bacon's Rebellion

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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