Photo credit: Richmond Times-Dispatch
Earlier this week the Richmond Times-Dispatch published an in-depth series tracing the history of the relationship between Dominion Energy, the General Assembly and the State Corporation Commission over the past twenty years. Michael Martz and Robert Zullo conducted dozens of interviews and reconstructed the complex history of electric utility oversight during a tumultuous period that saw a shift from regulation to deregulation, then back again.
The main thesis of the first article is that the relationship between the regulated and the regulators fundamentally changed around 1995. Until that time, the Virginia Electric & Power Co. (known as VEPCO) had its own board of directors and operated with considerable independence. Parent company Dominion amounted to little more than a holding company for the utility, which comprised 90% of its assets. But in a titanic boardroom struggle, which the Times-Dispatch recounts in great detail, Dominion CEO Thomas Capps ousted VEPCO President James T. Rhodes Jr. In the years that followed, Dominion acquired the Consolidated Natural Gas Co. in a $8.3 billion deal, transforming Dominion into a multi-state energy giant, dissolved the VEPCO board, and stepped up its involvement in Virginia politics and policy through its lobbying efforts and campaign contributions.
The second article chronicles the shift from regulation to deregulation and then, when experiments with deregulation around the country appeared to be failing, back to regulation — under the guidance of Dominion each step of the way. The end result of 20 years of legislative tinkering, the Times-Dispatch argues, was weaker oversight by the SCC, which Dominion cannot influence politically, and greater involvement of the General Assembly, which Dominion can influence. The culmination of this decades-long process was 2015 legislation that froze electric rates in response to uncertainty created by the unveiling of the Environmental Protection Agency’s Clean Power Plan and the locking in of what one SCC judge estimates will be $1 billion in excess profits over seven years.
In the final piece, the Times-Dispatch suggests that Dominion’s grip on Virginia politics may be loosening. The 2015 rate freeze has come under heavy fire for its proposal to build the Atlantic Coast Pipeline, its construction of unpopular transmission lines, its plans for disposing of coal ash, and the pace with which it is adopting renewable energy sources. Not since the 1970s when the old VEPCO was experiencing massive cost overruns and rate increases has the utility found itself embroiled in so much controversy.
Regarding the big picture, the Times-Dispatch makes an important point: The General Assembly has become increasingly assertive in defining Virginia energy policy, and in so doing, it has whittled down SCC power. Whether this was Dominion’s doing or the General Assembly’s, however, is less clear. The series describes how SCC Judge Hullihen Moore alienated many lawmakers by appearing before a House of Delegates committee and lectured them in a tone that many found condescending. That action adversely affected relations with key legislators and staff for a number of years.
The Times-Dispatch overlooked opportunities to describe other examples of lawmaker assertiveness. Especially noteworthy were laws initiated by Southwest Virginia legislators to spur economic development by creating favorable regulatory treatment to Dominion for building its $1.8 billion Hybrid Energy Center in Wise County and, in an encore, for building a proposed $2 billion pumped-storage facility in the region. The hybrid-energy plant, which burns coal, coal waste and wood, has a generating capacity of 600 megawatts. By way of comparison, the recently constructed Brunswick Power Station, which cost $1 billion, has a capacity of 1,358 megawatts. The two projects are not directly comparable because the hybrid energy center burns coal waste, which reduces an environmental hazard. But the fact remains that on a cost-per-megawatt capacity basis, the Hybrid Energy Center was four times as expensive — economic development for the coalfields courtesy of Dominion rate payers in eastern Virginia.
Similarly, responding to incentives created by the General Assembly, Dominion is giving serious consideration to a $2 billion pumped-storage project in Tazewell County that would have a capacity of 850 megawatts. These two cases appear to be driven by old-fashioned pork barrel politics: Southwest Virginia legislators stacked the regulatory deck to induce Dominion to invest in their economically depressed region regardless of the cost to Dominion rate payers.
The 2015 rate freeze has a very different background. That legislation arose in response to the Obama administration’s Clean Power Plan. Several years previously, the Obama EPA had pushed through tough restrictions on mercury and other toxic emissions, which forced Dominion to shutter several coal-fired units, and lawmakers were concerned that the Clean Power Plan could have a comparable impact. In an early estimate, Dominion said that write-offs on four coal-fired power plants could reach $2.1 billion, while the SCC estimated that ratepayers could be stuck with $5.5 billion to $6 billion to replace the lost capacity with new electric generating facilities. Governor Terry McAuliffe was so worried that he personally lobbied EPA chief Gina McCarthy to modify Virginia’s CO2 emission targets.
Nobody knew the cost for sure because the Clean Power Plan gave states several options for curtailing their CO2 emissions, and the final cost would depend largely upon which option the McAuliffe administration selected. Adding to the uncertainty, the plan faced legal challenges on constitutional grounds, and there was always the possibility, seemingly remote at the time, that a Republican might be elected president in 2016 and reverse the plan. The potential cost of compliance was a moving target, ranging from nothing to multiple billions of dollars.
The Times-Dispatch series did a fine job of summing up the political controversy that arose after the long-shot election of President Trump. If Trump was determined to scrap the Clean Power Plan, some legislators argued, what justification was there for a rate freeze any more? But the articles did little to illuminate the context that faced lawmakers and the McAuliffe administration when they negotiated the freeze. As should surprise no one, a lot of sausage-making went into the 2015 deal.
The law froze the base rates for Virginia’s electric utilities. Base rates, which cover mainly operating expenses, account for about half the total retail cost of electricity. They do not cover adjustments for volatile fuel prices, nor do they include “riders,” which are rate adjustments to cover the cost of specific projects such as new generating plants, new transmission lines, or underground burial of distribution lines.
During negotiations over the rate freeze, Dominion agreed to several concessions of value to McAuliffe. The utility promised to spend an estimated $25 million over five years on weatherization programs for the poor. The law declared it in the public interest to build 500 megawatts of utility-scale solar power. And the utility agreed not to collect an $85 million fuel cost increases from 2014. The law also gave GOP legislators something they wanted: a requirement that Dominion could not close a coal-fired power plant without first obtaining SCC authorization.
The law froze base rates and exempted electric utilities from biennial rate reviews for seven years. While the company had a chance of accumulating substantial excess profits, it shouldered several major risks: not just the risk of some $2 billion write-downs if it was forced to close coal-fired units but eating the clean-up cost from hurricanes and other natural disasters, which strike on average every three or four years. Unrecognized at the time, the company also took on the risk of closing its coal ash ponds under an EPA ruling that would be issued a half year later. Dominion has had to eat some $400 million in coal-ash expense, only some of which it has been able to pass on to rate payers. That liability could skyrocket if state regulators make the company bury the coal-combustion residue in landfills rather than cap it in place.
In sum, when the law went into force in mid-2015, there were a wide range of potential incomes for Dominion. If everything went perfectly, the company could make out like a bandit. If it had to take big write-offs, it could lose big time. In either case, rate payers were insulated from the uncertainty and guaranteed stable base rates.
It is only in retrospect, with the election of President Trump and his decision to kill the Clean Power Plan, that some have concluded that Dominion robbed the bank. SCC staff has calculated that Dominion earned between $133 million and $176 million in excess profits in 2015 and 2016, which it would have had to return to rate payers were it not for the rate freeze. (The sum would have been far larger had Dominion not incurred $174 million in coal ash clean-up costs.) Dominion disputes the accounting behind those numbers, but concedes that the company is probably ahead thanks to the freeze… at this moment in time. But the freeze has several years to run, and the company is still exposed to significant risk. Even the prospect of coal plant write-downs has not entirely disappeared. The McAuliffe administration is working on its own CO2 regulatory plan, the impact of which at this time is unknown.
The Times-Dispatch series could have benefited from some of this context. Zullo’s article leaves a strong impression that Dominion’s campaign contributions and political clout won it a sweet deal with the rate-freeze law. The picture is more complicated than portrayed. While critics say Dominion could rake in an extra $1 billion thanks to the rate freeze, at the time the deal was struck the company was exposed to $2 billion in write-downs, potentially hundreds of millions more for weather disasters, and potentially hundreds of millions of more for coal-ash disposal, a risk it had not even identified at the time.
For purposes of argument, let’s assume that the state CO2 regulations will be toothless and that Dominion’s write-off risk evaporates. Does that justify undoing the freeze, as some legislators have proposed? In effect, Dominion’s critics want a heads-I-win, tails-you-lose proposition. If the deal had worked out badly for the utility, would anyone be clamoring to let it off the hook? Not very likely. The critics only want out now that it appears that Dominion might — not will, but might — come out ahead.
That said, Martz and Zullo highlight an important trend that has gone largely unnoticed in all the reportage and commentary about Virginia’s electric power industry. The General Assembly has asserted ever greater authority over the industry recent years. The SCC still is influential — electric utilities still must win SCC approval for major capital expenditures such as new power plants and transmission lines. But the General Assembly has hemmed in the SCC’s latitude for decision-making by declaring everything from hybrid energy centers and pump-storage facilities to solar power generation to be in the “public interest.”
As long as legislators view utility investments as economic-development plums, as long as environmentalists and their allies seek to re-engineer the electric grid around renewable energy, and as long as the federal government feels free to dictate energy policy to the states, the politicization of the energy sector in Virginia is probably inevitable. Between its lobbying team and campaign contributions, there is no denying that Dominion exercises immense clout in state politics. But it’s not the steamroller that critics say it is.