The Logic Behind the Grid Transformation Act

Katharine Bond. Photo credit: Charlottesville Tomorrow

After providing an overview of The Grid Transformation and Security Act of 2018 yesterday, I had numerous questions about the thinking behind many of the measures it proposes. So I talked to Katharine Bond, a senior policy official for Dominion Energy to get the power company’s perspective. Dominion has been a key player in drafting the three-bill package, although Bond insists that many stakeholders, not just Dominion, have had input into it.

First question: How did Dominion Energy Virginia come up with that $1 billion figure for refunding or reimbursing its customers over the next eight years. Where is that money coming from? And does it fully compensate for the over-charges that Dominion retained thanks to the rate freeze implemented in 2015?

  • Up-front refunds for over-charges. Dominion will refund rate payers $133 million up-front. That number comes from a 2016 case in which the State Corporation Commission determined that Dominion had racked up that amount in over-charges during 2015 and 2016. Dominion foes have cited a figure of $400 million in over-charges, but that doesn’t account for big expenses relating to the disposal of coal ash. Dominion had to eat those costs due to the freeze, Bond says, and no reasonable accounting would omit it from the equation.
  • Offsetting later over-charges. To compensate for over-charges incurred since the SCC hearing, Dominion has agreed to write off expenses relating to the 2013 conversion of three coal-fired power stations — in Altavista, Hopewell and Southampton — as rough compensation. An SCC-approved rider (rate adjustment clause) allowed Dominion to bill rate payers for that conversion expense. Under the Grid Transformation Act, Dominion will drop those charges from its electrical bill, which will provide $25 million in rate relief each year — amounting to $200 million over eight years, and $540 million in additional savings beyond, for a total of $740 million. Why write off the biomass plant conversions? Dominion looked over its generating fleet, Bond says. It couldn’t very close down cost recovery of the Warren gas-fired station or one of the nuclear plants, so it settled on the biomass conversions.
  • Tax breaks from Uncle Sam. The intent of the legislation is to pass on 100% of the tax savings that Dominion Energy Virginia gains from the recently enacted federal tax reform, says Bond. “We’re comfortable that there will be at least $100 million. If there are additional savings, we’ll adjust rates down again.”

Second question: What’s wrong with the pre-freeze regulatory regime? What needs fixing?

After an unsuccessful experiment with deregulation, the General Assembly enacted the current regulatory regime in 2007. Electric bills reflect a composite of three types of rates requiring SCC approval: base rates, primarily operating costs accounting for about half of electricity charges; fuel adjustment clauses, which pass through rising and falling costs of fuel; and rate adjustment clauses (also referred to as RACs or riders), which cover the capital costs of new investments such as power plants. (The so-called freeze enacted in 2015 affected only the base rates.)

That regulatory regime “fit the world of 2007, not 2018,” says Bond. In 2007, carbon regulation wasn’t on the radar, as it is today. The utility didn’t have “literally thousands of points of interconnection” with intermittent solar power producers. Meanwhile, she adds, “tolerance for outages is decreasing every year.” If the power goes off, “people can’t work from home, can’t bank from home, kids can’t do their homework.” Virginia needs to upgrade its electric grid.

Dominion spokesman David Botkins elaborates in an email: The 2007 system was set up to incentivize new power generation “because policy makers were not comfortable with Virginia being the second largest importer of electricity [behind] California at that time. … Things have changed drastically since 2007. We have adequate generation supply now but the appetite for more renewables grows as the policy makers [want] to keep reducing carbon. Renewables require a much different kind of grid system that is less outage prone and more secure.

Yeah, I get that. But why can’t the old regulatory regime accommodate the changes that are needed?

Says Botkins: “We and others believe that the reinvestment (of earnings) model … is a better way to go. Less rate fluctuation, [fewer] riders, stronger/smarter grid. 2007 was for then. 2018 is for now and the years ahead. …”

Third question: Will the Grid Transformation Act emasculate SCC regulatory powers?

Bond says no.

The bill would change the SCC from reviewing and adjusting rates every two years to every three years. To me, that seemingly would allow Dominion to over-charge customers for longer periods of time. But even a three-year review is more frequent that the practice in most states, Bond says. Moreover, this way will allow the SCC to “smooth out” base rates. Many issues involve multi-year costs like early retirement. Instead of expensing the costs all in one year, perhaps they should be expensed over two years.

Also, to protect rate payers in riders, the proposed law provides for SCC review of the front end of so-called “transformative” investments enumerated in the legislation as well as the back end. “When it comes to the big transformative investments, we don’t have a blank check,” Bond says. “We have to bring forward a plan to say, ‘Here’s what we want to invest in.’ The SCC will review it. On the back end, we have to say, ‘Here’s what we spent, and here’s how it matched up.’ They check the math. It’s a fully litigated case.” If there are over-earnings, she says, the SCC will subtract them from what the company can charge.

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16 responses to “The Logic Behind the Grid Transformation Act

  1. Ms. Bond is a new and welcome addition to the Dominion team at the GAB. Mr. Botkins I know well. I hope readers understand these discussions are business, not personal. Because of my highly visible stance, some of these arguments have not been presented to me before. They ain’t talking to me this time.

    The 2007 statute was modeled on a defense contract approach known as cost plus incentive fee. A utility is allowed a certain ROE, and if it earns beyond that the question is who gets that. Under traditional rate making the utility gets it, but the regulator can intervene and start a rate case to seek to lower rates or order a refund. Also the customers can initiate a rate case.

    The compromise in 2007 was to limit the ability of the SCC or the customers to initiate rate cases, and to instead substitute a schedule. And the compromise was that the utility would split its excess profits with the customers. I would say excess profits “if any” but there was little doubt to most of us there would be plenty. UNLESS we started the whole process with a “going in” rate case and set the base rates correctly, meaning lower. That is the step that never happened. But the rebates did happen three times for a total of $824 million. Dominion’s share of the excess profits I have not compiled. Of course 2015, 2016 and 2017 they got it all.

    What Dominion is proposing now is a third alternative for the excess profits (which of course a mere few weeks ago they claimed did not exist). The excess profits that did not exist are now proposed to become a stable revenue stream for paying off the capital costs of various favored projects. If/when a future SCC review finds excess profits instead of rebating them, the utility will be allowed to keep them. I think the idea is it will be used to pay down these project costs, but making sure that actually happens is a key detail I don’t see spelled out in the bill. If I accept this argument, it only works if the dollar I don’t get in a rebate really means a dollar toward paying off those capital projects.

    One big glaring problem is they are asking to use the 70 percent share of the excess profits that are due the customer for these new purposes, but they are going to keep the 30 percent which belongs to their shareholders. That is patently unfair.

    My real problem with the Kilgore bill is it guts the SCC’s traditional authority to review projects in advance to consider lower cost alternatives, it reduces authority over ROE and it even weakens the absolutely vital language giving the SCC authority to reject costs which it decides are not reasonable and prudent. Behind the more benign discussion of who gets a cut of the excess profits, that lurks – once again, as I’ve seen them do countless times, they are pulling the teeth from the watchdog. Jim, you didn’t ask them about that. Play the record backward and its easy to hear….I can provide you line numbers but I’ll let others jump in.

    • A thousand apologies Jim, you did ask if the bill “emasculated” the SCC and her no was such a short answer I went right by it. That’s a strong word but without doubt it weakens it substantially. The change I mentioned, plus several places where favored projects are deemed “in the public interest” and their costs also deemed reasonable. And I still expect other elements to appear, such as the capital cost treatment in the Chafin bill.

  2. First – it may well be that we need a new regulatory approach to deal with a changed environment that is still evolving.. so I’m not opposed to that.

    But the process is pretty much pro-forma Dominion where they lay out how things oughta be.. and that’s pretty much it.

    they had a “stakeholder” process of which we don’t know the participants and we don’t know the dialogue… just that there was a “process”.

    It’s just not a way to do public policy and sure enough it walks and talks like a policy Dominion wants… not anyone else .

    We should NOT be refunding a billion dollars when we got at least that much liability for the coal ash cleanup.

  3. They admitted, as I said the other day, the majority of that money is the federal tax cut. Send your thank you note to Washington, not Richmond. They also seemed to admit they are closing those 3 biomass plants, so I don’t think they could have collected that future $740 million from us at all. That may not be a true savings either. But it works in the press release.

  4. I guess as Director of Operations, Mr. Bagby doesn’t read the annual report that lists Dominion in several places.

  5. regulated public service companies should NOT be giving money to legislators directly or indirectly and regulated public service companies should NOT be writing legislation that affects the regulators or the specifics of their revenues.

    it is outrageous that we have a legislature that lacks the spine to do the right thing but we have ourselves to blame – we vote them back into office and, in fact, we vote new ones into office – they AGREE to let a regulated public service monopoly write legislation that affects their own interests and legislators are more than willing to carry that water.

    No matter what you think of Dominion as a company – they should not be in the business of writing legislation that affects their own interests. It’s a corrupt practice that no self-respecting legislator should touch with a 10 foot pole.

    and you know.. when I hear all this drivel about Trump going after “elites” .. I wonder about things.. the “elites” in Virginia are the legislators getting dictation from regulated monopolies on the proper legislation. (sic).

    • Larry, most legislators and their staff simply don’t have the knowledge to draft legislation that governs complex and specialized subjects. What often happens is the Industry, a key member of the industry and the state agency closest to the Industry and/or subject matter wind up drafting legislation. That document, which normally goes through multiple iterations to obtain consensus is then presented to a legislator or legislators interested in sponsoring the bill. The bill normally is reviewed by some type of legislative agency to make sure it comports to the style, etc, of the state code. The bill is then introduced.

      Often other interest groups or legislators may propose changes to the bill, which, in turn, are often met with changes to the changes. The appropriate legislators and committees will generally reach consensus on the bill and, hopefully, with all of the stakeholders, to aid in passage of the bill.

      The process normally works. It does require other stakeholders some of which might be opponents to follow the legislation, make suggestions, lobby legislators and often work with people on the other side of the issues to develop an acceptable bill. I fully expect environmental groups to be involved in any utility regulation legislation. My big question is: beyond Steve and his client, who is representing residential and small business consumers?

  6. Right now I am relying heavily on Steve .

    But going down to the recent thread about higher debt loads in Virginia, yes we have some weaknesses. I see as lower electricity cost one strength area where Virginia has the opportunity to off-set some of our negatives like car taxes, and also lower energy cost should attract jobs.

    I am assuming we are in a favorable cost position, and I would like to see the dividends of that. Unfortunately the implication is Dominion and our elected officials want to keep electric prices artificially higher here to boost corporate profit margins and to afford higher donations to elected officials. Their justification is as long as we are paying national average elec cost, the public cannot complain. But we got enough other stupid stuff going on (Metro, car taxes etc)…we need to take advantage of our strengths.

  7. Ms. Bond’s reasoning strikes me as pure PR fluff. But let me address Mr. Botkins’ comment. “Dominion spokesman David Botkins elaborates in an email: The 2007 system was set up to incentivize new power generation “because policy makers were not comfortable with Virginia being the second largest importer of electricity [behind] California at that time. … Things have changed drastically since 2007. We have adequate generation supply now but the appetite for more renewables grows as the policy makers [want] to keep reducing carbon. Renewables require a much different kind of grid system that is less outage prone and more secure.”

    Regarding importation of power in 2007, understand that DOM owned, even then and moreso now, PLENTY of generating capacity to keep all its customers’ lights on and then some. What it didn’t have was enough mid-price-range units to run efficiently and generate cheap energy most of the time. It bought lots of cheaper power from the grid, from others generators on the grid, precisely because it was cheaper than to run its own units. That was not a failure on DOM’s part, but a consequence of having invested so much in baseload and coal units years ago that it hadn’t built much mid-range generation to round out its profile until recently.

    Dominion could have continued to buy heavily from the grid. That would have been cost efficient, and many other utilities chose to do so. But DOM stuck with a “build it for ourselves” approach for financial reasons. All that investment gave Dominion a growing rate base with a high “regulated” rate of return. Then they rigged the ratemaking game so as to increase its profitability. Gee, they could have made the same investment on an unregulated basis, but chose not to — guess why.

    Regarding the impact of renewables, primarily solar: we have yet to see hardly ANY of the “rooftop solar” homeowner-type development of solar in Virginia. Nearly all of it is “utility scale” and in many cases utility-owned, tied directly to the transmission grid, rather than “distributed generation” connected primarily at distribution voltages. But yes, DOM does want to be ready for the likely spread of DG development in coming decades. And yes, that requires some substation upgrades. The thing is, most of those upgrades would be needed anyway due to load growth in the suburbs and new office buildings and data centers, etc. The INCREMENTAL cost of grid modifications just to accommodate solar DG is slight. Ask them to elaborate on that sometime!

    The other big cost item resulting from renewables is not a grid upgrade per se, but a new generation profile heavy on cycling generation that can dovetail with solar generation’s limited availability. The PJM grid already offers that. Dominion keeps on talking about upgrading its grid for the future, but keep straight whether you are talking about the grid itself — the wires and substations — or the generation connected to the grid. The latter is something that shouldn’t even be in Dominion’s retail rate base any longer. Generation across-the-board was de-regulated two decades ago by the feds and by Virginia, but Dominion just refuses to deregulate its generation, thanks to the highly profitable regulatory arrangement it has kept going with the GA overriding rate review by the SCC. This is overdue to be eliminated.

    Finally, Dominion has been slow to move on energy efficiency, probably because it does run counter to its build-more-generation preference.

  8. I don’t doubt for a minute the industry is undergoing cataclysmic changes.. no question.. but is it up to Dominion to stipulate legislation for changes?

    that’s just totally wrong. Dominion may well think they know the issues better than anyone else – but there is no virtue what-so-ever in them deciding what is best for them AND consumers. Where in the dooda are the legislators?

    They don’t like the SCC so they’re just gonna let Dominion run the show?

    we hear talk of “elites” …and how they’ve presided too long over the status quo. I cannot believe this is the antidote.

    You want to know the “logic” Behind the Grid Transformation Act?

    Surely you jest! we’ll just roll up the whole Dominion, SCC, “transformation” conundrum into an office in the Dominion Corporate campus..

  9. It has become a widespread practice at the federal level for industries to write their own legislation and regulations. This has created corruption and rot throughout our national government, regardless of which party is in power. We should do everything possible to reduce the spread of that infection in Virginia.

    We should want our utilities to be financially healthy, but only because they are doing an exceptional job of serving customers by lowering energy costs and modernizing the grid.

    We should remove the incentive to build unnecessary power plants which passes the risk on to the ratepayers. Southern Company recently abandoned plans to build a gas-fired combined cycle unit in Southside Virginia. The market was telling them it was unnecessary and probably unprofitable. Yet Dominion maintains its plans to build a new combined cycle unit under the same conditions, because the ratepayers will pay for it (plus a handsome return) no matter what.

    Where are the commercial and industrial customers who should complain about paying higher rates than necessary? What about the economic developers who have been cheerleaders for the expensive pipeline that will raise everyone’s rates? These groups are not intelligent advocates for their own interests. They are either silent or supporting a plan that will lead to energy costs being higher than they need to be. Perhaps, Dominion plans to hold the commercial and industrial rates steady while having the residential customers pay extra for the higher costs that will result from implementing this plan rather than a more equitable one.

    Dominion once again demonstrates its financial savvy. They want to use our money now and pay some of it back later with cheaper (inflated) dollars. The U.S. government has been using this scam for decades in repaying its Treasury debt.

    The Virginia plan is an extension of old utility economics that favor the extension of 20th century behavior rather than development of a modern energy system. I am puzzled about why so many state legislators miss the economic flaws in this proposal. Perhaps too much money is going into their pockets to notice how much will be coming out of their constituents pockets.

    What would be your response if I owed you $100 dollars and said I’m keeping $30 now without discussion and I might pay some of the remaining $70 later but only after spending it on things that are good for me and maybe good for you, but you could get the same thing done cheaper using other means.

    The more they emphasize how good this will be for us, check your pockets and walk the other way. There is a path where everyone can benefit, but this isn’t it.

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