Has Rate Freeze Benefited Virginia Customers?

There's no evidence that the electricity rate freeze has hurt Virginians.

Rate freeze —

Are the electric power companies ripping off rate payers under the guise of a rate freeze? Some think so. The electric utility industry came under fire during the 2017 General Assembly session when Sen. Chap Petersen, D-Fairfax, submitted a bill to un-do the freeze in base electric rates enacted in the 2015 session. Although his bill never made it through the General Assembly, Petersen has appealed to Governor Terry McAuliffe to implement it as an amendment.

In an op-ed piece published in the Richmond Times-Dispatch this morning Mark Webb, Dominion’s senior vice president for corporate affairs, argued that the freeze is working as designed and is a good deal for rate payers.

Legislators wanted to protect customers from a potential price hike tied to environmental costs. Since then a Dominion residential customer has paid $1,100 less per year for electricity than those in the Mid-Atlantic.

Were the rates frozen after big increases? Not at all. Dominion residential rates are only about 4 percent higher than they were in 2008. Don’t you wish that was the case with your other household expenses?”

Meanwhile, the reliability of service has improved, Webb writes, and industrial rates have declined 16% over the same period. Virginia’s lower electric rates are significantly lower than Maryland’s and Washington, D.C.’s. Maryland residential customers pay 25% higher rates than Dominion customers, while industrial customers pay 49% more. D.C. residents and industrial customers pay an even bigger premium.

Dominion’s lower rates have been an economic boon for Northern Virginia, Webb says. “No wonder large electric users such as data centers overwhelmingly locate in Virginia instead of D.C. or Maryland.”

(Webb’s op-ed made no mention of the neighboring state of North Carolina, however, where the average electric rate is lower — 10.29 per kilowatt hour in December 2016 compared to 10.72 cents in Virginia.)

Webb then goes one step further, contending that the General Assembly’s re-regulation of electric power energy in 2008 has worked out well for Virginians, too. “Since Virginia’s landmark legislation reregulated utilities a decade ago,” he writes, “electric rates have been remarkably stable and well below the national and regional averages.”

Bacon’s bottom line: I was curious. What are the numbers? How have electricity rates fared compared to national averages (a) since reregulation and (b) since the rate freeze? I checked data compiled by the U.S. Energy Information Administration for “Average Retail Prices for Electricity” for answers.

Between 2008 and 2016, the average residential rate per kilowatt hour for retail customers nationally increased 11.7%, significantly higher than the 4% rate for Dominion customers that Webb cites. So, Dominion has out-performed the national average since reregulation. But rate-freeze critics have not disputed the fact.

A more pertinent question is what has happened to electricity rates since July 2015 when the freeze went into effect. As critics have noted, base rates cover only ongoing operating costs, not the cost of fuel, which is adjusted through fuel adjustment clauses, or the cost of new capital projects, which is incorporated into the rate structure through rate adjustment clauses. In theory, overall rates can climb higher while base rates stay locked in place.

But that has not happened. Between July 2015 and December 2016 (the most recent month available), the average price of electricity in Virginia decreased 8% to 10.72 cents per kilowatt hour. That compares to a 5.9% decline in electric rates nationally between July 2015 and November 2016, according to the Energy Information Administration.

Out-performing the national average since mid-2015 would seem to buttress Dominion’s case, but it still doesn’t end the argument. Former Attorney General Ken Cuccinelli has argued that the rate freeze locks into place hundreds of millions of dollars in excess profits, with the implication that if Virginia electricity rates would be even lower if they hadn’t been frozen. Webb side-stepped that issue in his op-ed piece, and the EIA numbers don’t address it.

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24 responses to “Has Rate Freeze Benefited Virginia Customers?

  1. This one is easy. Let them keep their rate freeze and make them dig up and landfill all the coal ash sites… AND allow 3rd party solar – end of dilemma… it’s probably what the public wants them to do anyhow.

  2. Since a number of states deregulated electricity and totally separated generation and distribution most rates in those states have increased. Some states did nothing. Virginia moved toward deregulation but didn’t force sale of generation so we moved back to hybrid reregulation. In other words, Virginia doesn’t fit neatly with other states and there is a huge difference in what happened in pricing of regulated vs deregulated states. The national average covers all that up. Typically, it’s a good thing to look at, but I’m not sure it’s appropriate when we consider this freeze. If Virginia rates were even lower and our relative ranking on cost improved, we’d be even better off.

  3. The proper question is, what would the rates be if the SCC were allowed to conduct the 2017, 2019 and 2021 reviews that were scheduled under the statute (2016 and 2018 I think for the other utility)? If the rates did not change, would there be customer refunds, as there were in 2009, 2011 and 2015? I’ve seen the current ad campaign where the utility cherry picks rate comparisons in its favor and ignores rate comparisons that might not be so flattering. But that is not the point. The point is in 2007 a rate making system was set up, it worked for a while, and then (1) successful efforts were made in 2013 and 2o14 to change the rules in ways favorable to the utility and then in 2015 (2) the system was entirely suspended and ratepayers were told to go pound sand until 2022. In both the 2013 and 2015 reviews the SCC concluded that Dominion’s rates and its projected expenses would produce profits substantially higher than the allowed return on equity. Yes, those were projections. But the only way to test the projection would be to allow a full SCC review of the books.

    The thinking behind this is not hard to follow. It is a well managed company. As it improves its operations and efficiency, its costs should go down and its profits go up. In 2007 the deal was that every two years there would be a review and an adjustment and either rates would go down or the customers would share in the profits through credits (not take them all, share). Which happened three times in four reviews – rate credits. Given their efficiency and the way more and more capital costs have moved to rate adjustment clauses, it is totally plausible that the base rates are higher than required now.

    Now, I’m attracted to Larry’s idea of forcing the utility to eat all of the costs of dealing with the coal ash within those base rates, but the truth is the utility will be perfectly within its rights to apply to the SCC any time it sees fit for a rate adjustment clause for that.
    And that is what the 2007 statute envisioned. That part has not been suspended.

  4. I am in 100% agreement with Steve Haner on this. Comparisons to national averages, etc. have no meaningful part of this conversation. The only pertinent question is if we assessed Dominion’s revenues and costs during the rate freeze and applied their authorized rate of return, would they have received more than they are authorized, about the same, or less than what they should have?

    It is the SCC’s legal role to ask this question at every review period and make appropriate adjustments. The GA should not be interfering with the SCC’s authority to make this determination. Anything that might have been related to the CPP could have been handled properly with this mechanism too.

    If the profit was as it should be or less, don’t you think we would be hearing a different story? Dominion is taking credit for historically low gas prices and a larger percentage of generation being provided by gas-fired plants.

    Methinks Dominion dost justify too much.

  5. RE: ” It is the SCC’s legal role to ask this question at every review period and make appropriate adjustments. The GA should not be interfering with the SCC’s authority to make this determination. Anything that might have been related to the CPP could have been handled properly with this mechanism too.”

    YEP…

  6. RE: ” It is the SCC’s legal role to ask this question at every review period and make appropriate adjustments. The GA should not be interfering with the SCC’s authority to make this determination. Anything that might have been related to the CPP could have been handled properly with this mechanism too.”

    YEP… What the GA did was essentially dismantle the terms and conditions of the monopoly allowing them whatever level of profits they can obtain and dedicate them to their investors.

    I’d not blame Dominion so much as I would the abject feckless behavior of the General Assembly – both sides taking money from the same corporation that they served up a sweetheart deal to.

    All this talk about conflicts of interest.. and “gifts” .. as if the millions of dollars these same rascals took -at the same time they’re voting to relieve Dominion of the requirements of their monopoly and the added cynical insult of telling voters it is a “rate freeze”. Virginia is for Rubes.

  7. I keep thinking that the people doing all of these terrible things to the people using Dominion — WERE ELECTED BY THE PEOPLE COMPLAINING
    am I wrong?– or is this just to create a problem where none exists.
    our rates are among the lowest in the country and you complain that they are not low enough?
    I can understand complaining about the ‘ COAL ASH ‘ and the fact that your elected representatives allowed the storage as it is for years & years without anything being done.
    but you are not?– isn’t it polluting you water?– seeping into your wells?
    and all you complain about is a few cents lower in your power bills, that you might be missing out on?
    seems to me that your priorities are off daydreaming
    reminds me of the residents of Alexandria not saying anything about polluting the Potomac river with millions of gal. of toilet waste for years?
    with never a word.

    • Yes: “What comes next?” It’s “the people complaining” we should blame.

      I guess it goes back to Henry Howell and Virgil Goode and that “blame it on the big boys” brand of Southern populism that made Virginia Power such a caricature of a whipping-boy. And in this Day of the Donald it isn’t surprising to hear those same themes from people who just ASSUME rates should be lower than they are, the fix is in, facts be damned.

      Meanwhile there are some rational folks out there who actually do care about the electric utility’s impact on the environment and the potential for stranded costs and energy efficiency in the home, and want to hear some discussion of these, but instead see regulators “missing in action” providing regulatory oversight highlighted by a “rate freeze” (with RACs for most big cost variables) and orders on review of DVP’s recent IRPs which at best kick the can down the road, at worst refuse to give either Dominion or the GA the benefit of their thinking about where we should be headed on new resource construction whether or not the CPP is (temporarily?) off the table.

      There’s an absence of leadership here — except at Dominion. The SCC is scared of the GA (which elects the Commissioners, after all!), and the GA is acting scared of the electorate, who don’t understand and don’t care to understand, and the Governor won’t even try to roll back the rate freeze when invited to. In this vacuum, why shouldn’t Dominion try to make its regulated businesses profitable, maybe even turned into cash cows to support its unregulated ventures? Why shouldn’t it concentrate on short term profits and let stranded cost fears take care of themselves?

  8. Another county heard from…it has been a ten year education process for me on these issues so I am not at all surprised that the average voter, and even the average legislator, is confused and satisfied to hear – your rates are low! Go worry about something else!

    Let the education continue: On this icy morning, let me give you an illustration of the interaction between base rates and rate adjustment clauses (RAC) for specific projects. The legislation this year expanding the RAC for residential underground projects will cost residential and commercial customers X dollars per year and there will be, as I recall, a reasonable ROE on that portion of the project financed by equity. I don ‘t have the engineering chops to argue merits of the idea, either it will work or it will not work. Either it will reduce the number of outages and shorten the time for recovery, or it will be mainly a bust and things will stay the same.

    One other thing to remember. The cost of repair and recovery is covered by the base rates. Most of the revenue Dominion loses when the power goes out is collected in base rates.

    Say the under-grounding project is wildly successful and a marked decrease in outages and far faster recovery times results. Dominion’s revenue goes up and its costs go down. All of this happens in the base rate pot. But the total cost of the project is covered by the separate RAC. The increased profit in base rates is in addition to and on top of the ROE allowed for the capital cost of the underground lines. And as I recall those charges will remain on the bill for decades, as long or longer then the charge for a new power plant.

    Say the under-grounding project is a total bust and we see little or no change in the reliability. It has cost the utility or its shareholders nothing. The RAC still collects the project costs plus a profit, and the base rates still pay for the repairs.

    The kicker is the base rates are untouchable. Thanks to the 2015 bill, the “freeze”, the SCC cannot review them. If the first scenario is correct, and the benefits are substantial, under the 2007 statute the ratepayers would share in the financial benefit. It is their investment, after all. The improved efficiency would produce either a lower rate or major refunds. But now it won’t. Because the base rates are frozen, untouchable, all of the potential benefits of this idea accrue to the utility and its shareholders and all of the costs and risks are placed upon the ratepayers.

    So how about that, Bacon, are we better off with this freeze? Hmmmmm? The very simple deal in 2007 was yes, utilities, you get these rate adjustment clauses plus ROE, but in exchange rate payers get a piece of the action if your costs go down and your profits grow. Pretty simple and fair deal until it ended. The real question now is, what comes next?

    • “So how about that, Bacon, are we better off with this freeze?”

      I don’t know, you don’t know, nobody knows. It would be helpful if the SCC at least had the ability to review rates, even if under the freeze it couldn’t change them. At least we would know.

      There is another issue, though, and that is the risk that Dominion took on when it agreed to the freeze. One thing that I doubt the company anticipated in early 2015 was the coal ash controversy. Under a best-case scenario, cleaning up coal ash will cost Dominion about $300 million. As I understand it, pollution-related expenses are classified as operating expenses, hence covered in the base rate. If environmentalists get their way and Dominion has to recycle/landfill all or part of the coal ash, the clean-up cost could reach $3 billion. Under the freeze, rate payers are protected.

      • Bacon. From the existing statute – the utility can apply for a RAC to cover:

        “e. Projected and actual costs of projects that the Commission finds to be necessary to comply with state or federal environmental laws or regulations applicable to generation facilities used to serve the utility’s native load obligations. The Commission shall approve such a petition if it finds that such costs are necessary to comply with such environmental laws or regulations…” There is zero, repeat zero, risk to base rates. The cost of dealing with the coal ash very well may rise to the level that such a RAC is in order. Ratepayers get zero protection – nor should they be protected from paying for legitimate compliance costs.

        • Plus, DVP DID know about the costs and risks posed by the coal ash; the Southern Environmental Law Center had already sued them over it.

          And Steve is certainly right about the way the RACs and base rates work. All declining costs are those that are covered in base rates (which can not by law be lowered) and all rising costs are recoverable in the Rate Adjustment Clauses.

          And Jim, you are naive if you believe Dominion “agreed to the freeze.” In fact, Dominion ordered it up from its compliant aiders and abetters in the General Assembly. Where do you think all ideas about electricity regulation arise?

  9. Looking at yesterday’s opinions here — it’s unanimous, and I agree. Should utility regulation be static or dynamic? Dynamic of course! Should the GA interfere? Of course not. Keep the regulatory discretion broad, don’t micromanage what you intentionally delegated to an expert agency because it’s so complicated.

    We can ask, though, what is best for ratepayers in the long run? Dynamic rate regulation gives the electric utility no incentive to try harder. It’s public service government-style, with all the good and bad that implies. Moreover, dynamic regulation usually allows a rate of return on equity (“profit” or ROE) that’s inadequate by the standards of unregulated private industry. What’s a good CEO supposed to do?

    The simple fact is, with pure dynamic regulation, every cost increase is reimbursed, every cost reduction is taken away. Nothing more nor less than that inadequate ROE ever goes to shareholders. It’s riskless, and deadly to corporate culture.

    I give Dominion high marks for fighting these forces of complacency and mediocrity very well. Dominion is among the best run electric utilities in the country. Now don’t get me wrong; a well run electric utility does what’s best for shareholders, and regulation must do its part to keep the interests of shareholders and ratepayers and the public interest aligned. The GA is NOT doing that; and they are NOT letting the SCC do a very good job of that.

    Shareholder and public interests align when the utility has a decent ROE (keeps the share price high which lowers the cost of raising capital), when it sells it product at a price below the local competition (the competition is other sources of energy like natural gas and propane selling at retail, self-generation, and, increasingly, other independent generators selling into the wholesale energy markets), and the national competition (to the extent that cheap electricity motivates businesses to relocate to your sales area). To keep this alignment going when there’s a lot of turmoil in the industry — such as from the advent of nuclear power in the last century, or unbundling and ISOs, or cheap solar today — the regulator has to get on board with, and support politically, the not-business-as-usual, fork-in- the-road decisions that come along from time to time. “Gotcha” regulation is destructive of that trust.

    Virginia regulators pushed too hard for intense dynamic rate regulation in the past. There was an adjustment clause with a quarterly review filing for just about everything, annual reviews of everything, special investigations on top of that, no room to breathe. What’s more, the Commission supported “retail access” in concept but, in the pivotal regulatory proceeding to consider DOM’s plan for spinning off some generation and becoming more dependent for purchases on the new wholesale marketplace, the Commission reversed course (under pressure from the GA) and rejected DOM’s plan. In effect, the Commission decided that Dominion should remain a vertically-integrated enterprise. That was a Gotcha. That was devastating to Dominion’s trust in the SCC.

    So Dominion, quite reasonably and predictably, did everything in its power to shut off SCC interference with its rates and insulate itself from SCC interference with its business planning. Beef up lobbying at the GA? Check. Shift resources and capital into unregulated subsidiaries? Check. Get a rate freeze in place for as much of the regulated business as possible? Check. Refuse to stick DOM’s neck out on big regulatory decisions like the future of NA3? Check.

    I don’t know where this is headed, but the lack of cooperation and absence of a shared vision in Virginia between the Commission, the GA, and the Company, is problematic, even unhealthy, these days. Paying for coal ash removal is only a blip in the big picture.

    • “Virginia regulators pushed too hard for intense dynamic rate regulation in the past. There was an adjustment clause with a quarterly review filing for just about everything, annual reviews of everything, special investigations on top of that, no room to breathe. What’s more, the Commission supported “retail access” in concept but, in the pivotal regulatory proceeding to consider DOM’s plan for spinning off some generation and becoming more dependent for purchases on the new wholesale marketplace, the Commission reversed course (under pressure from the GA) and rejected DOM’s plan. In effect, the Commission decided that Dominion should remain a vertically-integrated enterprise. That was a Gotcha. That was devastating to Dominion’s trust in the SCC.”

      I’ve got to say, AC, as someone who was there during “deregulation,” that much of what you posit in this paragraph is just flat wrong. The SCC never supported retail access “in concept,” nor, during the functional separation proceedings did the Commission succumb to pressure from the GA to “reject” legal spin-off of generation. In fact, the Commission approved plans from two utilities then operating in the state–Potomac Edison and Delmarva Power–to do just that very thing. Dominion brought intense pressure on the Commission to allow it to transfer its generation to an unregulated affiliate and the Commission wisely resisted, having witnessed what happened to electricity rates in both California and, more importantly, next-door neighbor Maryland after such divestitures. Rates in the Old Line state increased 70+% in a single year after Constellation got control of Baltimore Gas & Electric’s generation.*

      The opposition to the Dominion Virginia Power divestiture plan did not come only from the Commission’s Staff either. The Office of the Attorney General and the industrial customer coalitions each opposed the spin-off proposal. Even potential competitors objected to the proposal. The ruling by the Commission in the case was certainly not a “Gotcha” moment as the positions of the various parties had been known through publicly filed testimony for months and the public hearings were lengthy and detailed.

      I really don’t know what you have in mind with the comments at the start of the above-quoted paragraph about the “intense dynamic regulation” but generally utilities like periodic adjustment clauses, such as gas companies have on purchased gas, because they get quicker recovery of costs.

      (*Had cheap natural gas not come along a couple of years later, the PJM wholesale markets would have been a complete shambles and “competition” would have foundered entirely. )

  10. “The simple fact is, with pure dynamic regulation, every cost increase is reimbursed, every cost reduction is taken away. Nothing more nor less than that inadequate ROE ever goes to shareholders. It’s riskless, and deadly to corporate culture.”

    Acbar – understanding that, the 2007 statue incorporated what is called in other arenas a “share line” and the excess profits were split 60-40 in the initial bill, and then 70-30 in the 2013 amendments. And as I noted, in 2009, 2011 and even 2015 (despite a prediction it would not in that final case) the reviews produced major customer refunds. Was it fair? Well, they agreed to it – and got various valuable concessions on their side as well. But it is gone now and IMHO that will not come back. So I repeat, what matters is what comes next.

    • Yes, there’s been a lot of good theoretical work on “incentive ratemaking” and utility profit-sharing. The bottom line is, both sides of such a bargain have to trust that they have each other’s backs when the inevitable political carping occurs, especially if an unexpected event seriously disrupts the assumed future conditions to the point of requiring renegotiation of the deal.

      I’m not faulting the rate freeze. I fault the SCC here for not taking the lead but leaving it up to the GA to cut these deals. The legislature is not where this sort of action should be, except that Dominion and the SCC don’t trust each other. And that speaks of larger problems.

      • You have made many excellent points, Acbar. While in the industry, I was often critical of my utility’s lack of innovation. Then I realized if our attempts were successful, the benefits all went to the ratepayers. If we failed, the costs were absorbed by the shareholders. It was not a formula for encouraging creativity.

        In the absence of a partnership with the regulators, Dominion Resources has pushed forward with plans to serve the shareholders interest. They used the national discussion about the CPP to close poorly performing assets (old coal plants) and get easy approval for new large gas-fired plants. The new investments were covered by RACs rather than the base rates (which had historically been the case). By using the guise of the CPP they obtained a base rate freeze while all new large expenditures were covered by RACs. This increased profitability with no regulatory review.

        Dominion Resources has recognized the flattening of electricity demand (at least financially) and moved their emphasis into the natural gas arena. They have invested in gas networks out west and a gas transmission pipeline that yields 50% higher returns than typical utility projects and expect that they will be able to have utility ratepayers subsidize its higher cost.

        These are moves made by intelligent, powerful, financially savvy executives. There is a reason that Dominion Resources is a highly respected organization with a top-rated stock. However, these same decisions will not benefit their customers. Management has taken credit for the national shift to natural gas and the historically low gas price. Will they be as willing to accept the blame when gas prices increase and utility bills go higher?

        I think states such as New York are on the right track when they want to remove the incentive to build in order to earn and replace it with performance-based rates that will allow utilities to earn more when they serve the customers better.

        Someone in Virginia needs to get some spine and develop a mutually beneficial arrangement where shareholders, ratepayers, and the Virginia economy can all win. This is possible. It is happening elsewhere. It is the only sustainable path forward. And you are exactly right – it is built on trust.

  11. There is a nuance in Dominion’s recent statement: they say the rate freeze was enacted for “environmental” cost reasons, but the rationale at the time was the Clean Power Plan, which was uncertain then as it is now. So yes it sounds like they are now trying to redefine the justification to generic eco-costs (such as ash disposal).

    Like many regulations, what the public hears as justification is usually the PR spin. Acbar above is probably closer to some of the real reasons. We really never got an explanation for the rate freeze other than Dominion managers told McAuliffe they had to have it, and so the Gov argued that he asked for some solar energy projects in return.

    I do agree with Dominion that low electric costs for VA bode well for bringing jobs to VA. Most of the states to our North, with the exception of PA, are not focus on reasonable electric costs, so they have let VA/PA run the table on them.

    • We don’t have to have inside knowledge to talk about these things. I’ve been retired from the utility business and ‘out of the loop’ for more than a decade. Which leaves me quite free to speculate from the outside here. But I’m speculating about things that have change very slowly if at all in Virginia.

  12. I’m of the view that many companies do not want “low electricity prices” if it comes from coal. They want their power to come from solar with the grid as backup.

    Would 3rd party providers – provide that option to companies if they could?

    yep…

  13. “No wonder large electric users such as data centers overwhelmingly locate in Virginia instead of D.C. or Maryland.”

    What was it that Ronald Reagan said to Jimmy Carter in that debate?

    There you go again.

    If lower electricity rates dictate where data centers are built why are they all clustered together in high cost Loudoun County? Why aren’t they out in rural areas where you can buy an acre of land for $2,000? Why aren’t they in North Carolina where electricity rates are even lower than in Virginia?

    You know what else takes a lot of electricity? Smelting aluminum. Where are all the aluminum smelters in Virginia. Reynolds used to make tin foil in Richmond. However, I understand it was more due to the ready market of Richmonders making themselves tinfoil hats to protect themselves from government mind control than electricity prices.

    • Don, I can only surmise that Webb was speaking in the context of the Washington area having access to enormous broadband pipes. Access to monster broadband is the No. 1 criteria for locating a data center, right. Perhaps access to skill labor is No. 2, although, as you note, these things don’t need a lot of manpower, and Maryland has as much brainpower as Virginia. So, what’s the next largest input after that? Electricity, right?

      You’re the guy who knows. Enlighten us!

  14. Unlike NoVa – NC not only has data centers but ones that are for the private sector and not govt.

    and unlike Virginia – Duke Power actually works to provide solar to the companies that do want it…

    Virginia is screwed up… in several ways…

    Google buys solar power in North Carolina
    27 November 2015 By Peter Judge

    Google has contracted to buy the output of a 61MW solar plant to offset the energy needs of its data center in Lenoir, North Carolina.

    The search giant has signed a power purchase agreement (PPA) with Duke Energy, the largest utility in the US to buy the output of a solar farm in Rutherford County, North Carolina. The 61MW involved is enough to power the entire $1.2 billion Lenoir facility.”

    • Most of DVP’s data center load in Northern Virginia is for private industry, not the “government.” There is WAY more internet provider service in NoVa than in NC and just about anywhere else for that matter.

      Dominion Resources did buy a large solar facility on the Eastern Shore (about 80 MW output if memory serves) from its developer so that it could sell the solar output to Amazon’s data service centers in NoVa. Unquestionably, there is more solar in NC than in Virginia, but NC had a state tax credit, so much of that investment is being paid by taxpayers, rather than utility customers.

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