Tag Archives: Dominion

Heads I Win, Tails You Lose

This will be one of those blog posts where many readers will ignore the substance of my arguments and go straight for the jugular — Dominion Energy Virginia sponsors this blog, I’m a shill for Dominion, and, therefore, anything and everything I say can be discounted without further thought. If you’re one of those people, I know I won’t persuade you. But please, if you object to my conclusion, don’t settle for the cheap ad hominem shot. Explain to me why I’m wrong.

This post was triggered by a Washington Post op-ed by Del. Mark Keam, D-Fairfax, titled, “Why I’m Breaking Up with Dominion.” Keam wrote:

In 2017, President Trump made it clear there would be no Clean Power Plan, which put Dominion in a bind. Dominion couldn’t justify continuing the rate freeze when the reason it cited no longer existed and it held nearly a billion dollars of potential customer refunds.

On the other hand, as Virginia’s most powerful political donor, Dominion couldn’t admit its mistake and simply return to pre-2015 status. So, Dominion launched an all-out lobbying campaign to push for a different result.

First some background: In June 2014, the Obama administration began implementing its Clean Power Plan. The State Corporation Commission (SCC) staff estimated that the plan would cost Dominion between $5.5 billion and $6 billion for Dominion to shut down coal plants and replace them with power from other fuel sources. Environmental groups suggested that the cost would be much less. But nobody knew for sure, and nobody possibly could know until the Commonwealth adopted a definitive methodology for calculating CO2 goals to be attained. When the General Assembly convened in January 2015, uncertainty reigned.

A deal was struck to freeze base electric rates through 2022 (while continuing to allow the SCC to adjust rates for fluctuations in the cost of fuel and pay for major capital projects). The purpose was to guarantee rate stability for electricity customers. Whatever the outcome for Dominion and Appalachian Power, customers wouldn’t be subjected to higher base rates. Dominion and Apco absorbed the risk. They might make higher profits if the costs were lower than feared, but they might make lower profits if worst-case cost scenarios panned out.

In November 2016 something happened that no one anticipated — Donald Trump won the presidential election, and he effectively spiked the Clean Power Plan.

But what if Hillary Clinton had won, as virtually all informed political opinion expected? It’s no stretch to think that the Environmental Protection Agency and the McAuliffe administration would have continued implementing the Clean Power Plan. We cannot know which of the regulatory options the administration would have chosen — setting CO2 emission targets based on mass-based limits (or total tons emitted) or rate-based limits (CO2 emitted per unit of electricity) — but we can safely assume that the new regulatory framework would have been more costly than doing nothing at all.

Continuing our counter-factual scenario, let’s say the Clean Power Plan framework adopted by Virginia would cost the $5.5 billion to $6 billion postulated by the SCC, and that Dominion had to eat a billion dollars or two in write-offs when it shut down its coal-fired power plants. Now let’s say Dominion came to the General Assembly, saying, sniff, sniff, poor us, these regulations are ruinous, could you please bail us out? What answer would Keam and others of like mind have given? They would have said, “Not a snowball’s chance in hell! You took yer chances and you lost. Now beat it!” And rightfully so.

Of course, that’s not the way things turned out. Dominion lucked out. Trump won the election and he canceled the Clean Power Plan. By January of 2018, Dominion was accumulating earnings way above its normally allowed rate of return (although a major weather event or a regulatory order to pay of billions of dollars to clean up coal ash ponds could have negated those profits).

Inevitably, a hew and cry was raised that Dominion was making out like a bandit by pocketing huge excess profits. Dominion was on track to make a lot of money, all right, but not like a bandit. More like a poker player. Dominion didn’t steal anything — but it did win the bet.

A lot of politicians and consumer advocates couldn’t see the difference. And, politicians being politicians, they ignored the risk that Dominion absorbed back in 2015 and clamored for a rollback of the freeze. The game they were playing can be described forthrightly as, “Heads I win, tails you lose.”

When it became clear in the November 2017 elections that voters largely agreed with the anti-Dominion politicians, nearly obliterating the Republicans’ hefty majority in the House of Delegates, Dominion saw the writing on the wall. The utility seized the initiative with its proposal to end the freeze on its own terms — by reinvesting over-earnings into a massive grid-modernization plan. Politically, the ploy was brilliant. Dominion cut a deal with the new Northam administration, environmental groups, independent solar producers, and other constituencies, leaving Keam and his buddies to eat dust. I understand why the delegate is so sore.

The resulting Grid Transformation and Security Act may or may not be a good piece of legislation. I haven’t delved deeply enough into the details to conclude whether it will be harmful or beneficial to rate payers. We can be reasonably assured that it will be beneficial to Dominion, or the company would not have gone along with it. But if I were a senior Dominion executive, I’d be very wary of cutting a deal like the 2015 rate freeze ever again. Getting sucked into a heads-you-win, tails-I-lose political proposition is no way to run a business.

No Real Pipeline Story Here, But Read on If You Must

The public relations battle over the Atlantic Coast Pipeline continues unabated even as managing partner Dominion Energy edges closer to beginning construction of the 600-mile project. The latest flap surfaced in the Richmond Times-Dispatch this morning after the State Corporation Commission agreed, over Dominion’s objections, to accept expert testimony by natural gas industry analyst Gregory Lander in a hearing on Dominion’s Integrated Resource Plan.

Lander, who was retained by environmental groups opposed to the ACP, concluded that the pipeline will cost Dominion ratepayers between $1.6 billion and $2.3 billion. That conflicts with Dominion’s estimate, based upon an earlier study by its own consultants, that the pipeline will save rate payers $377 million annually. Dominion’s estimate will be harder to maintain now that the Duke Energy, an ACP partner, has acknowledged that the cost of project has escalated from $5 billion to between $6 and $6.5 billion as the company adjusted its route and incorporated environmental protections to accommodate the demands of landowners and environmentalists. But that cost increase doesn’t come close to accounting for the discrepancy between the two estimates.

The Southern Environmental Law Center trumpeted the SCC decision to accept the Lander study as a big victory. “This is proof positive that Dominion’s pipeline will not cut costs to customers but instead increase our bills,” said SELC attorney Will Cleveland. “It’s further evidence that Dominion’s original promise – that the pipeline would save customers money and spur job growth in the Commonwealth – has disappeared.”

The Times-Dispatch made the Lander testimony the lead of its story. But I’m thinking that reporter Robert Zullo is reading too much into the SCC decision. Sure, Dominion tried to prevent the SCC from considering the Lander study, but SCC proceedings are full of filings and counter filings. It’s what utility lawyers and environmental lawyers are paid to do.

Moreover, it is silly to read into the SCC’s decision to accept expert testimony into the public record an implication that the SCC is prepared to accept that testimony’s main conclusions. As Zullo quoted SCC spokesman Ken Schrad as saying, “the order merely allows the testimony to be part of the record in proceedings on the plan, which the commission determined is ‘reasonable and in the public interest.”

“That’s not saying it’s right, wrong or indifferent,” Schrad said of Landers’ testimony.

As Zullo further reported: “Last year, pipeline opponents urged the SCC to issue an order requiring the Dominion entities to file an application for the approval of the [natural gas contract with the ACP]. The commission dismissed the petition, stating that if the deal creates unreasonable costs, the remedy is to deny the utility the ability to recover them from customers in a fuel proceeding.”

At some point, the ACP will be built and will start supplying gas to Dominion Energy Virginia. Dominion will petition the SCC for a fuel rate adjustment. That rate hearing will be where the rubber meets the road. Dominion will submit its evidence, environmentalist and consumer groups will submit their evidence, all sides will get an opportunity to critique one another, and the SCC judges will weigh the testimony and decide whether a rate adjustment is justified and, if so, how much.

Zullo knows this — indeed he alluded to it in his article. But he’s a reporter like any other, and he hyped the clash between the SELC and Dominion. Otherwise, it looks like, there wouldn’t have been much from the IRP hearing to report.

Grid Transformation Controversy Shifts to SCC Nominees

The legislative logjam over a controversial electric grid modernization program appears to have broken. The much-modified legislation, backed by Governor Ralph Northam and Virginia investor-owned electric utilities, has passed the House of Delegates and state Senate, and in the estimation of Richmond Times-Dispatch reporter Robert Zullo, “could be headed to … Northam’s desk by the end of the week.”

The legislation will enshrine the “investment model” advocated by Dominion Energy Virginia of using rate over-earnings to help pay for building the electric grid of the future, including more solar and wind power, energy efficiency, power-line burial, a pumped-storage facility, a “smart” grid, and hardening against cyber-sabotage and terrorist threats. Opponents say the law could lock in excess utility earnings for years.

Assuming the bills in both houses can be reconciled and enacted into law, the battle between Dominion, Appalachian Power Co. and their detractors won’t be over. The action just moves to the State Corporation Commission. The SCC staff and three judges will hold a series of evidentiary hearings on a long list of proposed investments, and they will balance the broad objectives of affordability, reliability and sustainability when deciding whether to approve the requests. Presumably, they will take into account the declaration of the General Assembly that grid-transformation projects are in the “public interest.”

The SCC judges will have latitude — exactly how much is not clear — to draw their own conclusions. So it very much matters who serves on the commission. And it very much matters who will fill the position to be vacated by Judge James C. Dmitri, who, among the three judges, arguably has been the most critical of the electric utilities.

Yesterday the Senate Commerce and Labor Committee interviewed three candidates to replace Dmitri:

  • C. Meade Browder, Jr., assistant attorney general,
  • David W. Clarke, a Richmond lobbyist representing gas and insurance companies, and
  • Maureen Matsen, legal counsel for Christopher Newport University and a former deputy secretary of natural resources under former Governor Bob McDonnell.

Committee Chair Sen. Frank Wagner, R-Virginia Beach, a long-time friend of the electric utilities, made it clear that he wants to see the SCC get with the program. Wagner accused the commission, reports Zullo, of an inability to “see the big picture” because of a narrow focus on electric rates and consumer costs.

Wagner compared the commission to a short-sighted business owner who can hoard money by failing to invest in his company but “will end up going out of business for failing to keep up.

“They take that myopic approach despite many statements, getting more and more bold, from the General Assembly as to what the policy is for the future of Virginia and ensuring that those investor-owned utilities make the necessary investments for the long-term good of all Virginians,” Wagner said.

The SCC judge candidates, who are appointed by the General Assembly, expressed support for the new direction of electricity regulation.

Said Brouder: “I’m aware of your particular interest in that area. … I think any commissioners would work within the regulatory framework that y’all have laid out.”

Said Clarke: “It’s clear to me that the sense of the General Assembly is that we need to have more investment. Those things don’t come without a price tag on them, no question.”

Said Matsen: The commission “needs to be a broader, wider vision” on how it handles “a tremendously dynamic and exciting time for the energy industry.”

Economic Development Requires Grid Transformation

by Todd P. Haymore

Building a more diversified economy and regaining Virginia’s status as best for business were the overarching goals during my time as Secretary of Commerce & Trade under Gov. Terry McAuliffe’s administration.

Working in partnership with hundreds of companies, the General Assembly, regional entities, and colleagues in federal, state, and local governments, we were successful in our efforts to build a new Virginia economy, one less reliant on federal spending and more focused on private sector investment.

I have great confidence the momentum of the last four years will continue under Gov. Ralph Northam.

One way to help keep the positive results going is for state lawmakers to take steps needed to invest in the infrastructure of tomorrow. The Grid Transformation & Security Act of 2018 is an opportunity to address one of the state’s key economic building blocks and ensure we are best positioned for future investment, job creation, and prosperity.

Supported by state legislators on both sides of the aisle, this comprehensive energy policy package ensures a continued supply of clean, reliable, and affordable electricity from Dominion Energy and Appalachian Power for powering modern businesses.

Stakeholder input, which began last year, has continued during the current legislative session to ensure the proposal balances these needs with consumer protections and regulatory oversight. This work has led to greater immediate savings for customers, more opportunities for refunds and rate cuts, and an increase in State Corporation Commission reviews. The recent changes have been incorporated into both the House and Senate versions of the bill.

During my time in Gov. McAuliffe’s cabinet, we worked hard to keep Virginia at the forefront. We traveled the globe to open new markets to Virginia’s products and attract foreign direct investment. We promoted tourism, lured new employers, and supported existing businesses, which generated approximately 70 percent of the more than 200,000 jobs created from 2014-2018. The results included a record $20 billion in new capital investment, a drop in the unemployment rate from 5.4 to 3.7 percent, and significant increases in exports and tourism spending. Forbes, CNBC, and Site Selection magazine recognized the Commonwealth with top ten rankings for business climate.

Make no mistake about it, the affordability and reliability of energy is a key component of the site selection process.

Unfortunately, Virginia’s electric infrastructure is no longer keeping up with the pace of modern business innovation. Originally designed to take electricity one-way, from the power plant to your home, it wasn’t built to accommodate private solar generation from rooftop panels or spikes in demand from electric vehicle chargers.

As new technology emerges, so have the accompanying threats, which have been foisted upon our aging electric infrastructure. Cyber and physical threats are growing more complex, and frequent. Using secure communications networks and devices along with hardening for circuits and substations gives energy companies the ability to know with greater accuracy what is impacting their system.

With the influx of renewable energy sources in Virginia, come challenges we have never faced, or even imagined. A modern, or smart, grid would make it easier to continue the exponential growth of renewable energy needed to meet the clean energy demands of high-tech firms and continue to shrink the carbon footprint of residential customers.

The regulatory framework also needs to evolve. Policy experts, lawmakers, and stakeholders are working to redefine the current structure to ensure utilities can undertake a project of this scope without hiking rates on customers.

The Grid Transformation & Security Act allows investments to modernize the grid and expand the Commonwealth’s use of renewable energy primarily through existing rates. And it provides customers with bill credits, rate reductions due, and elimination of existing surcharges.

In short, I believe lawmakers want to ensure the costs of this transformation will not result in higher rates which would impact residential customers and hinder economic development. Indeed, transforming the grid is a necessary step to pave the way for the continued growth of a new Virginia economy.

If the General Assembly doesn’t act, others will overtake us and gain an upper-hand in retaining and recruiting businesses and the thousands of jobs that accompany them. Virginia can’t let this happen if we want to continue building a more diversified economy, and regain our title as the best state for business.

Todd P. Haymore served as Virginia’s secretary of commerce and trade under Governor Terry McAuliffe from 2016 – 2018. Prior to that, he served as Virginia’s secretary of agriculture and forestry under Gov. McDonnell and Gov. McAuliffe from 2010 – 2016.

Wall Street’s Perspective on Virginia Rate Re-regulation

Ken Cuccinelli

What follows is a letter from former Attorney General Ken Cuccinelli to members of the House of Delegates two days ago. His discussion of the Wall Street perspective on electric rate regulation adds a new element to the debate, so I publish the letter here with his permission. — JAB 

Dear Delegates,

One of the benefits of being Virginia’s Attorney General is the opportunity to pick various areas of the law into which one can “dig in.” After working on energy projects in the private sector prior to becoming Virginia’s A.G., I was enthusiastic about digging into electricity rates. I learned a lot, including learning about my own mistakes when I was in the General Assembly.

One other thing I learned was that while the issue of electricity regulation is the most complicated with which legislators must contend, “clarity” is often not encouraged but discouraged.  Why would that be so?  Because confusion and the speed of the General Assembly session are used to skew bills against ratepayers (read: taxpayers) while downplaying or denying the worst possible real-world applications of the proposed bill.

This was the case in 2015, and it appears to be the case again this year.

The SCC staff has done an admirable job in their bill summaries of clarifying a complex and confusing issue.  That provides one source of clarity.

Where else might we find clarity?  While you might not think about it, another source of clarity is Wall Street. Any perceived misdirection or incompleteness in Dominion or APCo statements to Wall Street subjects them to lawsuits – a consequence that does not exist within the General Assembly. For example, what was the consequence to Dominion of the fact that their main argument for the 2015 bill was not, shall we say, … accurate?

The main consequence is that Virginia’s taxpayers have electricity rates that amount to the equivalent to almost a $500 million tax increase (combining the cost of both Dominion and APCo).  The 2015 bill thus qualifies as one of the biggest tax increases in Virginia history, except that instead of those dollars being used for transportation, education, public safety, etc., they just go as a windfall to Dominion and APCo shareholders.

So, what does Wall Street think of HB1558/SB966 (hereafter “SB966” or “the bill”)?

On February 1st, investment bank UBS issued a report to their clients that gushed over how spectacularly Dominion handles the General Assembly and Governors of Virginia to boost Dominion’s value (at the expense of Virginia ratepayers). UBS called SB966 a “catalyst” that drives Dominion’s stock price higher, and Wall Street is so sure the General Assembly will pass the bill, and Gov. Northam will sign it, that it has already priced the benefits to Dominion of the bill into Dominion’s stock price!

UBS, in a model of understatement, opens its discussion of the bill by saying “Dominion has proven adept at navigating VA politics.” UBS continues by noting “…the state’s history of constructive utility legislation…” leads them to believe “that the bill has a good chance of passing.”

Of course to Wall Street, “constructive utility legislation” means legislation that makes it even easier for Dominion to make a lot of money, which would be a great thing, if it didn’t amount to legalizing seizure from Virginians and our businesses.  This grab is ‘legalized’ by the General Assembly and the Governor.

How easy does Wall Street think Virginia is on Dominion? UBS thinks Virginia’s regulatory environment is SO favorable to Dominion that they add a full 5% to the expected value of Dominion’s Virginia business just because of Virginia’s anti-consumer/pro-Dominion regulatory structure.  Now THAT is quite a return on Dominion’s “investments” in lobbying and donating to campaigns!

Dominion spends mere millions on TV commercials, on lobbying and on political contributions to candidates and legislators and in return Dominion gets to write its own legislation that returns billions of dollars in cash and value. That means that Wall Street thinks Virginia is among the easiest regulators of utilities in the entire country – i.e., Virginia’s General Assembly and Governors are pushovers for Dominion.

To use a dating analogy, if Virginia were dating utilities, her name and phone number would be on the boardroom wall of every utility in the Commonwealth under phrases like “for a good time call….”  And that “good time” doesn’t even cost Dominion very much.

Continue reading

How Is the New Double Dip any Different from the Old Double Dip?

The House of Delegates passed its own version of electric-utility regulatory reform yesterday. The big news is that the House amended the legislative compromise struck between Governor Ralph Northam, the electric utilities, and other key stakeholders to ensure that it prevents the dreaded “double dip.”

Reports the Richmond Times-Dispatch:

The Virginia Attorney General’s Office and the commission have warned that the bill still restricts the ability of the commission to order refunds and lower base rates and also allows utilities to double charge for the grid and renewable investments: Once by canceling out refunds and again by including the projects in the rate base upon which they earn a profit.

“The governor’s office doesn’t believe that there is a double dip in the bill,” Toscano said Monday. “The entire Democratic caucus was taking the position that if there was no double dip in the bill like everyone has asserted, we will make sure the language is absolutely, positively clear.”

I don’t understand how this arrangement would differ substantively from the way rate regulation always worked. Permit me to express my perplexity with a hypothetical example:

Let’s say Dominion Energy Virginia wants to spend $100 million on burying distribution lines prone to disruption in severe weather events. That may or may not be a sound use of the money, but that’s not the question. The question is how Dominion would be compensated for that investment under the proposed new rules.

First, let’s assume that the utility is raking in excess revenue. Rather than rebate the excess to rate payers, Dominion gets to “reinvest” that money in a panoply of grid modernization projects of which distribution line undergrounding is one. Rate payers don’t get the money rebated to them. That’s the first dip. Then Dominion gets to build that $100 million investment into its rate base, and it gets to generate a return on investment — let’s say 10% for purposes of simplicity — until it is fully depreciated. Instead of rate payers getting to generate income on that $100 million, Dominion gets to pocket the income. That extra $10 million constitutes the double dip.

But that’s not the whole story! Under the pre-rate freeze regulatory regime that governed rate setting until 2015, Dominion would have filed for a rider, or Rate Adjustment Clause, to cover the $100 million capital investment of burying the power lines. As I understand it, Dominion also would have been entitled to recover not just the up-front capital but the cost of capital — about 10%.

Under the Northam-Dominion compromise, Dominion would not get to file a rider. Call that a reverse double dip. Rate payers would benefit the once because Dominion doesn’t get its $100 million back through a rider. And they would benefit twice because Dominion wouldn’t get to recover its cost of capital. In other words, it’s a wash. The only difference is that the expense is embedded in the “base” rates instead of in a rate adjustment clause.

Now, there are many other issues one might raise about the re-regulation legislation. Does it undermine the State Corporation Commission’s role overseeing electric utilities? Should the General Assembly declare massive “grid modernization” investments in solar power, wind power, pumped storage, energy-efficiency, smart grid investments, and underground burying of transmission and distribution lines to be in the “public interest,” thus lowering the bar for SCC approval? Great questions, let’s debate!

But double dipping? Dominion won’t get any more licks of ice cream than it did before — unless I am missing something. If I am, I beg you, please explain how the proposed new double dipping differs from the old double dipping. If your explanation makes sense, I will publish it on the blog.

Update: As you can read in the comments, Tom Hadwin and I went back and forth on this issue. Here is how I now understand it:

(1) Rate payers lose the $100 million rebate.
(2) Then the $100 million goes into the rate base, where it must be repaid to Dominion. (That’s the point I wasn’t comprehending before.)
(3) Plus ratepayers pay Dominion a 10% rate of return on the $100 million.
(4) Dominion does not file a Rate Adjustment Clause (RAC), saving rate payers $100 million.
(5) With no RAC, Dominion doesn’t earn 10%, and rate payers don’t have to pay it.

Is Training a Better Investment than Education?

Worker in the control room of the North Anna nuclear power station. Photo credit: Style Weekly

In his book, ‘The Case against Education: Why the Education System is a Waste of Time and Money,” George Mason University professor Bryan Caplan argues, as the title of his book suggests, that much of secondary school and some 80% of time and expense dedicated to earning a college degree is wasted. Most of the facts and theories we absorb in college have little applicability in the “real world,” that is to say, the world of work, and are soon forgotten. The primary value of a college degree, he contends, is to signal to the labor market that someone has the intelligence, diligence and conformity (willingness to play the rules of the game) to make a good employee.

I’m about halfway through the book, so I don’t know if he adds any important qualifiers, but his arguments were in the back of my mind today as I toured the North Anna Power Station. Other than the engineers (most of whom went to Virginia Tech), relatively few of its 950 employees have college degrees. But that’s not to say they aren’t educated. They are well schooled in the highly specific knowledge and skills required to operate and maintain a nuclear power station.

It takes 39 months of training — classroom instruction, working in the power plant, and scenario training — to become a “plant operator” permitted to enter the nuclear inner sanctum. To graduate to a job in the control room requires an additional 18 months, including hundreds of hours undergoing computer-modeled simulations in a training facility mocked up to resemble the control room. Not only must student-employees meet the expectations of their Dominion managers, they must pass muster with Nuclear Regulatory Agency (NRC) evaluators.

Any electric utility wants its employees to perform to high standards. But nuclear power plants are a no-forgiveness environment. There is so much at stake should anything go wrong — another Three Mile Island- or Fukushima-style incident would be calamitous to Virginia, not to mention the company — that Dominion spares no expense with training. As consequence, the power-plant jobs are well paid. According to Recruiter.com, the pay scale for nuclear power-station operators ranges nationally from $56,000 to $84,000 a year, largely based on tenure. Not bad work for a high school education.

Circling back to Caplan’s book… People retain skills that they apply in the workplace. Indeed, they sharpen and refine those skills. By contrast the “fade out” of college knowledge and skills tends to be high. Some fields of study, such as engineering, computer science, and the health professions, are useful because they teach skills that will be employed in the workplace. But others — theology, ethnic/gender studies, and foreign languages, to pick three examples — are largely useless unless the student aspires to pursue a career teaching those topics.

Personally, I believe there is workplace value in learning how to think and communicate clearly in the spoken and written word — skills which, ideally, are taught in college. But I get Caplan’s larger point. Most of the knowledge I accumulated in pursuit of my B.A. and M.A. in history (with a concentration in African studies) has dissipated. I remember little of the content because I have had no occasion in my adult life to reinforce what I learned. I would like to think that intangible skills gained from my honors history program — how to think rigorously and analytically — carried over to my career in journalism. But I will confess that the ability to write in an academic style proved of so little value in newspaper reporting that I nearly got fired from my first full-time job with the Martinsville Bulletin. Most of what facility I have in writing has come from pounding away on typewriters and keyboards, year after year after year, on the job.

After getting a glimpse of Dominion’s training program, I am more inclined to agree with Caplan’s assessment than I was before: Much of the time and money dedicated to higher education probably is wasted. How to encourage more companies to invest more in vocational training, however, remains an open question. The U.S. workforce is highly mobile. Nuclear power-related skills are not readily transferable, so investing in training makes sense for Dominion. But other companies have little incentive to follow its example if its trainees jump to employers. How we solve that dilemma, I do not know.

Insufferable Self-Righteousness

Michael Bills, a former Goldman Sachs executive and chief investment officer of the University of Virginia, is so outraged by what he calls the “legalized corruption” of Dominion Energy’s outsized campaign contributions that he says he’ll donate thousands of dollars to legislators who pledge not to accept money from the power company and to divest any personal investments in the company.

The Clean Virginia Project will offer $5,000 per election cycle to participating delegates and $20,000 per cycle to senators, reports the Richmond Times-Dispatch. “Democrats and Republicans should represent their constituents and not powerful corporate interests, and Clean Virginia will be holding them accountable if they don’t,” Bills said in a prepared statement.

That’s really rich coming from a guy who made $1,344,500 in Virginia political contributions in 2017 — compared to $913,646 for Dominion.

Puh-leeease. If Bills and his buddies in the Charlottesville gentry want to criticize the legislation working its way through the General Assembly, I’m fine with that. There are a lot of pros and cons to most recent version of the bill that would rewrite the process for regulating electric utilities in Virginia. Does it lock in utility profits at an unacceptably high level? Does it undermine the State Corporation Commission’s powers of regulatory oversight? What form should electric grid modernization take? Those are all legitimate questions that would benefit from a robust public discourse.

But when it comes to criticizing Dominion for contribution to political campaigns, Bills sounds like the pot calling the kettle black. Spare me the insufferable self-righteousness.

When “Dominion” makes political contributions, the money isn’t coming from rate payers or even shareholders. The money is collected from Dominion executives and employees. If I understand the mechanics correctly, the Dominion political action committee aggregates the donations of individual employees, some of whom are wealthy executives and some of whom are every-day employees. Somehow, we’re expected to believe that Bills’ donating more than a million dollars from his massive personal wealth is less “corrupt” than hundreds of Dominion employees pooling their smaller donations.

Last year, Bills donated $416,000 to the Northam for Governor campaign. Dominion donated $50,000 — which it offset by donating $55,000 to the Gillespie campaign. If money corrupts the political process, one would think that Bills sank his talons far deeper into Northam than Dominion did. Yet Northam helped work out the legislative compromise with Dominion that Bills’ friends at the Clean Virginia Project find so objectionable. What happened? Is Bills upset that he bought Northam but he didn’t stay bought?

Clearly, money talks. If it didn’t, special interests wouldn’t dole out so much of it. But it’s not so clear that money buys much more than access — the right to be heard– as opposed to a politician’s undying fealty.

The irony is that in the past year or two, Charlottesville’s landed gentry has emerged as a much bigger source of political contributions than Dominion could dream of becoming. Just look at all the money donated to left-wing populist Tom Perriello last year. At least the Dominion PAC represents the interests of thousands of employees around the state. Who does Bills represent other than himself?

Peeling Back Another Layer of the Grid Modernization Debate

A critical point has gone missing in the debate over the Grid Transformation and Improvement Act: the effect of regulatory changes on the ability of Virginia’s electric utilities to borrow money.

Electric utilities like Dominion Energy Virginia and Appalachian Power Co. are highly leveraged; that is, a high percentage of their capital base consists of debt. They enter capital markets to borrow money needed to finance big projects, and the cost of that capital — the interest rate — is charged back to rate payers. Thus, any regulatory change affecting investor confidence and, thereby, interest rates, can have a little-noticed impact on electric rates.

In repealing the rate-freeze deal that has governed Virginia’s electricity sector since 2015, Dominion has advocated an “investment” regulatory model that calls for plowing over-earnings into renewable-energy and grid-modernization projects. This model first struck me as more complicated than it needed to be. Why not stick with the regulatory system that prevailed until the rate freeze? There’s a complicated answer to that question, and it involves utility borrowing costs and interest rates.


The old regulatory model, which Dominion lobbied to put into place in 2007, divided rate adjustments into three logical categories — base rates to cover ongoing operating costs, fuel adjustments to cover fluctuations in fuel prices, and project-specific riders (or rate adjustment clauses) to cover major capital investments. The State Corporation Commission (SCC) reviewed Dominion and Apco earnings every two years, determined if they were higher or lower than the permitted rate of return, and then ordered rebates for over-earnings. Pretty straightforward.

Under the proposed changes making their way through the General Assembly, however, over-earnings could be offset by investments in legislatively favored and SCC-approved priorities such as solar power, wind power, energy efficiency, smart meters, and the burying of electric lines. For those projects, over-earnings wouldn’t be rebated directly to rate payers. Instead, they would be deducted from what the utilities would have paid had they filed for riders to recoup capital investments. And customers would benefit indirectly from lower costs passed on through riders. It sounds like a regulatory system that Rube Goldberg would contrive.

As I explained yesterday, critics accuse Dominion of “double dipping” — benefiting once from avoiding the over-charge rebates, and benefiting twice by incorporating the overcharges into their cost structure, upon which they can then earn a 9%+ return on investment. While rate payers get their money back on the back end via an offsetting reduction in rate riders, Dominion gets to generate income off that money in the meantime.

I’m not sure that the critics’ argument stands up. If the old regulatory model still applied, Dominion would finance the grid modernization priorities through rate riders, they still would be allowed to make a return on capital it invested, and that return still would be passed on to customers. Double dipping appears to be an illusion. That’s my understanding, but I’m no expert in regulatory accounting, so I’ll dish definitive answers off to the experts.

The issue I want to focus on is why Dominion wants to pay for grid modernization the Rube Goldberg way rather than the straightforward way. Why would Dominion dream up such a convoluted approach unless it had something self-serving in mind? I put that question to the company. I hereby digest and repeat what I was told.

To understand the reason behind the “investment” model, we need to know how Dominion (and by Dominion, I mean the regulated utility, not the parent company) finances projects. If the company needs to spend, say, $1 billion to build a new power station or $500 million to build a new transmission line, it doesn’t have the cash sitting around to pay for it. It must borrow the money by issuing bonds. Investors want to be assured that Dominion will generate the cash flow to pay them back on schedule. They demand predictability. They hate uncertainty.

Some unpredictability is inevitable. No one knows if a hurricane will swoop through and knock out a lot of power lines, disrupting revenues and running up costs. No one knows if the state or federal government will enact new regulations for something like coal ash clean-up — or a regional greenhouse gas initiative — that had been entirely unanticipated a couple of years before.

A recent lightning bolt out of the blue was the reduction in federal income taxes. While parent company Dominion is celebrating the tax break for its unregulated subsidiaries, Dominion Energy Virginia won’t get a windfall. The Grid Transportation Act will require Dominion and Apco to rebate all tax savings to rate payers. Moody’s Investor Service, the bond rating group, sees the tax break as a negative event, not a neutral one. According to the Wall Street Journal, Moodys has reduced the rating outlook for 24 regulated and utility holding companies, including Dominion. (A negative outlook is not a rating downgrade; it merely says that a rating downgrade is possible.)

“If [cash flow] is going to be smaller, to us, the financial risk has gone up,” the Journal quotes Toby Shea, a senior credit officer at Moody’s, as saying.

Dominion’s proposed investment model takes some of the unpredictability and risk out of the equation. When going to the bond market to finance grid modernization, the company won’t get blindsided by an SCC order to cough up several hundred million dollars in rebates to customers. Instead, the company  will offset the rebates with spending on grid-modernization spending, which it can control. Investors will be reassured that Dominion’s revenues won’t decline precipitously, and the company will be rewarded by a better credit rating and lower interest rates than it would have enjoyed otherwise. That risk reduction translates into dollars and cents for customers.

That’s Dominion’s argument. Perhaps there are countervailing arguments. Even if so, it’s a critical piece of the debate that has yet to enter the public domain.

If valid, the argument calls into question the contras’ contention that customers would lose from double dipping. The critics’ accounting of pluses and minuses to customers fails to take into account the positive impact on Dominion’s borrowing power. On the other hand, the Dominion’s argument leaves some questions unanswered. How big would the impact of the Grid Modernization Act on interest rates be? One hundredth of a percentage point? A tenth of a percentage point? Bigger? How much would that save in interest rates? Are we talking about tens of millions of dollars,  hundreds of millions of dollars, or mere millions?

If Virginians want sound energy policy, we need to give this issue closer scrutiny.

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.