Bacon's Rebellion

Dominion Open to Ending Rate Freeze

Mark O. Webb

Take surplus revenue and invest it in modernizing the electric grid, the Richmond utility proposes.

Dominion Virginia Energy has proposed ending a controversial freeze in base electric rates and plow surplus revenues owed to rate payers into modernizing the electric grid.

“We believe it is time to transition away from the rate freeze as the outlines of state carbon regulation have become more clear and the need and the opportunity to reinvest in grid transformation becomes more pressing,” said Mark Webb, senior vice president for corporate affairs, in remarks made during a hearing of the Commission on Electric Utility Regulation.

None of the commission members seemed surprised by Dominion’s dramatic shift, which it aired publicly for the first time, nor did they have any questions. Dominion’s presentations were orchestrated with comments made by Technology Secretary Karen Jackson, who emphasized the need to bolster the grid against cyber-security attacks, and a representative of the Edison Electric Institute, who discussed how grid modernization sped the restoration of electric surface this year after Hurricanes Harvey and Irma.

In a separate presentation, Kimberly B. Pate, director of the division of utility accounting at the State Corporation Commission, noted that a reduction in the corporate tax rate from 35% to 20% embedded in Congressional tax legislation would reduce the tax liability of Dominion by $165 million and Appalachian Power Co. by $80 million. If the freeze in electric rates were still in effect, she said, the tax savings would flow straight to shareholders rather than rate payers.

Dominion pushed for the rate freeze in 2015 after the Obama administration had proposed its Clean Power Plan designed to electric utilities’ reduce carbon-dioxide emissions as part of the U.S. commitment to combat global warming. No one at the time knew what impact the regulations would have, but the SCC warned that the regulations potentially could cost Virginia rate payers billions of dollars. Since the Trump administration declared its intention to scrap the Clean Power Plan, critics have charged that the freeze would allow Dominion to keep potentially hundreds of millions of dollars of excess earnings instead of rebating them to rate holders, as it would without the freeze. Dominion officials have conceded that the company has generated excess revenue but contended that it faced other potential liabilities, such as storm damages and coal-ash disposal costs, and that the excess revenue could easily turn to a shortfall.

In endorsing an end to the freeze, Dominion positioned the rollback as a way to finance modernization of the electric grid.

“As you have heard today, there are new challenges to our ability to keep the lights on in the form of cyber threats, physical security threats, and super storms,” Webb said. “We need to modernize and transform the grid to know immediately when your power is out or even about to go out, and where to deploy our crews to restore power. We can, with the right investments, come ever closer to our goal of power that is always on.”

He continued:

Under any regulatory construct there will be years with excess earnings due to favorable weather, the absence of severe storms, economic growth, and business efficiencies. In this respect, forecasts of utility earnings are similar to forecasts of the state budget. Some years, forecasts may prove too optimistic, in others too pessimistic. The General Assembly may wish to consider a reinvestment model, where in years when there are such excess earnings, they are reinvested in modernizing and transforming the electricity grid, similar to how the Commonwealth sets guidelines for use of a budget surplus.

While the excess revenues would not be returned directly to rate payers under the proposal, Webb told Bacon’s Rebellion, rate payers would benefit indirectly: Dominion would not need to recoup the investment through a Rate Adjustment Clause, the usual mechanism for passing on the cost of capital investments to rate payers.

In addition to better managing power outages, Webb said that a modernized grid would facilitate the two-way flow of electricity in the distribution system that would make it easier to integrate increased production from solar energy.

Chris Eisenbrey, senior director of business continuity for the Edison Electric Institute, described the benefits of grid modernization for Florida Power & Light and CenterPoint Energy in Houston. Since 20016 FP&L has invested $3 billion in a stronger, smarter more resilient grid, he said. The utility estimates that the ability to identify problems, turn devices on and off remotely, and efficiently allocate its linemen and other resources saved its customers 40 million outage minutes.

Jackson, Virginia’s secretary of technology, said that the threat of cyber sabotage has evolved from teenager hackers in their basements to state actors with vast resources. She quoted an estimate that China had 100,000 people employed in its cyber-espionage division. Russia, Iran, and North Korea have thousands more. If a foreign power wants to launch a cyber-attack on the United States, the electric grid is a primary target. “Electric power companies are in an unenviable position,” she said.

“Our goal is to come ever closer to always keeping the lights on, and to dramatically reduce the time required to restore power outages,” Webb said. “Through investments in new technology, careful planning, and grid modernization we can keep the lights on to a degree unimaginable even a decade ago.”

No one responded to the Dominion proposal at the hearing. “It’s hard to react to something that is just a shadow of a hint with zero details,” said Stephen Haner, a lobbyist representing the Virginia Poverty Law Center (and a contributor to this blog). “Are they talking $1 billion or $5 billion? Paid for over three years or ten years or twenty years? What [Return on Investment] are they looking for?  What will be the long term impact on operating costs? Details matter a lot.”

Speaking generally, he favors the idea of modernizing the electric grid that saves money and manpower, Haner said. “I think the ratepayers and the SCC will be very supportive of moving in that direction.”

But he has reservations. “At one point I think Mark Web said they have to end the freeze in order to undertake the grid modernization and that is just laughable,” Haner said. “They only have to end the freeze if they are going to try to charge us more … in base rates, or they want to eliminate the legal authority of the SCC to order refunds or reduce rates. I doubt I will like their first draft.”

When asked to explain the change in policy regarding the rate freeze, Katherine Bond, senior policy adviser for dominion, acknowledged that Dominion has been heavily criticized for the freeze. “We’re active listeners,” she said.

Update: Senate Majority Leader Thomas K. Norment, Jr., R-James City, said he was “a little perplexed” by Dominion’s proposal, reports the Richmond Times-Dispatch. “I don’t think we’re going to be moving in that direction at a rapid pace,” said Norment, who chairs the utility restructuring commission. The T-D article provides other useful background not found in my blog post.

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