Category Archives: General Assembly

Drowning Puppies at Senate Finance

The Senate Finance Committee in action.

Barring a Lazarus-like resurrection from the dead, a bill that would require Virginia colleges and university boards to allow public input on tuition increases has been killed in the state Senate. The bill won approval in the House of Delegates 99 to 0, sailed through the Senate Committee on Education and Health 14 to 1, but died in the Senate Finance Committee on a 7 to 6 vote.

The bill, championed in the legislature by Del. Jason Miyares, R-Virginia Beach, and Sen. Chap Petersen, D-Fairfax, had been a top priority of Partners for College Affordability and Public Trust as well as this blog. Reports the Virginian-Pilot:

James Toscano, president of Partners for College Affordability and Public Trust, testified in support and said after the hearing that the Senate missed an easy opportunity to let Virginia’s students and paying parents know they care about the high cost of college.

“It’s bad enough that the cost of higher education in Virginia is spiraling out of control,” Toscano said. “But failing to ensure the voices of students and parents are heard before public appointees set tuition is a blow to good governance and transparency.”

But the views of the University of Virginia and the College of William & Mary, two of the public institutions that have raised their tuition the most aggressively in recent years, prevailed.

Representatives for both the University of Virginia and the College of William & Mary said they don’t oppose getting input, but said they give plenty of opportunities throughout the year

Betsey Daley, U.Va.’s representative, said the board members, president and other officials’ emails are easily accessible online. The student representative on the Board of Visitors also holds meetings on the issue and is “very aware of the sentiment and mood.”

“One public hearing is not a substitute for year-round input we have at U.Va.,” Daley said.

Bacon’s bottom line: Seriously? Affordability and access are the most important issues facing higher ed today. Student indebtedness, a direct result of unaffordability, is creating a social crisis so acute that President Donald Trump now is contemplating allowing students to discharge their debt through bankruptcy, thus foisting tens of billions of dollars of liabilities onto taxpayers. The real objection is that UVa and W&M don’t want their boards to endure the tedium of hearing the little people bitching about tuition.

Virginia’s colleges and universities, especially its elite colleges and universities, need more transparency and accountability. Their arrogance will haunt them. To paraphrase John Paul Jones: We have not yet begun to fight!

Grading Virginia at Crossover? Give them an A! 

by Chris Saxman

We are now on Day 38 of the General Assembly and only have 22 more days to go before Sine Die (adjournment) on March 10th. Tuesday of this week marked Crossover when each legislative chamber must have acted on its respective legislation, which is then sent over to the other chamber. House bills go to the Senate and the Senate bills go the House — the legislation “crosses over” to the other side of the Capitol.

If you are a follower of Virginia politics, you probably heard your inner monologue say, “Yes, I know. We do this every year.”

In November of 2014, leaders of Virginia FREE gathered at the University of Virginia’s Miller Center of Public Affairs to examine the “Virginia Way” of governing. We were joined by former governors George Allen and Gerald Baliles who offered us their perspectives on how Virginia should govern itself following the trial and conviction earlier that year of former Governor Bob McDonnell. Baliles was then the Director and CEO of the Miller Center and had flown back the night before from the Clinton Presidential Library in order to participate.

Baliles offered that in order to restore broken trust, we must take the time to identify the real problems while intellectually agreeing on solutions through mutual respect and consensus. We also must work together to help our political leaders govern by example; however, it will take time. While that is not a direct quote, Baliles did quote 19th century British Prime Minister Benjamin Disraeli asking us to “remember the context.”

So let’s “remember the context” of our political reality in this year’s General Assembly and gubernatorial inauguration of Governor Ralph Northam.

The election results of 2017 here in Virginia were, to say the very least, unexpected. Those results followed the unexpected results of the 2016 election. In fact, today marks the 32nd month since Donald Trump announced his campaign for President of the United States on June 16, 2015.

What’s the context then of the 2018 Virginia General Assembly? Consider the timeline first.

2014 – McDonnell conviction
2015 – Trump
2016 – Presidential nominations and elections
2017 – Virginia Governor and House of Delegates elections

Previously, I have shared the Napoleon quote “There is no destiny, only politics.” Now, allow me to insert into your consideration a quote from journalist Andrew Breitbart “Politics is downstream from culture.”

So what’s the context? Disruption. Massive disruption. Not simply change. Disruption.

Disruption – noun. disturbance or problems that interrupt an event, activity, or process.

Our culture and economy have been disrupted. Naturally our political disruption then follows since we are a republican democracy in which we elect people to represent us. Elected officials reflect us.

Enter the 2018 General Assembly and newly inaugurated Governor Ralph Northam. New delegates (a lot of them – 19), a new executive branch, and a not so new building in which to work.

Chaos, right?

NO! Not at all. In fact, there is relative calm and a high level of productivity.

Amid all the disruption and potential for chaos, the ship of state is, so far, weathering the storm.

But why?

Well, it just doesn’t happen.

Speaker Vance Wilkins and I were walking across the varsity baseball field of Riverheads High School in the spring of 2002 following an event he had initiated for the nearby elementary school. It was a thrilling event for this old history and government teacher as scores of students and teachers were learning about American government. I said, “Mr. Speaker, that was awesome!” Wilkins never broke stride as we walked replying, “Thanks. You know, nothing happens without leadership.”

So what’s happening so far in Richmond?  Continue reading

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.

This Metro Deal Literally Smells

As the General Assembly debates the state’s contribution to the bailing out of the Washington Metro system, Virginians are continually reminded of the company’s history of dysfunctional management. The latest news from the Washington Post:

An investigation by the agency’s Office of Inspector General has found that the grimey, orangey-brown, 1970s-era carpet installed in Metro trains are the product of “exceedingly stringent” requirements likely written to favor one supplier. The 100 percent pure virgin wool specification is no longer in use in the industry.

The recently concluded investigation found Metro’s standards for its carpeting were unchanged for two decades and that no other vendor could plausibly compete for the contract.

Moreover, the carpet lacked a required coating to prevent fungus and mildew, according to Metro Inspector General Geoff Cherrington — though it did meet standards for being fire-resistant and mothproof.

Further investigation found the carpet’s compliance testing was not being performed by an independent facility, as Metro requires, but by a laboratory with ties to the carpet manufacturer.

“The director of the lab used by the vendor is married to the Chief Financial Officer of the company that provided the vendor a line of credit” for the carpet order, according to a synopsis of the investigation included in a report to the Metro board.

Over the years, the WaPo reports, the carpet became known for collecting dirt and grime. “Riders are especially put off by the way it soaks up liquids — be it rain, slush, spilled beverages or um, other fluids — and smells.”

Meanwhile, back in the General Assembly, Republicans are far less amenable than Democrats to providing Metro the $150 million a year in additional support the ailing mass transit agency has requested to work down a maintenance backlog that has contributed to safety incidents, schedule delays, and declining ridership.

The new version of a bill sponsored by Del. Tim Hugo, R-Centreville, has been unanimously approved by the House Transportation Committee and will serve as the basis for negotiations with the state Senate over a final Metro funding bill, reports WTOP. Hugo’s proposal would provide Metro $105 million a year, less than the roughly $150 million requested, and provide the funds only if Metro limits operating spending increases to 2 percent per year.

Further, the bill requires studies and reports on Metro’s governance, labor agreements and the federal law that outlines arbitration rules. “Reforms have to go hand in hand with the money,” Hugo said.

Unlike the proposal recommended by former Governor Terry McAuliffe, the Republican proposal would not immediately require changes to Metro’s Board.

Bacon’s bottom line: This is Virginia’s one opportunity to hang tough and demand long overdue managerial, labor and governance reforms to Metro. Once legislation is passed and the money starts flowing, the Commonwealth loses all leverage over the mass transit system. While the current senior management appears to be more competent then its predecessors, the mal-governance of the system has been spectacular, and it costing Virginia taxpayers (especially Northern Virginia taxpayers) dearly. Without fundamental reform, Metro will remain a festering, oozing, pustular sore that will continue to drain Virginia’s scarce transportation resources.

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.

Layers

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.

How to Destroy Public Trust: Don’t Listen

University of Virginia students marching in a “no voice” protest against a 2015 tuition increase. Photo credit: Richmond Times-Dispatch.

As a follow-up to my previous post, I draw your attention to an op-ed penned by James Toscano, president of the Partners for College Affordability and Public Trust (a sponsor of this blog).

Toscano cites a September 2017 Mason-Dixon poll that asked, “How should the cost to attend Virginia’s public colleges and universities be addressed?”

Just 10 percent said colleges should be allowed to freely set tuition and fees. Overwhelmingly, 76 percent of voters said Virginia should freeze, lower, or limit tuition and fee increases to inflation.

Plainly, Virginians have serious issues of trust, and they are not alone. …

Just last year, the Association of American Colleges and Universities met to address what it called “an urgent need — expressed by educators from campuses across the country — for more effective approaches to restoring public trust in higher education.”

Considering that one of the first ways to gain confidence is simply to begin listening, you might think that 19 of Virginia’s colleges who are also association members would have gotten the message and acted — as they could have — on their own.

But apparently not.

Instead, the focus has been on killing legislation that would require public comment before votes to raise tuition and fees. Already this session, it’s happening to legislation introduced in the Virginia Senate, and the timing couldn’t be less poetic.

Not all Virginia colleges resist public oversight, notes Toscano. “But collectively, they have remained silent during legislative hearings instead of speaking in favor of the simple act of hearing from students and their parents.” Failure to advance the legislation, he warns, will “confirm the national conversation that says there’s a breach of trust between citizens and higher education.”

If Virginia’s higher-ed lobby refuses to allow public input into board decisions affecting tuition, fees and other costs of attendance, it will feed the impression that colleges and universities are arrogant, out of touch, and oblivious to the concerns of the students and parents who pay the bills. Such arrogance will inspire support for more draconian (and counter productive) measures such as HB 351. That bill, discussed in my previous post, would slap caps on tuition and out-of-state enrollment — a far greater infringement upon institutions’ autonomy.

If higher ed and its supporters in the General Assembly don’t bend, they  risk unleashing a storm that might break them.

In Praise of a Very Bad, but Very Necessary, Bill

HB 351 — a very blunt instrument. Yet indispensable.

A bill to cap in-state tuition at Virginia’s public universities is gaining traction in the General Assembly, reports the Richmond Times-Dispatch.

HB 351, which would cap tuition for the next four years at the 2017-18 rate, was reported 15 to 4 out of the House of Delegates Education Committee and will be heard next in the House Appropriations Committee. The bill, sponsored by Del. David Reid, D-Ashburn, also would limit increases in room-and-board charges to 90% of that of the Consumer Price Index, and would cap the number of out-of-state students at the current number.

I have many problems with this bill. The remedies are arbitrary, and they violate the spirit of autonomy and decentralization which has made Virginia’s four-year colleges one of the best, if not the best, undergraduate systems in the country. But I also understand Reid’s frustration with the stubborn refusal of many of Virginia’s colleges and universities to heed the pleas of middle-class families who are finding the cost of attendance — not just tuition, but fees, room and board — to be increasingly out of reach.

There are times when subtlety and nuance don’t do the job. Sometimes, you have to reach for a cave-man club.

The insensitivity of Virginia boards of visitors toward the concerns of the taxpayers, parents and students who are paying the bills has created a political climate in which people begin calling for sledge-hammer solutions. Higher-ed has brought this upon itself.

To my mind, HB 351 is a bad bill. It would place price controls on college tuition, room and board (yet, for some unfathomable reason, leave fees untouched). Throughout the economic history of man, price controls have led to little but misery. For recent examples, look to Zimbabwe and Venezuela.

Price controls on Virginia college tuition won’t lead to hyper-inflation, as in those two countries, but it will create distortions. Controls will reward those institutions that have increased tuition most aggressively in recent years by locking in those charges at a high plateau. At the same time, tuition caps will punish those institutions that have worked most assiduously to control costs and charges but may need the flexibility to raise rates modestly in the future. Also, one can predict from history that institutions will engage in accounting gamesmanship, reclassifying costs in capped categories (tuition, room, board) as student fees or some other kind of miscellaneous charge, the end result of which will be less price transparency than ever.

The cap on out-of-state enrollment also is problematic. Indeed, the enrollment cap is at odds with the tuition cap. Out-of-state undergraduates pay thousands of dollars more in tuition than in-state undergrads. Indeed, they pay more than they cost to educate, in effect subsidizing in-state students. Increasing the number of out-of-state students to increase is a safety valve that helps institutions hold down tuition increases. The bill would take that option away.

But the bill’s worst sin is that it addresses symptoms, not underlying causes. It does nothing to ameliorate the hidden drivers of rising tuition costs, such as:

  • The hunger for institutional prestige, which pits university against university in an ever-escalating arms race for superstar faculty and high-SAT students, with the attendant quest for the glitzy buildings and resort-quality amenities that it takes to recruit them.
  • Metastasizing administrative staff arising from federal regulations and higher-ed obsessions with diversity, sexual politics, economic development, community involvement, and other non-academic priorities.
  • Declining faculty productivity, in which tenured professors enjoy lighter teaching loads so they can spend more time on writing and research, while the grubby task of teaching undergraduates is offloaded to a cadre of untenured instructors, graduate students, and adjunct faculty.
  • The growth of R&D programs, in which undergraduate tuition subsidizes an ever-expanding apparatus not only of research professors but graduate students, specialized laboratories and equipment, and administrative support whose job is to seek research grants.

Another cause of rising tuition, as we all know, is the cutback in state support for higher education. But budget cuts, as I have explained before, account for maybe 30% of the overall increase in the cost of attendance at college.

The causes I bulleted above are poorly understood. Higher-ed accounting systems are opaque. Even college administrators themselves may not fully understand what they’re grappling with because, focused on other issues, they don’t compile the metrics or have the accounting systems to answer the kinds of questions that should be asked. And why would they trouble themselves? They would offend powerful internal constituencies if they dared try to reform the system.

I maintain that part of the solution is greater transparency into higher-ed accounting. Rather than impose arbitrary caps, we should pry open the system’s inner workings for all to see. We need keener insight into who pays for what, and we need to compile and track productivity metrics that reflect the cost drivers. Once the underlying problems are illuminated, boards of visitors can compel college administrations to act upon them. Alas, accounting transparency is missing from the reformers’ legislative agenda this year.

Fortunately, there are bills that would partially advance the goal of openness. One would require boards of visitors to allow the public to provide input on planned tuition increases. Another would define the prime responsibility of university board members as to the public, not to institutional advancement and the ceaseless, Quixotic quest for higher rankings.

Despite its flaws, the Reid bill does serve one useful purpose. When faced with the prospect of the sledgehammer — tuition and out-of-state enrollment caps — perhaps the higher-ed lobby will decide it can live with greater openness and a few tweaks to the governance system. If higher-ed refuses to budge on any of these issues, it runs the risk of destroying what little public trust it still enjoys. I’ll have more to say about that in the next blog post.

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.

A View from the Trenches: Ending the Freeze

by Chris Saxman

Statesmen should remember that they have been elected to persuade and to lead, and not just to accept as fixed the momentary moods and pernicious prejudices of the public.
     — Stanley Hoffman

Professor Hoffman might have been quite pleased watching yesterday’s Senate Commerce and Labor Committee as the compromise legislation on electric utility regulation, grid modernization, and energy efficiency was debated and sent to the Senate floor.

Here is Governor Ralph Northam’s press release on the legislation.

The bill – SB 966 – is being carried by Commerce and Labor Chairman Frank Wagner, R-Virginia Beach, along with Senator Dick Saslaw, R-Fairfax), who was carrying a similar bill, SB967. Saslaw’s bill was incorporated or “rolled” into SB966 at the start of the debate.

After that motion came internal committee debate and questioning of Wagner and Saslaw which helped explain the compromise bill brokered by Governor Ralph Northam and House Speaker Kirk Cox. Just hours before the committee meeting, the Governor announced that a deal, in fact, been struck.

Almost all of the committee members spoke at one point and in doing so exposed the extraordinary changes occurring in the political landscape – both in Virginia and in the U.S. Remember, that Virginia is a battleground, bellwether coming off a dramatic statewide election just three months ago. More on that later….

During the 2017 election, the issues being debated yesterday played a prominent but not decisive role.

Senator Mark Obenshain, R-Rockingham, opened the dialogue as he expressed concerns about the economic value of the significant solar investment required in the bill. The 5,000 megawatts of solar power to be added in Virginia by 2028, he thought, would be too heavy a cost to be paid by ratepayers, suggesting that this was more “social judgement’ than economic good. Obenshain expressed that perhaps the State Corporation Commission is in better position to make such decisions rather than having the General Assembly do it “on the fly.”

Saslaw explained that 5,000 megawatts equated to 1.25 million homes that would be powered by solar generation and that “nothing is free.” Saslaw said that “both” economic and social judgments were being addressed in SB966.

Senator Steve Newman, R-Campbell County, acknowledged his gratitude that the bill was “much improved in just a week” but that he, too, had economic concerns for ratepayers about the solar portions of the bill as a “giveaway too high and too great” for his support.

Senator Lionell Spruill, D-Chesapeake, questioned if the real winners of the compromise were the stockholders of Dominion or Appalachian Power while Senator Rosalyn Dance of Petersburg asked, “Who spoke for the consumers?”

Dana Wiggins of the Virginia Poverty Law Center, which had been very vocal publicly in decrying the current law written in 2015 in response to the Clean Power Plan, stated that while her organization had been part of the working group, it “still had concerns about double charging.” Later Wiggins would testify that the VPLC was neither for nor against the bill, which shocked many observers because the Center’s pre-session commentary had been so negative. Now it was neutral.

Southside Senator Bill Stanley, R-Moneta, did explore, along with Northern Neck Senator Richard Stuart, R-Westmoreland,concerns about “double charging” and “giving people their money back” as they questioned Dominion lobbyists Jack Rust and Bill Murray. Continue reading