Category Archives: General Assembly

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

Northam, Cox Agree to Roll Back State Regs

Do beauty parlor employees really need a state license to shampoo hair?

Governor Ralph Northam and House of Delegates Speaker Kirk Cox announced legislation yesterday that would launch a pilot program to “remove burdensome and unnecessary regulatory requirements facing hard working Virginians.”

“We have a responsibility to constantly evaluate every regulatory requirement and policy to ensure that it is doing its job in the least restrictive way possible,” said Northam in a press release.

Added Cox: “We know that red tape hinders entrepreneurs, innovators, and small and large businesses alike from creating more of the good paying jobs that our people need. This pilot program will significantly reduce regulations in two heavily-regulated areas and lay the foundation for further efforts to reduce regulations across state government, helping our economy and making government more efficient at the same time.”

House Bill 883 creates a three-year pilot program to be administered by the Department of Planning and Budget. The program will focus on the Department of Professional and Occupational Regulation and the Department of Criminal Justice Services, with a goal of reducing or streamlining regulatory requirements, compliance costs and regulatory burdens by 25 percent.

Professional licensure requirements have come under heavy fire in recent years for restricting job opportunities for lower income Virginians, and the Northam-Cox initiative follows a number of bills taking aim at specific regulations. Reports the Richmond Times-Dispatch:

On Monday, the House passed a bill to specify that hair salon workers who only clean, style or blow dry hair do not have to get a state-issued license. It also specifies that shampooing is not among the more sensitive chemical treatments that require extra government oversight.

“We don’t need to be regulating shampoos,” said Del. Mark Keam, D-Fairfax, the bill’s sponsor. “I don’t know about you, but I don’t want big government in my hair.”

Del. Nick Freitas, R-Culpeper, brought his daughter, Ally, onto the House floor Monday as a living argument for why the state should not include hair braiding it its cosmetology regulations.

When her friend provided her with a beautiful hair braid, she decided to compensate her with a dollar,” Freitas said. “And that is when her descent into crime began.”

Bacon’s bottom line: If we can decriminalize petty traffickers in marijuana, surely we can decriminalize shampooers and hair braiders!

Occupational licensing is a good place to start the regulatory rollback. The heavy hand of government isn’t oppressing big businesses here. It’s thwarting ordinary Virginians — typically lower-income Virginians with fewer job opportunities — from entering heavily regulated occupations and earning a living. Reform should appeal to free-marketeers and social justice warriors alike.

The bipartisan backing of this legislation is encouraging. If the pilot project proves successful, perhaps the experiment would provide impetus for deregulation of other sectors of the economy.

Compromise Bill Ending the Rate Freeze Advances In Senate

Lightning show

How good is the electric-regulation compromise worked out between the governor’s office, electric utilities, consumers, and other interest groups? It’s so good, Sen. Frank Wagner, R-Virginia Beach, said today that the average homeowner will see electric rates locked in at 2009 levels “for a long time,” even as Virginia invests heavily in solar power, wind energy, energy-efficiency, and grid modernization.

While some legislators in the Senate Commerce and Labor Committee worried that the compromise legislation to end the 2015 rate freeze would allow Dominion Energy Virginia and Appalachian Power Co. to “double dip” on earnings invested in grid modernization, Wagner and Senate Minority Leader Richard L. Saslaw, D-Springfield, insisted that they would not.

“There is not an avenue for double charging,” said Wagner. The “reinvestment” model, first advanced by Dominion and subsequently backed by Apco, would plow back over-earnings into grid-modernization projects, enabling the utilities to spend “in the neighborhood of” $200 million a year without increasing rates. Customers will receive more than $1 billion in give-backs and other benefits.

Governor Ralph Northam endorsed the controversial package after a Senate subcommittee made extensive changes to the legislation earlier today. Then Commerce and Labor voted 10 to 4 in favor of the package, advancing the legislation to the full Senate. Opponents of the compromise — strange bedfellows ranging from leftist environmental and activist organizations to a large industrial user group — registered their opposition.

“The goal of that legislation should be simple,” said Northam in a press release: “Give Virginians as much of their money back as possible, restore oversight to ensure that utility companies do not overcharge ratepayers for power, and make Virginia a leader in clean energy and electrical grid modernization.”

The compromise would repeal the 2015 rate freeze, provide immediate relief to rate payers, and restore State Corporation Commission oversight of electric utilities. Dominion would issue $200 million in rate credits to consumers who were over-charged during the rate freeze, and Apco $10 million. Dominion would pass along savings from recently enacted federal tax cuts to rate payers in the form of $125 million a year in lower rates, while Apco would give back $50 million. The SCC would review electric rates every three years, which Saslaw characterized as giving the Commission, utilities and other parties a respite from biennial reviews.

The legislative package would require utilities to invest in $1 billion energy-efficiency projects over the next 10 years, while declaring it to be in the public interest for Dominion to install 5,000 megawatts of solar and wind power, and for Apco to install 200 megawatts of solar. Other favored projects include a battery-storage pilot project, a pumped-storage facility in Southwest Virginia, and extensive upgrades to the electric grid to make it more accommodating to intermittent renewable energy sources, safer from cyber attack, and more resilient in the face of severe weather.

The greatest source of concern was the mechanism by which Dominion and Apco would reinvest excess earnings — no surprise, considering how complex and difficult to understand it is. Under current law, the utilities are allowed to earn 9% return on investment on their assets, with provisions for keeping an extra 30% over over-earnings as an incentive to invest in productivity and efficiency. The SCC reviews the books every two years, and requires utilities to return excess revenues to rate payers. Under the new law, instead of returning 70% over-earnings to rate payers, the utilities would have to reinvest 100% (including the 30% they would normally be allowed to keep) into renewables and grid modernization. None of those reinvestments could be used to trigger a rate increase during the life of the legislation.

“The technology is here,” said Wagner. “The question is, is Virginia going to embrace it?”

For some legislators, claims that the legislation would encourage billions of dollars in new investment while guaranteeing that that rates would not increase seemed too good to be true.

“This is a lot to digest real quickly,” said Sen. Mark Obenshain, R-Harrisonburg. If solar is so economical, why does the General Assembly need to declare it to be in the public interest — why not just let utilities make their own best decisions? “If we’re making a social judgment, let’s not dress it up” as a great deal for rate payers, he said.

“When I look at this bill, it appears that any costs that you have with any of these new facilities with solar or wind, or grid transformation, could still be charged back a second time,” said Sen. Bill Stanley, R-Moneta. “There will be an ability to double charge for these projects.”

One charge would be incurred when rate payers are denied a rebate for over-earnings. Utilities would reinvest the over-earnings in grid modernization projects, adding the capital to the rate base upon which the utilities are entitled to earn a profit. Earning a rate of return on that investment constitutes a second charge to rate payers. But the utilities counter that were they not allowed to invest the over-earnings, they would recoup the investment through a “rider,” or rate adjustment clause. In the end, they say, it all equals out.

While the bill advances goals for which environmentalists and activists have been fighting for years — more solar; more wind; more energy-efficiency; a smart, distributed grid; more rooftop solar — several groups opposed the legislation. The Virginia Chapter of the Sierra Club, Appalachian Voices, and the Chesapeake Climate Action Network cited concern about the double-dipping issue as reason for their opposition. Ironically, the Virginia Poverty Law Center, representing poor energy consumers, declared itself neutral on the bill.

But the line-up of speakers in favor of the bill was considerably longer. Environmental groups supporting the compromise included the Natural Resources Defense Council and the Virginia League of Conservation Voters. Alternative energy groups such as Apex Energy, the Alliance for Industrial Efficiency, Virginians for Clean Energy, and the Virginia Offshore Development Authority registered their approval. Prominent business groups such as the Virginia Chamber of Commerce and the Virginia Manufacturers Association, signed on as well.

Transparency and Accountability for EDAs

Image credit: Chesterfield Observer

How transparent and accountable should Economic Development Authorities be to the public?

That’s the fundamental issue raised by Sen. Amanda Chase, R-Chesterfield, who submitted a bill that would require local government approval for all EDA grants and budgets. That bill was defeated by one vote in the Senate’s local government committee, reports the Richmond Times-Dispatch, but Chase said she hopes to resurrect it in the near future.

“Bureaucrats who are not elected by the people should not be allowed to dole out taxpayer money,” said Chase. “I’m tired of elected officials abdicating their responsibility so bureaucrats can do their dirty work.”

The bill arises from a controversy in Chesterfield County over county plans to build an industrial megasite in the Bermuda district. The EDA wants to rezone and buy about 1,700 acres of land as a site for potential large, industrial users. The paucity of so-called megasites in Virginia has been identified as a bottleneck to economic development, ruling out the state for consideration by automobile companies, aerospace firms and other large-scale manufacturers. Success in attracting a major manufacturing concern could create $1 billion in investment and create up to 5,000 jobs.

Chesterfield economic developers contend that EDAs are accountable indirectly because authority members are appointed by boards of supervisors, and EDA expenditures of tax dollars are approved in counties’ budgetary process in open meetings. Additionally, all EDA expenditures are recorded by Chesterfield’s accounting department, and the EDA does an annual audit.

But members of a Chesterfield citizens group, the Bermuda Advocates for Responsible Development (BARD), say they have many unanswered questions about EDA expenditures and the proposed megasite.

EDAs have many powers, including the ability to acquire land and borrow money, said Patrick McSweeney, an attorney speaking on behalf of Chase’s bill. “This creates a shadow government potentially in every locality in Virginia. Once a decision is made by these authorities there is little that can be done about it unless they have done something blatantly illegal.”

“There’s no reason that local governments can’t do what they do,” he said. “There’s no reason not to have (EDAs) as an advisory body.”

Bacon’s bottom line: EDAs do spend millions of local dollars, they do issue tens of millions of dollars in municipal bonds, and their decisions do impact local communities. Virginians should insist upon total transparency in decision making regarding the assembly of land and building of infrastructure in industrial parks, and they should insist that elected officials be accountable for multimillion-dollar grants and expenditures. I don’t see how Chase’s bill does EDAs any harm, and I can’t understand why anyone would object to it.

Tinkering with the Electricity Regulation Bill

Lightning show

In yesterday’s fast-moving action in the General Assembly, bills to end the electricity rate freeze underwent several important changes. I have done no original reporting here. I’m just extracting key details from Robert Zullo’s article in today’s Richmond Times-Dispatch.

A substitute bill submitted by Del. Terry Kilgore, R-Scott:

  • Increases one-time rebates to Dominion Virginia Energy customers from $133 million to $175 million.
  • Allows the State Corporation Commission (SCC) to order refunds and lower base rates after a single triennial review instead of after two consecutive three-year reviews.
  • Allows the SCC to review 2017 earnings as part of the first review.
  • Incorporates elements from other bills that would authorize the burial of transmission lines, streamline the approval of efficiency programs, and declare solar development to be in the public interest.

The Kilgore bill still converts two-year reviews of base electric rates to three-year reviews, and it preserves Dominion’s proposal for a “reinvestment” regulatory model for modernizing the electric grid to make it more resilient from storms, more secure from cyber-attack, and better suited to renewable power, energy efficiency and microgrids.

I’m still unclear on how the reinvestment model works. David Ress with the Daily Press describes the concept this way:

Any excess profits Dominion earns would go to pay for those investments, instead of going in part to customers or justifying cuts in its base rates. … By using any excess earnings to improve the grid and install an eightfold increase in solar facilities, the company can finance those projects out of existing rates without imposing the “riders” — special surcharges — it has been using to build its newest power plants.

OK… Why does this make more sense than the pre-freeze regulatory model? What’s wrong with rebating excess earnings on “base” rates to customers, and what’s wrong with financing grid modernization through riders? There may be perfectly legitimate reasons for the changes, but the logic is not self-evident.

The reinvestment model is central to the revamping of the electricity regulatory system. Everyone would benefit from more clarity on how it would work and the thinking behind it.

SW Virginia to Share Pumped-Storage Tax Revenue

Sharing

Dominion Energy Virginia is studying two potential sites for a proposed $2 billion pumped storage facility in Southwest Virginia, one in Tazewell County and one in Wise County. Over and above the jobs created, the facility would generate more than $7.7 million a year in new tax revenue. Under Virginia’s current tax structure, a single county — the one where the facility is located — would garner the lion’s share of the benefits.

However, companion bills sponsored by three coalfield-area legislators would divvy up the tax revenues between seven counties and the City of Norton, reports the Coalfield Progress. Under Senate Bill 780, revenues would be allocated as follows:

  • 16% each for Tazewell and Wise Counties, with a 6% bonus for the host county.
  • 12% each for Buchanan, Lee, Russell, and Scott counties.
  • 10% for Dickenson County
  • 4% for Norton

Likewise, any direct costs to the host localities for infrastructure improvements will be allocated between the localities in the same proportion.

Bacon’s bottom line: I’m intrigued by the logic behind this proposal, especially why Tazewell and Wise went along with it. Think of it this way: Let’s assume each of those two localities have a 50% chance of winning the whole kit and caboodle. (Actually, the odds look somewhat better for Tazewell, but let’s make the assumption anyway for purposes of argument.) Under the new proposal, they are guaranteed to get at least 16% but only 22% if they are the host locality. It’s a classic bird-in-hand-versus-two-in-the-bush situation, except that it’s really a bird in hand versus five birds in the bush.

If I were a gambling man, which I’m not, and the odds were 50/50 on two horses, one with a $1 payout and one with a $5 payout, I’d bet on the second horse. But Wise and Tazewell are foregoing that approach. One might think that local leaders are calculating that sharing the revenue will unify and strengthen the region politically in the bid for its biggest economic development prospect in years. But the enabling legislation for the pumped-storage facility is already law. Unless there is something that I’m missing, which is entirely possible, it seems that Wise and Tazewell are showing remarkable forbearance. The coalfields could serve as a shining example for other Virginia regions competing for big economic development projects.