Bacon's Rebellion

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Environmental Groups Supported Paying “Lost Revenue” Before They Opposed It

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by

Steve Haner
in , ,

Paying an electric utility for power it doesn’t sell is the economic equivalent of paying a farmer not to grow corn or soybeans, and the result will be the same as well – higher consumer prices.

In a legal memorandum filed Friday, Dominion Energy Virginia doubled down on its request that about 40 percent of the money it seeks to recover for a series of new demand management programs be compensation for lost revenue.  If the programs work, and it is verified they reduced demand, Dominion wants to be paid for the electricity it didn’t sell.  Over and over, apparently.  

This element of the request was mentioned in an earlier Bacon’s Rebellion post, along with the complaints of environmental respondents that it should not be allowed.  A major element of the 2018 Ratepayer Bill Transformation was a commitment by the utility to spend $870 million over ten years on energy efficiency and demand management incentives for its customers.

The legal argument was filed along with several sets of testimony by Dominion employees seeking to rebut SCC staff assertions that the proposed programs will not draw as many participants as projected and in some cases won’t make a serious dent in demand.  The next step in the case is a March 20 hearing.

A 2009 Act of Assembly authorized payments for lost revenue in these circumstances, with environmental advocates arguing absent that the company would have zero incentive to engage in efforts to reduce sales.   “As part of such cost recovery, the Commission, if requested by the utility, shall allow for the recovery of revenue reductions related to energy efficiency programs.” 

The Dominion legal memo built around that sentence sparked an angry Twitter response from the patron of that 2009 legislation, former Northern Neck Delegate Albert Pollard, complaining Dominion must have been “JK (just kidding) on $870 actually helping people.”  Who is kidding whom about the value of these kinds of programs is another debate.  Pollard of all people should have asked questions about lost revenue before his friends endorsed the bill.

If Dominion’s opinion is upheld by the State Corporation Commission, perhaps $500 million or so would be spent on the programs (with profit and overhead included), while $370 million might be compensation for lost revenue.  If that $870 million goes only to the programs, it could trigger an additional $350-400 million in payments for lost sales, also collected directly from ratepayers. Suddenly the $870 million becomes about $1.3 billion or more.

Paying for lost revenue in addition to the programs would be the position of many of the environmental groups, who do not seem to have a philosophical objection to paying money for nothing.  They just want the whole $870 million spent the way they wanted, and failed to be specific in the language they accepted.  The Ratepayer Bill Transformation Act would have had trouble passing without their support.

Dominion, I’m sure, knew exactly what it planned to do way back a year ago. Writes McGuire Woods attorney Vishwa Link in Dominion’s brief:

“The Company has historically included lost revenues in the cost caps for its DSM Programs, however, and the Commission has specifically required inclusion of lost revenues in the cost caps it has imposed on the Company’s DSM Programs beginning with the Company’s 2011 DSM Proceeding,”

“…in the 2011 DSM Proceeding, the Commission explained that “rates are impacted not only by the operating cost of a program, but by the lost revenue cost that Dominion may collect from customers for an unspecified number of years.” In the same case, the Commission also found that “lost revenues are a major cost component to be considered in evaluating programs and determining whether they are in the public interest.”

Then she noted this section of the Code:

“In addition, subsection A 5 c goes on to require: None of the costs of new energy efficiency programs of an electric utility, including recovery of revenue reductions, shall be assigned to any large general service customer. (emphasis added).”

Yep.  The advocates for large industrial users could not stop Pollard’s 2009 bill from increasing costs on most other consumers, but we protected our own employers and clients, at least from those earlier energy efficiency programs.  The 2018 language threw many large customers under the new bus, and they will be paying their share for this next round of programs.

As Link’s memo relates, the utility has sought recovery of lost revenues in two previous petitions and both times the Commission said no. This time around the Commission could say yes.  Whether or not it includes lost revenues, the Commission should at least affirm in this case that $870 million is a hard cap.

The 2009 legislation was a major revision to the energy efficiency provisions put in the code just two years earlier in the compromise bill returning the utility to a novel form of regulation.  The 2009 fight was just one example of later anti-consumer changes made over the objections of participants to the earlier compromise.  Most of us from the earlier battles were not in the room negotiating the Ratepayer Bill Transformation Act last year, and that was no accident.

We’d seen the turnip truck.  We wouldn’t have climbed on again.  It was the environmental movement’s time to be taken for a ride.

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12 responses to “Environmental Groups Supported Paying “Lost Revenue” Before They Opposed It”

  1. LarrytheG Avatar
    LarrytheG

    re: ” Paying an electric utility for power it doesn’t sell is the economic equivalent of paying a farmer not to grow corn or soybeans, and the result will be the same as well – higher consumer prices.”

    isn’t that EXACTLY what we do right now with crop subsidies?
    ( USDA Pays $1.3 Billion in Crop Subsidies to People Who Don’t Farm)

    And some of us have been saying – all along – that Dominion has a monopoly and they intend to get every dollar they are entitled to for the VALUE of the electricity they COULD sell and that they fully intended to collect revenues for demand-side reductions also.

    Tom H, who posts here quite often has stated that there needs to be a way for Dominion to continue to make money even as less electricity is sold …

    And I think you may misunderstand the environmental community.

    First of all – they do not hold monolithic views. They are split on the issues. The one thing they agree on is the harm that pollution and emissions cause – but they differ on how to fix it.

    More than a few – see higher prices as just as effective as regulation to directly reduce emissions. They can and do point to places with higher costs electricity and the direct correlation of higher prices to less use.

    RGGI – would take higher prices and plow some of that money back into consumer rebates and loans to pay for demand-side technologh to reduce electricity use even further – with the consumer ultimately getting cost savings back from the higher prices by more efficient appliances and HVACs.

    So what Dominion is basically saying is that they want the cost savings from consumers installing demand-side conservation technology.

    This is not a revelation. It was clear some time ago that this was their philosophy. Now we act shocked that it’s actually written in the filings…

  2. Steve Haner Avatar
    Steve Haner

    It is a fair point that I am guilty at times of lumping all environmentalists into one basket when there are diverse opinions. Many did not support the 2018 bill. And I can’t really remember where everybody was on Pollard’s bill in 2009. And yes, I am making a direct comparison to the farm programs, which as noted are intended to keep the producer price and thus consumer price high.

  3. James A. Bacon Avatar
    James A. Bacon

    For purposes of argument, let’s take Dominion out of of this. We could be talking about Apco or ODEC, or a theoretical entity. We’re discussing principles. What compensation, if any, should an electric utility be due for spending its capital on reducing demand for its product? Obviously, making such an investment is not something that any for-profit enterprise (or even many nonprofits, for that matter) would be inclined to do.

    It’s one thing for a power company to fall victim to market forces. Hey, those are the risks of the marketplace. It’s quite another to compel a utility to spend its own shareholders’ capital to shrink its market. In an electric grid built around monopoly providers, you need to ensure that the power companies make enough money to do their job properly. You want to make sure the company can keep the grid in a state of good repair and respond to emergencies. No one should want their local monopoly to become like California’s PG&E.

    In Dominion’s case, the waters are muddied by the law freezing base electric rates, which has the effect of locking in higher profits than otherwise would have been the case. Under the circumstances, no one is feeling much sympathy for Dominion. That issue aside — remember, the rate freeze does end in a few years — if Dominion is going to expend its own capital to conserve energy and shrink its market, asking for a return on capital and compensation for lost market is not an unreasonable thing for Dominion to ask.

    Steve is absolutely right to say that the environmentalists don’t care if electric rates rise. Their number one priority is reducing CO2 emissions. They think they’re saving the planet. All other considerations are secondary. Although it would be impolitic for them to mention this, the logic of environmentalism is that higher electric rates are a good thing, not a bad thing. Higher rates increase the incentive for customers to conserve energy and reduce CO2 emissions.

    1. Steve Haner Avatar
      Steve Haner

      Jim, Dominion is not spending its capital to reduce demand. The GA has given it a path to spend OUR capital through this rate adjustment clause, OUR money. Huge difference.

      1. LarrytheG Avatar
        LarrytheG

        That’s FUNNY Steve… it actually reveals the “thinking” behind those who actually do support Dominion! It’s Dominion’s money not ratepayers!!

        You have shamelessly OUTTED Jim Bacon on this!

        Congrats! 😉

        I expect a full and remorseful mea culpa!

        1. Steve Haner Avatar
          Steve Haner

          And I will take any and all bets on any terms offered about the “rate freeze” ending in 2021. Lucy still has the football and it will be pulled away yet again somehow. The excuse this time may be the fiscal stress from the collapse of the ACP…..

    2. Reed Fawell 3rd Avatar
      Reed Fawell 3rd

      To elaborate on Bacon’s fine exposition, here is Mrs. Blanca Ocasio-Cortez:

      “I lived in the New York area for most of my life but started being unable to afford it,” she said in the living room of her modest by tiny Florida house … “I was cleaning houses in the morning and working as a secretary in a hospital in the afternoon. I was working from 6 am until 11 pm. And I prayed and prayed, and things worked out. After the children (including OAC) graduated from college, I figured it was time for me to move to Florida … it was a no brainer, I was paying $10,000 a year in real estate taxes up north. I’m paying $600 a year (in Eustis, Florida, a far suburb of Orlando.) It is stress free down here.” Quote from Daily-Mail.com as reported by WSJ today.

      Thus Alexandra Ocasio-Cortez’s mom thinks like Jeff Bezos as regards life the Empire State and City of De Blasio and Cuomo.

      1. Reed Fawell 3rd Avatar
        Reed Fawell 3rd

        Another way to think about our profusion of obsolete zoning laws is that a subdivision and its ordinance with its attendant restrictions is like putting on, and locking up, a steel suit at the birth of your land that neither you nor anyone else can take off, or matter how much your land wants to grow, or its surroundings want or need to change for many reasons. This original regime is reinforced by property rights that vest with the first title exchanged within the subdivision. Unwrapping these regimes is too often very hard to do. Often it needs to be. Often more flexibility is needed to unlock values and futures, so that a community can grow to best advantage of the place.

  4. LarrytheG Avatar
    LarrytheG

    That’s a lot of … umm… “explaining” but it’s really a simple thing – it’s like buyers of gas efficient cars having to pay the gasoline companies a rebate for using less gas.

    that’s the benefit and the harm of a monopoly for an enterprise who wants that monopoly to a guaranteed amount of revenue – no matter what.

    It argues against conservation – against competition. against consumers saving money and against reducing pollution.

    You say that enviros: ” Their number one priority is reducing CO2 emissions” and you’re totally wrong on this.

    Because enviros were opposed to pollution of all kinds including SO2, NOx and Mercury long before the issue of climate change came up. From the very beginning, they felt that pollution harmed the environment and people and now that’s been extended to CO2 as opposed to it being one issue that they suddenly discovered and they don’t care if it costs people more money.

    So your portrayal of enviros is wrong – and disingenuous when you ignore their involvement that began long ago – over pollution itself and it’s harm to people. Now that it’s a worldwide threat – some are claiming that enviros suddenly came into existence and made this an issue so they could “harm” people.

    We never get to any middle ground on this when you and others characterize the issue in this way.

    Enviros are the reason the EPA exists. They’re the reason why cars get better gas mileage. Why cities have cleaner air. Why the Chesapeake Bay is getting cleaner. That’s their credentials. They supported these things starting not yesterday but decades ago. What did you support other than opposition to enviros?

  5. TBill Avatar
    TBill

    I wish we could buy the stock of Dominion Virginia so we could capture the concentrated dividends of Virginia’s energy policy, that are stated by the financial community to be slanted so favorably in Dominon’s favor. If you can’t beat ’em, join ’em.

  6. Acbar Avatar
    Acbar

    Larry: “Tom H, who posts here quite often has stated that there needs to be a way for Dominion to continue to make money even as less electricity is sold …”
    Jim: “It’s one thing for a power company to fall victim to market forces. It’s quite another to compel a utility to spend its own shareholders’ capital to shrink its market. In an electric grid built around monopoly providers, you need to ensure that the power companies make enough money to do their job properly.”

    Larry, Jim, Dominion is going to make money on this! Nobody is talking, here, about denying Dominion or any other regulated Virginia retail electric supplier a “reasonable return” on its investment deemed made “in the public interest” on behalf of its ratepayers. Its regulated profit is measured in terms of return on investment. Its authorized rates are set to generate operating revenue which, after deducting operating expenses, using a “test year” adjusted to be reasonably forward looking, provides that return on investment. Where a single utility serves multiple jurisdictions and customer classes, costs and expenses and return-responsibility are allocated among these using generally-accepted allocation methods.

    This ratemaking formula, embedded in Virginia statutes and tons of hoary precedent, is sanctioned by the U.S. Supreme Court and followed nearly universally across the nation. How it is applied in practice is more contentious. In some states, like Virginia, the legislature by edict has “frozen” rates for periods of years, or declared certain investments or expenses to be “in the public interest” whether or not so found in public hearings upon evidence by the Commission, or instructed the utility to do or not to do certain things despite “best practices” elsewhere to the contrary. In some states worse than Virginia, the utility has been denied a return upon investments clearly made with enthusiastic state encouragement at the time, but which did not work out as anticipated. But nobody is talking about that here!

    How is this supposed to work? Dominion builds a generating plant and the Commission approves it to be included in the investment found to be in the public interest — i.e., the utility’s “ratebase.” Once included in the ratebase, that investment is amortized, or depreciated, usually on a straight-line basis, over the “useful life” of the plant involved (typically for a generator = 40 years). If the plant lives on beyond that date, the ratepayers cease paying a return on it but continue to reap the cost/benefit of any net operating expense/revenue from it. If the plant is retired “prematurely” because “obsolete,” the remaining undepreciated investment remains in the ratebase and continues to earn a return for the utility.

    OK, now, what the heck are TomH and Jim talking about, here? The ratemaking formula described above already provides “a way for Dominion to continue to make money even as less electricity is sold” PROVIDED its retail rates are adjusted frequently to reflect the fact (if it is a fact) that sales are dropping faster than the ratebase is depreciating. Of course, if the GA has “frozen” Dominion’s base rates for existing plant to prevent their decline from depreciation while at the same time conferring automatic increases in the rate base under various riders for all new construction, Dominion has no incentive to adopt measures that would reduce sales. Only by a return to frequent, comprehensive rate cases looking at all costs and trends would reduced sales be offset by rate increases — and the loss of its rate freeze and its Riders and the increased attention to what else it’s doing would be far more painful to Dominion than the resulting piddling rate increases for lost sales.

    Another factor not reflected here is the existence of the PJM regional wholesale marketplace. If Dominion builds a generator and its own customers don’t need it as much due to their own energy savings, Dominion’s sales into the marketplace won’t diminish in the slightest — PROVIDED all the other utilities in PJM aren’t cutting demand and/or building new generation at the same time. If they are, then Dominion has bigger problems than its own energy savings: it will be stuck with increasingly non-competitive generation, its retail ratepayers will get the pass-through benefit of lower regional market rates through the fuel & interchange adjustment clause, and yet Dominion’s base rates will have to go up to pay the return on that investment without as much operating revenue from the wholesale marketplace. And as its base rates increase, Dominion’s service area becomes less attractive to new customers. How long before those data centers move elsewhere?

    Ah, but everyone sympathizes with the challenge to Dominion of operating within the “new grid” with increasing renewables power sources: big utility-scale solar installations and some distributed solar that’s customer-owned too. So? Dominion mitigated that risk long ago by building all its latest gas-fired cycling generation strictly for rate-basing, NOT for competition in the marketplace. That way, retail ratepayers have to pay for the investment in those units until they are amortized whether or not they run at a profit. All the risk falls on the ratepayers. Of course, all the potential profit falls onto the ratepayers if those gas units turn out to be profitable over their entire “useful lives.” At the very least, these are cycling units that, while they may not run as much on the grid of the future as forecast to justify their construction, they won’t be total losers. That’s because I don’t see the grid eliminating its need for cycling units after dark anytime soon in the eastern U.S., where wind power is not as much of an option as it is out west. Time will tell how bad a deal, if at all, this turns out to be for ratepayers.

    But what about the argument that by mandating utility investment in customer energy savings we “compel a utility to spend its own shareholders’ capital to shrink its market”? Gee, that sounds awful! Except for two things: The utility investment in question goes into the rate base, so there is a return, or profit, due on that ratebase component; the amortization timeframe should be a lot faster than 40 years. And the shrinking sales should also cause an increase in rates as soon as the rates are re-set based on a new test year reflecting those shrunken sales, as well as the increased rate base. Plus there’s a fringe benefit: most customers love doing things to save on their electric bills, especially if the cost to do so is subsidized — so customer satisfaction goes up.

    The foregoing also neglects another important driver of investing in reduced sales: the fact is, in the short run, the utility’s investment can offset the cost of that investment, or even pay for itself, if the utility thereby avoids having to build expensive new plant to accommodate load growth. The incremental cost of new generation is huge, relative to old plant build decades ago. It’s particularly likely that the investment in energy savings will pay for itself where, as with Dominion, the utility continues to ratebase all its new generation. If Dominion were building these generating units at shareholder expense and risk, unregulated, to compete in the wholesale marketplace, then load growth would be satisfied by increased purchases from the wholesale marketplace. The regulated rate base would shrink, and along with it the regulated return on investment, but the unregulated profit from successful competition in the wholesale markets would rise — assuming, of course, that Dominion made wise choices what to build — and Dominion would be relatively indifferent to energy savings by its own customers because they would be buying all their electricity from the wholesale marketplace.

    Bottom line: Larry, Jim, TomH too, I’m not shedding tears over Dominion’s potential suffering from this mandate. Dominion will be made whole, at least in the timeframes relevant to current investment in energy savings. Distributed generation and batteries are not going to make the grid irrelevant or unnecessary; they may impact the economics of the grid but not so substantially or rapidly as to harm the utilities that prepare for that brave new world while they have the time to do so. What has to change is, regulators have to stop allowing (and incentivizing) utilities to place new generation in rate base at ratepayer risk, but require them to invest in the transmission and distribution and energy-savings techniques to take full advantage of the new sources of power that are rapidly entering the grid wholesale markets.

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