After providing an overview of The Grid Transformation and Security Act of 2018 yesterday, I had numerous questions about the thinking behind many of the measures it proposes. So I talked to Katharine Bond, a senior policy official for Dominion Energy to get the power company’s perspective. Dominion has been a key player in drafting the three-bill package, although Bond insists that many stakeholders, not just Dominion, have had input into it.
First question: How did Dominion Energy Virginia come up with that $1 billion figure for refunding or reimbursing its customers over the next eight years. Where is that money coming from? And does it fully compensate for the over-charges that Dominion retained thanks to the rate freeze implemented in 2015?
- Up-front refunds for over-charges. Dominion will refund rate payers $133 million up-front. That number comes from a 2016 case in which the State Corporation Commission determined that Dominion had racked up that amount in over-charges during 2015 and 2016. Dominion foes have cited a figure of $400 million in over-charges, but that doesn’t account for big expenses relating to the disposal of coal ash. Dominion had to eat those costs due to the freeze, Bond says, and no reasonable accounting would omit it from the equation.
- Offsetting later over-charges. To compensate for over-charges incurred since the SCC hearing, Dominion has agreed to write off expenses relating to the 2013 conversion of three coal-fired power stations — in Altavista, Hopewell and Southampton — as rough compensation. An SCC-approved rider (rate adjustment clause) allowed Dominion to bill rate payers for that conversion expense. Under the Grid Transformation Act, Dominion will drop those charges from its electrical bill, which will provide $25 million in rate relief each year — amounting to $200 million over eight years, and $540 million in additional savings beyond, for a total of $740 million. Why write off the biomass plant conversions? Dominion looked over its generating fleet, Bond says. It couldn’t very close down cost recovery of the Warren gas-fired station or one of the nuclear plants, so it settled on the biomass conversions.
- Tax breaks from Uncle Sam. The intent of the legislation is to pass on 100% of the tax savings that Dominion Energy Virginia gains from the recently enacted federal tax reform, says Bond. “We’re comfortable that there will be at least $100 million. If there are additional savings, we’ll adjust rates down again.”
Second question: What’s wrong with the pre-freeze regulatory regime? What needs fixing?
After an unsuccessful experiment with deregulation, the General Assembly enacted the current regulatory regime in 2007. Electric bills reflect a composite of three types of rates requiring SCC approval: base rates, primarily operating costs accounting for about half of electricity charges; fuel adjustment clauses, which pass through rising and falling costs of fuel; and rate adjustment clauses (also referred to as RACs or riders), which cover the capital costs of new investments such as power plants. (The so-called freeze enacted in 2015 affected only the base rates.)
That regulatory regime “fit the world of 2007, not 2018,” says Bond. In 2007, carbon regulation wasn’t on the radar, as it is today. The utility didn’t have “literally thousands of points of interconnection” with intermittent solar power producers. Meanwhile, she adds, “tolerance for outages is decreasing every year.” If the power goes off, “people can’t work from home, can’t bank from home, kids can’t do their homework.” Virginia needs to upgrade its electric grid.
Dominion spokesman David Botkins elaborates in an email: The 2007 system was set up to incentivize new power generation “because policy makers were not comfortable with Virginia being the second largest importer of electricity [behind] California at that time. … Things have changed drastically since 2007. We have adequate generation supply now but the appetite for more renewables grows as the policy makers [want] to keep reducing carbon. Renewables require a much different kind of grid system that is less outage prone and more secure.
Yeah, I get that. But why can’t the old regulatory regime accommodate the changes that are needed?
Says Botkins: “We and others believe that the reinvestment (of earnings) model … is a better way to go. Less rate fluctuation, [fewer] riders, stronger/smarter grid. 2007 was for then. 2018 is for now and the years ahead. …”
Third question: Will the Grid Transformation Act emasculate SCC regulatory powers?
Bond says no.
The bill would change the SCC from reviewing and adjusting rates every two years to every three years. To me, that seemingly would allow Dominion to over-charge customers for longer periods of time. But even a three-year review is more frequent that the practice in most states, Bond says. Moreover, this way will allow the SCC to “smooth out” base rates. Many issues involve multi-year costs like early retirement. Instead of expensing the costs all in one year, perhaps they should be expensed over two years.
Also, to protect rate payers in riders, the proposed law provides for SCC review of the front end of so-called “transformative” investments enumerated in the legislation as well as the back end. “When it comes to the big transformative investments, we don’t have a blank check,” Bond says. “We have to bring forward a plan to say, ‘Here’s what we want to invest in.’ The SCC will review it. On the back end, we have to say, ‘Here’s what we spent, and here’s how it matched up.’ They check the math. It’s a fully litigated case.” If there are over-earnings, she says, the SCC will subtract them from what the company can charge.
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