Does Anyone Really Understand this Dominion Deal?

pig_in_pokeby James A. Bacon

I’m still trying to figure out the legislative deal that Dominion has struck with the General Assembly. The grand bargain moving through the legislature freezes base rates for five years and requires the utility, not customers, to bear the risk of power plant closures due to federal carbon regulations. The bill has accumulated a lot of extraneous ornamentation — rate cuts reflecting lower fuel costs, promises to build more solar power, assistance to low-income families to weatherize their homes — but the main piece is the rate freeze.

The bargain responds to new Environmental Protection Agency rules regulating carbon dioxide as a pollutant, which, if carried out, would shut down several of Dominion’s coal and oil fuel plants. According to a State Corporation Commission (SCC) staff report, the changes could cost Dominion Virginia Power customers between $5 billion to $6 billion. The same rules would impose tremendous costs on customers of Appalachian Power Co. as well.

On the face of it, the legislation looks like a good deal to Virginia electricity rate payers. They get to lock down low electric rates for five years, while Dominion absorbs the financial risk of power plants shutting down. During that time, the SCC would audit Dominion’s books but not engage in rate setting.

But is it a really good deal for rate payers? I don’t know. I have questions for which I have seen no answers in the press accounts I have read.

First question: How real is the threat of power-plant shutdowns in the next five years? For all I know, the threat may be very real. But, then, maybe, given the glacial pace at which the EPA moves, and the ability of Dominion (and other electric utilities) to stall through lobbying and lawsuits, perhaps Dominion has reasonable expectations of fending off the shutdowns during that time-frame. Similarly, Dominion could be taking a calculated gamble that, if the power-plant shutdowns can be delayed two years, a Republican will be occupying the White House in 2017. A Republican president likely would reverse the EPA regulations through executive action just as the current occupant imposed it through executive action.

Of one thing we can be sure, Dominion can better assess its risks than Virginia’s politicians can. There is a dramatic asymmetry of information. Dominion has access to legions of lobbyists, lawyers, engineers, accountants and energy economists who keep the top brass fully informed of the risks and rewards associated with every action. Virginia’s lawmakers can draw upon the expertise of the SCC, but even the SCC doesn’t have access to all the information that Dominion does — and there’s no assurance that lawmakers would appreciate the significance of that information anyway. One thing we can reasonably assume: Dominion would not back the legislation working its way through the General Assembly unless it were advantageous to Dominion.

Second question: What happens if power plants get shut down after five years? While the rate freeze would end in 2020, the next rate review for Dominion would not be held until 2023, reports the Richmond Times-Dispatch, which quotes Edward Petrini with Virginia Committee for Fair Utility Rates as saying that effectively means Dominion is getting an eight-year rate freeze. But Dominion would absorb the financial risk of power-plant shut-downs for only five years. Could the costs of shutdowns in years six through eight be dumped onto rate payers?

Third question: What would likely happen to electric rates in the absence of a freeze? Would they head up or down? It makes no sense for Dominion to take on added risk unless it benefits from a freeze in base rates. This logic implies that Dominion expects that base rates would decline over the short run in the absence of a freeze. (Over the longer-term, rates assuredly will rise as non-compliant power plants are phased out.) How much will a freeze on base rates benefit Dominion? We don’t know. Is that amount, whatever it is, reasonable compensation for Dominion’s extra risk? We don’t know.

These are all basic questions to which lawmakers should know the answers. Alas, if they do, they haven’t seen fit to inform the public, and Dominion’s Keep Rates Low web page doesn’t address the issues. I don’t share the knee-jerk antipathy to Dominion that many pundits have — the utility has done a good job of ensuring reliable, low cost power — but I also have no illusions that Dominion is doing anything other than looking out for Number One. I find it inconceivable that Dominion would voluntarily (a) agree to a rate freeze that lowers revenue and profits, (b) take on the financial risk of power-plant shutdowns, and (c) make costly commitments to build solar power and weatherize homes. Something doesn’t add up.

I’m not saying that the legislation is a bad deal for the public — I’m saying the public doesn’t understand the deal. We don’t know if it’s a good deal or not. Lawmakers are buying a pig in a poke.

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25 responses to “Does Anyone Really Understand this Dominion Deal?

  1. The answer seems to be that Dominion “suggests that maybe, possibly” it may be forced to shut down some coal-fired plants if the EPA rules are finalized in their current form this summer.

    The utility was something like eight coal-fired plants that are its biggest carbon polluters, including the biggest of them all, the Dutch Gap plant on the James River in Chesterfield County.

    Dominion refuses to state absolutely that it WILL close the plants, but has raised the specter of shutdowns so much that it is getting its way with this new law that it hand-drafted and got Frank Wagner to introduce.

    So, it’s like frisking a seal. You raise the prospect then won’t say it is so, really. But if you note, there has been a very clear, concerted propaganda campaign by elites in the state complaining about proposed EPA rules, including politicians from both parties, lobby groups like the manufacturers association and so on.

    Dominion gets something like 46 percent of its generation in this state from coal. It has eight coal plants, but had already announced closures at two of them (Chesapeake and Yorktown) because the units are maybe 50 years old. It has already put new scrubbers at Chesterfield but I’m not sure if they will reduce carbon. It is the biggest air polluter in the state.

    I agree there is something wrong about the law to freeze audits. We just don’t know what really is going on here and when one asks, he or she is told that calculations show that’s what will be demanded if EPA’s carbon reduction plan goes forward.

    The plan is a draft and EPA has requested opinions from all parties before it makes the rules final. Somehow this fact gets missed int he rush to legislate.

    One wonders why Dominion needs the law NOW rather than wait to find out what EPA really does. What’s the rush? ARe they afraid that Hillary or Elizabeth Warren might be elected president in 2016?

  2. For this deal to make sense to consumers, there must be removal of the coal plants and their related expenses from Dominion’s regulated books now. This accounting would put the risks and rewards of operating or closing the plants on shareowners. Meanwhile, ratepayers pay existing rates for five years instead of rates that might go up and/or down. Under this plan, ratepayers aren’t affected whether the plants run or are shut down. So a shutdown outside the five year period rests on the shareowners. Management has the incentive to operate or shut down the plants in the most cost-effective manner. With this change in the legislation, I can buy into the concept.

    At the end of the five year period, the VSCC can set electric rates based on Dominion’s then costs and investments, which, by law, would exclude its coal plants that were subject to the rate freeze deal.

  3. My understanding the rates are frozen but not the fuel adjustment.

    so shut down plants – buy/produce expensive replacement power and sock it to the ratepayers?

    see – this is problem in Va. Who explains these bills to the Hoi polloi?

    Has any one of the house of delegates or senate dained to put into plain ordinary words what this bill does – or not?

    My inclination – based on past history – is that there is a reason why things like this never see the real light of day… and it’s not good – and the only real variable is just how badly the ratepayers get screwed.

    • I’m late to this exchange but it took a while to research. This one is complicated. LarryG you put your finger on the key, I believe, when you mention that the proposal covers base rates but not the fuel rider. Here’s a quote from a May 2, 2014 Dom press release:
      “Electricity bills are made up of several components. The fuel charge normally comprises about 27 percent of a typical residential bill and covers the variable cost of fuel for the company’s power stations and power purchases on wholesale markets. About 58 percent of a typical residential bill is made up of base rates, which cover the company’s operating expenses, such as storm recovery, system maintenance, general business and personnel costs. Expenses for specific infrastructure projects, such as new power stations, transmission lines and substations, are covered by individual rate clauses called riders and make up about 15 percent of the typical bill.”
      In addition there are jurisdictional considerations; for example, the federal regulator, FERC, sets all transmission rates and natural gas pipeline rates including Dominion’s, so they are not included under this SCC-regulated retail electric tariff. According to Dominion’s latest annual report its biggest non-transmission electric construction projects are the Warren County and Brunswick County units, both of which are largely covered in SCC rates already by special riders, and the natural gas or (so-called) bio-mass conversion of several older coal-fired stations, also already covered. So what else is there that’s not already (a) in base rates or (b) covered by the “fuel rider”? Not very much!

      So what’s the likely effect of any early retirements brought on by the EPA’s proposed rules? Dominion will have to replace the power from somewhere and most likely that would be from the Grid — specifically, from the PJM Interconnection (PJM), the Grid operator and electric wholesale market manager over the Mid Atlantic area stretching from the coast to Chicago and including all of PA, NJ, MD, VA, WV and OH. This huge area is ‘dispatched’ by PJM operators so that generation always equals load based on a sharing of all available resources, where those who generate more than their load are automatically deemed to ‘sell’ at the market price, and those who generate less than their load are deemed to ‘buy.’ There are also transactions between PJM and adjacent regions, but you can set them aside as largely transient and opportunistic.

      Dominion is part of PJM. So, hour by hour and minute by minute, what Dom will do is ‘simply’ buy more bulk power from PJM than it would have. And the extra cost, if any, will flow through the fuel rider. That may not, however, be much of an extra cost. Dominion has positioned itself well through its recent construction of new natural gas and combined-cycle units and conversion of its worst old coal clunkers. The wholesale electric market will be tight, since every other utility out there (especially in PJM) has the same potential problem with the EPA regulations, so the market price for wholesale power will rise and Dom may still find itself a net seller. Moreover Dom may not take everything targeted by EPA out of service right away but keep some of these units in cold reserve, ready to run on a couple of days notice in a capacity emergency, not fully retired. What about any generating units that are retired? Well, to the extent their cost basis is not fully depreciated away already, Dom might come up with some kind of argument for a rate adjustment to recover any costs left on its books due to premature retirement, and that kind of rate change could be filed as a rider, like the riders for new construction, rather than as a base rate adjustment; but don’t lose any sleep over it, the amount would not be large. Overall, I feel confident that Dom would never set out to bypass its own regulators by regulatory sleight of hand

      Now for specifics: Jim, you ask, “First question: How real is the threat of power-plant shutdowns in the next five years?” I think it’s widely perceived as real. PJM, for example, in its latest forecasts of tranmission adequacy in the region, says, “The implementation of four EPA rule makings with effective dates between 2011 and 2015 coupled with unfolding state environmental rules, including those in New Jersey, will keep at-risk generation scenario analysis at the forefront of PJM’s RTEP Process. PJM continues to monitor closely proposed and finalized environmental rules issued at the Federal and State levels affecting generating units – coalfired units in particular – to examine their impact on transmission reliability and resource adequacy.” [PJM 2013 RTEP Book 3 sec 2].

      You also ask, “What would likely happen to electric rates in the absence of a freeze? Would they head up or down?” As discussed above I don’t think they would head up or down much at all, given what a small piece of the Dominion pie is actually covered by the base-rate slice of the SCC-regulated Virginia electric retail business. It seems to me Peter has the better question. Peter asks, “One wonders why Dominion needs the law NOW rather than wait to find out what EPA really does. What’s the rush?” That’s a good question: why go through the exercise of a “base rate freeze” for five years if it isn’t really needed? I can only speculate: It’s a public display of confidence, for good public relations and good publicity. Fringe benefits: it says to Wall Street, Dom isn’t worried any longer about the EPA rules but ready for them; it helps free the regulatory and finance folks at Dominion (and to an extent, at the SCC) to concentrate on their gas pipeline and electric transmission projects; and it frees Dominion to do whatever it wants with the generating units it does retire, if any.

      • Thanks Acbar – pretty cogent analysis…

        I think the stranded costs might be fiscal, investor issue – i.e. what do their books look like in terms of return on investment…

        and I agree with Erica – I do not see how anyone who owns Dominion stock can vote on the legislation.

        I also still believe it is incumbent on the SCC to provide an objective analysis to the ratepayers. They speak of a “balance” on their site – but it feels a little too much like the fox in the proverbial henhouse to me.

        I also agree with Erica – on the legitimacy of the EPA to regulate verses the SCC’s “concern” about costs to the ratepayers… it sounds not very genuine to me.

        It’s a totally bogus concept anyhow in terms of pollution – and state lines.

        We’ve had some serious acid rain problems in the past – that – if the premise about the states having primacy over the EPA – would pretty much neuter the EPA on acid rain, mercury, river pollution and the Chesapeake Bay cleanup to name a few.

      • Senate Bill 1349 would exempt Dominion from biennial rate reviews. So when profits get too high, the state orders rate cuts and refunds.
        Now they won’t be able to.

  4. I will say this – also – Having a govt agency determine the acceptable profit for a company seems to be a problematical exercise but it’s what you are reduced to when the business has been granted a de-facto monopoly.

    But in Virginia – the behavior of the SCC especially with their recent letter to the EPA – calls into question their role of protecting the consumer – at least in my mind – and apparently in the words of the Attorney General.

    We do want people on the SCC who do understand the utility industry and that may mean the hiring of folks who have worked in the utility industry but that almost precludes an honest citizen/ratepayer perspective and to be perfectly honest – I’m not feeling all warm and fuzzy about how the SCC had conducted itself in explaining this legislation to the public.

    One might ask – should they? My question is – if they don’t, who should?

    • Have you watched how the industry has railed against the SCC over the last decade and forced it to respond more to business demands? It’s not surprising that the SCC sent the letter. They get a lot of pressure from Dominion and the rest who have reduced the decisions the SCC can make. Regularly now the companies get the General Assembly to make decisions based on sound bites and rushed schedules. Few legislators honestly consult the SCC. They listen to the companies. The SCC only speaks when spoken to any more and never takes a position on legislation. The judges all have to promise to operate that way when they are appointed.

  5. If the SCC staff is correct, and implementing the EPA regulations will cost Virginia $5 billion to $6 billion, who eats that cost? Dominion or the rate payers? That’s the BIG question, and I don’t see it getting answered.

    Even if the SCC is exaggerating the cost — let’s say it’s only $2 billion to $3 billion — you’ve still got to ask, who eats it, Dominion or the rate payers?

  6. on that – it’s pretty clear – if Dominion is allowed to charge fuel adjustments.

    They basically found a way to get taxpayers to pay for their stranded costs!

    You close a dirty coal plant – and you replace it with another source that, if more expensive, you pass than on to ratepayers as a fuel adjustment.

    why is that not the answer to closing the older plants?

    • Larry, ratemaking doesn’t work that way. The costs for shutting down a power plant do not fit into accounts that would be used to develop a fuel adjustment charge.

      I don’t see any conflict between representing consumers and opposing the EPA. States have been opposing Uncle Sam on matters that could affect utility rates for decades. Utility consumers want the lowest rates possible for reliable service. Some may have other interests and either support or oppose what EPA does. But there are other forums to raise those issues on the merits.

      • TMT – here’s my thinking.

        the rates are fixed – if they are higher than justified then Dominion takes in more money – unless the SCC does the adjustment.

        So the excess money goes to Dominion to pay their stranded costs as they retire the plants.

        and the energy to replace them is purchased and if higher cost – that cost passed on to ratepayers.

        on the EPA dealings – did they ever provide an explanation to ratepayers about the issue and why they wrote the letter if they had ostensibly written it in representing the interests of ratepayers?

        and on the legislation in Va – they are supposed to protect the interests of rate payers. Have they explained to ratepayers the impact the legislation will have on ratepayers? Isn’t that their job?

        • The SCC told the General Assembly that it already had the tools it would need to protect consumers from high rate increases without this legislation. Even if the federal regulation is effective in the next year, you can bet that any “impaired” assets will not harm the company and a way will be found to assure that rate payers foot the bill.

          Worse, when those expenses don’t come during this period, we’re likely to be asked to extend the freeze beyond that. Whatever, it’ll be something the company controls.

          Further, we “technically” paid stranded costs once before – when we deregulated. Remember there were no rate cases and they refused to quantify the costs. They needed the freeze back then to address stranded costs – which never materialized.

          Because the legislators won’t allow the regulator to do its job and accept whatever the company tells, consumers just get smacked again and again.

  7. I would like to see a non-partisan report prepared for the VA public summarizing EPA Targets off the 2005 base year. How many coal plants do we have? What might VA have to do to meet the EPA targets? Peter might be right about 46% coal, but if so I am thinking half of that is from out-of-state. Believe the EPA numbers are 20% coal in-state boundaries of VA for 2012. I know we have some big power plants on the other side of the WV state border.

    • I would actually agree – and then would ask why our own SCC would not – as a matter of informing the public and rate payers as to the issue – provide a dispassionate by-the-numbers report and to include in that report as an addendum what the legislation is about and how it is related or not to the issue as a whole.

      what we have here, it appears, is a failure to communicate from the agency that is supposed to be the one that does inform the folks it’s supposed to be representing – Virginian consumers of electricity.

      Mission Statement
      The State Corporation Commission will strive to apply law and regulation to balance the interests of citizens, businesses, and customers in regulating Virginia’s business and economic concerns and work continually to improve the regulatory and administrative processes. SCC’s Chief Goals

      • Carry out the duties prescribed by the Constitution and the laws enacted by the General Assembly of Virginia fully and to the best of its ability;

      • Ensure that all parties and persons who appear before the Commission receive due process of law;

      • Provide reliable information and assistance to Virginians in a consistent and high-quality fashion;

      • Provide assistance to Virginians who have valid disputes with regulated companies; and

      • Adopt rules and regulations that keep pace with legislative, business, economic, social and technological changes.

      I certainly question the part about providing reliable information to “Virginians”

      but I also see some parsing of words that makes me wonder just how much of a responsibility the SCC feels towards average, every-day Virginians when it comes to legislation like we are seeing.

      for instance their website DOES contain a 2007 write-up on legislation:

      but it appears there is nothing provided of recent … search their news releases, etc.. no dice.. at least for me… and bottom line – this is the kind of thing that ought to have links on the front webpage .

      I guess anyone can find something to complain about but since the SCC did decide to get involved with the EPA over their proposed rules it seems ODD that they have nothing to say about the legislation in the Va GA.

      I could be wrong but I think this is SCCs responsibility – to inform Virginians and it’s not happening.

      They were so willing to promote their politcal letter to the EPA – and it appears not so hotly inclined on facts on this.

      • It doesn’t matter what the SCC was originally created to do. It is operating as the legislature has bullied it into operating over the last 20 years. It is no longer allowed to tell Virginians what is happening.

  8. The title of the bill really says it all :
    SB 1349 Electric utility regulation; suspension of reviews of earnings
    But, when you have Mr Jones from Attorney General’s office come up during comments from the opposing side, to say the GA’s office has a problem with the bill and the SCC does too, you can be rest assured it’s NOT a good thing for the ratepayers.
    Just like last year when Dominion stockholder Senator Stosch introduced SB 459 Electric utility regulation; recovery of nuclear costs, rate adjustment clauses.
    They were able to write off hundreds of millions with this one:
    Sponsored by Sen. Walter A. Stosch (R-Henrico), would allow electric utilities to apply 70 percent of the cost of building nuclear and offshore wind power projects over the past six years to their expenses over 2013 and 2014. The other 30 percent, along with some future costs, could be recovered through another rider that raises rates, if approved by the SCC.
    The expenses are important for Dominion, because if the utility earns profits over a certain amount in a year, the SCC can order a refund to consumers. If profits are excessive for consecutive two-year cycles, the SCC can order a rate cut.
    By applying 70 percent of the $600 million that Dominion says has been spent on nuclear and wind power generation between 2007 and 2013, Dominion can avoid a possible refund in 2015 and rate cut in 2017.
    I think it’s pretty outrageous that our legislators can introduce bills in which they own stock. Seems it should be a conflict of interest. (Senator Wagner the sponsor of the bill, just sold his stock a few days ago..once things started heating up)

    Frankly I see it as a bait and switch!
    During the Senate hearing, Dominion claimed they need to pass SB 1349 because of impending EPA rules…yet on the other side in the House, the legislators passed another bill to defeat the EPA rules.
    The House Committee on Rules passed HJ608, introduced by Republican Del. Terry Kilgore. Under the resolution, the state would voice its opposition to the EPA’s emission rules because they “infringe on the commonwealth’s sovereign powers to regulate electricity for the benefit and welfare of its citizens.” The resolution passed the committee by a 12-3 vote.
    02/06/15 Senate: Referred to Committee on Rules
    Looks like the bill is still there in committee.
    Some of the legislators are already asking if VA is going to sue the EPA over the Clean Energy Plan/Rules.

    My question is, when will we stop allowing our legislators from introducing bills in which they have a financial interest?

  9. Mr. Jones was representing the Governor. Mr. Browder was from the AG’s office. Moderator, you might just want to fix this and not log it as a comment.

  10. Who is regulating who?

  11. If you don’t already follow Ivy Main’s “Power for the People” blog, you should – she is one of the sharpest, wittiest, most insightful writers in the space (tieing only with Jim, of course ;)). She’s an attorney and President of the VA Chapter of the Sierra Club, so you may not agree with everything she says, but just reading her blog is a pleasure!

    • I did sign up – funny thing that Conservative types continually tout the importance of small business and marketplace competition – until it comes to Dominion’s turf.

  12. 2/13/14
    Senator Petersen’s piece:
    When a regulated monopoly comes to the legislature pitching a “pro-consumer” bill, you have a right to be skeptical. Yet only six senators and 22 delegates expressed that skepticism by voting “no” on Senate Bill 1349, which suspended the state’s review of earnings by Dominion Virginia Power. The legislation is now on Governor McAuliffe’s desk…….

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