Understanding Your Electric Bill

Dominion's Brunswick power plant: a $1.3 billion rate "rider."

Dominion’s Brunswick power plant: a $1.3 billion rate “rider.”

by James A. Bacon

In 2009 Virginia enacted a law providing for the re-regulation of the electric power industry. There was a flurry of publicity surrounding the legislative process, then the media promptly forgot about it. Only with the sweeping mandates of the Environmental Protection Agency, which is compelling a massive re-engineering of Virginia’s electric power system, have reporters started to pay attention to how rates are set.

This morning John Ramsey with the Richmond Times-Dispatch highlighted the increasing importance of rate “riders,” also known as Rate Adjustment Clauses or RACs, in determining the rates electric consumers pay to Dominion Virginia Power, Appalachian Power Co., and local electric cooperatives. These clauses now account for nearly 9% of a Dominion customer’s monthly bill, he writes. And, I would add, they likely will account for a higher percentage in the future.

Your electric bill reflects three main components: the base rate, fuel costs, and riders. The base rate reflects the overall cost of operating the power company, excluding fuel costs. Fuel costs vary with market conditions; higher and lower costs are designed to flow through to rate payers. Riders cover new projects, most notably new power plants but also such initiatives as the hardening of the electric grid against threats like terrorism and sabotage.

Electric companies must submit these Rate Adjustment Clauses to the State Corporation Commission for approval. The SCC is not a rubber stamp. The commission recently rejected a Dominion propose to bury its most vulnerable power lines to reduce the incidence of power outages during bad weather.  (Boo! As one whose power goes out frequently, and for long periods of time, I thought it was a great idea.)

To understand how Virginia’s power companies respond to the challenge of EPA-mandated reductions in toxic emissions and CO2 emissions, it is critical to understand the incentives created by the rate structure. Writes Ramsey:

Although [Dominion’s] base rates provide for a regulated rate of return up to about 10 percent, the riders guarantee a 10 percent return. With the base rate frozen [under legislation enacted this year], new riders offer Dominion Virginia Power an opportunity to increase its profitability.

Dominion says the arrangement allows the company to recoup its investment in smaller chunks as it builds new plants, instead of waiting until construction is complete and hitting customers with bigger increases. It also allows for easier, and presumably cheaper, financing, which also benefits customers.

But Glen Besa, director of the Virginia chapter of the Sierra Club, says that Virginians will continue to see rate increases despite the freeze in the “base” rate. “We kept trying to tell the legislature that [freezing base rates] didn’t set a ceiling. It set a floor.”

Ramsey also quotes Albert Carr, who teaches a course in utility regulations at the Washington and Lee University law school, who thinks the riders make sense. “Going the rider route will give the regulator a much clearer focus on what amounts to additions to those base rates,” he says. “It eliminates some of the problems we’ve had in the past with regulation. You don’t have to take the whole car apart to fix the window.”

I’m not sure how well anyone outside of the SCC, the power companies, and a handful of utility and environmentalist lawyers really understand how Virginia’s electric rates work. Consumers certainly don’t. I don’t. I know a lot more than I did three months ago, but I’m still moving up the learning curve.

Even more opaque is how the structure for setting electric rates guides corporate strategy for building gas-fired and renewable power facilities, constructing new transmission lines, and purchasing power from the regional PJM grid. As a generality, power companies will steer capital investment to projects that provide the highest risk-adjusted rate of return. Does Virginia’s current rate structure bias utility investment in certain types of projects over others? I’m trying to figure that out.

There are currently 2 comments highlighted: 116830, 116861.

32 responses to “Understanding Your Electric Bill

  1. what we DO KNOW is that no matter what Dominion chooses to build – we will pay for it – even if they have a bad strategy.

    that takes away any risk assessment… they’ve got a blank check to choose without any consequences.

    but here’s the thing that puzzles me to no end.

    look at this map : https://www.scc.virginia.gov/pue/elec/el_map.pdf

    the explain to me why Dominion is the only one involved in deciding electricity generation in the state?

    why can’t the Rural cooperatives set up their own nat gas plants ?

    why can’t 3rd party providers set up plants and sell that power to the rural cooperatives and Dominion?

    why does Dominion have such an overwhelming political and corporate presence in a State with a dozen or more companies in the business of providing electricity in the first place?

    If Dominion can add new plant costs to bills – why couldn’t the rural cooperatives do the same thing or enter into long term agreements with 3rd party providers (who would have the capital) to do that?

    I’m starting to think that folks are clueless about this, transportation, and health care… all three… and .. the corporations and the elected – know it… and so when legislation comes to the GA – you have corporation lobbyists and the Sierra Club/SELC and that’s it and the “folk” who don’t like the SC/SELC are pretty much clueless.

    • Dear LarryG, why on earth do you imagine Dominion has “such an overwhelming political and corporate presence” in Virginia? Why indeed, if you are one of the largest corporations in Virginia and also heavily regulated by the GA and the VSCC?

      But Dominion is hardly the only one. You are right, there are a dozen electricity suppliers out there in Virginia alone. What your map doesn’t show is that the co-ops are banded together as member/owners of a wholesale co-op named Old Dominion Electric Cooperative, which whom they have contracts and which they control as ODEC’s members. You’d better believe ODEC lobbies the GA when its interests differ from the private utilities like Dominion. ODEC doesn’t have to lobby the VSCC because they are wholesale only (FERC regulates them) and because the GA carved Virginia co-ops’ retail sales out of the SCC’s jurisdiction years ago (a bad decision IMO). What ODEC does do is negotiate with Dominion over transmission rates and some long term power deals, and also participates in ownership or partial ownership of several power plants. Dominion also negotiates deals directly with the retail co-ops within its overall service area, including, of course, your REC.

      As for the other private electric utilities, they are parts of larger interstate utilities or utility groups and are usually content to let Dominion take the lead in Virginia just as they may take the lead elsewhere. Their interests are generally the same; why do the same job twice? I’m oversimplifying but that’s the way it goes generally with lobbying.

      Now, you also ask, “why can’t the Rural cooperatives set up their own nat gas plants ? why can’t 3rd party providers set up plants and sell that power to the rural cooperatives and Dominion?” Of course they can, and they do. Today, however, these sales generally take place in the short or medium range through the PJM energy and capacity markets, or they are part of long term deals involving direct capital investment by the co-ops themselves. Among other advantages, the co-ops have access to some very low cost loans from the federal government; that is less of an advantage in this time of low interest rates generally but it is not trivial. Here’s a list of ODEC’s own power generation in Virginia, some of it co-owned with Dominion: http://www.odec.com/generation-transmission/current-power-stations/ Of course ODEC also buys from other utilities and from independent generators, directly or through PJM.

      • Acbar – I suppose if I give my reasons why I said a bigger presence.. it might irritate you… but my apologies.

        1. – they seem to be the primary builders of generation for a state in which their service area is less than the other rural electrics combined

        lets say 1/2 and 1/2 and forget APCO… is Dominion building 1/2 of the generation or 9/10?

        2. – when I look at VPAP for money – it’s Dominion at the top of the list with few or any other utilities.

        3. – when I look at laws enacted that affect utilities – the focus seems to be primarily Dominion.

        that’s why I say they have an outsize presence.

        perhaps I’m wrong and it’s debateable!

    • Larry, I’m going to try to answer your questions above in this comment.

      “the explain to me why Dominion is the only one involved in deciding electricity generation in the state?” Dominion is not the only one involved. They are responsible for providing power for their customers, but Apco and Kentucky Utilities are 2 other investor-owned utilities responsible for providing for their customers. These 2 companies have most of their generating assets in other states, however, and no need to build new stuff here. Apco is converting one of its old coal units in Western Va to run on gas.

      “why can’t the Rural cooperatives set up their own nat gas plants ?” As I have explained in comments to other posts, the rural DISTRIBUTION coops have organized ODEC to be their generation provider. ODEC owns some units in Virginia, some in Maryland and I think a couple of little plants in Delaware. The distribution coops are full requirements customers of ODEC. Caveat: there are a couple of rural coops (NOVEC being the largest) that are not ODEC members so they could build plants if they wanted to.

      “why can’t 3rd party providers set up plants and sell that power to the rural cooperatives and Dominion?” The law permits this and there are several such plants in the state, Panda being the latest to undertake construction. It’s largely a matter of economics to the developer that determines if a plant goes forward.

      “why does Dominion have such an overwhelming political and corporate presence in a State with a dozen or more companies in the business of providing electricity in the first place?” Dominion makes more money than any other business in the state and you know what talks…..

      “If Dominion can add new plant costs to bills – why couldn’t the rural cooperatives do the same thing or enter into long term agreements with 3rd party providers (who would have the capital) to do that?” See the answers above. Theoretically, ODEC could enter into a contract with a 3rd party provider, but has little incentive to do that. As a non-profit cooperative, ODEC has very cheap capital available to it through federal borrowing programs, long history of successfully operating plants and a very slowly growing customer demand. You may remember 3 or 4 years ago it was investigating building a huge coal plant in Surry County. ODEC pulled back from that project as new air regs became apparent and instead is building a gas fired plant in Maryland.

      Hope this is helpful.

      • thanks Rowinguy…

        my perception is that Dominion is probably providing a large amount of the power that is distributed by the RECs.. but perhaps that’s not true and they ARE getting it from ODEC and PJM.

        I do remember the coal plant – Cypress Creek I believe.

        • My understanding is that Dominion supplies nearly all of its municipal customers’ power. The coops, which are larger and better organized, have done some shopping around for power supply, though they are still largely dependent on Dominion’s grid for transmission. Rowinguy’s point about the coops’ load not growing very fast is important; but there are important exceptions.

          • Dominion does serve a number of municipalities and, as you note, Acbar, there are some faster growing cooperatives, notably NOVEC, but it is not a member of ODEC and obtains its own power, either through contract or purchasing out of the PJM market.

  2. Jim,

    Glad you highlighted the quote from W&L’s Professor Carr that was buried all the way at the end of the long T-D story. His statement sums up well the reason for the “riders” that must be approved in a public proceeding for each major project. This is a much-clearer process than lumping everything together in a “black box.”

    A few other comments about the T-D story:

    Dominion’s rates were artificially low in 2007. We were just coming out of a 2½-year freeze on fuel rates at a time when fuel costs had skyrocketed. The full cost of fuel was not reflected in customer rates until July 2008. Even when you take into account an increase scheduled to take effect next month, Dominion’s residential rates have gone up less than 6 percent in the last seven years.

    The T-D story references our low rates, but does not say how low. Again, even after the September increase, the average U.S. residential rate will be more than 20 percent higher than what is charged by Dominion.

    Finally, we take exception to the opening words of John Ramsey’s story. The riders are hardly “little-known fees.” The Times-Dispatch itself has written about them dozens of times over the years.

    Thanks.

    Chet Wade
    Vice President, Corporate Communications
    Dominion

    • I get electricity from REC but I do not recall see a line item for the plants.

      does that only show up on Dominion bills? Is there a image that shows how that rider charge appears on a bill?

      • If you are a customer of REC, then you do not pay for any of the DVP plants.

        • if I am an REC customer and REC is getting power from DVP – then how am I charged for my share of the plants?

          • I doubt that is the case (that you are getting power from DVP via REC) but if it is, then it would just be part of the line on your bill indicating purchased power or generation or something similar. Not sure what coop bills actually look like.

  3. The rural cooperatives are free to build their own plants (subject to regulation), but they only rarely do it because of the cost factor.

    In nearby South Boston, NOVEC built a biomass plant a few years ago.

    https://www.novec.com/About_NOVEC/SBE.cfm

  4. Couple of initial comments on Jim’s article before I read the other comments. Jim, the riders are only available to Apco and DVP. The cooperatives are regulated under a different set of statutes.

    Base rates pay for everything that is NOT fuel nor recovered in the rate adjustment clauses (RACs). Most all of the personnel costs, all of the costs of distribution assets, maintenance, all the power plants that were in operation at the time the new law went into effect, etc. The charitable donations you have written about. Basically all the stuff whose costs are declining is recovered in the “frozen” base rates and everything whose costs are increasing come in via the RACs. Pretty good deal for DVP (which is actually building plants) and a little less so for Apco, which is not.

    All the new power lines being built in the Commonwealth? There’s a RAC for those and they include profit levels (rates of return on investment) that is set by the FERC, not the SCC. FERC’s rates of return are higher than those set by the SCC, too, by the way. But, the legislation declares all those costs to be reasonable and prudent. So, we pay them.

    Environmental compliance costs? Yes, there’s a RAC for that. Apco has some rate riders for environmental compliance.

    Energy efficiency measures? Yes, another RAC. This one includes a little kicker–not only does DVP recover the costs of implementing these measures, it also can recover ALL revenues it “loses” as a result of such measures.

    All the RACs include not only the opportunity to recover the return on investment, but a guarantee that the utility will earn those profits.

    So, yes, RACs will be an increasing part of the bill.

    • Rowinguy,

      I am a bit dumbfounded by the RAC for energy efficiency measures. I have been a proponent of energy efficiency for some time because it is (in most cases) by far the cheapest way of gaining added capacity. Permanently saving a kWh is the same as generating a kWh.

      I have also been looking for good ways to encourage utilities to invest in energy efficiency because they often look upon it as a loss of revenue (with no 10% return). But to fully compensate them for all lost revenue (for life?) plus investment costs is a huge subsidy provided by other rate payers. I am surprised Dominion isn’t abandoning plans for future gas plants and going full bore towards energy efficiency – with a rate like this it would provide a far higher return on investment than spending money on a new gas-fired plants.

      Energy efficiency and demand reduction are important parts of a long-term plan. They can also be used as credits for the CPP process. However, a fair rate and proper incentive for efficiency investments should be worked out. Such a favorable rate for Dominion essentially shuts independent Energy Service Companies (ESCO’s) out of the market, which is probably their intention.

      • Yes, that aspect of the re-regulatory statute is very little known. I should also say that recovery of those lost revenues is not guaranteed, but the law does give a utility the opportunity to seek recovery. Theoretically, the SCC could turn it down.

        I will generally agree that energy efficiency is a cheap “source” of power, but I’m skeptical about “permanently saving” that kWh through these measures. Measurement and valuation of something that is not there is tricky.

        I’d say you are probably right about the tough impacts on Esco’s.

        • It is a bit difficult to prove the size of something that no longer exists, but the science of energy efficiency has come a long way. It is fairly clear how much energy is saved when you replace flourescent lighting with LED’s. You usually have a fair history of heating costs for existing buildings when you add insulation and higher performance windows (these historical costs are needed when you do your cost/benefit investment analysis). The numbers are also easily calculated when you replace an old pump or motor with a more efficient one or rebuild an inefficient piping run. The point remains that many of these investments have a 2-8x return on investment which is far greater than the ROI of building a new plant of any type.

          Efficiency investments could also buy us 2-3 years of time to evaluate cost trends for natural gas and renewable energy. For example, this would allow us to postpone approval and construction of the Greensville gas-fired plant for a few years to determine if it is truly needed before we are saddled with a huge stranded cost – if it turns out that it is not necessary (or the cheapest alternative). I would think that in a time of great flux in the energy industry a little bit of extra time to assess the best solutions would be welcome to the long-term energy planners (whoever they are).

  5. excellent discussions here.. thanks …!!!

  6. Virginia has one of the most transparent utility rate processes in the country and some of the lowest electric rates. That’s why I am puzzled by this article on Dominion Virginia Power’s rate structure.
    Remember, back in 2007, the Virginia General Assembly adopted a clear process for utility rates: The State Corporation Commission (SCC) must review and approve expenses for each new construction project, along with fuel expenses and electric transmission costs.
    Each project is examined as its own rate adjustment clause, or rider. Albert V. Carr, a professor at the Washington and Lee Law School, says the process allows the SCC “to focus only on those figures instead of looking through the company’s entire portfolio each time they approve a change.”
    There is nothing unknown or obscure about this process and numerous publications have reported on these rate changes many, many times over the past eight years.
    As your readers know, sometimes a rider goes up in cost. Sometimes it comes down. In all instances, Dominion cannot change rates by a single penny, up or down, unless the SCC authorizes the change. Dominion’s requests – and the SCC’s hearings and orders – are all public and transparent.

    Thomas P. Wohlfarth
    Senior Vice President – Regulatory Affairs
    Dominion

    • Does the SCC have the up-to-date industry knowledge to know what a given type of plant should cost to build and operate?

      or are they relying on what Dominion provides to them?

      So I guess I’m skeptical that the SCC has folks that are essentially knowledgeable enough that they could essentially go to work for Dominion and help Dominion make good cost-effective decisions.

      More than that – is Dominion’s strategy for the near and longer term future – good and correct?

      Do they build a plant or do they work on the demand side?

      when they build a plant – do they look at the likely cost of fuel over the next decade so the plant makes sense now – and into the future?

      what about other utilities and 3rd party players also pursuing short and long term strategies?

      we see 2-4 different companies looking to build pipelines and obviously in competition with each other and there is a real question as to how much can existing pipelines serve verses what more might be needed – as well as why the two existing providers can’t expand their network versus new players entering the field and duplicating facilities.

      There is a lot of ignorance on the part of the public and I include myself in that assessment and one of the recent revelations (to me) was the number of utilities involved in Va.

      https://www.scc.virginia.gov/pue/elec/el_map.pdf

      and yet – it seems that Dominion is involved in generation far more than these other utilities and I wonder if Dominion is generating power for them or they are getting it elsewhere from PJM or 3rd party.

      all of that affects decisions that Dominion makes for the future.

      and I worry about 2 things;

      1. – is Dominion making good decisions for the future or are they picking paths that conflict with how power is going to be generated in the future? I will admit – to this point – it sure looks like they have picked right – with some qualms when contemplating stranded costs.

      2 – if we are going away from coal and to natural gas that comes from fracking… it appears to be a finite resource yet we seem to have the pipeline folks anticipating exporting it at some point. That seems like an awful idea … if resources get depleted… electricity rates are going to skyrocket.

      finally – credit to Jim for his decision to involve Dominion – and credit to Dominion for coming online and making comments and responding to questions. I’m not sure how they, as a corporation, decided to do that – because there are potential downsides from unruly folks… but on the upside – a better understanding of how something as fundamental to our lives – actually does work.

      Would be great to hear Dominions views about CPP!

  7. Many thanks to Chet Wade and Tom Wohlfarth for joining in this conversation. I’ve highlighted your comments so readers can take note of a first — Dominion executives engaging in the back-and-forth on Bacon’s Rebellion.

    Virginia’s regulatory process may, in fact, be transparent by the standards of utility rate making. But it’s still strange and unfamiliar to most Virginians. The more we can de-mystify the process, the better.

    • The transparency of the State Corporation Commission would be greatly enhanced if the General Assembly made them subject to FOIA.

      We won’t get the FOIA Council’s study results back until the end of 2016. Gee, there’s no hurry in that, eh?

  8. Jim,

    We encourage our customers to learn about how their rates are set. A lot of misconceptions out there.

    Dominion has information on our web site at https://www.dom.com/residential/dominion-virginia-power/customer-service/rates-and-regulation. (Sorry for the long link.)

    The VA State Corporation Commission also has information at: https://www.scc.virginia.gov/power/index.aspx .

    Hope this helps.

    Chet Wade
    Vice President, Corporate Communications
    Dominion

  9. Rate riders are a perfectly legitimate mechanism for rate adjustments and rate regulation when used transparently and carefully overseen. I have only one concern about the way they are implemented in Virginia. The “base rate” piece of Dominion’s retail rate is assumed to be stable, with the rate riders coming and going and fluctuating in layers on top of the “base rate” base. Base rates include all the costs of existing generation, transmission and distribution except what’s covered by the riders, while the riders include certain new project costs and certain discrete categories of other costs (fuel, purchased power). What regulators have to watch out for is changes in the way Dominion’s system is run that result in cost increases reflected immediately in the various riders while lowering costs already assumed in base rates. Dominion’s rate structure gives it an incentive to operate so as to maximize this effect. I’m not pointing a finger here, and the VSCC has a pretty good reputation for watching out for such shenanigans, and the end result MAY be in the ratepayer’s interest anyway; just saying.

    • The SCC is very good at watching out for shenanigans but when they’re hogtied by the General Assembly, that oversight potential is highly diminished. See the now deceased Biennial Review process as an example.

      Aso, what other company gets a free pass on recovering $600 million in business development expenses?

    • Acbar,

      Your point about the base rate going unreviewed and delaying possible corrections to the cost increases of the riders is a good one. As I understand it, the normal every two year review by the SCC of Dominion’s overall financial situation will not take place again until 2022, with no savings being refunded to ratepayers during that period. It’s a bit of a “heads I win, tails you lose” situation.

      The period of 2015 – 2020 will likely see the greatest changes in utility business models and regulatory structures that we have seen in the 100+ year history of the utility industry. For Virginia to shut down the review of the overall finances and business planning of the state’s leading utility for the next seven years is difficult to understand.

      We need healthy utilities, but we also need a healthy state economic climate. There is no reason why these should not go hand in hand. However, with major changes occurring in the utility industry nationwide, we need an extensive and open discussion of the best ways to chart our mutual future.

      I appreciate the participation of the utility leaders in this discussion. We need more open dialogue about these issues. Utilities are not the enemy. They are crucial participants in establishing our state’s long term economic climate. But they are not the only ones who should be setting the agenda. Many new technologies are becoming available to deal with our energy issues. The old methods of setting rates to cover costs and provide a return to shareholders is breaking down as changes in electrical use have been flat or declining and are now decoupled from increases in GDP.

      We should be actively exploring ways that utilities can prosper by lowering the costs to their customers. By doing this, Virginia could become an attractive location for business development and our utilities could become leaders in creating a 21st century energy climate.

      • There is one more biennial review, starting next week as a matter of fact, before the SCC is put into cold storage until 2022….

        • Is that an open process? Can the information be accessed by the public and is there an opportunity for public comment or is it an internal SCC staff review?

          • TomH, there is a process for public comment and much case information can be accessed at the SCC website. Typically, the first few minutes to hours of any Commission proceeding are devoted to taking comments from the public. You just have to show up and fill out a form that the courtroom bailiffs provide.

            Oh, and you can submit written comments through the Commission website, too, I believe.

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