The State Corporation Commission is conducting a two-week hearing to determine whether or not Dominion Virginia Power should rebate $66 million in excess profits to ratepayers, as calculated by the SCC staff.
This review of Dominion’s base electric rates (which cover operating costs, not fuel or rate adjustment clauses) will be the last until 2022. Rates will be frozen until that time as part of a legislative deal designed to provide rate stability as Virginia electric utilities implement Clean Power Plan mandates. The Virginian-Pilot explains the issues at stake here.
According to SCC staff calculations, Dominion earned a profit of 11.34% over the two-year period covered, significantly more than the 10% allowed. The SCC maintains that Dominion owes a refund; Dominion contests the SCC’s accounting. A key issue is how to account for the closure of coal ash ponds at three power stations under the threat of litigation from environmental groups.
The SCC also contends that Dominion will generate a return on equity of 12.9% going forward, which could create $300 million in extra profit each year. Thanks to the rate freeze, the SCC cannot adjust Dominion’s base rate or order rebates for six years. Dominion maintains that the SCC analysis is flawed, assuming no storm or environmental costs going forward.
The accounting issues are all very interesting, but what’s most fascinating to me is the number that’s not discussed — the 10% Return on Equity (ROE). Earning 10% on your money is a pretty good deal if you can get it, especially given the relatively low-risk nature of the business. While Dominion isn’t guaranteed a profit, the rules are structured in such a way as to make it likely that the company will meet the target. No small-time investor can hope for a risk-adjusted return anywhere near that high. And given the prolonged interest rate suppression engineered by the Federal Reserve Bank, even the braniacs administering the nation’s biggest pension funds are adjusting the projected long-term return on their portfolios downward from 8% or thereabouts to 7%.
Dominion’s 10% ROE compares to 9.76% ROE for the electric utility industry as a whole in the 2nd quarter of 2015, according to CSI Market, up from 8.48% the same quarter in 2014. By a different set of metrics published by New York University, the utility industry (electric and gas) was earning 11.0% as of January 2015. That was higher than 32 other industry sectors and lower than 61.
The electric utility business is undergoing massive change. Environmental Protection Agency regulations are pushing the industry into a shift from coal-fired generation to natural gas and renewables, which entails the shuttering of old power plants and rerouting of electricity flows. Meanwhile, renewables and smart grid technologies are challenging the old business model of building large-scale, centralized power plants and giant transmission lines. It is easier than ever for electric customers to generate their own power. Yet everyone needs backup, and someone has to maintain the electric grid.
These are interesting times indeed for the State Corporation Commission: many questions and no easy answers.There are currently no comments highlighted.