Author Archives: Steve Haner

JLARC: Discount Incentive Benefits By 90%

Click for larger view. Source: Joint Legislative Audit and Review Commission.

Virginia’s legislative audit agency started its most recent analysis of Virginia’s economic development incentive grant programs with an assumption boosters would quickly dispute – that 90 percent of the economic activity they produce would have happened anyway.

With that assumption baked into the data, the Joint Legislative Audit and Review Commission found very small benefits for the various grants or tax incentives Virginia offers employers for new business locations or expansions.  This year’s summary looked at $1.8 billion spent on grants or foregone through tax exemptions over eight years.

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Governor Hints At Local Business Tax Reform

On Friday, after skirting the topic in a major address to a business conference in Williamsburg, Governor Ralph Northam told a reporter that “he’s planning to ask the General Assembly to tackle business tax reform,” adding it would be “comprehensive.”

The reporter asked about it because of other comments made by Secretary of Finance Aubrey Layne and the President of the Virginia Economic Development Partnership, Stephen Moret.  Since his arrival in Virginia, Moret has from time to time mentioned local business taxes as a hindrance to economic recruitment and business start-ups. He did that again Friday in his own presentation to the Virginia Chamber of Commerce.

For more than a decade local business taxes, especially two of them, have been the focus of the Thomas Jefferson Institute for Public Policy, among others.  The taxes are generally despised by the business community, but local governments are highly attached to them, because they are a revenue source other than residential real estate taxes.

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IRP Rejection Part of a Pattern of Trouble

The State Corporation Commission’s decision Friday to reject the Dominion Energy Virginia integrated resource plan is just the latest sign the energy package sold by the utility to a compliant General Assembly in early 2018 still has an uncertain future.

Two headline elements of the legislation – the promised massive renewable projects and a rebuild of the grid — are in limbo as the 2019 General Assembly looms.  Another headline element, the ability of the utility to use excess profits it is holding to pay for both and thus eliminate risk of rate cuts or refunds, won’t even be tested in front of the SCC until at the earliest 2021, when the utility might (might) undergo its next rate review. Continue reading

“Incomplete!” SCC Sends Back Dominion IRP

SCC Offices on Richmond’s Main Street

The State Corporation Commission today rejected the 2018 integrated resource plan (IRP) filed by Dominion Energy Virginia, stamping it “incomplete” and asking the utility for additional information in a supplemental submission.

The IRP is only a planning document, and the one for 2017 was just approved by the Commission a few months ago.  But in response to the 2017 plan and the massive revision to utility laws by the 2018 General Assembly, several specific directives were imposed for this next plan, which is supposed to have a longer shelf life.  The SCC asserts Dominion failed to comply with some of those directives.

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EITC, TANF and the Benefits Cliff

The “Benefit Cliff” for a mother with two children in Albemarle County. As income rises, SNAP, TANF, Medicaid, housing assistance and other benefits disappear.  This example does not include the Earned Income Tax Credit.  Source: VA DSS

For low income families receiving assistance in Virginia, their cash benefit from the federal Earned Income Tax Credit (EITC) is larger – often substantially larger – than the cash provided by Temporary Assistance for Needy Families (TANF).

A single mother with two small children who has a full-time minimum wage job ($7.25 per hour) qualified for EITC benefits of $436.33, in an example provided by the Virginia Department of Social Services based on 2015 data.  The EITC is paid out as a lump sum but the example broke it into monthly increments.  Doing that underlines its origin as a form of guaranteed minimum income, with the grant adding the equivalent of an additional $2.50 per hour to income.

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To Get Useful Answers, Ask Correct Questions

It’s all in how you ask the question.

The Judy Ford Wason Center for Public Policy at Christopher Newport University has done a pre-General Assembly poll testing various issues that may dominate the 2019 session.  The headlines are driven by the favorable and unfavorable rankings (ask me about President Tariff Man this morning as I survey my portfolio) and the apparent openness of Virginians to ending restrictions on gambling.

The poll’s authors took a dive into the complex world of tax policy, as well, seeking to tease out how voters view various moves related to the windfall tax conformity revenue.  It could have been more useful.  To start the discussion, here is the question they used:

Q8: Virginia is expected to receive as much as $600 million in additional tax revenue as a result of the recent federal tax reform. There are several ideas about what to do with this additional money. I’m going to read two of them and I’d like you to tell me if you support it or oppose each one.

  1. Provide an across-the-board tax cut to all Virginians who pay state income taxes.
  2. Provide a fully refundable tax credit to low and moderate-income Virginians regardless of how much they pay in state income taxes.
  3. If only one of these options could be done, which one would you most prefer to see done, an across-the-board tax cut to all Virginians who pay state income taxes or a fully refundable tax credit to low and moderate-income Virginians regardless of how much they pay in state income taxes?

The results were ambivalent, with a healthy portion of voters liking either approach.  There were predictable partisan divides, with Republicans preferring the idea of a broad-based cut for all taxpayers and the Democrats leaning towards a tax credit targeted to the lower and middle income.  But 59 percent of Democrats were positive on Q1 and 49 percent of Republicans were positive on Q2.  Forced to choose by Question 3, the partisan divide appeared again.

The problem is those are not the choices, at least based on the discussions so far.

First, missing from the mix was the idea which may yet prevail, taking no steps to return the money.  A fair additional option to give the poll respondents would have been: “Retain the money to increase the state’s financial reserves and spend it on other pressing state priorities.”  Listing especially popular priorities would have pumped up the positives on that question.

That is the biggest and most important question:  does the General Assembly keep the money or give it back?  They didn’t ask it.

Second, nobody has proposed an across the board tax cut to all those who pay the income tax.  We at the Thomas Jefferson Institute have come closest to that, with a proposal to double the standard deduction that might reach 70 percent of taxpayers, and we may tout the Wason result as supporting our case.  But that is not a tax cut for everybody who pays, so they didn’t poll our idea.

Third, I doubt if more than a handful of people polled know what a “fully refundable” tax credit is (or a partially refundable one, for that matter).  It sure sounds nice; everybody loves a refund – the word by itself may inject a bit of question bias.  Which of course is why it has always been used to describe the Earned Income Tax Credit grant payments.

But imagine the answer to this question, which more accurately describes the proposal around the Earned Income Tax Credit: “Provide an annual cash payment to low- and moderate-income Virginians who do not owe any income tax but are still struggling to meet the needs of their families.”

There still would have been positive responses to that, but how many?  Would it have proven to be as popular a choice as a general tax cut?  More popular?  We will never know.   Will we hear repeatedly in the coming weeks that this or that idea has been “strongly supported in a poll”?  Probably.

To borrow a line used about modeling, all polls are wrong, but some polls are useful.  This poll unfortunately is not very useful because it left off the main choice – keep it or give it back – and didn’t really describe the two choices for giving it back getting the most attention.

I do commend the CNU center for releasing the full text, cross-tabs and demographics of their sample.  Absent those, nobody should believe any poll result featured in the media or in campaign materials.

Updates: Deadly Road Diet? Rider T1 Case

The Powerful Law of Unintended Consequences

A raging forest fire is hard to imagine in Northside Richmond, but there could be other emergencies where the city and its residents would come to regret the loss of vehicle travel lanes on Brook Road. A recent deadly fire in California we all watched on television may be giving us a warning.

Apparently, evacuations from the lightning-quick brush fire around Paradise, California, were complicated by a 2014 decision there to impose a “road diet” on a four-lane road that became the escape route.  The push for “road diets” is also behind the argument for creating new bike lanes in both directions of several miles of Brook Road, a topic of earlier Bacon’s Rebellion posts and furious local debate.

A description of the bottleneck created by the highway adjustments in Paradise, and its impact on the fire evacuation, was published on wattsupwiththat.com, an interesting blog I only found because it linked to one of my posts on Dominion Energy.

The bottom line problem is that people just like building in dangerous places in California, including fire-prone areas.   When I lived in Southern California in the 60’s there were regular local stories about houses sliding into the ocean or homes destroyed by brush fires, only to be quickly rebuilt.  The population has grown, development has pushed further into countryside and mountains, and now there are regular national stories.

Bottlenecks have already developed on Franklin Street because of its seldom-used bike lane.  Just about any activity (parked or parking delivery trucks, leaf removal) in the one remaining travel lane causes a backup.  Similar bottlenecks will happen if the Brook Road project proceeds.  In both cases there are parallel streets that were not available to evacuees in the High Sierra, but it still calls into question whether safety ever trumps ideology with some people.

Next Step, Supreme Court of Virginia?

The State Corporation Commission issued an opinion Friday reaffirming its earlier decision that Dominion Energy Virginia must include payments it receives from the PJM regional transmission authority along with the payments it makes to PJM in the separate Rider T1 it puts on all our bills.

Following the commission’s August decision the utility filed for reconsideration.  The next step, should it decide to take it, is to the Virginia Supreme Court.

The amount of money in dispute is minor, so the precedent must be the point.  Dominion Energy is seeking to book the payments it is getting back from PJM into base rates, which increases the amount customers must pay in Rider T1 (for transmission) and increases the profit the company earns (and keeps) in base rates – base rates that seemingly will never be adjusted downward again and profits which may never be shared as rate credits again.

“Put simply, Dominion seeks to charge customers dollar-for-dollar for these transmission costs through Rider Tl but opposes crediting customers in the same manner for transmission revenues received for the exact same service,” the order reads.

Since 2007, more and more of the company’s operations are being paid for with stand-alone rate adjustment clauses outside of base rates.  New renewable generation may be funded that way, and the coming rebuild of the distribution grid might be as well.  If there are to be silos keeping all the costs in one place, the same silos should hold any and all related revenues to offset those costs.

Bacon Bits: Taxaginia, SCC Approvals, Blue VA

The Taxaginia Total:  $1.7 Billion in 2020

The four taxes I wrote about in “Taxaginia” last month could reach a combined fiscal impact of $1.7 billion by about 2020.  In preparation for a talk (which I will not get to give today after all), I did a bit more digging and some additional information has since come out.

The $611 million estimate for the state income tax hike resulting from conformity to federal tax changes is a Northam Administration estimate, known since summer.

The legislative money committee retreats last month produced a firmer estimate for the provider assessments (a.k.a. taxes) on private hospitals, with $719 million tagged as the revenue haul for 2020.  (Don’t you wish you could develop a futures market on these estimates?  That’s not going to hold.)

The Virginia Department of Taxation is now using $165 million as its projection of additional revenue once Virginia revises its sales and use tax to comply with the Wayfair decision and demand more tax collection by online merchants selling and shipping into the state.

The estimate on the carbon tax that will be imposed when Virginia joins the Regional Greenhouse Gas Initiative (RGGI) is a year old and is likely being revised as a new iteration of the regulation is considered. I’m using the number of $203 million, the upper range from last year’s Department of Planning and Budget estimate.

Under the newest version of the proposed regulation, electricity producers burning fossil fuels will need to pay for permission to emit 28 million metric tons of CO2, and the price per ton can only be estimated until the auction process gets underway.  As it stands now, the plan is that all the money the utilities pay for their carbon rights will be returned to ratepayers somehow and not spike rates, but that mechanism is unclear. 

Nobody Fights The Energizer Bunny

Not all the proposals Dominion Energy Virginia makes spark controversy. Proposed guidelines on planned pilot programs for utility-sized storage batteries have now cleared the State Corporation Commission.  No objections were raised, no pile of testimony accumulated, and only a few tweaks were made to the original language.

One provision in the massive 2018 electricity regulation revision authorized Dominion to install up to 30 megawatts of storage, and Appalachian Power up to ten megawatts.

Another New Option for Customers Who Want Renewable

Also uncontroversial, but far more complicated, is a new choice offered to large electricity customers, the so-called Schedule RG tariff.  This is a way for a Dominion Energy Virginia customer to buy exactly the kind of renewable power desired, but still remain under the umbrella of Dominion’s existing monopoly.

Attorney Will Reisinger of the Richmond firm GreenHurlocker has written about the SCC’s approval of the new tariff on that firm’s blog.  Limited to 50 large customers, it is designed to prevent any costs being borne by non-participating customers, in contrast to a recent solar project.

Reisinger represented Mid-Atlantic Renewable Energy in the case, and other participants included Wal-Mart Stores and Sam’s East, Inc., possible customers for the new rate schedule.  Your correspondent admits he has not plowed through the record but relies on Reisinger.

“Finally, it is important to note that Schedule RG was not approved under Va. Code § 56-577 A 5 and would not constitute a 100% renewable energy tariff under this statutory provision,” Reisinger wrote.  “As we explained in our Regulatory Guide, this Code section authorizes any Virginia customer to purchase electricity “provided 100% from renewable energy” from non-utility suppliers, so long as the customer’s incumbent electric utility does not offer an SCC-approved tariff for 100% renewable energy.

 “Therefore, if Dominion received approval to offer a 100% renewable energy tariff pursuant to Va. Code § 56-577 A 5, Dominion customers would lose their existing rights to shop for such energy.

“Currently, no Virginia utility offers an SCC-approved 100% renewable energy tariff. Dominion and Appalachian Power have both applied for approval to offer such tariffs, which thus far have been rejected.”  

So that one chink in the utility monopoly remains.

And Finally, A Stunning Endorsement for Bacon’s Rebellion!

The following excerpt is from no less than Blue Virginia!  It was part of a piece where Jim Bacon was attacked for being a damnable climate-denier, of course, and the Richmond Times-Dispatch was roundly condemned for hiring him, but it also included this:

Let’s be clear: Bacon’s Rebellion material is sometimes entertaining and, in some of the material, has a form of wonkiness that can be attractive/engaging for policy nerds. On its best days, it can provides (sic) valuable windows and thinking about policy interests with enough substance that can enable thoughtful engagement.

The Push for EITC Cash Grants Accelerates

A useful EITC example from the Commonwealth Institute’s website. Whether anybody “earns” a credit is debatable, but that claim will appeal to those who benefit.

With the 2019 General Assembly now a handful of weeks away, the main advocacy group for a new cash welfare entitlement in Virginia is ramping up its efforts with various appeals, perhaps testing themes for later use.

On Wednesday on its website the Commonwealth Institute for Fiscal Analysis was arguing that the state Earned Income Tax Credit (EITC) should be converted to a “refundable” cash grant because of how it would help “communities of color,” who pay a larger percentage of their income in state and local taxes.

A few weeks back, the focus was on how “veterans and their families deserve full credit.”  And, of course, they have broken down their data by legislative district, conflating the number of people who claim the EITC already with the number who would benefit from their idea.  Not everybody who now claims the state EITC would qualify for a grant.

The first to advocate for converting the tax credit into a cash payment was Governor Ralph Northam, who mentioned it last summer as his favored use for the windfall state income tax dollars generated by conformity.  It has nothing to do with that windfall.  In order to benefit from this idea, you already must be paying zero state income tax.

In recognition of that, the argument now is people need to get the balance returned in cash because they are still paying sales, excise and other taxes, just not income taxes.  It’s not good enough to zero out their income tax, advocates claim.

As previously explored, the Earned Income Tax Credit is a program with conservative credentials and has succeeded in improving the finances of low-income working families.  At the federal level, if your income and family size qualify you for a credit which is larger than your tax bill, the difference is sent to you in cash.  To call it a “refund” is political fiction, because it is not cash you paid in taxes to start with.  It just comes at the same time the rest of us are getting refunds.

The federal version has grown into a major income transfer program, about $60 billion annually, and as always with these programs the push to expand them is constant.  A Democratic House of Representatives will be more attentive.

In an earlier tax reform effort, Virginia added its own version of the program, allowing a credit against state taxes equal to 20 percent of the federal EITC.  But Virginia did not take the second step of paying cash grants from state revenue to people who had larger credits than tax bills.  That is what Northam and the Commonwealth Institute are talking about doing now.

The cost impact is about $250 million, based on an earlier legislative proposal which failed, but a full analysis is lacking.  The cost to taxpayers – and it is a cost to taxpayers, not a refund and not tax reform – will need to be more carefully spelled out when a bill finally appears.  Advocates have developed a calculator for individuals and for some the grants would be substantial.

While this proposal is not tax reform, but instead is a way to share the windfall revenue with low-income working families, the idea is not incompatible with tax reform.  It would be possible to couple it with an increase in the standard deduction or some other change in personal income taxes that actually aligns with to the conformity windfall.  It is only a question of how much revenue with which the legislature is willing to part (for some, the answer is none).

The proposal to expand the standard deduction would reach far more Virginians – more in “communities of color,” more veterans, more in every legislative district – than would turning EITC into a cash grant.  The problem for some on the left is they would not all be poor or working-class and might even be well-off.

What they would not be is the same people.  As noted before, to qualify for the cash grant Northam and the Commonwealth Institute are talking about, you already must be paying zero state income tax.  If the EITC credit has already wiped out your state tax bill, an additional standard deduction is of no value.

But there is this, which should appeal to the Commonwealth Institute:  The additional standard deduction would add to the number of people who pay zero income tax.  An EITC cash grant would go to those already paying zero but would not grow their ranks.

And this:  The additional standard deduction would stay with you as your income grew.  EITC – whether a credit or both a credit and grant — shrinks as your income grows, and that is what people really want, growing income.

If the General Assembly must choose, it should choose tax reform and increase the standard deduction.  If its willing to do both, well, this is why the legislative process is great theater.  It cannot be predicted.

State Colleges Face New Financial Stress Test

Source: Auditor of Public Accounts

The Virginia Auditor of Public Accounts has applied a nationally-recognized strategic financial analysis tool to Virginia’s fourteen public colleges and universities, revealing that only one – the University of Virginia – has a strong financial foundation and several are vulnerable to stress.

The work done by Eric Sandridge, Director of Higher Education Programs at the APA, was published in a full report in late October and was summarized in a presentation to the House Appropriations Committee on November 13.  It is the first of what are planned to be annual reports tracking the results over time, focused on the same kind of risk created for the state by stressed local governments.

The key composite financial index (CFI) he used has a ten-point scale. “A score close to one indicates that the institution may be very light on expendable resources and have difficulty meeting operating demands in the current environment,” Sandridge wrote in his main report. Longwood University, Christopher Newport University, Norfolk State University and the University of Mary Washington have all had recent years with a composite score of one or below.

A CFI score of three is considered healthy and of one is concerning. And then there is UVa. Source: APA

The College of William and Mary’s scores have only barely exceeded a one on this scale in recent years, but look far better when the financial resources held in its foundation are factored in. Several of the schools see better scores with their foundations included in the measurement. But not all have substantial endowments.

A score of three “generally indicates that an institution is financially healthy,” Sandridge wrote in his report. Even with their foundations included, eight of the fourteen schools miss that mark, although Radford University is close.

The University of Virginia is everybody’s rich uncle, to the point Sandridge pulls it out of some averages. VMI’s endowment is also off the charts for public schools of that size thanks to its loyal alums.

CFI Test with foundation resources included, improving the position of several schools. Source: APA

“The Composite Financial Index or CFI combines four core ratios by assigning various weights to generate an aggregate score for financial strength and stability. These ratios: Primary Reserve ratio, Viability ratio, Net Operating Revenues ratio, and Return on Net Position ratio provide for an understanding of the institutions’ available resources and results of current operations,” is how Sandridge summarized the method, devised by the accounting firm of Prager, Sealy & Co., LLC.

The various financial tests, similar to those a business analyst might use, look at the schools’ debt, the comparison between their operating revenue and expenses and available reserves. Their auxiliary enterprises are measured, along with their endowment and the investment success on that endowment. The age of facilities is factored in. Enrollment trends count. The haves and have nots comparison that results is stark, but it is not clear just what if anything the state might do about it.

One possible conclusion:  Virginia is the only school well-positioned to fully end its status as a state school.

Sandridge was the APA expert called in when the University of Virginia’s Strategic Investment Fund was making headlines, and the legislative attention on that issue might have sent the state looking for a deeper analysis tool.

One of the slides he used with the House broke down endowment divided by student head count, and the disparity there really underlies much of the rest of the report. The per capita amount at the University of Virginia exceeds $260,000 and the per capita amount at George Mason is just one percent of that, about $2,600.

You don’t get more have and have not than that.

Dominion Grid Plan Battered in Testimony

Caroline Golin, Ph.D., witness for Appalachian Voices, SELC

Two witnesses told the State Corporation Commission Tuesday that Dominion Energy Virginia’s proposed grid transformation program will not bring the utility’s customers into the modern energy economy.

Both Scott Norwood of Texas, an expert witness often used by the Office of the Attorney General, and Caroline Golin, an expert from Georgia hired by environmental groups, paralleled their written testimony reported on in an earlier post.

The commission must agree that the company’s $917 million first phase of its plan, which includes a roll out of new automated metering technology, is reasonable and prudent before the company can proceed. Just how customers will pay for this – either through a rate adjustment clause or the use of excess profits retained by the company – is not yet before the commission. With financing costs and profits the long-term revenue requirement for all phases of the plan is estimated at $6 billion by the SCC staff.

“The company is not proposing to operate the grid in any new way,” Golin said Tuesday. If it were moving aggressively to distributed energy, to more customer-driven demand management, to time-of-day pricing, to use of storage, “then I would agree they need more control of the grid. But right now, they are not proposing any of those.”

Norwood noted that a major part of the plan’s cost will be spent to reduce average outages by a few minutes per year. “I’m skeptical most customers will notice. It’s like the break we took at midmorning.” Benefits of that kind of reliability flow to larger, commercial and industrial customers but will be paid for by the residential customers.

Golin picked up on the same point: “There is a difference between reliable and perfect” and the company is now shooting for perfect. “This is something the commission needs to be very critical of. The average customer does not require perfect power.”

Support from some of the environmental groups, and a neutral stance taken by others, was crucial to passage of the 2018 legislation. Dominion Energy packaged it to the public it as a grid modernization effort, but its final version also included major incentives and directives to build more renewable generation. Now the environmental groups are leading the charge against the grid-related element of the bill, claiming it is a lost opportunity to truly transform the utility for a renewable energy future.

Golin, who has joined Google since being retained in this case, has been involved in grid redevelopment cases around the country and has also been especially critical of Duke Energy’s North Carolina plan.  Her statement that Dominion had no plans to operate the grid differently was vigorously challenged by Dominion and even an SCC staff witness later in the hearing.

Since the first round of written testimony was filed, Dominion’s leaders have supplemented the record with rebuttal testimony, but it was picked apart at the hearing as more evidence that no real cost-benefit analysis had been done, much of the engineering work is preliminary, cost estimates have little valid basis, and some obvious grid-related issues were flat ignored.

Dorothy Jaffe of the Sierra Club used questions to a Dominion witness to point out no real plans were made for the growth of electric vehicles, and the initial $3 billion plan would have to be supplemented – perhaps at additional cost – to support that expected transformation.

The Office of the Attorney General and the SCC staff have not asked for a total rejection of the proposal, but acceptance with conditions or acceptance of only the early pieces that involve planning and engineering. 

As with most of the issues that have reached the commission growing out of that legislation, the key question is does the regulatory body have the power to say no. In some cases, such as the off-shore wind demonstration project, the legislative wording was a clear directive. In the case of the grid projects, however, the new language mandated a review for reasonableness and prudence. A separate hearing on the commission’s authority was held November 7.

“The new law does not require a single one of these projects to be implemented,” said Nate Benforado, an attorney for the Southern Environmental Law Center, who used his opening statement to dismiss the whole effort as “a plan to spend money” which “puts the customer last.”

“This is a huge issue for the coming decade,” Benforado said. Dominion really doesn’t need to build new generation. There is testimony in the current integrated resource plan case that demand is flat or dropping, with plenty of generation assets available through connection with other utilities. “Dominion is looking for ways to spend customer money and earn a rate of return.”

The decisions on this case and on the integrated resource plan will probably need to be viewed together to glimpse Virginia’s future. The IRP case appears ripe for a published opinion with no further hearings planned. The commission has until mid January to issue a decision on this matter.

Confusion, Silence Will Earn Business Higher Taxes

State revenue impacts of conformity to federal business tax changes without a corresponding cut in tax rates. Source: Department of Taxation

“I’m not going to get into it unless anybody wants me to.”

So said Kristin Collins, policy development director for the Virginia Department of Taxation, as she neared the end of her November 19 slide presentation on federal tax conformity and its impact on Virginia state taxes.  The final handful of slides focused on the business tax issues, and not one member of the legislative panel asked her to get into them.

With all the focus and political discussion swirling around individual income taxes and conformity, the business tax issues have received little notice.  In the projections on the state’s revenue windfall the higher business taxes produced by conformity play a big role.  In 2023 and 2024, the later years in the state’s projection, higher business taxes account for over 40 percent of the new revenue, according to an outside consultant’s study.

Collins was presenting to the Joint Subcommittee to Evaluate Tax Preferences, the closest thing Virginia has to a permanent tax commission in its legislative body.  Many key players on the money committees belong.   The chair, Delegate Lee Ware of Powhatan,  who also chairs House Finance, intends to call the joint panel together again for a deeper discussion and perhaps some decisions before the General Assembly starts in January.

A group I’m working with has already recommended on the individual side that Virginia increase its standard deduction, and on the corporate side we think Virginia should start to cut the corporate income tax rate, from 6 percent now down to 5.5 percent for this tax year and 5 percent for next tax year.  The full Thomas Jefferson Institute paper on our proposal is now available.

The business community needs to get its act together and decide what it wants, or it’s going to get the full effect of these business tax increases.  Unincorporated businesses – S corporations, pass-throughs, partnerships – do very well under conformity but incorporated businesses get hit.  The cut in the corporate income tax rate we propose effectively short-circuits that tax increase in general but does not return the benefit directly to the companies hit with the highest new taxes.

Some in the business community would prefer to leave the tax rates intact but instead get the General Assembly to restore the corporate deductions targeted by Congress.  They would have Virginia refuse to conform to those certain aspects of the federal system, which does target the corrective action directly to those facing higher taxes.

Our proposal is full conformity but rate cuts aimed at all corporate taxpayers.  It represents general tax reform, not maintenance of the status quo.

A short list of changed business provisions create the big tax hike, and they are spelled out in the Tax Department chart above.  You can see that several grow in impact over time, and a major change in the treatment of research and development expenses doesn’t even kick in for three years.   Unlike some of the new individual tax provisions, these changes have no sunset date.

What is wrong with that chart – and potentially misleading – is it includes provisions for both unincorporated and incorporated businesses.  The two changes producing lower taxes are mainly for the entities exempt from the corporate income tax, and most of those raising taxes are for corporations.  It also fails to detail one of the more controversial changes dealing with repatriated international earnings.

That provision, which goes by the wonderful acronym GILTI, is already the subject of a lobbying effort by some Virginia corporate taxpayers, who note some other states (Tax-achusetts included) have already elected to allow that deduction despite the federal action. It stands for Global Intangible Low-taxed Income, and the IRS guidance runs to 150 plus pages.  The argument over whether and how to tax intangible income (royalties on patents and copyrights for example) is an old one.

The Section 199 deduction also known as the domestic production activities deduction (DPAD) has been a source of contention in Virginia before, because when Congress expanded it Virginia balked at going along in full.  Its purpose was to lower the effective tax rate on manufacturers, and by lowering the tax rate for everybody by 40 percent Congress largely addressed that problem.  It then killed Section 199. (Virginia should do the same:  accept the change and lower its rates!)

The largest cash impact comes from new limits on the deduction for interest expenses, and here Congress also had reasons for its move.  Why subsidize excessive debt?  Apparently there is also a push on in Virginia to keep that deduction in place on Virginia corporate returns.

The limits on amortization of research and development expenses have a delayed impact, but eventually a large one.  That’s another one where Virginia could stay the course, maintain the old rules, but at the cost of a lost opportunity to lower overall rates.

The business community has some decisions to make, and it may be a handful of companies who have a developed presence at the General Assembly who get to make them.  Long-term considerations and discussion of overall economic policy tend to get ignored when lobbyists can angle for their own client’s advantage. That game is now afoot.

SCC Staff: Convert A Dominion RAC Into A PPA

All-in lifetime revenue requirement for two solar projects related to Facebook. Key data is hidden. Operating and maintenance costs are also kept secret, perhaps to prevent simple math from disclosing the RECs. ARO stands for “asset retirement obligations” and ITC is the federal tax credits. Source: SCC staff testimony.

“Facts are facts, and the SCC does a really good job of compiling them.”  Former State Senator John Watkins of Chesterfield.

After demonstrating that two solar energy facilities Dominion Energy Virginia has proposed in a deal with Facebook leave ratepayers holding all risks, reported already in the Richmond Times-Dispatch, the State Corporation Commission staff suggested an interesting solution that shifts that burden.

“Should the Commission determine that the proposed US-3 Solar Projects are not prudent as filed, the Commission may want to condition approval on the implementation of cost recovery through a rate adjustment clause (“RAC”) based on the market index in lieu of the cost of service model proposed in this case,” wrote Gregory L. Abbott, deputy director of the utility division.  His and other documents are available online.

“This would reasonably protect the nonparticipating customers from performance risk as the customers would only pay for the actual MWhs that the proposed US-3 Solar Projects produce.  Implementing cost recovery through a RAC based on the beginning market index price of $31.82/MWh would also meet the Commission requirement in Case No. PUR-2017-00137 that Schedule RF should be implemented in a manner that holds nonparticipating customers harmless,” Abbott concluded.

So.  Instead of guaranteeing the utility a full return of its capital costs with profit, the SCC might instead charge ratepayers no more than the market value of the power produced.  On this deal, Dominion would be no better protected than an independent merchant power producer.

This little case, involving only 240 megawatts of production and $410 million of construction cost, is important because after Facebook come others with similar or larger appetites.  This is the first of many such arrangements the company expects under its experimental special rate for customers demanding the appearance of green energy virtue.  Any new plants need SCC certificates of public necessity and convenience.

The Commission last year approved the experimental “RF” tariff designed to serve the new Facebook facility and others like it, but included this in the order:  “As acknowledged by the Company, however, our approval herein does not represent a presumption or pre-approval of any subsequent proposals related to Schedule RF….We agree with Consumer Counsel that Schedule RF should be implemented in a manner that holds non-participating customers harmless.”

Here is how it appears to work:  Facebook will buy the same “tainted” power including from fossil fuels and nuclear from the grid as everybody else, but to keep its green cred intact also promises to buy 100 percent of the renewable energy credits and other “environmental attributes”  for a comparable amount of power from solar.  Those contracted payments are applied to the capital pay-off for 20 years and lower the cost of the project for other ratepayers, who will still see a rate adjustment clause (US-3) on their bills.

Dominion is not building solar to connect directly to Facebook, and should a third party try to do that in Dominion’s monopoly territory, heads would roll.  That monopoly is the most valuable asset its stockholders enjoy.  The only difference between this and any other solar project appears to be the sale of the RECs to Facebook instead of into some other market.  I’m open to correction on that point.

One point the SCC staff makes is it didn’t have to be a company-built project.  Staff witness Earnest J. White said Dominion could have met Facebook’s needs by purchasing an existing solar facility. “This option would have permitted the Company to know, rather than estimate, the benefits to customers before exposure to risk of performance,” he wrote.  (Unmentioned by him – that option does not produce 9.2 percent annual return on equity for the utility. )

Another instance of redactions rendering SCC data useless to the ratepayers and reporters.

The revenues from the renewable energy credits at the two plants, along with the tax credits, are applied to the 35-year payoff on the two new solar facilities, reducing costs to ratepayers.  But as the SCC testimony makes clear, two variables then become crucial.  The first is the capacity factor of the project (what percentage of the time power is produced) and the second is the market value of those renewable energy credits.  The two are interrelated because the RECS are based on actual output, not 100 percent capacity – less output, less REC revenue.

Complicating reporting on this case, as usual, are all the key data covered up with black ink or entire memos withheld from public scrutiny.  The projected REC revenue is kept confidential.

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Do They Want a Low Tariff? Or A Higher One?

Three bottles from the private stock – and the price difference was not the tariff. (The Virginia wine goes with tomorrow’s turkey.)

Unlike most we met, the wine salesman in the shop in St. Emilion did not speak English well, but as he poured samples it began to matter less.  When he heard we were from Virginia, though, his response was quick: “Oh, good wines!”  We had to agree, but the case we shipped home was pure Bordeaux.

When President Trump made his recent threat to impose higher tariffs on French wine, that got my attention, and then I read in this morning’s Richmond Times-Dispatch the argument put forward in support by a Virginia wine producer.  He provided some details that Trump omitted, such as what the tariffs now are.

On a case of wine imported from France, 60 cents.  On a case of wine exported to France, up to $3.48.

According to data from the International Trade Center, the United States imported $1.8 billion worth of French wine in 2017, while France bought just $71 million worth of American wine. That makes the United States the largest market for French wine, accounting for 17 percent of the country’s exports.

 “This is largely because the tariff disparity makes it nearly impossible for wineries here in America to compete,” wrote Al Schornberg of Keswick, just a short trip away from El Presidente’s family operation.

That isn’t it, guys. A difference of 24 cents per bottle?  Equalizing or eliminating those tariffs will not markedly change your appeal to European markets.   My wife and I gave up most other forms of alcohol about two decades ago, and we started visiting Virginia wineries and were pleased as the quality improved.   We visited another one up in Albemarle two weeks ago, White Hall, and brought home three bottles.

But the small wine fridge we have is also stocked with product from California, Argentina and Germany, and usually the most expensive bottles we have are those from Virginia.  The volume and efficiency of Virginia’s operations cannot produce quality at the same price. Not yet.  But that should be the goal.

Schornberg mentions the real problem: “For years, I’ve been searching for a distributor to carry our wines onto the shelves of stores around the country. Instead, time and time again, I am told that our wines are too expensive to compete with the wine portfolios of French distributors.”  But wait, on those transactions there is no domestic tariff.

What Virginia’s wineries can do is provide a lovely setting for an outing and continuing to heavily market that should also be a key strategy.  Another key part of the picture is to look at the barriers to shipping cases across state lines or internationally.   Years ago, I did some work for the Virginia Wine Wholesalers on that front, but I don’t know the current state of the law.  Removing any remaining barriers to direct shipment might help more than an equalized tariff.

Shipping that case from St. Emilion proved to be a challenge, far more complicated than a similar effort to ship wines back from Monterey or Sonoma, California.  I ended up getting a bill for import duties.  Truly free trade would remove both tariffs and direct shipment barriers.

When I see this argument start, on any product, I’m always wondering if a level playing field is not the real goal, if the proponents are really after a protective tariff.  It is going to have to be a whopper to remove the price differential on French and Virginia wines of similar quality.  Better to keep the competition going, because that is what will bring Virginia’s industry to world class level.

Delayed, ACP Price Tag Reaches $7 Billion

Delays mainly caused by continuing regulatory battles have added another half a billion dollars to the price tag for the Atlantic Coast Pipeline project now crossing Virginia.  Dominion Resources CEO Thomas Farrell used a new top figure of $7 billion in a discussion of the project with investors and analysts on November 1.

Back in February it was the Duke Energy CEO who first floated a figure of $6.5 billion for a project that started out with a $5 billion or less advertised price.  Those costs do not include financing, which will add to the amount customers pay for the gas in coming years.  Dominion is the lead partner in the pipeline, along with Duke Energy and Southern Company, but owns slightly less than 50 percent of the project.

The transcript is rough in places, the fault of the transcriber I’m sure, so I may add some suggested translations here and there.

“The FERC stop work order in (and?) delays obtaining permits necessary for construction have impacted the cost and schedule for the project. As a result, project cost actions have increased the range of $6 billion to $6.5 billion to a range of $6.5 billion to $7 billion excluding financing costs,” Farrell told those assembled on a conference call to discuss the company’s third quarter results. The most recent dispute involves the proposed compressor station in Buckingham County, with its permit decision delayed at the last Air Pollution Control Board meeting.

“The Atlantic Coast Pipeline is pursuing a phase in service approach with its customers whereby we maintain a late 2019 in-service date for key segments of the project to meet peak winter demand in critically constrained regions. ACP will be pursuing a mid-2020 in-service date for the remaining segments.  Farrell said later their profits are not threatened if they don’t start pumping gas in 2019 because the are guaranteed to recover funds used during construction.

“Through this process, we’ve already been through one process with customers on the rates, and we’ll continue to work with them. The returns are going to be very adequate and comments (commensurate?) with the normal returns we get in projects like this in our midstream business,” Farrell said.

Dominion Energy Virginia, through another arm of the company, is one of those customers, meaning of course its millions of Virginia ratepayers will ultimately pay off the portion of the pipeline serving Dominion generation plants.

Opponents tend to focus on the top line number ignoring the fact that there will be other customers sharing the cost along the line.  Opponents are quite right when they point out that new pipelines cost more than old pipelines built at lower cost.  Those issues will be debated in future State Corporation Commission cases, where the higher transportation charges will be compared to cheaper alternatives. 

In speaking to the analysts, Farrell was positive about the prospects of another huge capital expense coming at ratepayers like a train – license extensions to add another 20 years of life for its four nuclear reactors.  In some recent State Corporation Commission testimony, the company has been equivocal on its plans.  Who’s getting the real story, the SCC or the stock analysts?

“Now, on October 16, we filed with the regulatory commission for subsequent license renewable (renewal?) for the [indiscernible] power station reactors. This is an important first step in which we expect will be a multiyear $4 billion investment program that will extend the lives of both the [indiscernible] (Surry?) and North Arizona (North Anna) nuclear stations by an additional 20 years. We expect to submit the North license suspension (extension?) application in 2020. As a result of this initiative, our customers will continue to benefit from clean, reliable and low-cost generation from these best-in-class facilities,” Farrell is quoted in the transcript.

And on a related note…..

Former State Senator John Watkins was actively promoted this past winter as a candidate to fill an opening on the State Corporation Commission.  He was apparently derailed by concerns about his votes on key utility regulation issues and his ties to various legislators who have shown little interest in protecting ratepayers when the utility was rewriting the law to its benefit.  Yesterday’s Wall Street Journal took note of how things work in Virginia.

Apparently that Clean Virginia group published something pointing to relatively high electricity bills in Virginia, and Senator Watkins rose to the company’s defense in a guest column in The Roanoke Times, a paper far from his Chesterfield County home.  Read it and form your own opinion of his fitness for the Commission job, which is still open after all.

One line of his did inspire me.  “Facts are facts, and the SCC does a really good job of compiling them. Legislators and the public count on the SCC to provide that information to make sound decisions,” he wrote.   My mission at Bacon’s Rebellion to report on the Commission process and the facts that drive its decisions will continue.