Dominion Energy Virginia does not want state regulators to require a formal cost-benefit analysis of its plan to spend $3 billion on grid modernization over the next decade, reports the Richmond Times-Dispatch.
“I do not believe it would be appropriate to impose such a requirement for its approval,” said Edward H. Baine, senior vice president of distribution for Dominion Energy’s power delivery group. In testimony filed with the State Corporation Commission. He urged the commission to consider “the many qualitative or otherwise unquantifiable benefits” of the plan.
At first blush Baine’s remarks sound like Dominion is asking for a blank check –“Give us permission to spend a bunch of money, but don’t look too closely at how we spend it.” Predictably, Dominion’s critics of all stripes have been quick with criticisms. Some say the grid modernization sacrifices the interests of rate payers with unnecessary spending, others that the plan is insufficiently transformative of the electric grid. In today’s political environment, Dominion makes an easy target. In the T-D article, even the utility’s friends had qualms about the company’s wish to avoid a traditional cost benefit-analysis.
My intention in this post is not to defend the plan, the details of which I have yet to see. As a general rule, I am a huge proponent of conducting cost-benefit analyses for any public expenditures (or in Dominion’s case, expenditures that require public approval). Indeed, some criticism may be justified. As Steve Haner has pointed out, some of the tap-lines in the proposed undergrounding project sound absurdly expensive. And as Walton Shepherd with the National Resources Defense Council has blogged, the strategic thrust of the $3 billion spending plan, a grab bag of initiatives, could use sharpening.
So, by all means, let’s have a vigorous public debate over Dominion’s grid modernization plan. But let’s have a better debate than the one that seems to be shaping up. To start, let’s admit that some benefits to Dominion’s plan are, in fact, difficult or impossible to quantify. Then, permit me to introduce two critical concepts — (1) risk and (2) the time value of money — without which we cannot have an intelligent discussion.
Writing in the Commentary section of the Times-Dispatch today, Robert M. Blue, CEO of the Dominion Energy Power Delivery Group, discusses the benefits of the plan’s priorities — investment in renewable energy and energy-efficiency; resilience in the face of sabotage, cyber threats and natural disasters; more assistance to lower-income Virginians — without offering a cost-benefit justification.
In his SCC testimony, Baine has said the plan will save the company more than $2 billion over 20 years. In other words, $3 billion invested over 10 years will save only $2 billion over 20 years. On its face, that seems like an indefensible assault on the rate payers. But, as he made clear, the numbers exclude “unquantifiable benefits.”
Let’s take the undergrounding program as an example. In March Dominion filed to recover $284 million to bury 660 miles of its most outage-prone tap lines. Those lines accounted for 9,368 outages over the past 10 years. Dominion should be able to quantify the estimated cost of continuing to repair these tap lines over the next 10 years. I don’t know what the cost is, but it’s certainly in the tens of millions of dollars, perhaps in the hundreds of millions of dollars. What Dominion cannot quantify is the value to customers of having their electric service restore more quickly. When your power goes out, how much is it worth to get it back on? The loss of an hour or two is a minimal hardship. But the loss of electricity for three, four, or five days — I’ve had mine go out for 10 days — spikes as food spoils, working at home is impossible, or as extreme cold or heat makes houses uninhabitable.
Alternatively, let us consider investments in hardening infrastructure against the sabotage of physical facilities or corruption of IT systems. These may be investments for which we never see a benefit. Dominion can spend tens of millions of dollars upgrading its IT computers and communications and never come under cyber attack. Without making the investment, however, there is an increased risk of system-wide collapse. How much will Dominion decrease the risk of catastrophe by making those investments? That’s impossible to measure. What would the cost be if the grid experienced an extended blackout? Also impossible to measure.
While the risk of sabotage on an electric sub-station, a cyber-attack on grid IT systems, or a Category 3 hurricane overwhelming coastal infrastructure may be remote, it would be irresponsible not to guard against them. How much should Dominion spend to protect against them? There is no measure. The decision requires a judgment call.
Next, let’s address the time value of money.
In his T-D article Michael Martz makes the following statement:
The company plans to spend $2 billion on the Strategic Undergrounding Project, which the SCC estimates will cost $6 billion over the life of the buried lines, including the financing expense and utility profit.
I am seeing this total-cost number — initial cost + profit + financing costs — quite often. The purpose, of course, is to make the cost to rate payers look as large and frightening as possible. We never see this with other types of infrastructure expenditure, as in, to make up an example, “The Virginia Department of Transportation plans to spend $2 billion to build Superhighway X, which will cost $6 billion after operations, maintenance and interest expense on bonds are taken into account.”
When a private-sector company examines its capital-expenditure alternatives, it looks not only at the up-front cost, it looks at the time value of money. The basic principle is that a dollar spent today has greater economic value than a dollar spent twenty years from now. Why? Because a dollar put to work today will have twenty years of compounded returns compared to a dollar invested two decades from now. In simplified terms, a dollar spent today is worth two dollars spent twenty years from now.
To compare the value of projects with long expected finance costs and financial payback, financial people calculate what they call net present value. To include the financing expense of the Strategic Undergrounding Project (or any other project) without taking into account the time value of money is highly deceptive.
Do these qualifiers mean that Dominion’s proposed $3 billion grid-modernization investment is totally justified? Not at all. The SCC needs to give each component a good, hard look. But it is fair to say that any analysis of costs and benefits is meaningless without taking into account unquantifiable benefits, risk and the time value of money.