McAuliffe Reverses, Now Opposes Electric Rate Freeze

Governor Terry McAuliffe

Governor Terry McAuliffe said yesterday that he supports legislation that would cancel the freeze in base electric rates on Dominion Virginia Power and Appalachian Power if President Trump kills the Clean Power Plan. The endorsement came a little late for state Sen. J. Chapman Petersen, D-Fairfax City, whose bill to roll back the freeze was killed in a Senate committee in January in a 12 to 2 vote.

Taxpayers “are entitled to the lowest, most efficient rate that we can deliver to them,” McAuliffe said on the John Fredericks Show, which broadcasts in Hampton Roads, Richmond, Lynchburg, Danville and Franklin. “If Chap Petersen can get me a bill on my desk, I’d sign it. Let me be clear.”

“There’s a better chance of me starting for the Redskins as quarterback,” said Petersen, as quoted by the Richmond Times-Dispatch. “Governor, you’re going to need to send down the legislation.”

In 2015 The General Assembly passed a bill freezing base electric rates, which McAuliffe signed, after the Obama administration had rolled out the Clean Power Plan requiring Virginia’s electric utilities to significantly reduce CO2 emissions. The State Corporation Commission staff had estimated that the legislation could push electric rates 20% higher. With a stated goal of providing rate stability in uncertain times, the legislation locked base rates in place for six years.

Environmentalists were critical of the bill from the beginning, arguing that the Clean Power would increase rates only marginally. Then industrial customers contended that Dominion had been overcharging customers before the law went into effect, and the law locked in rates at excessively high levels. Moreover, they charged, the electric companies weren’t even taking on a major risk: If the Clean Power Plan had forced them to retire coal plants and build new generating facilities, they would have been able to pass on the cost through a Rate Adjustment Clause, which wasn’t affected.

Dominion has argued that the law also provided for annual, instead of biennial, review of power companies’ Integrated Resource Plans, making the planning process more transparent. As part of the legislative compromise, the company also upped its financial commitment to its Energy Share energy-efficiency plan for low-income homeowners.

Furthermore, Bill Murray, Dominion’s managing director of public policy, said last week, the company has taken $296 million in write-offs for the past two years for expenses relating to the closure of its coal ash ponds. The freeze prevents the company from recovering those costs. “Those are costs we are absorbing.”

Bacon’s bottom line: McAuliffe’s support for reversing the freeze is a day late and a dollar short. As a practical matter, Petersen’s bill cannot be resurrected. Reversing the freeze without understanding the emerging regulatory context may not make sense anyway. The Trump administration has made clear its intention to kill the Clean Power Plan. We Virginians need a clearer idea of what kind of energy policy we want going forward. Simply rolling back the freeze doesn’t inform that debate.

Solar power is the potential game changer. The cost of generating solar energy continues to decline, and so does the cost of battery storage, which will help offset the intermittent nature of solar generation. No one disagrees with those propositions, but many questions remain open. How rapidly are solar prices declining? When will solar become economically competitive with natural gas in Virginia? That depends in large measure what happens to natural gas prices. Will they rise from currently low levels, and, if so, by how much?

Another big question is how much solar can Dominion, Appalachian Power and Virgina’s electric co-ops absorb without undermining the reliability of the electric grid. A related set of questions revolves around how much retail competition regulators should allow, how to guarantee the integrity of the grid if electric utilities lose market to independent solar operators, and how rate payers will be impacted if utilities experience a decrease in consumption.

One more pressing matter: What’s the role of nuclear in a post-Clean Power Plan world? While it still may make economic sense to renew the licenses for Dominion’s existing nuclear power plants, building a third unit at North Anna guesstimated to be $18 billion probably does not. Dominion wanted to maintain that option as an insurance policy, at a cost of hundreds of millions of dollars in engineering and permitting expenses, to protect against the most onerous of the Clean Power Plan regulatory scenarios. In a Trump presidency, that scenario looks highly unlikely. Should Dominion scrap North Anna 3?

If Virginians want to unfreeze the freeze, we need to recognize that no regulatory action takes place in a vacuum. Rather than dealing with each of these issues piece-meal we should settle them in a comprehensive way.

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4 responses to “McAuliffe Reverses, Now Opposes Electric Rate Freeze

  1. There never was a convincing reason for the “freeze” in the first place. Even if the CPP had come to pass, virtually all of the costs DVP might have incurred would have been recoverable (and still are) through the parts of their rate structure that were not “frozen,” i.e., their very generous rate adjustment charges that permit cost recovery of new generation and costs of environmental compliance, and their fuel factor, if they had to switch sooner from coal to increasing the loads on their gas units.

    This bill was signed by McAuliffe after they dressed it up a bit with some solar construction. Just another tax on Virginians in the guise of favorable rate treatment for DVP enacted by their loyal minions of both parties, but mainly the Rs, in the General Assembly.

  2. yup and aided and abetted from the Virginia Energy Plan that Weldon Cooper later exposed as full of errors…

    Report on Appendix A-1 of the Virginia Energy Plan: Impacts of Proposed Regulations under Section 111(d) of the Clean Air Act July 2015

    ” One early report on this issue came in a study carried
    out by the Center for Coal and Energy Research (CCER) at Virginia Tech for the Department of Mines Minerals and Energy.1 Unfortunately, this report is deeply flawed and could lead the public policy debate down an unproductive path. The report contains a number of large errors including a double counting of costs that overstates compliance costs by half. The study establishes an incorrect baseline for calculating the costs of changes needed for compliance. The study fails to provide even-handed treatment of uncertainties,
    emphasizing only those uncertainties that serve to overstate compliance costs. Finally, the study focuses its analysis only on unrealistic, high-cost options for compliance, while giving
    only the most cursory and dismissive treatment of the options that most observers believe will form the core of cost-effective compliance options. In short, the report is almost
    certainly worse than no study at all because it misstates likely costs, analyzes irrelevant options, and gives short shrift to the cases that really matter.

  3. The original bill passed with full support of Gov. McAuliffe. He made no attempt to veto, he said Dominion top management told him they had to have this rate freeze. The Gov used his persuasive abilities to argue in favor of the rate freeze, without explaining clearly why it was needed. The Clean Power Plan justification for rate freeze seemed suspicious from the getgo.

  4. Dominion testified in the September 2016 IRP hearings that all costs of future plant construction and other activities whether there was a CPP or not, would be handled by Rate Adjustment Clauses (RACs) not changes in the base rate. This was in response to a question by SCC Commissioners.

    Several of Jim’s other points have not been addressed.

    Even with Dominion’s arbitrary assignment of a 40% penalty for solar generation, their 2016 IRP showed that the current cost of solar was nearly equal to the costs of new gas-fired plants. Several other well-respected studies (such as Lazard’s) show that solar is now at the low end of the levelized cost of energy (LCOE) for gas-fired plants and solar facilities in very sunny locations are a good bit cheaper.

    The cost of solar is declining by 50% every 4-5 years and is expected to continue on this trajectory for several decades. The cost of storage is also declining by 50% every 4-5 years.

    Even with storage costs dropping so fast, storage is not necessary for solar to be useful right now. Solar is considerably cheaper than the intermediate and peak load generation that comes on line during the daylight hours (adding to the baseload capacity). We should use solar whenever it is available to lower our energy costs. A PJM study showed that we can accommodate up to 30% solar generation in the grid without significant difficulties or extra expense. We probably have less than 1% of solar contribution in Virginia today, so we can accelerate solar development with plenty of time to work out the grid issues. Using a good share of distributed solar instead of mostly utility-scale solar provides greater reliability and resiliency to the grid.

    Using energy efficiency and renewables to meet any increases in demand or to reduce the peak will save ratepayers money. We can use our existing generation to meet the nighttime load as it is currently doing.

    Unfortunately, this disrupts the current utility business model. They are paid more when they build more, which is why there are plans to build so many new power plants, even though the load is not growing. A path of building more power plants, with a rate adjustment each time a new one is built, plus the inexorable increase in fossil fuel prices (natural gas prices have increased 50-100% in the Marcellus the last 6 months), creates a trend of constantly increasing energy prices. This is not friendly to families or businesses.

    Using energy efficiency and renewables rather than building more new gas-fired plants reduces our energy costs and provides many thousands more long-term jobs in Virginia compared to the jobs that last just a few months building power plants and pipelines.

    This is great for the citizens and the economy of Virginia, but we must create a profitable role for utilities to transition into. This is being done in several other states, so it is certainly possible here.

    Nuclear has priced itself out of the game. At current prices (not prices in 10-15 years that will be 1/4 to 1/8 of current costs) solar plus storage can produce reliable dispatchable power at a lower cost than what would be produced by North Anna 3. By 2030, the new gas plants (that have already been built or approved) could be kept running at near 100% capacity, allowing them to pay for themselves, to energize the pump storage plant during the daytime. Renewables would provide most of the daytime load by then. Batteries plus pumped storage would provide frequency and voltage control (lowering costs) and meet variations in load day and night.

    Since the ratepayers have paid so much for a plant they will never gain any power from, perhaps once Dominion receives approval for NA3 they could auction off the NRC approval to another utility. Many nuclear plants are changing hands at bargain basement prices these days.

    We don’t need to wait to develop an entirely new energy plan to eliminate the rate freeze and return rate and regulatory control to the SCC where it belonged all along.

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