Another Double Dip? That’s One Issue With Dominion’s Proposed Market-Based Rate

Dominion Energy Virginia’s proposed market-based pricing structure for large industrial customers has been criticized as a way for the utility to double collect, harking back to a key issue during the 2018 legislative push for its Grid Transformation and Security Act. 

The criticism comes in an overall endorsement by Microsoft Corporation of the proposal pending at the State Corporation Commission. Microsoft owns a growing fleet of data centers in Dominion’s territory and is already eligible to seek electricity from a competitive service provider (CSP).   The purpose of this new rate (the full case record is here) is to keep big customers happy, so they lose interest in third-party providers.  One detail of the proposal has Microsoft unhappy.

“Dominion admitted in discovery that the minimum charge does not recover any costs that are not already recovered from customers in other rate components….To the extent that Dominion collects a “minimum charge” in addition to these other charges, the “minimum charge” would effectively double-recover the cost of service,” a Microsoft attorney writes in comments requesting a hearing on key elements of Dominion’s proposal.

“The minimum charge appears to be an arbitrary mechanism by which Dominion is adding to its revenues with little oversight by the Commission… Finally, Dominion has admitted in discovery that the minimum charge will be applied to customers who choose a CSP.

An order filed Wednesday granted that motion for a hearing on the case. The staff analysis of the proposal is still to come, and the case so far has only drawn participation from that one major customer.  Representatives of other major industrial users are not listed as parties but could join the party late.

What’s up here?  Any large customer with a peak demand hitting five or more megawatts has a right to find a competitive supplier now, but takes a risk because Dominion could make it wait up to five years to return.  This new rate schedule is aimed at them.  It is a separate and much more comprehensive proposal than the generation charge discount for industry that the General Assembly mandated in the 2018 GTSA, which I still call the Ratepayer Bill Transformation Act.

Dominion has had experimental market-based rates for large industrial users since 2016, with some participation but not the authorized level. An MBR rate tracks the fluctuations of the wholesale prices in the PJM Interconnect LLC, allowing time-of-day pricing. The experimental rates are set to last until 2022, but Dominion is moving now to first improve the program based on customer feedback and then make it permanent.

Large industrial users who agree to three years in the program would see their costs decline but lose predictability.  Just how much of a decline is a part of the company filing which has been held confidential, with one skirmish already over making those figures public.  Dominion in its filing asserts the new rate would have no impact on other customer classes and will protect them from financial harm that might result if large customers deserted in droves.

Dominion’s Gregory J. Morgan, director of customer rates and regulation, is the point person on the application and cited three main reasons Dominion customers have given for requesting a new MBR schedule, one that is better than the existing experimental rate.

  • These current and potential customers view market-based pricing as being critical to their business strategy and such customers make expansion or new facility siting determinations based upon the availability of market-based pricing.
  • Sometimes the driver for such customers is to match renewable facilities with their load. Most renewable facilities sell power into the market at hourly prices. If these customers place load on an MBR tariff, a natural hedge can be created with the renewable facilities.
  • Many such customers have facilities in neighboring states where market-based pricing prevails.

Along with the minimum charge that caught Microsoft’s attention, and which may or may not double collect costs, Dominion includes a margin for its own administrative and fixed costs, and in this new rate that is greatly reduced.  The charge is a flat fee based on usage, but it goes up as the customers demand drops below 85 percent of their peak.  (You pay more the more your load fluctuates.)

As Morgan noted, this is Dominion seeking a way to offer customers costs similar to what they can get either from a CSP or by moving production somewhere else.  It is a response to competitive pressures, but the discovery and the staff analysis may reveal how effective a response. Others besides Microsoft may intervene, and the Office of Attorney General as Consumer Counsel should be watching for a shift of risk to other customer classes.

Anticipating the question in his testimony, Morgan has reasons why this approach is not being offered to residential or smaller commercial customers, but some of those reasons could easily disappear if that interactive, interconnected, super-duper grid transformation which was promised ever appears.  This rate could also be an alternative for those smaller commercial customers seeking to aggregate their scattered stores and warehouses into a five-megawatt load and escape to a CSP.

This case was not on the Bacon’s Rebellion radar screen, but it is now.  Stand by for updates.  Surely the ongoing integrated resource plan case, the current energy efficiency applications, the anticipated revision to the grid modification plan, the implementation of the carbon tax, cap and trade scheme, and the new rate adjustment clause for environmental expenses – not covered yet – will keep readers transfixed.

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20 responses to “Another Double Dip? That’s One Issue With Dominion’s Proposed Market-Based Rate

  1. just to note here – I’m NOT commenting…but WAITING for others…
    another good article by the way – very thought provoking..

  2. I am too depressed to comment further, we are just hosed by GA and Dominion, ad infinitum. I felt the same way in New Jersey, except in NJ I was getting coal plants shoved into my backyard, so I am less depressed.

    Dominion CEO was on Cramer’s Mad Money the other day, because Cramer absolutely loves Dominion’s profitability and stock investment potential, and utililties are performing very well at the moment. Cramer grilled him on ACP and some other issues, he said just a small group of environmentalists are not happy. I was thinking that may be true, but they have Gov Northam’s full support on everything with possible exception of ACP.

    • It may be dead. If they cannot get permission to run it by tunnel under the Blue Ridge Parkway, right there at the Wintergreen entrance road, that may be all she wrote. I’m not fully up on where that all stands but I think it is all hands on deck in Washington, a story yet to be told. Sounds like Farrell was doing some damage control? (Jeez, three cliches – shame on me.)

      • Interesting development. Presume we hear more later?

        • I’m not following that closely. The combatants will shout and will likely get regular media coverage on any major development, either way. It is my fate to follow the obscure and ignored matters….:) Just took stock and updated my tracking list of nine current SCC matters…

  3. I would be interested in seeing the particulars of this rate proposal. It is hard to imagine that if certain industrial customers were exempt from paying the base rates and RACs that the other customer classes are contributing to that it would not increase the prices to others.

    Market based pricing works in other states because generating facilities are not in the rate base and rates can vary as costs vary. That is not how we currently operate in Virginia. This feels like a way to keep industrial users in the system at the expense of the other ratepayers. There should be enough transparency in this process to determine if this is the case.

  4. Dominion is working off of an obsolete utility monopoly model and is not about to allow their captive “customers” to escape. Anyone who escapes means others will have to pay more.

    It’s not really about “stranded costs” – it’s about Dominion getting the full monetary value of their monopoly and as long as they have political power – they’re gonna hold to that.

    And yes, the investors and Wall Street love it as do their supporters in the GA and at this point – I think the SCC does also despite their image as a “regulator”. Too many things seem to go Dominion’s way at the SCC in my view.

  5. Here is a quick pipeline update:

    Dominion now plans to develop the ACP in two phases. Phase 1 would be to develop the ACP from its connection to Transco in Buckingham County and build it southward into North Carolina and from there also eastward to Chesapeake.

    Dominion has told FERC that Transco can supply enough gas to meet all of Duke’s needs in North Carolina. In fact, Transco can provide all the capacity that the ACP intends to provide and transport gas much more cheaply than the ACP, but that’s another issue.

    The price of gas is now the same between production zones, so it boils down to the cost of transportation and new pipelines will lose that battle every time.

    Building this segment of the pipeline would serve all of the shippers (the utility subsidiaries) that have signed long-term transportation agreements with the ACP. Once completed in 2020, this would allow the ACP to begin collecting the $20 billion that is owed by the shippers over the next 20 years.

    The new combined cycle units have been cancelled in Virginia. The first new power plant that might use the ACP isn’t scheduled until 2025 in North Carolina. So at most, only 20% of the announced capacity of the ACP would be utilized through 2025. No idea how much more might be needed because none of the power plants that comprised 80% of the needed capacity on the pipeline have been approved, and they could be displaced because of lower load growth or cheaper renewables.

    Phase 2 would be the section from West Virginia through the mountains to Buckingham. This is the portion that is hung up by the Forest Service permitting issues regarding endangered species and the Appalachian Trail crossing. If the permit issues are resolved in one way or another, this segment would be completed by 2021, according to Dominion estimates.

    Mr. Farrel painted a rosy picture on Cramer’s show. It is difficult to properly discuss complicated issues in a few minutes of sound bites, but he left some very misleading impressions. He said Dominion’s carbon emissions would decline by 50%. I think what he meant to say was that Dominion’s carbon “intensity” would decline by 50%. The three huge new gas-fired combined cycle units will release more carbon than the old gas and coal units that didn’t run very much. But the carbon produced per MWh will decline.

    He continued to say that the ACP was very much needed in the area (it is not). And that it would lower energy costs. This is certainly untrue and is a continued misrepresentation in Dominion’s presentations to the public and to investors. The ACP is good for investors because it will deliver billions in profits to Dominion and Duke. But customers of their utility subsidiaries will pay a heavy price for something they don’t need.

    For example, Virginia Natural Gas is obligated to pay the ACP over $2 billion over the next 20 years. The cost of transportation using the ACP will add 60% – 100% to the current price of gas, depending on whether you use the old estimates or the new estimates for the price of the pipeline.

    VNG could build a pipeline to connect to Transco or Columbia Gas for a few hundred million dollars for a lifetime of service rather than paying the ACP $2 billion for just 20 years.

    There are lots of complicated issues in the energy arena. They need to be fully disclosed and properly evaluated. Too much is being decided based on limited information, without those who are affected having any clue what they will be asked to pay over the next 35-40 years.

  6. Larry, wait no longer. Steve, you mention this key fact: “Any large customer with a peak demand hitting five or more megawatts has a right to find a competitive supplier now, but takes a risk because Dominion could make it wait up to five years to return.  This new rate schedule is aimed at them.”

    Why is Dominion so hell-bent on heading off any use of this “competitive supplier” provision, the last surviving remnant of the retail access law passed in the late 90s? Because Dominion is at risk of no longer being one of the lowest cost suppliers of retail electricity on the East Coast, that’s why. Pack all that generation into the rate base without long-range justification of the need, with risk of obsolescence placed on the ratepayers? Get the GA to pass bills mandating the “gold-plating” of its distribution system, including widespread undergrounding, in ways that most utilities are not undertaking voluntarily, all at a cost added to the ratebase? Allow it to build utility-scale solar while heading off customer-owned distributed solar? And at the same time, place as many of these costs as possible into RACs so they hit rates immediately without adjustment to rates for the lowered operating expense of running those old coal plants nearly as much (if at all)? Big ratepayers (including some with sophisticated power purchasing departments, like Microsoft, Amazon and Google) can read these tea leaves. They can self generate, or relocate, or play the same games as DVP at the GA, or — use the laws that are currently on the books for leverage.

    The old retail access legislation was not totally repealed, but Dominion did get that 5-year-notice-to-return provision added as a poison pill to deter the retail competition. But that won’t work forever. It’s reasonable for a utility that currently plans to serve a given chunk of load to insist that if the load leaves, the customer must give some sort of notice to return. The retail supplier must make commitments to serve that load. But how long in advance? PJM requires all Load Serving Entities (DVP is the largest LSE in Virginia, but by no means the largest LSE in PJM) to have sufficient capacity committed to serve its forecast load up to three years in advance. PJM runs a wholesale capacity market to satisfy that need on a rolling basis three years out; and the PJM capacity market is perhaps the most vigorous in the nation, with plenty of competition from independent generators and traditional electric utilities from Illinois to the Atlantic.

    Five years notice for a customer to return to Dominion is, frankly, at least two years more than FERC or the industry normally requires. While five years may be egregious, and while it serves Dominion’s purposes by deterring competitors, it’s not impossible to satisfy even this requirement given the wholesale price of energy and capacity in PJM these days. The problem used to be that an alternative supplier can go out of business, leaving load with nowhere to turn for electricity. Someday, somehow, an alternative supplier will come along with the deep pockets and the contractual backing to guarantee that it will serve any customer that leaves DVP for at least 5 years beyond notice that the customer wants to return to DVP. This would be an easy decision if the customer itself has a portfolio of commitments from independent generators to provide wholesale capacity to the retail middle-man of the customer’s choice. With customers the size of Amazon involved, that sort of customer-self-help is quite feasible.

    Is there really any risk to Dominion that requires 5 years notice to plan ahead? Today, absolutely not. The fact is, if a chunk of DVP load, like, say, all of Amazon, leaves DVP for an “alternative supplier” the total amount of load in PJM has not changed, and the amount of generation in PJM has not changed. Logically, if Dominion loses load, it should sell that amount of generation into the PJM wholesale capacity market; just as that new “alternative supplier” should seek to find additional capacity in that same market. There is already an overabundance of capacity in PJM; in response to this migration of load, some of that capacity will simply migrate as well. The capacity is already there on the ground. If that load wants to come back, that will free up enough capacity from its previous supplier that Dominion can buy back in turn.

    Dominion does not want to admit that the PJM markets might reliably supply its customers. After all, its narrative, its message to the GA that “Dominion can only supply its Virginia customers reliably if it owns enough Virginia generation to do so,” is the justification for all that rate-basing of new generation, which the world of de-regulated, competitive generation no longer requires. So Dominion does not want to admit that anything less than five years notice will allow it to serve a returning chunk of retail load because, it says, it would take at least 5 years to build new generation from scratch. That totally ignores the fact that the PJM capacity market has been around for over two decades now and that there is plenty of capacity available there even on only a year or two’s notice. Dominion is using the old stand-alone-utility logic to get what it really wants, which is the ratebasing of all that investment that the wholesale markets would love to provide — at a lower cost to ratepayers. The irony is that the sweet deal it is offering is a “market based rate” which is a straight markup of the PJM wholesale energy rate!

    So now, DVP wants to buy off the Amazons and Googles and Microsofts from their restlessness with a sweet deal under its retail tariff, keeping these customers — but at what price? It makes sense that Dominion should do anything to keep from having to sell off excess capacity in the wholesale market. A “market based rate” is one which passes along the wholesale energy rate in the PJM marketplace; on top of this, DVP wants to add its own profit and “a margin for its own administrative and fixed costs.” The customers know that these adders to the wholesale price are pure profit for Dominion, which receives payments for its wires charges separately. They know that if push comes to shove they can proceed, even with the five-year-notice provision, to find an alternative supplier who will charge less of a markup from the wholesale market price than DVP is asking. DVP may even try to discount its price to these customers to levels that are not sustainable. Only the SCC can ensure that DVP doesn’t discount those adders so much that its other retail customer classes end up subsidizing the price to these big industrials. Of course, if the SCC rejects the proposed MBR rate for that reason, an end run to the GA cannot be far behind.

    The SCC is a forum for airing all these issues, but its decision really is only one step along the road to retail access in Virginia as envisioned in the 90s — after all these years!

  7. Question to Tom – Why does Dominion want to build a pipeline in Phase 1 that is essentially also territory that Transco might want to build also?

    Wouldn’t these be a natural extension of the existing Transco network?

    Question to Acbar: If Dominion succeeds in it’s efforts to essentially hold all ratepayers – residential and commercial “captive” does the SCC support that idea as a way to assure Dominion’s monopoly is not degraded? What role should the SCC play in this issue where folks want to pursue other sources of electricity if cheaper and still rely on the DOminion grid for fall-back?

  8. So, Acbar, I would encourage you to send a version of that to the Washington Post or the Richmond TD as an op-ed. Just about the right length. The comments you and Tom post deserve more readership….probably more than my efforts.

    • Ha! Opinions provoked by opinions, the best result of a good blog post. But there are readers here who enjoy this sport, on this topic, too; I only aspire to provoke them also.

  9. Larry, that big question is one that even I think needs to be addressed at the General Assembly. That’s not the SCC’s role, although it needs to be part of the discussion. It is like they have flipped places, with the politicians making the day to day decisions which should be immune to politics, forcing the commissioners to be looking at the big picture.

  10. Larry,

    From the beginning it made sense for Transco to serve any new demand in Virginia and North Carolina.

    The Atlantic Sunrise expansion to the Transco system was approved by FERC before the ACP was certified. Sunrise is a 1.7 million Dth/d pipeline, larger than the 1.5 million Dth/d ACP. Only the 350,000 Dth/d to Cove Point was allocated from the Atlantic Sunrise project, leaving almost exactly the amount available that was reserved by utilities on the ACP.

    Even using the original published rate for transportation on the ACP, transporting gas on Transco was far less expensive than using the ACP. And it could serve all of the locations intended to be served by the ACP. Transco has already expanded by several times the capacity of the ACP. Just a few connector pipelines would be needed to reach the delivery points identified for the ACP.

    By approving the ACP, FERC took away potential customers from Transco, and cost ratepayers in Virginia and North Carolina billions in higher energy costs.

    The ACP exists for one reason, to increase profits for the utility holding company owners of the pipeline. If this was a free market and the end users could choose between being served by the lower cost Transco option or the much higher priced ACP, that would be one thing. But the ACP told their subsidiaries to sign contracts with the ACP, taking the Transco option off the table. It was expected that the full cost of these contracts would be passed on to the ratepayers making them responsible for the costs and risks of the project.

    There is no true market demand for the ACP (or the MVP either). People and businesses will pay a higher price for energy and have to live with the disruption of air, water and land from the unnecessary construction of the pipelines.

    This is the message that Transco gave to the South Carolina Public Service Commission. Transco said that the ACP duplicates capacity that Transco already has in place.

  11. “What role should the SCC play in this issue [keeping customers captive] where folks want to pursue other sources of electricity if cheaper and still rely on the DOminion grid for fall-back?”

    You’re asking about the alternative to captive customers, which is what “retail access” and “unbundling” were all about, the grand 1990s experiment in deregulation.

    “Unbundling” was the name for separating the traditional electric utility’s role into four parts: generation, transmission, distribution, and metering/billing. FERC forced this on the states by demanding that independent generators be treated the same as utility-owned generators; this led to the creation of competitive wholesale markets and third-party independent system operators to run them and oversee the planning and grid access. Many states quickly realized that the federal goal of competing, deregulated generators was compatible with, even invited, a similar state regime of competing, largely deregulated (market priced), retail sellers of electricity, Only the wires functions, transmission and distribution and metering, would remain monopolies and thus heavily regulated; this “delivery” function would be provided by the wires owners as “common carriers” required to deliver without favoring their own sales but equally for any supplier on non-discriminatory terms (like “net neutrality is to the modern world of internet service providers).

    All this reorganization took place largely “under the radar” in the 1990s; Virginia was one of those states that embraced the new concept of competing retail suppliers, aka “retail access,” and passed legislation designed to implement it. Indeed it was the GA, not the SCC, that led this initiative; the SCC was skeptical about all the purported benefits of competition replacing regulation, a transition that had already become rocky in their experience working through the breakup of “Ma Bell” and the transition from tradition wired telephones to cell networks.

    What the SCC overlooked, and the GA did not acknowledge, is that the potential for retail access was a tremendous continuing incentive for Dominion, APCO, etc. to keep their retail rates low — independent of the SCC’s ratemaking practices. The retail-access message for utilities in the Northeast and Midwest was, let your rates get out of hand and you will start losing customers. Dominion lobbied hard to eliminate that message from the markets, that threat to profit, in Virginia. Perhaps even in 2007 it contemplated just what has transpired: holding onto the financial benefits of monopoly-style ratebasing of investment, using utility subsidiaries locked into contracts to benefit each other as affiliates, while bypassing or ham-stringing the State’s regulation of the resulting rapidly increasing rates.

    Perhaps now, in light of all that has transpired in the GA and in the courts, and in light of all the uncertainties facing all users of the nation’s electric grid, the SCC, even if it can’t control Dominion’s rates directly, will now do what it can to keep that vestigial retail-access, market-based lid on Dominion’s potentially runaway abuse of its ratepayers.

  12. Thanks for the explanation.

    I think it interesting that deregulation seemed to work in other states but “failed” in Virginia and without any real explanation as to why -just that it “did” and thats-that, there’s no going back to try to do it right.

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