Bill Slams Exits Used for Electricity Competition

Legislation that effectively eliminates two avenues for electricity customer choice in Virginia gets its first public hearing in a House subcommittee Thursday afternoon.

House Bill 2477, introduced by House Commerce and Labor Committee Chairman Terry Kilgore, prohibits additional customer choice if a utility’s overall demand is not growing more than two percent annually.  That describes both Dominion Energy Virginia and Appalachian Power Company.  It also requires customers who leave to keep paying non-fuel generation and transmission capacity related costs, things not previously charged to customers buying power elsewhere.

There are only three ways to break free of the Virginia monopoly electric service providers.  Large industrial or commercial customers with a demand in excess of five megawatts can seek an alternative supplier.  State law also creates an opportunity for a group of customers to aggregate their demand to reach that demand threshold and shop for electricity together.

The third route, open to all customers large and small, is the right to buy 100-percent renewable-sourced electricity from an outside supplier if the utility doesn’t have its own rate for such a product.  That process is not changed by this bill.  APCo now has such a tariff, closing that door, and Dominion was working on one but withdrew its application earlier this month.

The aggregation path to competition has been allowed for more than a decade, but the first commercial aggregation petition was approved for the Reynolds Group earlier this year.  A series of such petitions have now been filed by companies including Costco, Wal-Mart and Sam’s Stores.  All must make their case  at the State Corporation Commission.  State law will only allow customers representing one percent of the utility’s load to go elsewhere, and the SCC must reject a petition deemed harmful to the rest of the utility’s customers.

Departed customers do continue to pay utility distribution charges, since they continue to use the utility’s wires.  Adding those generation and transmission-capacity costs mentioned in Kilgore’s bill reduce or wipe out the price advantage of competition.

Another impediment to seeking an alternate supply is once the large customer leaves, the utility can insist on a five year notice before taking it back.  A Senate bill likely to draw utility opposition would reduce that to 90 days.

The argument against allowing retail choice is it imposes higher costs on customers remaining behind, which is why the load cap was imposed in 2007.  In reviewing the pending petition of Costco, the SCC staff did not dispute Dominion’s assertion that loss of the 13 megawatts of load in the 27 aggregated accounts might add a few cents to the monthly bill of residential customers.

Patrick W. Carr of the SCC staff added: “…(Dominion) base rate earnings would be reduced. The latter impact could reduce customer refunds or customer credit reinvestment offsets and/or lead to higher base rates than would be necessary absent Costco taking service from a competitive service provider.”  

Please, what refunds?   In who’s lifetime?  Those excess profits and the customer credit offset shell game are the reasons Costco wants out, according to Shay Reed, the energy buyer for the company who filed testimony in support of the petition.

“Under the current circumstances. Dominion’s overcharging and overearning are what makes Dominion so attractive to investors and so unattractive to customers,” she testified.

“From a customer’s perspective, Dominion should not be overearning in the first place. As a customer, Costco wants to pay cost of service rates that include a reasonable return. Dominion’s objection to any reduction of its overearnings helps explain, in my opinion, the raft of aggregation petitions now pending before the Commission.  These are due, in my estimation, to the fact that there is no penalty to Dominion for over-earning.”

In other regions, she stated, the company has saved about 25 percent by opting for a competitive supplier.  Reed did not reveal the savings expected in this case, but expressed confidence savings would come and noted Costco is not alone in that expectation.

“I believe that the eight aggregation petitions being considered by the Commission in 2018, as well as the huge potential cost impact if Dominion elects to fully Implement the Grid Transformation and Security Act, are compelling evidence that the aggregation petitions are sorely needed to send a strong price signal to Dominion that its multiple additions of rate adjustment clauses and its persistence in making new investments rather than providing base rate reductions or base rate credits are making its tariffs increasingly unattractive to its customers.”

The utilities have seen the signal.  House Bill 2477 is probably not the response Reed was pointing toward, but is no surprise to Virginia Capitol veterans.

The impediments to retail competition imposed in 2007 were part of a negotiated compromise, which produced a bill intended to start with a full rate case to set fair and just prices, followed by regular reviews and regular refunds of any excess profits.  Dominion set about breaking all those promises and handcuffing the SCC in subsequent years.  There is no regulatory compact in Virginia anymore.

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16 responses to “Bill Slams Exits Used for Electricity Competition

  1. They should rename the bill to be ” It’s our damn monopoly and no one is taking it away” !

    😉

  2. “There is no regulatory compact in Virginia anymore.”

    That’s the nub of the issue. And the problem isn’t just Dominion using the legislature to stack the deck in its favor, which it clearly has done. A lot of the people furious about Dominion’s monopoly would like to break the regulatory compact, too, when it suits them.

    In my ideal world, electric transmission and distribution would be a regulated utility, while the market for electric generation would open up to competition. A decade or two ago, we had something like that, but the market hadn’t developed to the point where any real competition emerged. But the market is very different now. For starters, Virginia now belongs to PJM Interconnection, which runs one of the most sophisticated electricity markets in the world. Secondly, there are a lot more merchant generators and middlemen than were 10 to 20 years ago. So, we could move to market-generated electricity if we wanted to.

    There are complications, however. The biggest is stranded cost. If Dominion invested in generating capacity in good faith, and it turns out that some of that capacity is rendered uneconomic in a deregulated environment, the utility deserves some compensation.

    Another complication is that environmentalists are lobbying for small-scale, decentralized power production — which is a great idea in many ways. But they don’t want to pay for the backup capacity or the transmission and distribution system to deliver backup electricity when the sun ain’t shining. If you move to a deregulated market for electricity, anybody can install solar capacity on their roof, in their back yard, whatever. But if you want to connect to the grid and access electricity generated somewhere else when the sun ain’t shining, you’ve got to pay for it. There’s no way around it. In a deregulated environment devoid of cross-subsidies between generation and transmission, you can’t force power companies to provide that capability for free.

    I expect Dominion will rue the day when it re-wrote the regulatory regime the way it did. Democrats are increasingly defining themselves as the anti-Dominion party, and Democrats are poised to take control of the General Assembly. Now that the precedent for legislative micro-managing of the regulatory process has been established, legislative power can be turned against Dominion just as easily as it was wielded in its favor.

  3. I see the stranded costs pretty much the same as the coal ash issue. In both cases – Dominion did what was legal and really, directed legislatively and regulatorily – and those costs are legitimately owned by ratepayers.

    On the distribution versus generation – one can view them as operation and capitalization/infrastructure and Dominion is claiming that they are not entirely severable in a clean way in that operational costs were/are based on how many folks are in the rate base and if folks leave the rate base – some embedded costs are pushed onto either existing ratebase or investors.

    I think Dominon IS entitled to all of their promised ROI and they should not lose any of it but they are NOT entitled to penny MORE profit.

    So what this seems to mean is that people cannot have rooftop solar without some costs either assigned to roof-top solar OR absorbed by other ratepayers. Those costs, if real should be owned by the rooftop solar folks but we need to see the proof.

    So we do need to understand why that is and to charge those with solar an “availability fee” that is fair and equitable and right now it appears that even folks who sell/buy solar from PJM are not paying that fee – and probably should but none of it should be profit to Dominion. Zippo.

    I think the current Va GA all-politics game creates winners/losers in not a truly equitable way but blaming it on Dems is not a reasonable perspective unless one wants to admit that the GOP has not exactly stood up for consumers to this point – either.

    When the GOP has not stood up for an equitable approach – that makes the Dems the bad guys for asserting some better equitable approach?

    Sorry Charlie – lelt’s be fair here. The GOP folded and ran away and now when the time comes to set it right – the Dems are the bad guys?

  4. Stranded costs … Overbuilding has been Dominion’s choice. It makes them more money because the cost of the build is put into the rate. What we have seen, finally, at the SCC is that Dominion’s figures for projected need have been inflated for years. Building new generation based on inflated numbers isn’t the customer’s issue. Stranded costs belong to the shareholders and the company, especially when overcharges are not returned as they should be.

    Beginning in 2009, Dominion has forecast peak load growth between 10 percent and 15 percent for the first six years of each IRP presented … “while actual peak load growth over the past decade has been nil. The inaccuracy of the Company’s peak load forecasting has resulted in repeatedly over-stating future capacity needs by thousands of (megawatts).” (IRP letter of complaint from IT Companies)

    AND this is why Virginia is paying more they should for electricity … and why we have no building efficiency programs or rooftop solar…. because that would reduce demand and cut the rates. The 2 issues are linked.

    New research from Applied Economics Clinic, commissioned by Consumers Union, concludes a greater investment in energy efficiency would reduce new household energy demand by nearly 60%. Such a reduction would help significantly cut Dominion’s need to build additional capacity, according to the research, and could save customers up to $1.7 billion over the next decade.

    By investing in efficiency rather than new infrastructure, “Dominion could meet most of its future energy needs through smart energy efficiency projects … Energy efficiency is a cost-effective tool that lowers energy demand, saves consumers money on bills and avoids costly new power generation,” Shannon Baker-Branstetter, senior policy counsel for Consumers Union, said in a statement.

    Dominion is at the bottom of the efficiency list of utilities. This statement says a lot …
    “Monthly bills for Dominion’s average residential customer rose 7 percent between 2015 and 2017, while the average monthly bills for similarly situated utilities in the Southeast fell slightly during that time, according to the attorney general’s office.

    AND … Wall Street has called Virginia’s regulatory system one of the most utility friendly in the country and Dominion is currently projecting “best-in-class” annual dividend growth of 10 percent through 2020.”

    Finally, backup costs should be paid for, we all agree. The NY REV evidently split generation ownership and costs from the gird costs. The idea is that the monopoly part of the utility compact still applies to the wires, just no longer to generation.

  5. Jim,

    What you are recommending is already in operation in other states. The award of “monopoly” power began for the wires only. It was only decades later that utilities realized the financial benefit of including generation under the umbrella of the monopoly.

    Today, transmission is mostly regulated at the Regional Transmission Operator (RTO) level, PJM in our case. Other states are redefining the utilities’ role as a Distribution System Platform Provider, which also includes the retail sale of electricity and the sale of services such as connecting other energy service providers with customers within the utility’s system.

    In this scheme a variety of providers can offer distributed energy resources (renewables, storage, demand management services, etc.) that save customers money and provide utilities with a stream of revenue for the services they provide to make the connection (like an Internet Service Provider).

    The utilities would not be required to provide “backup” power for free. That cost is already priced into the PJM market today. The net cost of the connection within the distribution system would be calculated by totaling any extra costs for modernizing the local distribution system to manage a two-way flow of energy and information minus the savings provided by the distributed facility for increasing reliability and resiliency, lowering costs for transmission and distribution congestion, and avoiding investments in new facilities such as extra substations that might have been otherwise needed.

    This method would accurately reflect the costs and benefits without any cross-subsidies. A modern energy system with an up-to-date regulatory scheme is good for both the utilities and their customers. It will be different, but better for everyone, if it is designed correctly.

    Currently, Dominion and APCo are double dipping. They get fully reimbursed by the ratepayer for the cost of a new generating unit, plus all of the costs of financing the debt, plus about twice the project cost returned in a stream of profits over the life of the facility. The utility also gets the proceeds from PJM’s capacity auction and the daily energy auctions. Normally, this is supposed to get tallied up and compared with the overall authorized return. If the utility’s profit is too high, customers get a refund. If profits are too low, rates go up.

    There is no free market to provide feedback to balance the price. The regulatory process is the only way for this to take place. In Virginia, this balancing has been short-circuited at least since 2013, perhaps as far back as 2007. It is a mystery to me why politicians and business leaders are resistant to considering a scheme that opens up our energy system to a more market-based system that will lower customer costs, promote more new industry and job creation, and through performance-based rates give utilities a chance to earn more by serving their customers better.

  6. Utility regulators have been dealing with stranded cost issues for a long time. They are well equipped to deal with them, if they are given the opportunity. Many existing power plants in our region did not clear PJM’s capacity auction this year because they did not meet the base requirements. Most of these units are still operating, but do not receive the auction payments.

    Dominion has chosen to mothball a number of their old units because it was not cost-effective to bring them up to standards. Normally, this might trigger a filing for stranded costs after the current capacity payments cease (the auction is for 3 years ahead). But Dominion will not retire these units. They will be on standby and will require several months to return them to operation. This is a savvy move by Dominion since they save money by no longer having payroll, operating and maintenance costs associated with these units. All of the savings will go to the shareholders without a rate review. By avoiding a rate review these units still receive rate recovery for depreciation, and all other costs as if they were operating as they did when the rates were last reviewed (2013?). This could continue until 2028 under the current bill.

    Decoupling generation from the rate base removes the incentive to build new units if they aren’t really necessary.

    The most vibrant economies will be those that learn to use less energy to produce more goods and services. Our current energy policies in Virginia are adding billions in higher energy costs to families and businesses in the state. This is taking us in the wrong direction.

    We need to develop appropriate regulations that will allow our energy companies to do well in this new environment by lowering costs and increasing choices for their customers.

  7. Tom thanks for your thorough explanation of those issues … thorough and DEPRESSING!

  8. So where’s our Attorney General? Why doesn’t Herring file an antitrust suit against Dominion for tying a non-monopoly service (generation) with a monopoly service (transmission and distribution)? From what I see, a lot of people want to buy power generated by another company (say a renewable energy source) but effectively cannot. Just filing the suit would shake up the political status quo.

  9. It will take General Assembly action to restructure the system as Tom and Jim are discussing, which means a decision on that playing field which is already steeply tilted against consumers.

  10. A federal antitrust suit against Dominion trumps state law. Thre Bell System unsuccessfully argued persuasive state regulation exempted them from the antitrust laws. I bet a legislative solution would soon appear. Dominion would quickly accept a reasonable change in state law to avoid a court ordered breakup.

    • Theoretically, yes, antitrust law should help. However, how much have you seen our government use antitrust recently? That Bell breakup was decades ago and today the pieces have reorganized into essentially 2 companies. Overall, we’re not using antitrust these days.

    • There is not any antitrust issue in the provision of integrated public utility service, TMT. While many states have de-regulated the provision of electricity by requiring or permitting the divestiture of generation assets by their local electric companies, Virginia has not mandated this action. Thus, there is no “tying” of a monopoly service to a competitive one. Incumbents have protected service territories because they are OBLIGATED to provide service to anyone in the territory–they cannot deny service.

  11. I’ll be shocked if a change of the political color of the GA changes the fundamentals we are witnessing. Might slice the baloney left-handed so the grain might be a little different looking.
    Hey maybe the Dems could give us back the old Va EZ File Online Tax system. I might forgive a lot for that.

    • PS- One thing to consider re: Dominion’s Va. profitability is apparently a lot of you are using electric heat pumps. We have gas – the house came that way- but most of the neighbors are electric I guess, so as a whole Va. has high electric use rate.

      • TBill,

        You are right about that. It’s because we live in a relatively mild climate zone – not too hot, not too cold. For many customers, heating and cooling loads can be handled with heat pumps. Colder climates rely much more heavily on gas and oil for heat.

        That is why Virginia’s residential electricity rates are 24th out of 51 (includes DC), but our electricity bills are the 10th highest in the nation. Our shift to natural gas will push utility bills higher as gas prices continue to increase. Refurbishing our nukes will push our utility bills even higher.

        We need to do modern energy system planning that considers what is best for the citizens and businesses not just what is best for utility shareholders. A modern system can be good for utilities too, but the rules need to be changed to allow that to happen.

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