Category Archives: News

What It Takes to Build Virginia’s Talent Pipeline

House Speaker Kirk Cox

It’s time to give Virginia’s colleges and universities some “tough love,”  House Speaker Kirk Cox, R-Colonial Heights, said yesterday.

The answer to sky-rocketing increases in the cost of attending college is not tuition freezes, caps, unfunded mandates or other one-size-fits-all measures like those that surfaced in the General Assembly last session, the Speaker said in a speech to the GO Virginia Foundation board meeting in Richmond.

But he added: “If the higher education institutions do not come together with the state government and the business community to address affordability in a meaningful and tangible way… if they do not support common-sense reforms like the bill passed by the House of Delegates last session to allow public comment before raising tuition… then I fear there will be little anyone can do to stop a wave of policy proposals along those very lines.”

Cox issued the warning while addressing the broader topic of the link between workforce development and economic development. In the most concrete proposal of his speech, he called for partnerships between government, business and individual higher education institutions that spell out (1) what the school will commit, (2) what the state will invest, and (3) what the business partners will contribute.

“We don’t need more people playing politics with the price of education, but we also don’t need people with their heads in the sand, pretending the problem doesn’t exist,” he said. “We need people partnering in practical ways to bring the price of education down!”

There is no silver bullet or quick fix on college affordability. We need to move forward on a range of solutions: alternative pathways; transfer programs; online options; cost-saving innovations; more efficient collaboration among institutions; more help for students through financial aid, TAG grants, and work-study opportunities and so on. …

In the institutional partnership agreements that I envision … in return for a financial commitment from the Commonwealth, each school will make transparent commitments concerning the four-year net cost of attendance for in-state undergraduates, the internship and work-study opportunities that will be provided, and the maximum student loan debt levels that any Virginia student may incur.

Virginians cannot expect tuition predictability and restraint at the campus level if the General Assembly cannot provide “adequate, reliable funding,” Cox said in a reference to erratic state support for higher education. But he placed much of the onus for declining affordability and access on the higher-ed institutions.

“Higher education is at a pivotal moment,” Cox said. “We have never needed our higher ed system more than we do now … because it is the key to the talent pipeline, and the talent pipeline is the key to the future. But, at the same time, higher ed’s political position has never been shakier.” The bond of trust between colleges and elected officials “has never been more at risk.”

If our colleges and their leaders don’t recognize the shift in public opinion on higher education…. if they don’t understand how the populist message is resonating…. and if they don’t come to the table seriously on the points of greatest concern — affordability and accountability — then it is very likely that the criticism will reach critical mass, and it will be impossible to maintain the progress we have made.

The talent pipeline. In one of the most comprehensive speeches on workforce development to come from a Republican legislator in recent years, Cox affirmed the need for an educational system that provides young Virginians with the skills they need to participate in a growing economy.

“What we hear from Virginia businesses, large and small, is this: The main reason their business is not growing is they can’t find qualified workers.” At the same time, Virginia is experiencing a brain drain — unable to find good jobs here, people are leaving for better opportunities elsewhere. For four straight years, he said, Virginia has experienced a “net loss of talent” to other states.

The “build it and they will come” approach is not only ineffective. It costs too much… is too resistant to innovation… moves too slowly to keep up with the fast-changing economy… and, frankly, is too old-school and uncool to appeal to eager, creative, tech-savvy young people.

Cox embraced the goal of making Virginia the Top State for Talent, similar to the long-term objective stated by the State Council of Higher Education for Virginia (SCHEV) to make Virginia the best educated state in the country. But he stressed that increasing the number of college graduates must be accompanied by efforts to provide grads with meaningful employment, or they will leave. Continue reading

Dominion Objects to Testimony on Pipeline Cost

One of the first decisions the State Corporation Commission may need to make in Monday’s hearing on the Dominion Energy Integrated Resource Plan (IRP) is whether to allow and consider testimony about the cost of the Atlantic Coast Pipeline.

Dominion filed a September 7 motion asking that testimony from a witness brought by Appalachian Voices “be stricken as irrelevant and improper,” which the environmental group answered with its own brief filed Friday.  Dominion argues the cost of the pipeline is not part of the IRP and is not properly before the commission in this case.  It will seek to recover the pipeline capital costs when gas from the pipeline is subject to a future fuel cost review.

Gregory Lander of energy consulting firm Skipping Stone states in his disputed testimony that the costs are already built in.  “The Company’s 2018 IRP embeds the costs of the Atlantic Coast Pipeline into each of the generation scenarios it presents…. (but) has not properly costed-out the all-in cost of increasing, beyond its current pipeline capacity portfolio, the costs associated with the level of pipeline capacity it intends to obtain on the Atlantic Coast Pipeline.”

He claims that acceptance of the IRP by the Commission in effect accepts that up to $3 billion of the cost of building and operating it will be passed on to ratepayers over 20 years.  Those are in addition to the cost of the gas.  Opponents of the pipeline argue it is not necessary to bring natural gas via the ACP to Dominion’s generators, and if it does so it will be supplanting lower-cost alternatives.

“In reality, the Company’s goal is not to avoid scrutiny of the ACP costs in this proceeding, the Company’s goal is to avoid scrutiny of the ACP costs in every proceeding,” states the brief in support of retaining Lander’s testimony.  It noted a similar effort to keep the data out was made successfully in 2017’s IRP case and during the certificate of need case for the new natural gas generation plant in Greensville County.

This is just one of the disputes expected when the SCC takes live testimony for two days on the plan, which outlines several scenarios for meeting future demand in Dominion’s territory while meeting current and future environmental rules. The amount of demand growth over the period is itself the main point of contention, with opponents claiming the utility has inflated its needs to justify excessive new plant construction.

In rebuttal testimony Dominion pushed back on claims by the SCC staff and others that it won’t need additional generation. It says the others ignored recent winter peak demands and claimed that an economic slow period responsible for flat demand is coming to an end.  “The lack of economic growth in Virginia has been a key driver to the forecast being higher than what has actually occurred” wrote Dominion’s director of energy market analysis Robert Thomas.

One of the reasons cited for expected growth is the explosion of data centers in Virginia, but representatives of that industry filed their own written comments disputing they will cause higher demand.  The letter was signed by eBay and Adobe among others.

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BVG Makes Case for Virginia as Offshore Wind Supply-Chain Hub

Manufacturing job-creation potential for the offshore wind industry. Source: BVG.

Virginia is very well positioned to establish a supply-chain hub for an East Coast wind-power industry, says a report written by offshore-wind consulting firm BVG Associates and underwritten by the Virginia chapter of the Sierra Club.

Although Virginia will not participate in the “first wave” of  East Coast offshore wind projects, which is ramping up now in northern coastal states, Virginia-based businesses could supply key components to those pioneering efforts if the Commonwealth acts quickly, concludes the newly published report, “Offshore Wind in Virginia: a Vision.”

The report lays out the following scenario for wind farm-driven economic development:

Virginia will derive immediate economic benefits while maturing its offshore wind supply chain, ensure development of its own 2 GW [gigawatt] offshore wind by 2028, and provide the tipping point for a second wave of lower-cost projects off Dominion Energy’s service territories, notably the Kitty Hawk lease area in North Carolina.

The study should be read with the understanding that Sierra Club-Virginia is promoting Virginia offshore wind generation to advance its long-term goal of eliminating fossil fuels and nuclear power from Virginia’s energy mix. Even with that caveat in mind, the study provides the most detailed analysis yet published of how Virginia can leverage offshore wind into a major economic-development boon for the Hampton Roads maritime sector. The Northam administration has hired a BVG associate to help the state fashion a strategy to build an offshore wind supply chain.

According to the report, Virginia has five big competitive advantages:

  • An industrial coastal infrastructure, with large areas for laydown and storage, quayside length for load-out, and direct access to the open ocean with unlimited vertical clearance.
  • A large workforce with competitive pay scales and experience in shipbuilding, ship repair, ports, logistics, and vessel operation.
  • Highway, rail, and inland waterway connections linking Virginia’s ports to industrial centers throughout the Southeast, Mid-Atlantic, and Midwest.
  • Eastern population centers with high and growing electricity demand, particularly for the Internet economy. Northern Virginia has a large and growing data-center corridor, and two new data centers are being built in Virginia Beach.
  • High-voltage interconnection capability in Virginia Beach sufficient to handle the anticipated commercial wind-lease area after “moderate investment.”

The first two advantages make Hampton Roads an attractive location for the fabrication and assembly of jacket foundations and offshore substation platforms. Two sites in the region could be made ready for a steel fabricator within 20 to 29 months at a cost of $5 million to $15 million. Jacket and substation production could create more than 2,000 new direct and indirect jobs.

The first phase of offshore wind production will be expensive. Wind supply chains in Europe like to see an annual market of at least 1 gigawatt, the equivalent of 80 to 125 turbine nacelles, turbine towers, blades, or foundations. A factory owner would look to produce 200 kilometers of cable per year, a volume needed to apply lean manufacturing strategies. Lacking U.S.-based investment, first movers in offshore wind would have to pay premium prices. Another complication is the Jones Act, which prohibits European-built and based vessels from transporting components between U.S. harbors. Offshore wind-service companies cannot yet justify building state-of-the-art jack-up vessels in the U.S. in compliance with the Jones Act.

First-mover states — Massachusetts, Rhode Island, Connecticut, New York, New Jersey, and Maryland — have committed to build more than 3 gigawatts of offshore capacity. Virginia has committed to build 5 gigawatts of renewable energy, including a substantial component from wind, by 2028. Dominion Energy has proposed to build two turbines with experimental designs to ensure that a larger wind farm could stand up to hurricane conditions frequently experienced in the Mid-Atlantic.

Writes BVG:

By the middle of the next decade, Virginia could be a leading U.S. market for offshore wind, driven by the ability to benefit from the lessons learned from northeast coast states and the maturing U.S. supply chain, complemented by Virginia’s strong infrastructure, location benefits, and deployment of offshore wind at scale.

Suppliers to the wind industry, such as turbine, foundation and cable manufacturers, like to see a regular run-rate for installed capacity. This allows easier investment planning and more efficient facilities. Manufacturers also need projects of a certain size to achieve economies of scale. … The Virginia market in our scenario is … not big enough by itself to attract investment, so the Atlantic Coast market as a whole is crucial. In our scenario, Virginia provides the tipping point, creating the demand needed to support an investment decision.

Some infrastructure investment in Hampton Roads may be necessary. Given the inevitable time lags in gaining regulatory approvals, BVG says, Virginia needs to act quickly. Portsmouth Marine Terminal would need between $11 million and $25 million to upgrade the port for major offshore use, with “additional costs in the facilities themselves.”

The report provides no estimate of how much it would cost to upgrade Virginia’s electric grid to accommodate a massive supply of offshore wind, nor, beyond general statements that wind power is complementary with solar power, does it discuss the impact of intermittent wind power on reliability. Fossil fuel advocates argue that wind and solar provide no surge capacity in extreme, polar vortex-like weather events.

The BVG study make no policy recommendations. It cedes that task to the Department of Mines, Minerals and Energy, which is developing a strategic plant to identify supply-chain businesses and how to market Virginia as a hub for the industry.

VA CPAs Say Conform, Hold Tax Funds for Later

The Virginia Society of Certified Public Accountants (VSCPA) Monday called on the 2019 Virginia General Assembly to conform Virginia tax with recent federal changes, to track and sequester the hundreds of millions of dollars in higher taxes thus generated and to hold those funds for a future tax reform effort.

Nobody knows these issues better than the people who prepare tax returns, and the CPAs cite continued uncertainty over the full impact of the federal changes, especially with several issues still awaiting guidance from the U.S. Internal Revenue Service.  The society’s position is detailed in a white paper.  It offers no firm advice on what policy changes should eventually be adopted.

“VSCPA leadership and the VSCPA Tax Advisory Committee considered and discussed numerous policy options in an effort to make a recommendation, considering extensive input from VSCPA members and tax professionals, and determined that there was no member consensus on any single policy prescription,” Vice President Emily Walker wrote in an accompanying news release.

The VSCPA has enhanced its clout on this issue by hiring former Senate Finance Committee Chairman Walter Stosch as an outside lobbyist.  Stosch’s message to conform in full and then hold the money for later decisions is likely to carry greatest weight with his former colleagues in the Senate.

On the same day the CPA’s position was announced the first piece of proposed conformity legislation was filed, a House bill seeking to allow one major deviation from conformity.  It would allow Virginians to take the standard deduction on their federal returns but still itemize deductions on their state returns.  The deductions they can take will be under the new federal rules, however.

In previous Republican-generated statements pledging to allow Virginians to keep state itemized deductions while taking the federal standard deduction, the question of which deductions – new or old — has not been addressed.  The new federal law places limits on state and local tax deductions, eliminates the moving expense deduction, and make many other changes.

Delegate Richard Bell (R-Staunton) is not on either the House Finance or Appropriations Committees and it is likely other bills will emerge, probably many of them, before the session starts in January.  To apply retroactively to tax year 2018 any bill will have to pass with 80 percent super-majorities in both chambers, requiring a bipartisan consensus.  A bill changing policy for tax year 2019 needs just the usual majorities plus the Governor’s signature.

Secretary of Finance Aubrey Layne was back discussing the issue before the House Appropriations Committee Monday, at the end of his regular presentation on the state’s finances.  A CPA himself, he probably helped influence that society position paper.  The Northam Administration is resisting efforts to make immediate tax policy changes in response to conformity but has not ruled out a tax reform effort next year.

That approach has its own challenges.  By the administration’s own estimates, conformity with no policy changes produces almost $600 million in additional revenue for tax year 2018 from individuals and businesses.  To hold the funds in reserve for a future tax policy debate would require great discipline on the part of the elected leaders.  And if done in special session next year that debate would take place during the run-up to what is likely to be a bitter primary and election season for both House and Senate.

Layne has access to the revenue model produced for the state by Chainbridge Solutions LLC and added a data tidbit yesterday:  While some people will see a tax increase if Virginia adopts full conformity, others will see a tax increase if the state does not.  The individual tax hike from non-conformity is more than $181 million.  That’s far less than the other way around but demonstrates the complexity of all this.

Speaking of complexity, an effort to explain this in easier-to-understand language led to the production of another white paper, this one mainly written by me and distributed Monday.  You can find it on the Thomas Jefferson Institute website here.

Chain Reaction: Tuition Rises Due To Higher Tuition

Annual average increases since 2010 in General Fund (GF) support and in-state tuition and fees at each school, compared to the Higher Education Price Index (HEPI) and Consumer Price Index (CPI). At nine schools the state funds have lagged even the smaller inflation measure.  Source: House Appropriations Committee

Increased pay for faculty and administrators is one of the major cost drivers behind the continuing climb in tuition and fee charges, a member of the House Appropriations Committee staff told that committee Monday.   As those charges climb, the universities are also increasing the percentage of tuition revenue used to provide financial aid for students being priced out, transferring costs from one group of students to the other.

Anthony Maggio’s presentation went into details missing from the State Council of Higher Education for Virginia’s own review of the cost increases.  His critical overview highlighted:

  • The six institutions that exceeded the tuition increases in their six-year plans. (Eight institutions including the Virginia Community College System stayed under the amounts in their plans.)
  • The amount the schools are still charging in their mandatory fees to support their athletic programs, now more than $1,500 at eight of fifteen schools and over $3,000 at one.  Legislation in 2015 slowed but has not stopped the growth.
  • A potential way he believes the universities may be shifting more research program costs onto the students’ tuition or fee payments, further explaining rising tuition.

Athletic charges included in mandatory comprehensive fees. Source: House Appropriations Committee

Maggio reported that Radford University increased tuition 7 percent instead of a planned 3 percent hike and blamed, among other things, enrollment loss and a commitment of funds to economic development activities.  The other schools that exceed their targets often mentioned salaries or fringe benefit costs.

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A Model Transfer Program That Should Be Copied

Under prodding from the General Assembly that goes back years, Virginia’s four-year institutions are finally developing an easier path from community college to a bachelor’s degree.  Unfortunately for students, it is spreading slowly.  Unfortunately for anybody obstructing the process, there is one place where the full potential is being realized and proving the concept.

The dual enrollment and transfer relationship between Northern Virginia Community College and George Mason University is so seamless the community college students have GMU identification cards and access to GMU recreational facilities.  The Nova Advance program works for 20 degrees with a goal of expanding to 50 possible degrees.  Community college students have access to advising and other forms of support from the start.

Paying community college prices for two years saves $15,000 or more towards a bachelor’s degree.  Also, before this process community college transfers often found they needed more credits than traditional students, adding additional and wasted cost.  With the early guidance toward the right courses and firm agreements to accept the credits the standard 120 credit hours should now do it.

GMU Vice President for Academic Innovation Michelle Marks said getting this ready for launch this term “is the most complicated process I’ve ever worked on.”  Hundreds of faculty members at both schools had a hand in course and program design.  They planned to start with five degrees, but the enthusiasm pushed them way beyond that.  “People wanted to do this,” she said.

There will be some lost revenue for both schools but the presidents of both see this as “right for the families and right for the students.” Marks said.   The first 129 Advance students are in class now, with 189 more lined up to start in the spring.  The long-term growth plan runs to four digits.

This past summer, Virginia Commonwealth University and the two Richmond community colleges announced they are working on a similar program, but on a  smaller scale and limited to arts and humanities degrees.  Previously about 75 students per year have switched from John Tyler or J. Sargeant Reynolds to VCU.

The new program will take three years to implement, with the first year (underway now) spent on evaluation and planning, and is supported by $2.4 million over the period from The Andrew W. Mellon Foundation.  It will be another year from now before students enter the pipeline.

Jeff Kraus of the Virginia Community College System mentioned three other working relationships, involving Virginia Tech, James Madison and the University of Virginia and their neighboring community colleges.

Sharon Morrissey

These examples do make a key point: What is working is a relationship between the four-year school and its neighboring community college or colleges, rather than a statewide, system-wide focus.  “Community college students are not going to travel to the other end of the state to finish a degree,” said Sharon Morrissey, VCCS Vice Chancellor for Academic Services.  The dream remains far more widespread portability of transfer credits from community colleges.

The General Assembly started pressing this forward years ago with the classic carrot, financial aid in the form of a program of scholarships for VCCS transfers to four-year programs.  Those transfer grants have grown to almost $4 million per year, and the 2,500 students using them this term can receive up to $3,000 per year if seeking a science, technology, engineering or math degree at one of the major institutions.

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Northam To Ask Again To Spend Carbon Fees

The gap between the amount of generation Dominion projects it will need by 2033, and what the SCC and an outside consultant project. It deals with thousand of megawatts of capacity. Source: SCC staff comments on Integrated Resource Plan case.

Virginia Secretary of Natural Resources Matthew Strickler told a legislative commission today the Governor will again ask the General Assembly to keep and spend the proceeds of a new electricity carbon tax, rather than find a way to return it to ratepayers.

Strickler pointed to Senate Bill 696 and its companion House Bill 1273, defeated by General Assembly Republicans on party-line votes, as models for what might come back in the 2019 session.  He estimated that once Virginia joins the Regional Greenhouse Gas Initiative (RGGI), and Virginia utilities are having to buy carbon credits at auction for their fossil fuel generation, it will generate $200 million per year.  The fiscal note on the failed bill estimates between $175 million and $208 million.

(Here’s an earlier discussion of RGGI on Bacon’s Rebellion, and here is the Richmond Times-Dispatch coverage of the meeting.)

The draft regulation pending at the Department of Environmental Quality would have the money paid to RGGI in the auctions eventually return to the utilities, after RGGI dips into the pot for its cut.  When former Governor Terrence McAuliffe started the regulatory process in 2016 he said the money would come back as credits to ratepayers and in effect create a shell game with little final cost.

The bottom line of the briefing before the Manufacturing Development Commission was all talk of money is just speculation until DEQ and the Air Pollution Control Board release the final regulation, and no details on that were reported.  The draft sparked 7,500 written comments and the Air Board can amend it before it takes a final vote.  Strickler predicted release of that in early December.

With all the other electricity rate increases barreling toward Virginians because of recent state legislation – building new solar and wind, a major effort to place residential lines underground, a massive roll out of smart metering and other grid improvements – it is easy to dismiss the cost of RGGI fees as a rounding error.  But $200 million more piled on annually will make a difference if the money is spent on other things the state wants, or somehow is retained by the utilities – which is very possible.  Some of that will be paid by customers of Appalachian Power or other smaller generators.

The State Corporation Commission staff told the commission that any cost estimate will depend on the actual CO2 emission targets set for Virginia by RGGI.  The starting point from which you measure the planned 3 percent annual reductions will matter.  Greg Abbott of the SCC staff said it is possible the utility could have an easy time meeting early goals and make a profit on the effort.  Just what happens to those dollars once RGGI sends them back to Virginia is not spelled out in the law and may depend on how the utilities treat the money in their own accounting.

The issue is also tied up in the SCC’s review of the Dominion Energy Virginia integrated resource plan.  Several of Dominion’s proposed capital plans assume a need to comply with RGGI and assign a cost.  But the SCC and others are challenging a key assumption behind those projections – the growth in demand for electricity from Dominion customers.  Slower growth makes meeting the RGGI goals easier and cheaper.

A chart from the SCC testimony in that case illustrates how its projections vary is at the top of this post.  An outside consultant to the SCC, Robert McBride of DrillingInfo Inc., believes Dominion will need less generation in 2033 than it currently has.

For its part, Dominion today provided absolutely no details at all on the cost or policy implications of RGGI, not even what it has included in the IRP.  It turned up with a short slide set to show how low its rates already are in comparison to other states, and tell how it helps low income customers.

Senator Frank Wagner, R-Virginia Beach, chair of this Commission and obviously still a RGGI skeptic, indicated he may call everybody back before his Joint Commission on Administrative Rules, which has statutory authority to challenge pending regulations.  Wagner questioned the need for RGGI membership, pointing to his own 2018 bill which authorized up to 5,000 MW of new renewable generation.

If that gets built, he asked Strickler, doesn’t that more than meet any carbon reduction goals RGGI might set?  So why join RGGI and layer on the carbon tax costs?   Strickler zeroed in on “if” and pointed out that the legislation did not actually order construction of those assets.  Joining RGGI sets a goal that creates more pressure to build them, he argued.

Dominion Proposal A Total Refresh, SCC Staff Says

The integrated resource plan (IRP) for Dominion Energy Virginia, pending at the State Corporation Commission, involves building or rebuilding enough generation to replace most of its existing capacity.

That is one conclusion reached by the SCC staff’s own analysis of Dominion’s filed plans. A bottom line $5.6 billion estimate of the 15-year customer cost of this building spree, along with upgrades to the transmission grid, produced a banner headline story in the Richmond Times-Dispatch.

Go to the SCC website and you find the staff written testimony divided into eight documents, with a total of 422 pages, and there are additional exhibits not available to view because the company has demanded the information remain confidential. An integrated resource plan by its nature covers the entire company operation, and this review is the first since 2018 legislation changed many of the rules and produced General Assembly blessing of grid and renewable energy investments.

A summary of the overall testimony is provided by Gregory Abbott, associate deputy director of the public utility division. It was Abbott who noted that the 15 gigawatts (GW) of generation in the plan approaches the maximum demands of 16.3 GW in 2017, although summer peaks for Dominion customers have reached 18 GW. “In other words, the Company’s build plan is nearly equal to its existing coincident peak load,” Abbott testified.

SCC testimony hides the projected cost of extending the life of Dominion’s nuclear plants, at company’s request.

Part of that is not new generation but a license extension for the existing nuclear plants accounting for 3.3 GW.  The cost of upgrading those plants to achieve that extended lifespan is substantial however and needs to be weighed against alternatives.  The actual cost is hidden by redaction.

To make room for the new, about a dozen existing plants will be retired years before the end of their useful lives, stranding about $450 million of depreciated costs on the company’s books.  Most of them burn coal, oil or wood to generate electricity, although two burn natural gas. Customers get the bill coming and going, paying for both sets of facilities – new and old.

Dominion plants proposed for early retirement, and their expected retirement dates.

The staff testimony usually starts the debate on these cases, and other case participants will now add more to the record, all of it answered eventually by Dominion staff and its own outside experts. The two judges of the Commission (no movement on filling the third seat at the Assembly) will hold a public hearing starting September 24.

The IRP itself is just that, a plan, and only takes form as the various grid or transmission projects later come to the Commission for review. The SCC in the past has said approval of the IRP does not guarantee approval of the elements. But this IRP, more than any previous one, is going to the heart of key issues facing Virginia.

First, as noted by the newspaper article, the SCC staff is rejecting Dominion’s own internal projections for electricity demand growth. It points to data from the regional transmission organization PJM that indicates a lesser demand going forward, and if you don’t have as much demand, you don’t need all these new generation sources. If you build them and don’t need them, the cost per customer goes up.

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The Logic Behind Northam’s Plan for Spending the Tax-Reform Windfall

Finance Secretary Aubrey Layne

The starting point for understanding the Northam administration’s logic behind divvying up the tax windfall from federal income tax reform is the conviction that Virginia cannot count on the personal and corporate tax cuts lasting more than a few years. Democrats may regain power in Washington, D.C., and reverse the tax cuts, or at the very least block any attempt to extend the personal income tax breaks beyond the five years provided in the legislation.

While the tax reforms might survive, explained state Secretary of Finance Aubrey Layne in an hour-long interview with Bacon’s Rebellion Tuesday, political volatility in the nation’s capital makes it unwise to count on an ongoing boost to state revenue, which is estimated to amount to $532 million in fiscal 2019 and $444 million in 2020. It would be irresponsible to expand ongoing state expenditures in the hope that the revenue gusher will continue. Prudence dictates that Virginia allocate the funds to non-recurring programs and capital projects.

There are many possible uses of the money, Layne conceded. Some say give the money back to taxpayers. Some say dedicate the money to school improvements. Governor Ralph Northam prefers initiatives that would benefit mainly rural Virginia: Earned Income Tax Credits for lower-income wage earners and non-recurring investments in broadband, workforce development, and affordable healthcare.

The controversy swirling around the impact of federal tax reform on Virginia finances has created considerable confusion, Layne said. One sticking point is the issue of “conformity” with the federal tax code. When Congress enacted new tax policies in the past, Virginia traditionally has enacted the changes needed to make the state tax code align with the federal code. Congress’ new tax code will require 20 or more significant changes in the Virginia code. Failure to conform is not an option, he said. It would throw state tax collections into confusion at enormous expense to tax payers.

If Virginia conforms and makes no adjustment to tax rates, brackets or deductions, as he expects, the Commonwealth should see a spike in revenue. There has been some controversy over the effect on taxpayers – the impact will vary widely from household to household — but there is no question that, absent any action to return money to taxpayers, the state treasury will be a big beneficiary.

Then comes the question of what to do with that money. Virginia may not spend any revenue from tax year 2018. The tax year is advanced and the state is still awaiting guidance on the details. “There’s a lot we still don’t know,” said Layne. There will be no time to update tax preparers much less modify tax-calculation software such as Quicken. Returning money to taxpayers that year might make sense, although, he added, he’s not advocating such an action.

The 2019 tax year is a different matter. He expects the General Assembly to bring the tax code into conformity in the 2019 session, eliminating the uncertainty, and the Commonwealth will be in a position to start spending money.

Northam wants use the money to help working families in rural Virginian, said Layne. The governor proposes to do that by dedicating about half the windfall to increasing the Earned Income Tax Credit (EITC), a tax refund that would eliminate state income taxes for many lower-income households. The money would flow to lower-income Virginians across the state, but the beneficiaries would be concentrated in rural localities, especially in Southside and Southwest Virginia.

The governor wants to use the other half to fund economic development programs for rural Virginians. A top priority would be to accelerate the deployment of broadband Internet in low-density areas where Internet Service Providers cannot profitably invest. The state needs about $1 billion to make broadband ubiquitous, said Layne. Perhaps the windfall could use public dollars to seed public-private partnerships that could leverage private investment.

Northam also has talked about using the money to underwrite programs for workforce development and education — although Layne conceded that the welter of state workforce training programs is redundant, inefficient and needs fixing — and to improve rural access to healthcare. The priorities are conceptual in nature, and no specific proposals have been advanced. He readily agreed that the state might consider other alternatives such as raising money for Interstate 81 improvements, upgrading the Central State mental health facility, or paying down the pension liability. Northam would consider an alternative to the beefed-up EITC if it would benefit rural Virginia, he added.

Whichever priorities lawmakers approve, said Layne, they should be one-off projects. “I don’t know how we could go to the [bond] rating agencies and use this money for ongoing expenses.”

Comformity Boosts Key Business Tax 40 Percent

Increased Virginia corporate income tax revenue under full conformity. The 2023 figure is 46 percent of the 2019 baseline tax. Source: Chainbridge Software LLC

A decision by the Virginia General Assembly to fully conform state tax rules with recent changes in federal tax law could result in major increases in state corporate income tax collections, totaling an additional $1.4 billion over six years, an outside consultant has concluded.

Virginia’s corporate income tax under current rules is projected to collect $912 million in this current fiscal year, compared to $861 million last year.   The impact of conformity starts slowly, adding less than $30 million in tax during the first year.  But by the third year collections would grow 20 percent, or $182 million, and by the fifth year (2023) the extra tax of $417 million is 45 percent of the baseline for 2019.

These projections are part of the Chainbridge Software LLC analysis released by Governor Ralph Northam on August 17.  It stated the business provisions with the most significant Virginia revenue impact (listed with their six-year total tax increase) include:

  • Limits on the net interest deduction ($619 million)
  • Amortization of research and experimental expenses ($454 million)
  • Repeal of the domestic production activities deduction ($274 million)
  • Modification of the net operating loss deduction ($229 million)

It cites two new federal provisions which will also reduce state revenue if Virginia conforms:

  • Increase in IRC section 179 expensing (reducing taxes $202 million over six years.)
  • Simplified accounting for small business (reducing taxes $195 million over six years.)

On the federal side the various changes in the rules were accompanied by a drop in the tax rate from 35 to 21 percent, and these projections assume the same rules at the state level but no change in the state’s 6 percent corporate income tax rate.

Full chart of projected impacts of changes in federal business tax rules. Source: Chainbridge Software LLC

The tax conformity discussion so far has focused on the personal income tax impacts, with full conformity adding potentially $3 billion in state individual income collections over the first six years.  The state collects far more personal income tax than corporate tax, with more than $14 billion in personal taxes projected for next year, so on a percentage basis the personal tax impact is small in comparison to the business impact.

Along with the six listed above, Chainbridge estimated the positive or negative impact of sixteen additional business income tax provisions.  Many were too small for its main model and the authors added a disclaimer that Internal Revenue Service guidance on many questions is still unavailable.  The chart does illustrate the complexity of what Congress did on the business side.

One goal of the new federal rules was to encourage companies holding cash in foreign accounts to repatriate the funds to the United States, which normally would then also be taxable at the state level.  This is one area of federal tax law where Virginia has traditionally differed, allowing businesses a full deduction for foreign-sourced income.

The Chainbridge analysis assumes that deduction remains on the business tax returns, but also assumes some of those repatriated profits will be distributed and taxed as stockholder dividends.  That would add about $85 million in personal income tax collections for 2019 and 2020.  This provision has the acronym GILTI, for “global intangible low-taxed income.”

The business tax changes were at the heart of the decisions made by Congress, with the goal of stimulating investment.  The General Assembly could be concerned that such dramatic impacts on business taxes within Virginia would be detrimental to growth and question the proposal for full conformity on the corporate side or consider a corporate tax rate cut to reduce the impact.

Full Conformity Raises $3.6B In First Five Years

Projected State Income Tax Revenue Increases if Virginia Conforms With No Adjustments. Source: Secretary Layne’s Presentation

Assuming the Virginia General Assembly conforms the state’s tax rules to the IRS code as it exists now, adopting intact the recent federal changes, the state will reap an additional $3.6 billion in revenue over the next five years.

Almost $2.5 billion of that will come from personal income taxes, with an additional $1.1 billion collected from business tax returns.  By the sixth year, 2024, the total new state revenue attributed to conformity with the Tax Cuts and Jobs Act of 2017 reaches $950 million per year.

Those figures were revealed Friday by Secretary of Finance Aubrey Layne, having been forecast by a new proprietary revenue model developed for the state by Northern Virginia-based Chainbridge Software LLC.  Layne’s presentation went into detail on the state’s revenue results for the fiscal year just ended, the official revenue forecast for the year that just started, and the federal tax conformity debate.

There are two key assumptions behind those Chainbridge projections.   The first is that the state makes no changes in state tax brackets or rates or state-specific exemptions, all of which could be changed to reduce the impact on individual or business taxpayers.  The second is that taxpayers take full advantage of the new federal rules when the federal benefit exceeds any tax cost at the state level.

While state taxes are projected to grow, federal taxes paid by most of those individuals are projected to decline by far higher amounts.  Aggregate federal income taxes on individual Virginia residents are projected to drop by almost $4 billion for 2018, more than ten times the expected state income growth on the same earnings.   These are projected totals, and to borrow a common disclaimer individual results may vary.

Governor Ralph Northam, who opened the meeting Friday with his own remarks, has proposed taking advantage of the revenue surge to amend Virginia’s Earned Income Tax Credit (EITC) making it refundable, meaning taxpayers who qualify would get any excess credit – more than their state tax liability – given to them as a tax refund.

He used the example of a lower-income family with a state tax liability of $800 and an EITC of $1000.  Right now, Northam said, “Virginia keeps that additional $200.”  Under his proposal “we’re giving that $200 back.”   Critics of the idea would argue the $200 in question is coming from other Virginians as an income transfer payment.

Previous efforts to make the state EITC refundable have been estimated to cost up to $250 million per year.  For tax year 2018, according to Layne’s data, individual taxpayers declaring incomes above $50,000 per year would be paying the state an additional $290 million, only slightly more than the cost of the EITC refunds.

Layne forcefully argued for full state conformity with the federal changes, adopted in early 2019 so the rules can apply to tax year 2018 in full.  If Virginia stands still and does not conform, individual taxpayers will have to deal with as many as 20 major differences between their state and federal returns, and for business filers it is more like 30 provisions which would differ.  For decades Virginia has traditionally conformed fully or almost in full with the Internal Revenue Code.

Passing an emergency conformity bill at the start of the January session, which would need an 80 percent vote, would not preclude a later debate about adjustments Virginia might want to make to rates, brackets, or other provisions.  In statements outside the meeting, but not stressed Friday, many Republican legislators have discussed allowing Virginia taxpayers freedom to itemize deductions on their state returns while taking the standard deduction at the federal level.

The policy combinations are endless, and Layne pledged to work with the legislators who have ideas they want to test with the new revenue projection model.

(Note of apology – earlier versions used the wrong name for Chainbridge Software LLC.)

 

Media reaction to Goodlatte’s 2018 Chesapeake Bay Amendment

Background: Republican Rep Bob Goodlatte (Va – 6th) has proposed an amendment to an appropriations package which would forbid the EPA from using federal funds to take action against bay states that fail to meet pollution-reduction targets set by the EPA and agreed-to by the states.  The amendment is to the 2019 Interior, Environment, Financial Services and General Appropriations Act.  The amended bill passed the U.S. House of Representatives 213 to 202.  The same bill (without the Goodlatte Amendment) was passed by the US Senate 92 to 6.

Goodlatte’s rationale. Rep Goodlatte previously explained his rationale for restricting the EPA’s authority over the Chesapeake Bay cleanup on his website.  You can view that explanation here and here. (Hat Tip: Jim Bacon). However, it should be noted that the first link was from 2014 and the second from 2016. One would think that Goodlatte’s most recent attempts to curtail the EPA’s enforcement of the TDML Blueprint would require an updated explanation of intent … especially in light of the continued success of the Bay cleanup effort since EPA enforcement began.

Media reaction to the 2018 amendment. In order to get the essence of the media reaction to Bob Goodlatte’s proposed amendment I performed an internet search with the argument “Goodlatte & Chesapeake Bay Cleanup.”  There were 42,800 results. Here are the top 10 written in 2018 pertaining to Goodlatte’s latest attempt to restrict the EPA from enforcing the TDML Blueprint:

  1. Measure to weaken EPA enforcement of bay cleanup is up for House vote – again (Daily Press)
  2.  US House again votes to restrict federal enforcement of Chesapeake Bay Cleanup (Baltimore Sun)
  3. Editorial: Goodlatte once again targets the bay cleanup (Fredricksburg.Com)
  4. Senators vow to fight stripping funds to enforce Chesapeake Bay cleanup (LA Times)
  5. Environmentalists claim measure will set back Chesapeake Bay (13 News Now)
  6. Virginia GOP Congressman Again Tries to Gut Accountability For Chesapeake Bay Cleanup (PA Environment Digest Blog)
  7. Goodbye and Good Riddance to Goodlatte (Bacon’s Rebellion) (LOL)
  8. Harris backs Bay cleanup (The Star Democrat)
  9. Bay Journal: Hogan urges US Senate to reject curb on EPA role in Bay cleanup (Maryland.gov)
  10. House Republicans Advance Bill that Would Derail Chesapeake Cleanup (NPR)

Methodology reminder. Bob Goodlatte has made many failed attempts over the years to prevent the EPA from regulating the Chesapeake Bay’s TDML Blueprint. Interspersed with articles relating to his most recent attempt were articles referencing his prior attempts. Those prior articles were omitted from this list.

Conclusion. Goodlatte seems to have very little support for his latest attempt to restrict the EPA’s authority over the Chesapeake Bay. Beyond the dearth of media articles in support of Goodlatte, seven of Virginia’s eleven U.S. House of Representative members voted against Goodlatte’s amendment. Both Virginia U.S. Senators committed to blocking the amendment in the Senate. Even Maryland’s Republican governor came out publicly against the Goodlatte amendment. I also quickly scanned the next 10 articles (numbers 11 – 20) on the sorted list of responses to my internet search. All were opposed to Goodlatte’s latest attempt to restrict EPA enforcement of the TDML Blueprint.

— Don Rippert

Dominion Files 10-Year Grid Modernization Plan

Dominion Energy today filed a plan with the State Corporation Commission outlining how it intends to comply with the Grid Transformation and Security Act of 2018. The filing asks the SCC to approve the programs and investments included in the first three years of a 10-year grid modernization initiative. The filing can be viewed here.

Features of the plan highlighted in a Dominion press release include:

  • $200 million in bill credits to customers, and $125 million in annual rate cuts due to tax relief;
  • Modernizing the energy grid to improve reliability, resiliency and the ability to integrate more renewable energy and emerging technology;
  • Significantly expanding the company’s renewable energy fleet in Virginia;
  • Future testing of wind turbines off the coast of Virginia Beach.

Dominion emphasizes that the improvements will not require any rate increases. Rather, the upgrades will be paid for through earnings over and above its normally allowed Return on Equity, which will be retained for the purposes of reinvestment in grid modernization. This particular provision, the most controversial aspect of the 2018 legislation, was criticized as a form of “double dipping” that allowed Dominion to earn money on its original investment and then to earn more money on the profits that otherwise would have been returned to rate payers. The legislation was said to have fixed the double-dipping issue, but it is not clear how that will work out in practice.

In the meantime, Virginians can look forward to aggressive investment in solar power, wind power, and energy efficiency. Dominion is committing to having 3,000 megawatts of wind and solar in operation by 2022, adding to what the company touts as the sixth largest solar fleet in the nation. (It’s not clear from the press release if that includes solar resources outside of Virginia.)

The plan asks the SCC to include the Coastal Virginia Offshore Wind (CVOC) project: two experimental turbines generating 12 megawatts of power in a federal lease area about 27 miles off the Virginia Beach coast. Experience and data gained from operating those turbines could pave the way for widespread deployment of wind turbines in the future.

Dominion also is asking to install 2.1 million smart meters at a cost of $450 million. These meters, in conjunction with a new customer information system, will enable customers to better manage their energy bills. Additionally, the utility is proposing to spend $870 million in energy efficiency programs over the next decade. The programs are “designed to help customers save energy and manage the demand on Virginia’s electric system.” At least 5% of these programs must benefit low-income, elderly or disabled individuals, “most likely through weatherization upgrades.”

Proposed new construction and material standards will improve grid resiliency by hardening infrastructure and protecting against cyber-attacks. The burial of outage-prone distribution lines and the deployment of intelligence devices and control systems will are meant to speed the re-establishment of electric service.

There is no mention in the Dominion press release of a much talked-about pumped-storage facility in Southwest Virginia, which previous legislation had declared to be in the public interest. The pumped-storage facility would use electricity in off-peak hours to pump water from a lower-elevation containment lake to an upper-elevation lake, and then generate electric power during peak hours.

The State Corporation Commission has been skeptical of some of these investments in the past, but the Grid Modernization Act declares them to be in the public interest. It’s not clear exactly how that assertion of General Assembly priorities will play out in the SCC decision-making process. The next few months should tell the tale.

Ratepayers Cover $760,000 Line for One Customer?

Highest cost projects from DEV underground line program phase three,with lifetime revenue requirement from ratepayers. Source: SCC pre-filed testimony.

The State Corporation Commission staff audit of Dominion Energy’s ongoing effort to place residential and small business electric service tap lines underground has turned up some expensive examples.  A handful of lines will cost ratepayers hundreds of thousands of dollars over time to serve a single residence.

The average cost for the first 18,000 customers getting new lines is about $50,000 each based on my own calculation.

Those are the all-in costs for planning and constructing the lines, then adding the interest cost or profit margin depending on how the utility financed it. The projection uses the current 9.2 percent return on equity. The money is collected over the estimated useful life of the new lines, about 40 years.  For phases one, two and three the total cost with financing is about $921 million, according to the SCC staff analysis.

The SCC staff compared the full capitalized cost of installing the highest-cost lines to home values.  “This means it is possible in some instances that the company could have purchased the customer’s homes at a lower cost than undergrounding their tap lines,” testified David J. Dalton of the SCC staff.

This program to expand underground lines is something else paid for with a specific monthly charge on everyone’s bill, a rate adjustment clause known as Rider U.  It is also something else that the General Assembly has deemed to be in the public interest and virtually off-limits to SCC challenge.

Photo: Dominion

The annual review of the program to adjust the billing charge is underway now and was the subject of a hearing at the SCC Tuesday. With big questions settled by the legislature, the discussion is focused on minor issues such as accounting changes or how the costs are allocated between various classes of customer.

The largest industrial customers are exempt but everybody else under the SCC’s jurisdiction pays, including the 600,000 customers who already have underground service (and paid for it themselves) and the unknown number who will never get underground service.  For that mythical average residential customer using 1,000 kwh per month, the current charge is 55 cents per month and Dominion is asking to raise it to $1.98 as of next February.

The legislature has authorized this to go until at least 2028, and Dominion expects to place 4,000 miles of lines underground in 12 phases at a direct cost of $2 billion and a fully-capitalized cost of almost $6 billion.  At that point the residential charge will be more like $5 per month.  The charge for commercial or small industrial customers was not reported.

Spending other people’s money is very popular.  The record on this case includes favorable comments from Senator Glen Sturtevant (R-Richmond), Delegate Vivian Watts (D-Fairfax) and several local officials where the program is active.  A spokesman for the American Red Cross attended Tuesday’s hearing in person to testify about that organization’s support, noting how wonderful it is not to have your power go out.  At the end he said his own house has already been upgraded under the program.

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Tax Act Impact on Virginia: 5,782 Jobs

The Tax Cuts and Jobs Act of 2018 will create 218,000 full-time equivalent jobs across the United States this year, asserts the center-right Tax Foundation, which specializes in analyzing the impact of tax policy on the U.S. economy.

Using its Taxes and Growth econometric model, the Tax Foundation provided a job-creation estimate for each of the 50 states and Washington, D.C. In Virginia, predicts the model, the economic stimulus of corporate and personal income tax reform will create 5,782 jobs.

That number compares to 20,100 total jobs created between Dec. 2017 and May 2018, according to U.S. Bureau of Labor Statistics data. Annualized, Virginia was on track for creating 48,200 jobs in 2018, suggesting that the tax cuts are accounting for about 12% of the state’s job growth.

The tax cuts’ impact on Virginia falls in the middling range compared to other states. The 5,872 jobs created in Virginia amounts to 678 jobs per 1 million population, according to Bacon’s Rebellion calculations. On a jobs-per-population basis, the impact ranges from 1,640 in Washington, D.C. to a mere 110 in Oklahoma, both of which appear to be anomalies. Excluding those two, the impact ranges from 564 jobs per million population in Mississippi to 824 in North Dakota.