Category Archives: Regulation

Dominion Files to Extend Surry Nukes

Surry Nuclear Power Station

Dominion Energy has filed an application with the Nuclear Regulatory Commission to renew operating licenses for its Surry Power Station for an additional 20 years, the company announced today.

Like all nuclear units, the three-loop Westinghouse pressurized water reactors, capable of generating 1,676 megawatts each, were originally licensed to operate 40 years. Under its current licenses, the two nuclear units are allowed to generate electricity through 2032 and 2033. A second re-licensing would extend their lives through 2052 and 2053. The units account for about 15% of the electricity consumed by Dominion customers.

Dominion also has applied to re-license its two units at the South Anna power station. Between the four units, the utility estimates that it could spend as much as $4 billion on the re-licensing program.

Critics are certain to attack the proposal on the grounds that the power company should not make a long-term commitment to an expensive electric generating source even as the cost of solar power, wind power, and battery-powered backup continue to decline. Dominion argues that the nuclear units will provide a reliable, CO2-free source of base-load electric power. In essence, the critics are advocating a zero-nuclear, renewables-intensive energy policy similar to Germany’s energiewende, which has resulted in high electricity rates and burns CO2-intensive coal to replace the lost nuclear power.

It will make a fascinating debate.

JLARC Report on Licensing: Useful, But a Missed Opportunity

As the old saying goes, you find what you look for. And in its examination of occupational licensing in Virginia the Joint Legislative Audit and Review Commission (JLARC) largely found what it was looking for — inefficiencies and overcharges. Conducting the review was worthwhile, but the exercise was small ball — it missed the opportunity to examine much bigger issues.

In 2017, JLARC instructed its staff to study the Department of Professional and Occupational Regulation (DPOR) staffing and organization, its processing of occupational licenses, and its enforcement of occupational rules. Staff also assessed the affordability of fees and the processes for adjusting fees.

Here’s what JLARC did not study: To what extent does licensing create barriers to entry into the regulated occupations and professions? To what extent do regulated professions use regulations to protect their occupational turf and boost their earnings? To what extent does the public suffer from these legalized labor monopolies?

To its credit, given the limited scope of its inquiry, JLARC did come up with some interesting findings in “Operations and Performance of the Department of Professional and Occupational Regulation“:

  • No legal justification for regulating 11 occupations. Eleven occupations regulated by DPOR appear not to meet the criteria for regulation established in the state code. These include community managers, opticians, residential energy analysts, soil scientists, landscape architects, waste management facility operators and others. Regulation of these occupations does nothing to advance the public health, safety and welfare of the public.
  • Excess fees. DPOR is funded by the fees it charges to applicants. DPOR’s method for calculating fees has over-projected agency expenses leading to unnecessarily high fees in the past. Fees have been reduced since, but the balance still has grown $27.2 million — up from $15 million ten years ago, and far more than needed.
  • Many complaints go unexamined. Staff closed 71% of the disciplinary cases it opened in FY17. Staff do not investigate all potential violations.
  • Poor use of IT. DPOR does review and approve licensing requests in a timely manner, but it would make the process more user friendly by making it more accessible online and by automating key processes.

These are all useful findings, and the report makes some 36 recommendations on how to improve the system. While the goal of improving administrative productivity is laudatory, however, making a flawed system work more efficiently doesn’t do much to build a more prosperous, equitable Commonwealth.

Conservatives have long targeted occupational licensing for creating barriers to upward mobility. Do the state’s 73,000 barbers and cosmetologists really need regulating? Do they really need formal education and credentialing? Is the public health and safety truly harmed if someone gets a bad haircut or cracked fingernail? The crafts of hair cutting, cosmetology and hair-braiding, which provide an avenue of occupational mobility for lower-income Virginians, could be taught perfectly adequately in informal apprenticeships. Why burden people with educational costs and licensing fees?

Of greater concern is the regulation of the medical professions. In theory, the system is designed to protect the public from frauds, charlatans and malpractice. The system does do that, so some form of licensing is necessary. But the system also carves out occupational turf, protecting doctors from competition from nurse practitioners, and nurse practitioners from registered nurses, and registered nurses from licensed practical nurses, and so on down the line. That may not be a big problem in major metro areas, but it is a huge problem in large swathes of rural Virginia that have trouble recruiting medical professionals.

Indeed, it is fair to say that the crisis of access and affordability in rural health care is largely the result of rigid occupational licensing rules that prevent nurses from performing a high percentage of the routine procedures, and dental hygienists from cleaning teeth and filling simple cavities. No health care, it appears, is better than health care not delivered by doctors and dentists.

I would love to think that the General Assembly might get serious about tackling these issues. But I don’t see it ever happening. As the Richmond Times-Dispatch editorial page observes today, only one in twenty jobs required government certification a half century ago. Today, one in four does. It should come as no surprise that highly compensated professions, intent upon maintaining their occupational monopolies, have become major campaign contributors. According to the Virginia Public Access Project, physicians have donated $347,000 to political campaigns so far in 2018-19, dentists $223,000, optometrists $114,000. Nurses? Only $33,000. Don’t expect rural healthcare reform unless it involves paying doctors and dentists more money.

Pulling Teeth: Admitting Errors in Dental Care Post

In a column posted last month, “The Political Economy of Dental Care,” I suggested that one way to improve the affordability of and access to dentistry services in Virginia might be to reduce the cost of educating dentists. I highlighted the high cost of completing a dental degree at the Virginia Commonwealth University, Virginia’s only school of dentistry. While I still maintain that the cost of attendance is so high that graduates feel compelled to set up shop into metropolitan markets where they can earn enough to pay off their student loans, I got some of my facts wrong.

In the post, I stated that the cost of attending the VCU School of Dentistry runs about $133,000 to $140,000 per year over four years. In fact, according to data published on the school’s website, the cost for in-state students runs between $85,000 and $89,000 a year and for out-of-state students between $114,000 and $119,000 — high, to be sure, but considerably lower that what I stated. (The four-year cost is estimated to be $344,000 for in-state students and $461,000 for out-of-state residents.

Compounding my initial misperception, I also stated that the cost of attendance at VCU was significantly higher than the national average. To the contrary, the School of Dentistry cites American Dental Association (ADA) data to the effect that VCU’s cost of annual D.D.S. education was lower than the national average for in-state students in 2017-18 —  $59,569 compared to $64,305. However, the cost for out-of-state students was somewhat higher — $88,073 compared to $81,939. (I’m not sure how the ADA data is reconciled with the cost-of-attendance figures on the School of Dentistry’s website.)

Thirdly, ADA data contradicts my speculation that Virginia dentists might graduate with higher debt than their peers outside the state. In 2017, the average debt was $162,384 for a VCU in-state student, $207,924 for a VCU out-of-state student, and $239,895 for students at public dental colleges nationally.

I also argued that “dental technicians” should be given freer rein in under-served rural areas to provide dental-related services. Nan Johnson, director of communications for the School of Dentistry, informs me I was using improper nomenclature. The term “dental technician” is not used in the profession. Rather, the classifications of those who work with dentists are referred to as dental assistants, dental hygienists, or dental laboratory technicians.

Finally, I referred to the Virginia Oral Health Coalition as “an alliance representing the dental profession.” In point of fact, says Johnson, it is an alliance “to ensure that all Virginians can access affordable, comprehensive health care that includes oral health.” The Coalition includes not just dental professionals but educators, health care providers, and community members.

I am duly chastened. I think the larger points of my piece still stands — the high cost of dental school aggravates the shortage of dental services in rural areas, and the dental profession’s solution is to increase federal and state spending rather than address the cost side. But it helps no one to employ inaccurate facts. Further, I had no basis for singling out the VCU School of Dentistry as being especially expensive. The high cost of dental education appears to be a national problem.

When and Why Can the SCC Say No?

When the General Assembly and Governor pass a law that states a source of electricity – or even a specific power project – is in “the public interest,” what is the State Corporation Commission left to do?  Does that mean the SCC must approve the project even if it turns out to be unreasonable, imprudent or not needed?

Since 2007 the Assembly has designated several aspects of generation and transmission “in the public interest,” this year adding to the list up to 5,000 megawatts of renewable generation and a small and expensive demonstration project for off-shore wind for Dominion Energy Virginia.  Before going further on that wind project, Dominion filed a petition seeking a declaratory judgement on the question of prudence.  Just because one parent said yes, best to check with the other one.

The two SCC commissioners then turned the tables and asked all participants in the matter to give their legal opinion on seven specific questions.  Lawyers for the two major electricity providers, for environmental groups and for the Office of the Attorney General all took a crack at questions such as this one:

“6. Do the statutorily-mandated public interest findings under either Subsections A or E override a factual finding that the project’s: (a) capacity or energy are not needed for the utility to serve its customers; and/or (b) costs to customers are unreasonable or excessive in relation to capacity or energy available from other sources, including but not limited to sources of a type similar to the proposed project?”

Before Dominion dictated a new regulatory approach in 2007,and before Virginia legislators developed a taste for micromanaging the state’s energy economy, such questions never came up.  The SCC had unlimited authority to decide what was needed, prudent or reasonable, subject to appeal.

The briefs are all buried in this pile of documents and they were supplemented with oral arguments on Thursday, drawing a packed house.  There was agreement that a finding of public interest is distinct and does not override questions of prudence or reasonable cost, and the SCC can reject a project for those reasons.  But picking up a phrase used before, Joseph Reid III of McGuireWoods said Dominion views the legislative blessing as “a thumb on the scale” and that phrase in the law “strongly encourages a result.”

The petition dealing with the wind project is filed under a new process for testing prudency. “It would be illogical for the General Assembly to first declare solar or wind generation facilities to be in the public interest and provide for a prudency determination if the General Assembly meant for the terms to be treated synonymously. There would be no need for a prudency determination if such was the case,” wrote Assistant Attorney General Mitch Burton of the Consumer Counsel’s staff.

Burton also pointed to the part of the new bill dealing with putting residential power lines underground.  The General Assembly years ago deemed that underground program in the public interest, and directed the SCC to interpret the law liberally, yet the SCC scaled back the project based on cost.  This year the Assembly added a hard mandate that those costs had to be deemed reasonable,  but that implies SCC discretion remains in other areas.

At times the argument focused on the general issues, but at other times it focused on the project at hand – the 12 megawatt, two-turbine wind project planned for 27 miles off Virginia Beach and projected to cost $300 million.  Supporters of the project argued that the SCC should not reject it just because the tiny energy output is not needed.  Given this has been billed all along as a small demonstration project, not a major source of electricity, the question of need may not apply in its case.

But need will be a question in other cases, and projected demand growth is a major dispute in the pending Dominion integrated resource plan.  The rapid move to renewable sources may be accompanied by the early (and costly) retirement of existing fossil fuel generation. This part of the discussion produced the strongest disagreement among the parties.  They had different answers to part (a) of the question set out above.

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Legalized Medical and Recreational Marijuana Use Appear to Hurt Alcohol Sales

High times.  In a recent Bacon’s Rebellion column … Will Virginia Legalize Recreational Marijuana Use … I noted that well over 20% of Americans now live in states that have legalized the recreational use of marijuana.  In the column I wondered whether our General Assembly’s reluctance to address the question in a meaningful way might be attributable to Virginia’s unholy trinity of political corruption:

  1. Unlimited campaign contributions
  2. Opposition by well heeled vested interests (i.e., the alcohol manufacturing, distribution and retail industry)
  3. Essentially non-existent rules on the use of, or reporting on, campaign contributions

My hypothesis was that a river of money flows from Virginia’s alcohol industry into the pockets of our elected officials.  The alcohol industry is opposed to legalizing marijuana since legalization hurts alcohol sales.  Meanwhile, our elected officials want to keep the money flow going since it funds not only their re-election plans but also dinners at Bookbinders, golf outings, private clubs and all sorts of other goodies.  Therefore, legalization of marijuana is intentionally stalled in Virginia.  Virginia’s reputation as America’s Most Corrupt State is, in my opinion, well established.  However, the question of whether legalized marijuana use hurts alcohol sales needs to be further examined.

Paging Doctor Weed.  The best information about the impact of marijuana legalization on alcohol sales comes from studies of medical marijuana legalization.  Medical marijuana has been legalized for longer and in more states than recreational marijuana.  Some would say that medical marijuana is a poor proxy for recreational marijuana because medical marijuana is only used to combat disease and therefore is not a substitute for booze.  Yeah, right.  A university study using retail scanner data from 2006 – 2015 found that alcohol sales fell 15% in jurisdictions that legalized medical marijuana.  For the sake of emphasis – this was a study of legal medical marijuana on alcohol sales, not legalized recreational use of marijuana.

The Oregon Trail.  The relationship between legalized recreational marijuana and liquor sales has been studied in Oregon.  In that state, recreational marijuana use is legal at the state level but localities have the right to ban it in their jurisdictions.  A study comparing Oregon localities that allow marijuana sales vs those that don’t found the growth rate of liquor sales for the “booze only” places was faster than in the “booze and reef” areas.  Early days.  Only one year of data.

Miller Time.  A 10-K disclosure by the Molson-Coors company cites legalized cannabis sales as a potential risk to their business. “Although the ultimate impact is currently unknown, the emergence of legal cannabis in certain U.S. states and Canada may result in a shift of discretionary income away from our products or a change in consumer preferences away from beer. As a result, a shift in consumer preferences away from our products or beer or a decline in the consumption of our products could result in a material adverse effect on our business and financial results.”  Four months after citing the business risks of legalized marijuana Molson-Coors announced they are considering the sale of ganja infused beer in Canada.

Rocky Mountain High.  Earlier this year the Aspen Times reported that Aspen’s legal marijuana dispensaries outsold its liquor stores in 2017.  As far as anyone knows, this is the first time such a shift has happened.  I’ll wager it will be far from the last time.

— Don Rippert

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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What Virginia’s Electric Grid Could Look Like

A Next-Era Energy Resources battery storage facility.

by Jane Twitmyer

Virginia has all the tools it needs to build an inexpensive, reliable, clean energy future. We’re not talking about exotic technologies that might become available some day in the future. Solar power, wind power, battery storage, microgrids, energy-efficient buildings and other clean-power technologies are available right now at a cost competitive with fossil fuels and nuclear. The Old Dominion just needs a regulatory structure to match.

Virginia’s energy landscape has changed faster than many thought possible. Electricity-hungry data centers are demanding electricity generated from 100% renewable sources. As projected demand has shifted, Dominion Energy has canceled two planned large, base-load natural gas plants. In their place the company now plans to build 3,600 megawatts of gas-fired “peakers’” designed to back up the promised 5,000 megawatts of solar and solar power when clouds block the sun or there is a lull in the wind.

But the experience of other utilities is showing that even the peaker plants aren’t necessary. Consider the Moss Landing gas-powered plant in California. In 1998 PG&E sold Moss Landing to Duke Energy, which spent $500 million upgrading the plant before selling it to Dynergy. Last year Dynergy retired two super-critical steam units because they were no longer economically competitive. Now, a newly reinvented Moss Landing anticipates becoming an energy storage facility filled with 300 megawatt/1,200 megawatt-hour batteries.

In Vermont, Green Mountain Power has built a system of distributed stored energy. Solar customers pay $15 a month to host a utility-owned and-operated Tesla Powerwall in exchange for backup power. During peak energy days the utility pulls from 500 Tesla Powerwalls as well as energy storage facilities in Rutland and Panton. Vice President Josh Castonguay says these alternatives to gas work as planned this summer when the batteries took the equivalent of 5,000 homes off the grid.

In New Hampshire, Liberty Utilities wants to own and install 1,000 Tesla Powerwalls in the homes of its customers. The five megawatts of aggregated battery capacity would allow Liberty to reduce its load peak, saving an estimated $693,000 a year in transmission costs and potentially offsetting traditional wires upgrades.

Another approach to meeting peak demand is to combine offshore wind with solar. Rooftop solar combined with our extraordinary offshore wind resource can meet all of Virginia’s summer peak demand. Solar’s peak production ends as the wind picks up, and thanks to the sea breeze effect, an offshore wind farm is very productive when electric demand in the region is at its highest.

Virginia’s offshore wind has the potential to generate three times as much net energy as Dominion’s 2017 net energy load with no fuel required. Just the offshore leases acquired by Dominion in 2013 can provide the electricity equivalent of 2.5 nuclear plants. More leases will be available in the future, yet the utility’s 2018 Integrated Resource Plan anticipates building only two “demonstration” windmills on Dominion’s leased waters during the next 15 years. Offshore wind looks like a missed opportunity.

The Virginia coast is located on the Mid Atlantic Bight, the geological formation that runs from Cape Cod to Cape Hatteras. The Bight is the shallow, wide edge of the continental shelf 30 miles, more or less, from shore. Wind speeds on the Bight are higher, blades can be larger, and the “sea breeze effect” generates power during times of high demand onshore.

The Mid-Atlantic Bight has been called the potential “Saudi Arabia of Wind.” Bight wind installations are underway in Rhode Island, Massachusetts, and Maryland. The Governor of New Jersey Governor’s has signed an executive order setting a goal of generating 3,500 megawatts of offshore wind energy by 2030. New York Governor Cuomo has called for developing 2,400 megawatts of offshore wind by 2030, targeting 800 megawatts for this year and next.

The U.S. offshore wind industry will be built. A pipeline of wind projects totals 25.46 gigawatts, including 1.3 gigawatts added last year. Building Offshore Wind means building a whole new industry. Costs will drop rapidly as supply chains and construction capabilities develop. Gov. Ralph Northam’s recent hiring of the international energy consultants BVG Associates to analyze how the state can become a coastal leader for the offshore wind industry is important. The Hampton Roads area is well suited to becoming an offshore wind hub. According to the Natural Resources Defense Council (NRDC), it will bring 4,377 jobs and $641 million economic benefits to the state.

Price has been an issue but onshore support for the new industry changes the pricing picture. Block Island’s wind farm, built only last year without onshore support facilities, cost $244 per megawatt-hour. Recent bids for Vineyard Wind have come in at $74/megawatt hour, demonstrating the financial value of onshore support facilities. In Massachusetts the old whaling port of New Bedford is undergoing a commercial makeover of more than $200 million, including the construction of a marine commerce terminal financed by the state, to prepare for the offshore wind industry.

The clean energy economy is being created around the world. Virginia needs to diversify away from gas as its primary, centrally distributed resource. We all want Virginia’s privately owned utilities to remain profitable, but it will take writing basic new rules to avoid the “death spiral” of declining monopoly utility sales and rising electricity rates. A utility-owned multi-directional grid that can accommodate a multiplicity of solar and wind is proving to be the most reliable and affordable choice for other states, and can be for Virginia, too.

Jane Twitmyer is a member of Renewable Loudoun. She has been a renewable energy consultant and advocate since 2011.

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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Dominion Excess Profits Continued to Roll in 2017

Bill increases since 2007 by category. Source: SCC

During 2017 Dominion Energy Virginia earned $365 million in profits above the target return on equity the State Corporation Commission would likely have established, but of course the General Assembly regulates the utility now – not the SCC.

For the year Dominion Energy’s profit margin on its Virginia operations was just under 14%, well above what probably would have been an allowed target of less than 10%.  On the generation side of the house the margin was more than 19%, which would make most other manufacturers ecstatic (and, yes, Dominion manufactures electricity).  The margin on transmission was right on target.

The figures come from the annual update the SCC provides to the General Assembly on utility regulation since the landmark 2007 return to regulation, which was followed by the unprecedented 2015 law that suspended rate regulation, only to lead to the 2018 revolutionary regulatory revisions only now taking full shape.  (The adjectives are intended to be sarcasm and fully reflect the opinion of the author.)

Yes, the instability borders on insane. The 2018 bill calls for a full SCC review of rates and profits, the first “rate case” since 2015, in 2021 and these excess profits will be part of that review (along with this year and the two following). Do not bet your retirement funds on that happening without further changes to the law.  But in the interim, instead of a rate case we get this report.

A similar report last year detailed large excess profits for 2015 and 2016, the first two years covered by the General Assembly’s suspension of SCC authority. A portion of those profits, $200 million, is being returned to ratepayers as rate credits in 2018 and 2019, a concession Dominion Energy offered for all the other good and valuable considerations in the 2018 bill.  You got the first portion on your bills in July.

The 2017 SCC report predicted that the excess profits would continue to roll in, and the new numbers fit that prediction. Under the regulatory scheme Dominion wrote for itself last winter, there remains a chance ratepayers could receive some of that excess back in refunds, potentially more than $200 million. But the new law gives the utility a pass on paying refunds if the money is instead invested in its coming grid capital program or certain favored renewable energy projects.

The state’s other investor-owned power company, Appalachian Power, also earned profits above the likely target, with a profit margin of 11.3 percent. Its excess earnings were estimated at $32 million but APCo has one-fifth the number of customers, so keep that in mind when making comparisons to Dominion.

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Peeling Back the Layers of Hospital Dysfunction

Image source: Wall Street Journal

There are many layers to the dysfunction of America’s (and Virginia’s) health care system. I have written frequently about price opacity, the inability of consumers to compare medical services by price. Prices are essential to a market-based economy. Indeed, one could say that without prices, it is impossible to have a market-based economy. I’m not sure how you’d label the system we do have — there’s too much private ownership to call it socialism. But whatever it is, it sure as hell isn’t a market-based system.

The question I continually ask is why. Why is there no price transparency? Part of the problem is the convoluted system in which hospital charges bear no relationship whatsoever the cost of providing the service. Hospitals post charges. Government programs (Medicare and Medicaid) and insurance companies negotiate the posted charges to a lower level. And consumers pay some residue of those lower charges based upon how generous their insurance plans are. I chronicled my own experience with price opacity in the Richmond health care market when I elected to undergo hip-replacement surgery. (See “One Man’s Descent into Healthcare Price Opacity.“)

A recent Wall Street Journal article suggests that the dysfunction is so extreme that hospitals themselves often don’t know how much it costs to perform a routine, commoditized procedure such as knee replacement surgery.

The article highlights a rare instance in which a hospital, the Gunderson Health System’s hospital in La Crosse, Wis., undertook a study to find out how much it cost to conduct a knee replacement surgery. The hospital had been routinely jacking up its charges by about 3% a year, reaching a list price of $50,000 by 2016. But no one knew how much it actually cost to do the surgery. After a detailed, 18-month review, the hospital concluded it cost at most $10,500 — including the physicians.

Thus, another part of the answer to my question is the failure in hospital accounting. Hospital charges are largely unrelated to cost because the hospitals themselves often don’t know what procedures cost. If hospitals don’t know what routine procedures cost, how can they make rational business decisions? How can they exercise cost controls? No wonder health care costs go nowhere but up.

Writes the Journal:

Hospitals can be shielded from the competition that forces other industries to wring out expenses and slash prices. Hospital list prices are a starting point for negotiations with insurance companies over what they will actually pay, and those deals are confidential. Consolidation has given hospitals greater pricing power in many markets, according to health-economics researchers.

“Being cost effective was not an imperative in that type of market dynamic,” said Derek Haas, chief executive officer of Avant-garde Health, a health-care cost and quality analytics company that worked with Gundersen. …

For consumers, the prices paid for the surgery at some hospitals in the U.S. were more than double the prices at others, according to an analysis of 88 million privately insured people to be published in the Quarterly Journal of Economics.

In a market economy, competition would work to drive down the price of elective surgical procedures. If Hospital A charges an excessive price for knee replacement surgeries, orthopedic physician’s practices or a competing hospitals could enter the marketplace, charge less, and gain market share. But here in Virginia, hospitals have consolidated into massive health care systems, and they have shut down competition through Certificate of Public Need regulation. Regulations restrict entry of newcomers into the medical marketplace, thus conferring monopoly-like protections on hospitals. Virginia hospitals are not compelled to drive down costs and reduce charges to stay in business. They just ratchet up their charges each year, immune to pressures from the marketplace.

So, what is Virginia’s political class doing about this? Basically, nothing. Rather than address the core issues of competition and price transparency, the political class is focused on doing what it knows how to do, which is rob Peter to pay Paul — in other words to redistribute wealth. Thus, the public policy debate in Virginia focuses on Medicaid expansion and who pays for it. Meanwhile, costs for everyone, rich and poor and in-between, continue to rise with no end in sight.