Simpler is usually better. Monthly electric bills for many Virginians are about to get less complex, and in the short run also lower. Will that lower cost be long term? It is too soon to tell.
On July 1 Dominion Virginia Power will stop collecting separate monthly payments on its bills for three of its newer power plants, all now covered by their own stand-alone rate adjustment clauses or RACs. This change flows from the major regulatory revision the General Assembly recently adopted and does not need State Corporation Commission approval. Dominion instead notified the SCC of this change.
This is a different filing than the one about collecting its unpredicted fuel costs, and while they were announced together on May 1, really needed its own analysis.
The three generation RACs to be retired are Rider R for the Bear Garden natural gas plant, Rider S for the Virginia City Hybrid Energy Center which burns coal and biomass, and Rider W for the Warren County natural gas plant. Combined, they are collecting about $350 million per year from customers for operations, capital costs, and utility profits.
Dominion’s proposal to delay collection under Rider A of its excess fuel expenses from past years until it can roll them into a 10-year bond does not constitute “bill relief.” Baking these RACs into base rates, on the other hand, may prove beneficial over time to its customers. Whether that is true and by how much won’t be clear until Dominion files its next overall rate case.
Using the standard illustration for residential users of 1,000 kWh usage, this will save that account about $6.75 per month. Different customer classes pay different amounts per kilowatt hour for these RACs. Larger commercial and industrial customers pay less on these RACs, in some cases about half the cost per kilowatt hour. The changes to their bills from this consolidation will thus be less dramatic.
When the state rewrote its regulatory laws in 2007 and created the opportunity for the plethora of individual rate adjustment clauses now in place, the original intent was that some would be short term. As the company went through periodic rate reviews, the opportunity would exist to fold them into the base rates. Under traditional ratemaking, pre-2007, these separate charges were rare and new generation plants were all paid for through base rates.
The intent to routinely retire the rate adjustment clauses was just one of several parts of that 2007 bill which never came to pass. Now, however, it is finally happening. When Dominion does file that application for a full rate review later this year, using the new rules in the 2023 bill, one of two things is likely to happen.
It may not seek any adjustment in its current base rates and may instead decide to continue paying the operational and capital cost for these three facilities with the existing charge. That will be viewed by some as strong evidence that the base rates have been excessive all along, as many claim (including the SCC).
Or Dominion may indeed seek an increase in base rates blamed in part on covering these costs. Which will be fine. But that will mean the “bill relief” now being claimed was only temporary, as with the fuel costs. Theoretically, adding the cost of these plants into base rates might also prevent a base rate reduction the SCC would otherwise have ordered. The SCC accounting process should sort that out.
Ideally, base rates should be designed to cover the cost of service, cost of capital, and provide the allowed profit margin with no excess in either direction. For the past fifteen years most cases have involved fierce arguments over whether the utility had earned excess profits, and if so whether customers were owed refunds. In many years the SCC ordered such refunds.
This move won’t change that argument in the next review, which will look back at the period ending December 31, 2022. For that period, all of the RACs will still be considered as outside of base rates and in their own silos. It may still be that Dominion earned excess profits and owes customer refunds.
But the better outcome going forward is setting base rates which produce no excess or shortfall. Putting these three RACs back into the general expense pot may move Dominion in that direction. Perhaps one or two more conversions would be needed to complete the task, but whether the SCC has the authority to do that on its own may turn into another major legal battle.
The irrefutable bottom line which must always be remembered is this: one way or another, now or later, the customers pay for it all. Shuffling the deck doesn’t change the outcome of the game.
First published by the Thomas Jefferson Institute for Public Policy.