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.

The very chewy report goes into several other topics and includes an analysis (used before) of the increases in both Dominion and APCo rates broken down to specific parts of the bill.  In Dominion’s case, the growing number of itemized rate adjustment clauses (RACs) is driving up consumer costs, and the new legislation authorized a host of new ones. The excess profits discussed above are entirely earned in that first column, base rates, although profit margins also are baked into many of the RACs.

Rate adjustment clauses have driven the increases. Source: SCC

Another key finding: “From 2007 to 2017, DEV’s energy mix has experienced significant changes. In particular, coal contributions have decreased from 36% in 2007 to 19% in 2017; natural gas contributions have increased from 6% in 2007 to 31% in 2017. For APCo, over the same period, coal contributions have decreased from 75% in 2007 to 69% in 2017; natural gas contributions have increased from 0% in 2007 to 14% in 2017.”

Addressing the competitiveness of Virginia rates: “On a total rate basis, APCo’s rates have become less competitive in comparison with peer electric utility providers. On a scale from 1 to 18 among peer group utilities, APCo’s rates have dropped from a 2006 ranking of 1 (most competitive) to a rank of 10 in 2017. DEV’s competitiveness ranking has remained stable, earning a rank of 7 in both 2006 and 2017.”

Dominion will tout that final result as proof Virginians should be fully satisfied with the job our legislators are doing by replacing the staid judicial regulatory scheme imposed by the SCC with the more hurly-burly process dominated by their large campaign donors (and Dominion is only one of them).

Parting shot: Excess profits of a third of a billion dollars a year do put those proposed $70 Micron grants in an interesting context.

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32 responses to “Dominion Excess Profits Continued to Roll in 2017

  1. I am concerned about the fate of our state economy, and our families and businesses now. Most of the provisions in the new energy bill increase the revenues of our utilities by billions of dollars without creating a savings for customers.

    Ultimately, many of the customers will find a way to do less businesses with the utilities, hobbling them financially.

    A continued cash grab to feed the needs of the parent company will eventually make worse the situation they are currently trying to avoid.

    Maybe I’m a broken record, but there is a better way. One that will lower costs and increase choices for customers and provide new sources of revenues for our utilities. The longer this is delayed, the bigger the price that all parties will pay.

  2. You know what is also funny… Virginia GOPs pitiful bleating about Northams “tax increase” compared to their “concern” about Dominion’s gobbling of folks dollars.

    Or perhaps there’s really no comparison – perhaps the Dominion “bite” is tiny compared to Northams… 😉

    One thing I am not sure about and that is if the Rural Electric Cooperatives are also part of this. Is it Dominion, APCO – AND the RECs?

    • Right at the start of the report – Dominion serves 67.5 percent of VA customers (home, business, gov’t), APCO 14 percent, everybody else served by the coops and a tiny number served by a Kentucky utility.

      • One million customers served by co-ops and muni’s according to the 2014 state energy plan.
        2.4 million customers – Dominion
        1.o million customers – Co-ops & munis
        0.5 million customers – APCo

    • LarrytheG, No electric cooperatives are not part of this. They are member owned and any earnings go back into the business (usual strategy) or to back to owners. They are not seeking to make a profit while the investor owned utilities (IOU’s) are.

      None of the electric cooperatives are included in this. Kentucky Utilities serves a tiny portion of far SW VA and has the lowest rates, usually.

      As a customer on the most expensive Virginia utility, tiny Craig Botetourt Electric Cooperative, we spend a lot buying our electricity – we have no generation. Unfortunately, we mostly buy from AEP and Dominion and it was a battle to get that opportunity. As our former coop manager has said, the wholesale rate for the cooperative is higher than the retail rate a cement plant next to the cooperative pays – for about the same quantity of energy. The IOU’s don’t do us any favors in the rates for which they sell us energy.

    • If you start with $365 million per year in overcharges, add the $200 million per year for the ACP that has no value, and the several hundred million more that putting solar and energy efficiency in the rate base will add, plus the added costs to ratepayers for the undergrounding of the distribution lines that goes in the rate base, but no savings to customers (at least until the first rate review – 2021-2028?), and add the extra transmission charges for ratepayers that should be on Amazon’s bill – you have a pretty big “bite”. Up to $.750 to $1 billion per year in overcharges perhaps? With few, if any, savings to ratepayers as a result – this scheme will have to collapse sometime.

    • Dominion is a non-partisan funder of Virginia politicians. One look at Dick Saslaw’s VPAP statistics should conform that.

  3. re: ” Unfortunately, we mostly buy from AEP and Dominion and it was a battle to get that opportunity. ”

    dumb question time again. We often hear that power can be purchased via auction at PJM… not true for Co-operatives?

    • All Load Serving Entities purchase at wholesale from PJM, as far as I know. But each co-op must also have an agreement in place to contract for enough capacity to meet their peak load plus a reserve. It is likely that this contract cost significantly increases their cost for generation. I imagine that the utilities use their least efficient capacity to sell for these contracts, although my guess is it must clear the PJM capacity auction. ODEC owns a share of a nuclear facility (North Anna I think) that they probably contract to co-ops.

      Maybe Acbar can shed more light on this.

      • ODEC is a subset of cooperatives and does not include the most rural. They are the areas the IOU’s didn’t want to serve. Some coops, especially around NOVA, now have growing populations and increased customers, others, especially in the most rural areas, have fewer customers. These areas are often surrounded by IOU served areas (see the Va service map above), so new businesses that will spend a lot on electricity will select the areas served by IOU’s. As a result, communities don’t have the same situations/ opportunities.

  4. Looks like the RECs serve about 10% of Virginia’s electric consumers but half of the geography.

    So the rate “freeze” / excess profits – issue. Does that apply ONLY to Dom and ApCo or are the RECs also getting increased profits?

    • LarrrytheG you are right about the difference in customers served/portion of geography.

      RECs are generally not getting increased profits. The Va law changes addressed here don’t really affect us. Those changes were designed to address the IOU issues.

  5. The energy bill speaks about Phase I and Phase II utilities, which are APCo and Dominion. They are the major investor owned utilities in the state.

  6. Just to add some context: ” Virginia Power serves a total of approximately 1.9 million customers; ” and ” Approximately 67.8% of Virginia’s retail customers are served by Virginia Power, about 16.5% by APCO, 2.7% by Potomac Edison, 1% by Kentucky Utilities and 0.5% by Delmarva Power & Light. ODEC and distribution cooperatives serve approximately 10.6% of Virginia consumers”

    http://www.scc.virginia.gov/comm/reports/restrct4.pdf

    but the geography looks like this:

  7. Through spokesman Rayhan Daudani, Dominion has submitted the following response to the SCC report:

    The Grid Transformation and Security Act addressed these very issues by setting up a mechanism through which the company can make needed investments approved by the State Corporation Commission without raising customer rates. Earlier this summer, we applied for projects to help us better meet customer needs utilizing this forward-looking reinvestment approach. The $750 million being invested is more than twice the earnings number identified by SCC staff. This includes investments that will improve reliability and reduce outage response time, provide customers with greater opportunity to manage their energy use, and create new clean energy projects. Specifically we are talking about projects such as smart meters and offshore wind. By reinvesting these earnings, we can continue with stable rates while builder an even smarter, stronger, and greener electric grid.

  8. well.. it sorta sounds like standard PR boilerplate… Are there some specifics? Will any of this take place in the REC service areas or is it restricted to Dominion and APco service areas only?

    I think Dominion owes everyone more detail on their plans. It’s really not their money they are spending and there does need to be some basic accountability.

    • LarrytheG Where the investments will be made (geographically) is not part of the IRP. And some of the information provided Dominion requests to be kept private – not shared with the public – for business reasons.
      In the IRP Dominion is only addressing needs of its customers, not REC’s. When it sells energy it generates to a REC, it is a separate transaction, not overseen by the SCC. Most REC’s are too small to own generation or transmission assets.

  9. As I said before, using $200 million of the ratepayer’s money, Dominion can build a $400 million project, earn $800 million in profit (undiscounted) and avoid paying $430 million in dividends (using ratepayer’s money instead of shareholder’s money). The ratepayers are responsible for paying the $400 million in financing costs for the $200 million debt portion of the project.

    Dominion has not contributed a dime of their own money to reap these rewards. And no money is paid for the long-term use or confiscation of the amount the customers overpaid.

    With the overcharge almost 2 times more than $200 million, multiply the numbers above by almost two

    This is a brilliant strategy for using other people’s money for free and making it sound like they will benefit as a result.

    Most of the projects in the energy bill do not result in customer savings.

    They are right. They maintain stable rates instead of lowering them as would have been required without the two rate freeze bills. But rates actually increase with RACs for solar, energy efficiency, undergrounding, etc. Plus the $200 million per year that will be passed through the fuel factor for the unnecessary pipeline. There is nothing customer friendly about our current energy policy.

  10. I suspect the average person does not truly understand the issue and Dominion with friends in the GA feels no real need to vary from the current path.

    For example – how much money is involved at the average ratepayer level?

    If ratepayers don’t know or understand – they’ll not feel compelled to be involved.

    Not to go too far afield but things like this are not that uncommon.

    I’ve been reading about the price of drugs and how the price for a given drug can and does vary wildly because of entities known as Pharmacy Benefits Managers… the public is pretty much clueless about it – and it takes gobs of money from much of the population and from taxpayers that pay for MedicAid and Medicare.

    Both what Dominion is doing as well as the Pharmacy Benefits issue illustrates how a “free market” actually works even when the govt attempts regulation. Money is spent to educate legislators and then more money given to those educated to support that “free market” to get re-elected.

    In Dominion’s case – they successfully neutered regulators in place.

    I’m not opposed to Dominion as a for-profit company nor their efforts to be as efficient as they can be and generate profits and dividends for their investors.

    But make no mistake – they are a powerful and influential corporation that even the Governor has to be careful in deciding how much to challenge because, in part a significant number of the GA are influenced by Dominion also.

  11. Yes, Larry, for the average homeowner the dollars involved are small, maybe $5-10 a month depending on their usage. And the fluctuations in fuel cost effectively mask even that some times. I got involved on behalf of a company paying $25-30 million a year, and a change in the law or a win at the SCC might save its customer (uh, you, the American taxpayer) hundreds of thousands or millions. I saw us actually as a proxy for the whole defense establishment in Virginia, including government installations. Still waiting for my meritorious service medal from DoD…..

  12. I’ve read where the law has changed/been interpreted to prohibit Dominion from including excess profits in the rate base when they are invested in the modernized grid. What are the facts?

    Where are the state and local chambers of commerce in protecting their many members against excessive electric rates? Oh, they’ve probably sold out their members for cash from Dominion.

  13. TMT, sorry, I ignored your first question. Short answer, excess profits in base rates are not eligible for customer refunds if the company elects to spend them in certain ways: grid projects, new renewable projects, and some other ways. Bottom line we all expect them to do just that and never have to worry about either refunds or a possible cut in those excessive base rates.

  14. Is Dominion a highly successful, strong, and competent company in an industry that is absolutely critical to Virginia’s future?

    If that is a false statement, then why precisely is it false?

    If that statement is true, namely that Dominion is a highly successful, strong and competent company, then in how many ways does Dominion benefit Virginia?

    For example, would Micron, and a slew of other pillars of Virginia’s growth and its future, be staying in Virginia to continue their growth in Virginia, absent Dominion?

    • Good question. DE’s basic strong reputation rests on its past tradition of good management and its past achievement of low rates for good service. Companies like Micron and the owners of all those data servers in NoVa still believe DE’s past is prologue.

      Dominion got where it is today without overearning, without abusing the regulatory process through legislative flanking maneuvers, without shifting the risk of future grid uncertainties onto ratepayers. Yet that is what it is doing now. It seems to me, and I suspect many others, that Dominion leadership believes it needs to make the most hay it can while the sun shines because a big storm is coming. Dominion is acting like it has no confidence in the implications of its own forecasts; if it did, it would spend shareholder dollars on new generation and keep all the profits in its unregulated generation subsidiary for the benefit of those shareholders. Instead it’s investing in generation that looks profitable now, and may remain so for a few more years, but with no long term confidence that these new units will continue to be profitable to run, placing that risk of premature obsolescence not on shareholders but on ratepayers. And the financial markets are responding, “That’s a good thing.” It’s as though they don’t believe in the long term benefits of all this new investment either.

      How long will the Marcellus Shale continue to supply cheap natural gas from fracking? How long will it take for distributed customer-owned, on-site solar generation and cheap battery storage for time-shifting to become the norm? What will be the Grid impact of a fully electric-powered transportation fleet, or a vigorous carbon tax? To these uncertainties add: How long will Virginia voters put up with the GA’s willful suspension of cost-based utility ratemaking?

      Does Micron care? Micron can pull up stakes and move to Texas for cheaper power in 20 years, or sooner if it has to; but those generation and grid investment decisions that DE currently is making on behalf of ratepayers will have financial consequences for 50 or more years.

      • Acbar, your answer is a sobering response to my questions, even more so since you are so well informed on the subject.

        Dominion’s long term service, its cost and reliability and volume, is critical to every customer it serves, indeed to entire regions and states. A deterioration in its service to all its customers, no matter the locale, or customer, or grouping thereof, radiates outward, adversely effecting everything the deterioration touches. The same is true of increased service at lower costs. Then too the benefits radiate out, benefiting all those they touch.

        Electricity is our lifeblood. Without it we die. With it better and better we thrive exponentially. Every tick downward in service, every tick upward in cost, takes us closer to failure, making our life harder, threatening our success.

        But the stakes grow ever higher now. So incredibly inter-dependent now, we are far more fragile than we can ever imagine. Our huge success right now blinds us to our great fragility. Like never before, we truly believe we are Gods. But cut off our electricity for a day or two, then we’ll collapse. Cavemen knew how to live in their stone age. We don’t. Our lives, everything we know, value, or take for granted, can now collapse in a heap, over days and weeks. Or perhaps it will take a decade or two, with recovery unknown, or very difficult at best.

        Or maybe an entire region, most of Virginia, will go grey, into mild dysfunction, lose its edge for several generations like the American Rust Belt did and does.

        When was the last time, America’s most critical utility industry faced systemic disruption, traveling fast down an uncharted course, without clear guides, but with perhaps ever diminishing margins for error. Maybe now we are already at the point of no return? Do we just hold on, hope for the best? How do we structure ways to limit risks, find best solutions?

        It strikes me this is not the time to allow interested parties to fix alone their priorities on short term private gains, at the possible expense of long term public interests, including ratepayer interests, whether retail or otherwise, or the interests of everyone and interest in an entire state. This is a bad way to approach of a critical public utility in times of great change. Nor can such technical operations by supervised by politicians.

        I know, because this blog has taught me, that there are already many redundancies built into the system four ways to Sunday to prevent collapse. But at long last now I see, acbar, the point you have been making now for some time. That Virginia commission of wise men needs to be reinstated like it had been in place and empowered before, to fairly and independently balance and protect all interests in Virginia, public and private. The risks now you say are too great in these uncharted waters to do otherwise. The recent past now proves it, you say. I believe you know what you are talking about. And I have come to see that too all over this blog now for several years running.

        • Hallelujah!

          Reed, please share with me the key bits of information that brought this to full light for you. I think it is very important that intelligent people, such as yourself, who are skilled in disciplines other than the utility business, understand what will happen to the state economy and business climate in Virginia as Dominion adds billions of dollars to our energy costs without any benefit to the ratepayers. We already have the highest residential rates of all surrounding states except Maryland, and they just lowered their rates.

          Our current energy policies have broad repercussions for chambers of commerce, businesses of all sizes and laborers too. Everyone lined up behind these policies are helping to create the rope that will bind them in the future.

          Despite, what some might interpret, I am not anti-utility. Just the opposite.I am arguing against the current policies because I believe they will injure the utilities in the long-run. The executives creating the havoc will live comfortably in retirement when the full bill comes due.

  15. Tom said:

    “Reed, please share with me the key bits of information that brought this to full light for you.”

    Steve Haner’a post here on the SCC’s August 29, 2018 Status Report on the “Implementation of the Virginia Electric Utility Regulation Act” laid out Dominion Energy Virginia’s 2017 “rates and profits.”

    Steve also put those figures into historical perspective, given the dramatic changes in Virginia’s regulatory regime over the past decade, beginning in 20o7.

    These 2017 profit and rates figures – “On the generation side of the house the margin was more than 19% ” for example – I found surprising. Dominion Energy Virginia is a public utility, after all.

    Plus, Steve said, “In Dominion’s case, the growing number of itemized rate adjustment clauses (RACs) is driving up consumer costs, and the new legislation authorized a host of new ones.”

    So it appears that excess shareholder profits are soaring while customer prices are being pushed up, not only in the face of a highly speculative market disruption by reason of changing technology that requires great prudence, but also perhaps by a more permissive regulatory regime, governed now unfortunately by increasing private and political interests. This could be a toxic mix. Thus the tenor of Dominion’s response to Steve’s article (see above) also raised red flags.

    The question regarding Dominion is whether or not shareholder and ratepayer interests now too far out of alignment? Are shareholder interests trumping the ratepayers’ interests? And in so doing, driving a business strategy that is not in the best interests of the ratepayers. And if so, in how many ways, for what end result? Are they long term, or short, or both?

    This caused me to ask the question I posted above at August 31, 2018 at 8:23 pm. Acbar’s reply namely:

    “Dominion got where it is today without over-earning, without abusing the regulatory process through legislative flanking maneuvers, without shifting the risk of future grid uncertainties onto ratepayers. Yet that is what it is doing now. It seems to me, and I suspect many others, that Dominion leadership believes it needs to make the most hay it can while the sun shines because a big storm is coming. Dominion is acting like it has no confidence in the implications of its own forecasts; if it did, it would spend shareholder dollars on new generation and keep all the profits in its unregulated generation subsidiary for the benefit of those shareholders. Instead it’s investing in generation that looks profitable now, and may remain so for a few more years, but with no long term confidence that these new units will continue to be profitable to run, placing that risk of premature obsolescence not on shareholders but on ratepayers. And the financial markets are responding, “That’s a good thing.” It’s as though they don’t believe in the long term benefits of all this new investment either … those generation and grid investment decisions that DE currently is making on behalf of ratepayers will have financial consequences for 50 or more years.”

    This reply to my question crystallized my concerns, for several reasons.

    The equitable allocation of risk and reward in commercial transactions is an essential ingredient of a free, open, efficient and vibrant economy. Such equitable allocation over long periods of times is very tricky and hard to achieve, given human nature. Sponsors today are too often temped to structure business transactions and strategies in ways that benefit their own short term private interests at the long term expense of other stakeholders.

    Here, in the case of Dominion Energy, the potential risks and impropriety are substantially magnified. This is in the nature of the business of a public utility. The customers (rate payers) are not investors. They should not share investment risk. Nor should their monies be used to leverage other adverse interests. Quite the reverse. Ratepayers here are entitled to the lowest reasonable rates both long and term. Nor should the state and its citizens generally share in undue risks imposed on the grid and market, to satisfy the overreaching or private advantage of private shareholder interests. Indeed, here in this case, the entire economy of Virginia could be put at undue risk.

  16. Excellent summary, Reed. Thank you.

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