Ratepayers of Dominion Energy Virginia will start in June to pay for construction and operation of two solar energy facilities in Surry County intended to meet Facebook’s renewable energy goals. The State Corporation Commission decided one issue created by the case in favor of consumers but punted on another that pit one group of customers against another.
In an opinion released this week, the SCC allowed Dominion to proceed with a new rate adjustment clause on customer but kept alive a dispute over how to allocate the costs between various classes of electricity customers. The SCC staff and the Office of the Attorney General are complaining that the traditional cost allocation formula is less fair to residential customers when the generator is non-dispatchable, intermittent and provides its benefit through lower fuel costs.
Back in January, the SCC approved the certificates of public necessity for the project, 240 megawatts in two fields designated US-3, which will cost about $410 million to build and $843 million in total over its lifetime. In response to SCC staff concerns, reported in Bacon’s Rebellion in November, it put various conditions on the approval intended to protect customers if the project fails to produce as much electricity as promised.
These are medium-sized projects with a minimal impact on customer bills, perhaps 16 cents a month initially on that mythical 1,000 kWh home. But the two issues in play, allocation between classes and consumer protection against poor performance, will take on great significance as more solar and eventually wind generation is built.
The performance guarantee, significant enough to produce an SCC news release in January, requires the panels to achieve a 25 percent capacity factor (averaging six hours of full production per day) measured over a year. If the plants fall short, Dominion will have to make up the loss of revenue from the sale of renewable energy certificates (RECs) and the cost of any replacement power bought from other utilities. Otherwise those would be added ratepayer costs.
The value of those RECs are crucial to this proposal, but the dollar amounts related to that remain redacted from the case record. Through a subsidiary Facebook has agreed to buy them for 20 years, and that revenue stream works to lower the ultimate cost of the power, along with the various solar tax advantages.
Some risk posed by unknown future REC values still faces consumers, the SCC noted in its January order:
“The actual cost to ratepayers of the US-3 Solar Projects will depend on the value of the RECs generated by the Projects and sold to Facebook. The proceeds from the REC sales will offset the cost to ratepayers, and will depend upon the projected output of the Projects, the negotiated price to be paid by Facebook for the RECs for the first 20 years of the Projects, and the Pennsylvania Tier 1 forecasted REC prices for the remaining 15 years of the Projects’ 35-year life. It is therefore possible that the cost to customers will be higher or lower than expected, should the Projects’ output or forecasted REC prices be less than or greater than expected.”
With the performance risk addressed in its January opinion, the SCC kept the case going over the cost allocation dispute. The science of economics is seldom more dismal than in arguments over utility cost allocations, which produce very different price per kWh costs for homes, small businesses, retail establishments and industrial users.
In this week’s opinion, the SCC stuck with the traditional “average and excess” allocation method but only for the first year. Dominion will have to return annually to report on the project and its costs and renew its rate rider, and the SCC asked it to study the allocation of costs for future consideration in the next review.
The goal of any allocation scheme is to avoid any subsidy of one class by another. The SCC and Office of the Attorney General claim that happens in this case with the traditional allocation formula, to the benefit of larger users.
The SCC’s Greg Abbott, deputy director of public utility regulation, described in testimony how capital and operating costs are apportioned between classes based on a number of factors including peak demand but the fuel charge is based solely on the amount of energy used. The benefits of these new facilities — fuel the company doesn’t need to buy, the REC revenue, and off-system sales, if any – show up in a lower fuel factor cost. Wrote Abbott:
“This mismatch in allocation factors results in the residential class being assigned 55 percent of the cost of the US-3 projects, but only receiving 43 percent of the energy benefits. The net effect of this is to shift cost away from the GS-3 and GS-4 (industrial) classes to be borne by the residential and small commercial rate classes.”
The large commercial customers participated in the case and disagreed with the SCC staff’s conclusions and its proposed solution with a new allocation formula. The large customers argued among other things that the current allocation formula is already unfair to them, and using this new approach would add to the problem.
Wrote Stephen J. Baron of J. Kennedy and Associates, an expert witness for the industrial customers:
“In Dominion’s 2018 Tax Cut and Jobs Act (“TCJA”) case, the Company presented the results of a 2017 class cost of service study that showed that the rate of return of the Rate GS-4 rate class is substantially greater than the retail average. The study showed that the Rate GS-4 Rate of Return Index was 1.27, meaning that the GS-4 rate of return was 27% greater than the retail Dominion average. Adoption of an allocation method in this case that shifts even more of costs to high load factor rate classes, such as the GS-4 rate class, would simply exacerbate the situation.”
What is one of those large industrial customers, where even a tiny change in a rate formula can produce tens or hundreds of thousands of dollars in higher or lower costs? Facebook is, as apparently was noted during a hearing on the dispute last month.
