Dominion Seeks To Add Carbon Tax In Fuel Factor

Dominion Energy Virginia is taking advantage of its annual, and usually boring, fuel cost review to move the cost of any future carbon tax or emissions allowances out of its fixed base rates and into its variable fuel charge. If the State Corporation Commission agrees it could either lower or raise your bill someday but place your bets on the latter.

The case (here) has also drawn testimony that Dominion has so much natural gas capacity under contract in existing pipelines that it is selling the excess capacity to others – about 25 percent of it, in the case of the Transco pipeline. It needs no more capacity, according to a witness hired by environmental groups.

UPDATE:  Through a Twitter response I’m told that Dominion has notified other parties it will withdraw the request to place any future CO2 costs into the fuel charge,  and the document I missed has been flagged.  So the “is” in the lede paragraph is now a “was.”  I’ll leave the story up because it remains something to watch.   

The utility is allowed a dollar-for-dollar recovery of its fuel costs, with no added profit. Every year it makes a forward estimate of what it will spend on coal, natural gas, uranium fuel, purchased power and related inputs (including contracts for transportation). That amount is then adjusted up and down based on the results from the prior year. The result is costing you 2.7 cents per kWh this year and a projected 2.42 cents per kWh next year.

The early retirement of several fossil fuel plants and the addition of more solar generation (free fuel) are in part behind those lowering costs.

Questions of profit do enter the issue in one way: If Dominion sells electricity off-system and earns a margin, 75% of that profit is credited to customers in the fuel charge. Dominion is projecting $1.3 million in such profits next year, with $1 million credited to customers.

The company’s big profits, of course, are in its base rates, already deemed excessive in prior SCC reports on its operation. Those base rates have stayed the same for a long time, while more and more of the capital costs have moved to separate rate adjustment clauses. As those costs move from one pot to another, the profit margin in the first pot grows. Base rates never seem to go down.

There are no carbon tax costs yet, either under the Regional Greenhouse Gas Initiative or some proposed federal scheme, but the utility also participates in standing cap and trade programs for nitric oxide (NOx) and sulfur dioxide (SO2). Those costs and some revenues are currently accounted for in base rates as plant operation costs.

Dominion wants to move them all, with related incremental costs, to the fuel factor. Here’s the rationale from Glenn Kelly, director of generation services:

“The Company currently collects emission allowance costs through base rates. However, these costs are clearly variable in nature and are closely associated with generation from fossil fuels. Because these costs are determinate in the dispatch of the Company’s generation fleet, it would be logical to collect these costs through fuel rates in the future. In addition, during a given year, emissions allowances could result in net revenues or net costs. Recovery of emissions allowances through the fuel factor would allow for the review and reimbursement of these variable expenses, or the flow through of benefits to customers, on a more current basis.”

Under the stalled RGGI proposal, blocked until at least the 2020 General Assembly, money paid by generators to purchase allowances to emit CO2 was to be returned to those utilities and then back to the ratepayers. There was no clear way to do that, and this change to the rules could create that path.

But many supporters of RGGI or other carbon tax schemes have other plans for that money. Absent a return to ratepayers in some fashion, the payments for emissions credits would be taxes collected through the fuel factor. If there is no repayment to ratepayers, there is reason to ask whether the charge belongs in base rates. Anytime the pea is moving under the walnut shells, it pays to watch closely. When a cost moves out of base rates, they should go down in proportion.

Gregory M. Lander, the environmental witness who works out of Massachusetts for Skipping Stone, Inc., was highly complimentary of how Dominion is now managing the pipeline contracts, better than it was a year ago. Ultimately that is also good for ratepayers, he said. His testimony is here.

This fuel case is not about the Atlantic Coast Pipeline, but if that pipeline is ever completed and used to feed gas to Dominion generators, the fuel factor is where the new pipeline’s costs would appear. There are no routine cases anymore, not with this crowd and in this environment. Testimony in one case often bears on another.

Lander was so impressed by how well Dominion is now doing managing its excess pipeline capacity that he wants the SCC to require more information on the transactions and suggests Dominion improve its revenue with a reserve price. This overlaps some of the issues raised in a Bacon’s Rebellion report in March about Virginia Natural Gas and its pipeline contracts.

But it is clear that Lander is looking beyond that and is really focused on the need for the ACP.

“…the Company’s existing contracts made significant deliveries to non-power plant locations during the review period. For example, 25% of its total used capacity on the Transco system—fully 51 billion cubic feet (Bcf) annually—went to uses other than Company power plants. Therefore, I conclude that the Company has sufficient pipeline capacity to serve its existing generation fleet. Further, because of the frequency, magnitude, and duration of the non-power plant deliveries under its existing pipeline contracts, I conclude that the Company has ample pipeline capacity to serve additional power generation load should that be necessary.”

Dominion also has contracts to move gas through Columbia Gas Transmission and its own affiliate, Dominion Energy Transmission. Lander testifies that excess capacity on those is more valuable than with Transco, because Transco has substantially increased its overall capacity recently.

“Recent expansions, like the Atlantic Sunrise project, that Transco has brought into service in the regions where the Company was predominantly making segmented releases have suppressed the value of capacity in the secondary market. It is basic supply and demand. When the supply of pipeline capacity increases greater than the demand for that capacity increases, the value of that capacity declines….

“In the future, I expect the Company will be less and less able to “make its ratepayers whole” by selling excess capacity on the secondary market. That, in turn, makes it important that the utility not over-procure firm capacity in the future because it virtually guarantees a greater net cost to ratepayers.”

That “firm capacity” he is advising against, of course, is the embattled Atlantic Coast Pipeline.

(Hat Tip:  Albert Pollard)

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16 responses to “Dominion Seeks To Add Carbon Tax In Fuel Factor

  1. Ah.. that name – Pollard! there’s history there!

    There’s a problem with the narratives about Dominion here in BR.

    Basically – we’re getting different narratives over time and depending on who is “reporting”.

    Dominion clearly wags the dog on a lot of issues to include this one – it’s like there are no other utilities in Va – just Dominion – so it gets to define how Carbon or RGGI should be handled. We have a dozen other utilities in Virginia and yet – apparently they have no voice in any of this.

    And the ACP – why is the truth now way different from what Dominion has been saying from the ACP inception? Is Dominion disputing the “excess” capacity claim? If not, how can it in good conscience, advocate taking land from other property owners?

    Steve, you originally supported the ACP – have you changed your mind?

  2. one short note on gas and how much is needed for electricity generation versus solar.

    Think of solar as a fuel that can be used when it is available as opposed to it not being a “reliable” fuel because it’s not always available.

    If you think of it as a fuel that you CAN use WHEN it is available then it means you can burn it instead of burning gas.

    What that means is that as time goes by and more and more solar is built – that less gas will be needed to burn 24/7. In fact, the amount of gas needed for sunny days should decrease substantially if we can harvest solar on those days.

    The thing about this is that 3rd party providers seem to know this and that market is proceeding while Dominion is still treating solar as some sort of “pilot” project that they are “ok” with as long as they get their regular ROI profit out of it.

    So Dom keeps advocating for MORE GAS and though it touts it’s solar – it’s basically talking point PR rather than part of it’s IRP strategy.

    And as long as the Va GA and SCC let let them run at will – they will. It’s amazing to me – again – that so many people think Dominion defines (or should define) energy policy in Virginia…. even as the market and other players are going in different directions – i.e. less gas and more solar.

  3. I often talk about the influence of money and it’s really important when in the form of salary. For 12 years I worked for a certain industrial firm in Hampton Roads which is still listed as a major supporter….That said, I strongly support that new connection into Hampton Roads which is part of the ACP, and I do believe that either the ACP or the Mountain Valley Pipeline should be built, there is a strong case for at least one of them. I always wondered if both were really necessary, doubted FERC would approve both, but also assumed people smarter than me were betting big bucks and had done the research. I do not share your basic enmity toward the eminent domain process or Tom Hadwin’s basic enmity towards natural gas. CO2 is great for trees and other living things….:)

    I don’t doubt Dominion is serious about solar. It makes its money on any and all forms of cap ex. But like many I believe a healthy amount of base load generation is essential.

    • re: ” … do not share your basic enmity toward the eminent domain process”

      I don’t have a problem with eminent domain used for a road or railroad or for a school, or any other government need and purpose.

      What I have a problem with is one property owner taking property from another for not real government need or purpose but rather the economic “wants” of a for-profit company.

      The premise that any pipeline is justified to use eminent domain is more akin to robber barron than true “need” and you kind of admit that in that you acknowledge there is likely not enough gas demand to justify two pipelines. If it were a true govt need – it would be put forth by the govt on a competitive bid basis so that there actually would be only one pipeline.

      So I am opposed to ANY for-profit company using eminent domain to take property from others but I am wholly in support of it for a legitimate govt purpose or need.

      And I’m totally opposed to Dom using eminent domain as a way to essentially subsidize the cost of a pipeline rather than having to actually negotiate with property owners for price.

      Dominion justified the ACP because they said they “needed” the gas to generated forecast electricity demand – which is simply not true.

      Could Hampton Roads use more gas – maybe – but so could all those counties west of Hampton Roads for their own economic needs also.

      What justifies taking private property and NOT providing access to gas to the counties the pipeline goes through?

  4. If I understand correctly, the carbon tax/fuel factor issue boils down to this: Should pollution abatement costs be recovered via the base rates or the fuel adjustment clause?

    One could argue that pollution abatement costs are, by definition, inherently bundled with the consumption of fuel. Without the fuel, there would be no need for abatement. Therefore, the environmental costs associated with the fuel should be bundled with the cost of acquiring and transporting the fuel.

    If we adopt that argument, how do we account for coal ash clean-up costs? Should those costs be rolled into the fuel adjustment process?

    On the other hand, one could argue that CO2 is not a pollutant. Greenies say it contributes to global warming, but CO2 also is essential to life. (If it is deemed a “pollutant,” then I suppose we should deem oxygen a pollutant. Excess oxygen can be fatal.) At the very least, we should be able to agree that CO2 falls in a different class of “pollutants” than, say, SO2 or NOx.

    What a morass.

    • re: ” but CO2 also is essential to life. (If it is deemed a “pollutant,” then I suppose we should deem oxygen a pollutant. ”

      ANY substance that is in heavier concentration than normal – can be a threat to human life – don’t get bound up over the word “pollutant”.

      If you drink too much water – it will kill you – does that mean water is a pollutant?

      Salt? alcohol?

      How about nitrogen? If we doubled are tripled the amount of nitrogen in the air – would we then call it a “pollutant”?

      Only those who refuse to deal with reality – play this silly “pollutant” game.

  5. I don’t want to move anything else out of base rates, not one dollar of cost for any purpose, until the entire base rate structure is reviewed and adjusted and brought back under consistent regulation. With that, the discussion of how to collect these costs becomes far less important. Right now, every buck they move from base rates to a RAC is a buck they keep in profit.

    If the carbon fees are then given to the government to spend on something else, they are just a tax. Pure and simple.

  6. I agree Steve. That was the point that I was about to make.

    Pulling this out of the base rates leaves the base rate recovery as it is now, but Dominion will have added this charge to the Fuel Factor. That’s a double dip. Who knows how long it will be until the base rates are properly adjusted or if the ratepayers will receive a full refund for the years of overcharges.

    I think you have misunderstood my position on gas. I have been trying to point out that our commonly held assumptions about gas are faulty. Using faulty assumptions makes for bad energy policy. Here are some of the most commonly held misconceptions:

    1) Gas helps deal with climate change.
    The energy industry has cleverly made the comparison between coal and gas about carbon levels not total greenhouse gases. Using gas-fired plants rather than coal results in about the same total GHG releases. Coal does have some additional downsides though.

    We have also contaminated over one trillion gallons of freshwater with toxic drilling fluids.

    2) Gas is cheap.
    Gas is cheap because we have an excess of production. That drives down prices. Gas producers were encouraged to produce more for export. Wall Street hopes that will increase gas prices. So far, demand is much lower than production and prices fell again. Gas producers have lost money since the shale revolution began.

    We do have large potential supplies of gas, but it will be increasingly expensive to recover. We are using the most productive areas first.

    Developing a global energy policy using gas to combat the Russians is foolhardy. Using expensive fracking wells that decline quickly and LNG tankers to compete against Russia’s cheap conventional wells and pipelines will never be cost-competitive. It will only end up costing Americans more. Maybe that’s the plan.

    3) Gas infrastructure is a good long-term investment.
    Energy efficiency, lower cost renewables, and gas-on-gas competition are making it harder for gas-fired plants to compete. Several gas-fired plants just 5-10 years old have been closed down in Texas and California because they could not generate at competitive prices.

    A former FERC Chairman has warned that our overzealous build-out of gas infrastructure will lead to stranded costs. Perhaps, as soon as within ten years of initial operation.

    Over 40% of our electricity is now generated with gas. Gas will be our primary fuel for electrical generation for quite some time. It will provide reliable baseload generation, but it will increase in price.

    My point has been that it does not make sense to build more of it, especially since domestic demand is not increasing.

    The 20th century concept of “more” no longer serves us. As hard as it is to change old habits and ideas, changing the way we think about energy is crucial.

  7. For the policymakers, politicians, Chambers of Commerce and sideline cheerleaders that have bought Dominion’s explanation that the ACP is essential for us to have the gas we need in Virginia, please note the testimony of an industry expert regarding pipeline capacity and pricing:

    “…the Company’s existing contracts made significant deliveries to non-power plant locations during the review period. For example, 25% of its total used capacity on the Transco system—fully 51 billion cubic feet (Bcf) annually—went to uses other than Company power plants.

    Therefore, I conclude that the Company has sufficient pipeline capacity to serve its existing generation fleet.

    Further, because of the frequency, magnitude, and duration of the non-power plant deliveries under its existing pipeline contracts, I conclude that the Company has ample pipeline capacity to serve additional power generation load should that be necessary.”

    1. Dominion has said that it will not build any more gas-fired combined cycle units.

    2. The potential peaking units Dominion proposes run just 5-10% of the time and are likely to be located near load centers away from the ACP corridor. Those areas are currently served by existing pipelines that have expanded in capacity. Advances in storage and declines in price could render some or all of the proposed peakers unnecessary.

    3. Fear of “not having enough” has been used to sway public opinion about the ACP. When carefully documented numbers that describe Dominion’s actual situation are described, it is clear that the ACP is unnecessary for reliable operation of its utility system. This is about profits.

    $. Dominion notified FERC that Transco has enough capacity to meet all of the requirements of the ACP for southeast Virginia and North Carolina. Using the ACP to deliver that gas would only add to the cost for ratepayers, while providing profits for the pipeline owners.

  8. Dominion is as crooked as any company in America. Adding a rate adjustment for Climate Change is a price signal for consumers to reduce their consumption of energy and, as a practical and more important action, switch to non-fossil fuel-generated power. But while we can do the former, we cannot do the latter. We have no realistic choice of other generating companies. In theory (and presuming the Greens are not lying), other non-fossil-fuel power generating companies should be able to offer lower prices to Dominion customers, allowing them to both avoid the Climate Change fee and consume clean power and save money.

    The charge by itself provides no benefits to consumers and, as such, is unjust and unreasonable. It should be rejected by the VSCC.

  9. “The utility is allowed a dollar-for-dollar recovery of its fuel costs, with no added profit.”

    Ok. So, putting the charge in the fuel costs would not positively or negatively affect Dominion’s profit. Isn’t the goal to “push” Dominion toward a faster adoption of clean / renewable fuel? How does this work from the perspective of motivating Dominion?

  10. As bad as “gas” is – I still have to ask how we’d power the night without it.

    And no – not with batteries. Maybe some day – but not right now.

    So would we advocate for not burning ANY gas at all?

    At that point, I part company with those who say Gas is “bad”.

    I am very much concerned that we may already be doomed but I’m also wary that the “no gas, it’s as bad as coal” does not lead to a rational outcome – at least right now.

    I’m perfectly fine “burning as much solar and wind as we can and using conservation technology to reduce our consumption – but at the end of the day- anyone who says they support a “reliable” grid has to admit that without gas – we lose “reliability”.

  11. Larry,

    You jumped from my recommendation of no new gas infrastructure to “not burning any gas at all.”

    It is hard to have a dialogue about energy when everyone restates an idea into its most extreme example, that was never mentioned.

    In the past 4-5 years Dominion built 4400 MW of new combined cycle units. We will pay for those for the next 40 years whether they generate economically or not. Why should we build more of them? Even Dominion has recognized that is not a good idea.

    I mentioned that a former FERC chairman said it is very likely that they will be stranded assets before the end of their financial life. Why should we saddle ratepayers with billions in extra expenses for a pipeline that is not necessary to assure the reliable operation of our existing gas units?

    That is far different from saying “not to burn any gas at all.” In fact I said that we will continue to use gas because it is the single largest portion of our generating fleet.

    The point I am trying to make is that our energy system is becoming much more dynamic. We are shifting demand through energy efficiency and demand response. Supply is shifting as a result of more renewable input and new storage options. The old response of plugging in large chunks of inflexible generation that is dependent on fuel that is increasing in price (coal, gas, nuclear) is not such a good idea anymore.

    Letting our utilities plan all of our energy responses (with the help of the GA) will give us a system designed to meet the needs of the shareholders not the customers.

    If you are concerned about climate issues, you cannot stick your head in the sand and limit your views about gas to just carbon emissions. Even just considering carbon, our emissions in Virginia will increase with all of the new gas plants. The old coal plants that are being retired didn’t run very often. That’s why much of Dominion’s discussion about carbon is in terms of intensity (tons/MWh) as opposed to total emissions. They needed to kill the RGGI proposal, which is based on total output not intensity.

    If we open up our energy system to allow the participation of third-party suppliers, the lowest-cost, most reliable options will make their way into the system when they are the best choice. Currently, we are obstructing that from happening and foreclosing many choices by locking in 40 more years of old technology. Imagine if we had taken that path with computers and telephones.

    PJM is responsible for assuring that we have enough capacity for reliable operation. They are working with a significant surplus. In states like Virginia, allowing utilities to continue adding more unnecessary generating capacity, of whatever type, just increases our costs. Having solar and wind provided by independent producers at a fixed price (PPA) and not put in the ratebase, lowers our costs.

    We can design a system that keeps our utilities financially sound and gives customers more choices and lower costs. We will get there more quickly if we avoid the scare tactics of saying “we won’t have enough” or “they want to turn off all of the gas right now.” Safeguards are in place to provide reliable service. But that does not mean we must restrict our choices to only those currently presented that harm our economy and our environment.

    • Okay Tom – perhaps a fair point but here’s what I was reacting to:

      ” 1) Gas helps deal with climate change.
      The energy industry has cleverly made the comparison between coal and gas about carbon levels not total greenhouse gases. Using gas-fired plants rather than coal results in about the same total GHG releases. Coal does have some additional downsides though.

      We have also contaminated over one trillion gallons of freshwater with toxic drilling fluids.”

      then in this response you say: ” Supply is shifting as a result of more renewable input and new storage options. The old response of plugging in large chunks of inflexible generation that is dependent on fuel that is increasing in price (coal, gas, nuclear) is not such a good idea anymore.”

      I’m NOT advocating MORE gas generation and I’m NOT saying that you are saying “stop burning gas period”.

      But what I AM saying is that we must still burn gas AND that renewables without a standby-backup like gas don’t “work”.

      AND that some day storage that can take over the standby role – so that gas is no longer needed is not here yet.

      So some of this is that you’re saying some things about it and not others and I’m not getting enough clarification to know what you are really saying.

      So I’ll ask straight out.

      Do you agree or disagree that we must have gas as the standby fuel for renewables – that’s we must burn it when solar/wind are not available or not enough?

      If not, then what is your position?

      I see the hope for storage to reduce/eliminate the need for gas – some day – perhaps very soon – but it’s not there right now.

      So I am left with the idea that – right now – we have no choice but to burn gas.

      I believe we should burn as little as possible and build more and more solar and wind so that the times when we must burn gas are reduced further and further – but until we have “something” that can carry the night – I just don’t see any alternatives to gas.

      So that’s my view … it’s been fairly consistent… I’m all in for renewables but a pragmatist on the whole. Some day – we’ll likely run on 95% renewables and “storage” but right now – no.

      So.. again – please fill in the blanks that I keep perceiving from your vision… how do you see the grid working right now with respect to gas and storage?

  12. Agree Tom! Well stated.

  13. I’m NOT an advocating of burning gas as the best way to power the grid. I’m opposed to that.

    I KNOW and agree that it is a fossil fuel and likely a potent GHG.

    I DO fear that we are headed for disaster on the Climate if we don’t make significant changes soon and I’m not optimistic that we will – and even IF the US does – the rest of the world is still an issue.

    So our role is to lead. We have to show how we can go forward – in a sustainable way.

    And – at this point in time – we cannot do that with storage batteries. They are just not ready.

    So my problem is when we talk NOW – today – what should we do with respect to Gas? I think we have no choice but to burn it. But I also think we should minimize it as much as possible by using wind/solar when we can.

    I just get frustrated when the dialogue about what to do – right now – basically says we need to move to storage batteries and just slips sideways from the realities that force us to gas.

    If we want to convince others of what the path forward is – I’d posit that talking about storage batteries is a way to shoot ourselves in the foot.

    We have to acknowledge where we are right now – with gas. All this talk about grid reliability goes out the window if some folks are perceived as advocating that we not burn gas – that burning gas is as bad as burning coal.

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