Dominion’s Rate Hike and the End of the Cheap Energy Era

Not only are cheap petroleum and gasoline relics of a bygone economic era, so is cheap electrical power. Citing explosive increases in the price of energy prices globally, Dominion Electric Power has filed for permission to pass on $1.1 billion a year in energy costs to its rate payers. On average, consumers will see electric rates rise 18.3 percent. (Additionally, the utility is requesting reimbursement for another $697 million in unbilled fuel costs from years past, which it proposes collecting over three years.)

Inevitably, we’ll hear carping from “consumer” advocates that Dominion is ripping everyone off. To deal with those concerns, the power company has proposed several measures to buffer consumers from financial hardship, which I won’t dwell on here. For details, look for coverage in your local newspaper.

These rate increases are not concocted by greedy utility executives. They reflect fundamental shifts in the supply and demand for energy: relentlessly rising demand combined with constrained supplies. There is no way around it: Energy is getting much more expensive, and there is no way to protect consumers from that harsh reality. Before I delve into the details of Dominion’s situation, permit me to quote a statement made yesterday by Peter T. Socha, CEO of Richmond-based James River Coal, in that company’s 1Q quarterly report:

The first quarter of 2008 will be remembered as a watershed period for the coal industry. For the first time, it became clear to the general public that large developing economies around the world have a voracious and growing appetite for all commodities, including coal. It also became clear that the coal industry in the United States will play a much greater role in meeting the world’s demand for coal.

The reason I quote Socha is to assure readers that Dominion is not fabricating a crisis here. In truth, Virginia consumers remain better off than most.

Dominion has a balanced fuel mix, which is designed to reduce the exposure of consumers to spikes in the price of any one fuel. Trouble is, energy prices are rising across the board. Here is a list of Dominion’s energy sources, including the share of the energy source in the power company’s energy mix, and the percentage increase in the cost of that fuel since 2004:

Coal — 46% of the fuel mix, up 143 percent
Nuclear — 42% of the fuel mix, up 14 percent
Natural gas — 7% of the fuel mix, up 129 percent
No. 6 fuel oil — 1% of the fuel mix, up 224 percent

Hydro, biomass, wind and other renewable energy sources also account for a small portion of Dominion’s fuel mix. The utility also buys electricity from other companies, both from within the state and outside of it. Purchased power, which accounts for 28 percent of the company’s power supplies, has increased 130 percent in cost.

Electric consumers can be darn thankful that nuclear power is a major component of the energy mix. Even though the price of yellowcake (unprocessed uranium) has soared 400 percent since 2004, the cost of the raw material constitutes a relatively small portion of its delivered cost to Dominion. The uranium must be extensively enriched and fabricated, and the cost of those processes have increased only modestly, says Dominion Virginia Power President David Heacock.

That’s the past. What about the future? The good news is that Dominion is far along in the permitting process to expand its nuclear power capability at North Anna. “North Anna Three would be a good option for us,” Heacock says. That facility would provide about 1/3 of the projected 4,000 kilowatts in additional capacity the company sees as necessary over the next decade.

Meanwhile, coal prices will continue to increase. Dominion has buffered itself against price hikes through long-term contracts with coal producers. But as those contracts expire, they will be replaced by contracts at higher prices. No one is expecting much relief in oil or natural gas prices. While alternate fuels are an option, they still are not price competitive with coal or nukes, Heacock says. “As fossil fuel costs goes up,” he says, “it tilts the balance to renewable energy. But, for the most part, renewables are not competitive. Wind fuel is best. But our customers don’t always use power on the same schedule as the wind blows.”

One more note, which for the sake of brevity I will mention only in passing here: The cost of fuel at the proposed “hybrid energy” plant in Wise County would be highly competitive. I had always assumed that, because its use was mandated by the General Assembly, Virginia coal sources would not be price competitive. But Heacock insists they are. But that’s a subject for another post.

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  1. Anonymous Avatar

    “Hydro, biomass, wind and other renewable energy sources also account for a small portion of Dominion’s fuel mix.”

    Right above, the percentages given for Coal, Nuclear, Natural gas, and No. 6 fuel oil are 46, 42, 7, and 1 which add up to 96% total.

    This begs the question: If oil is only 1%, what are the specific percentages of renewable sources?

  2. Anonymous Avatar

    Coal is renewable if you wait long enough.

  3. Dominion could further assuage the rise of energy by reinvesting in mass transit. Dominion is the great grandchild of the Virginia Passenger and Power Company that ran Richmond’s hydro-electrically powered streetcar system.

    They were divested of that responsibility by a New Deal-era law that sought to break up the nationwide monopolies utilities had on transit. Guess what? That law was repealed in 2006.

    Why not a pilot project in Richmond? Light rail costs around $20 million-ish per mile to install. They could go back into transit and look like they’re concerned about fuel costs, transportation, and the environment, all at once.

    Just sayin’.

    Otherwise, I saw this movie. Guy in a crow’s nest of a large, fast-moving ship. ‘Iceberg, dead ahead!”

    When the brown outs and black outs start, just as they happen in California around the time of peak air conditioner use, we’ll be shaking our fists at “the power company” which will be, well, powerless.

    It’s not like we didn’t see this coming, after all. The era of cheap oil is over; it’s really been over since about 1978, but you can’t turn a super tanker on a dime.

  4. Groveton Avatar

    Does anybody know where you can find the financials for Dominion – Virginia as opposed to the consolidated financials for Domonion Resources? I’d be very interested in their profitability in Virginia immediately before and after the rate hike. If it’s really all escalating costs – we should see flat profits. If not …

  5. Jim Bacon Avatar
    Jim Bacon

    Groveton, The SCC has detailed financial information about Dominion Virginia Power. Everything you could possibly want to know. I don’t think they put it online, but it should be public record.

  6. Larry Gross Avatar
    Larry Gross

    Choose One:

    1. – double digit annual rate increases

    2. – brownouts, frequent outages…during peak power periods

    3. – Smart Meters & Peak Hour pricing

    oh.. and forget the buck a gallon plug-in hybrids…. it’ll now cost the equivalent of $3 bucks a gallon but then again gasoline will be $4.

    Right after you get home from your 100 dollar weekly fillup.. you open up the $500 Dominion Bill..

    hoooboy… it sounds like a load of crap is rolling downhill and picking up speed…

  7. Anonymous Avatar


    It is probably going to be all three, plus a few we haven’t thought of yet.

    If you have any trees on your lot, you might want to get a big dog.


  8. Anonymous Avatar

    If you are worried about excess Dominion profits, buy some stock.

    If you think mass transit saves a lot of energy, think again.

  9. Larry Gross Avatar
    Larry Gross

    “all are subject to the same global market S/D forces.”

    It’s pretty clear now if it wasn’t before that the concept of domestic energy independence by developing and keeping our own coal and oil resources is …. not true.

    It appears that we can drill all we want offshore and in ANWR and we can clear off as many mountaintops as we want – but the coal and oil will be sold to the highest bidder.

    The question is – what does the average American understand when our political leaders urge more domestic production of oil and coal… on the premise that it will lead us to lower energy prices and energy “independence”?

    The only way to lower energy costs and become less dependent on “world” commodities is to use less.


    we face higher and higher energy prices .. no matter what we do domestically.


  10. Anonymous Avatar

    CPV holds promise for cheaper clean energy, but airline travel is creating more pollution than first thought.

  11. The Green Miles Avatar
    The Green Miles

    Are coal and nuclear the only options? Every other state is ramping renewables through the roof in the face of certain carbon pricing. Jim, when you say the cost of fuel at the coal-fired power plant (it’s embarrassing that you regurgitate Dominion’s “hybrid energy” propaganda) will be “highly competitive,” are you including the cost of burning coal in a national cap-and-trade future?

  12. Larry Gross Avatar
    Larry Gross

    pretty ironic…..

    the price we pay for electricity is determined by how much coal China needs.

    re: CPV

    well, the more we pay for energy.. the more lucrative it will be for any group of investors or company that succeeds in breakthroughs in solar panel technology.

    so on one hand, we have Bush/Cheney and their pro-consumption business brothers saying that once the price of energy gets high enough it will (should) spur more domestic exploitation of oil and coal…that will ease the domestic energy “crisis”….

    but now we know – that new domestic energy is not dedicated to domestic use but instead is for sale on the open market to the highest bidder.

    At some point… CPV or similar breakthroughs may each homeowner the choice of paying upfront for 30 years worth of electricity via solar panels or pay the “open market” price for it to Dominion.

    When will we know this is close to being a reality?

    When the guys on Wall Street downgrade Dominion and Coal Companies Stock…

  13. Jim Bacon Avatar
    Jim Bacon

    Green Miles, Let me clarify my post. I should have said that Dominion Virginia Power CEO Heacock said the coal was competitive, and he gave reasons justifying that remark that I had not heard before. I do not believe that he was including the cost of burning coal under a cap-and-trade agreement.

    I don’t have the knowledge to reach an independent conclusion on whether the coal is competitive or not. But I had made the assumption, based on the fact that Virginia coal use was mandated, that it was not.

    Hopefully, I’ll have time to elaborate.

  14. Groveton Avatar

    “If you are worried about excess Dominion profits, buy some stock.”.

    That might be good advice financially. However, Dominion has been re-regulated in Virginia. Part of that re-regulation is guaranteed ROIs. Dominion gave up the right to unfettered profits when it went sobbing back to Richmond after failing to succeed in the cold cruel world of the free market. As a re-regulated entity Dominion Virginia should have its profits regulated as well.

  15. The Green Miles Avatar
    The Green Miles

    Ahhh, time to elaborate … the one thing all (sane) bloggers want but don’t have. Can I ask for that for Christmas? 🙂

  16. Anonymous Avatar

    “but airline travel is creating more pollution than first thought.”

    Pollution from ships is far higher than pollution from airplanes, but the polution airplanes put out is higher, physically.


  17. Anonymous Avatar

    As Friedman stated a coulpe of times, and I paraphrase, the world is indeed flat and those who don’t accept that risk their own peril. Of course Chinese and Indian demand for energy affects US energy prices.

    But what is missing from some of the comment analysis is the locational cost of energy. For example, production limits on natural gas in the US drive up prices here, since 90% of the natural gas consumed in the US comes from . . . the US. Importing gas from overseas can make sense but when developing nations closer to the foreign source are driving demand, the locational cost differential diminishes. Generally speaking, natural gas is natural gas — at a commercially-standard pressure and heat content.

    You cannot make that same argument, necessarily, for coal and especially for oil, since all coal is not equal (some US coal is low sulphur, some is not). For oil, the locational price argument goes almost out the window since the US has not allowed a refinery to be constructed in a generation. So much of the oil imported is refined rather than crude.

  18. Larry Gross Avatar
    Larry Gross

    ….”since the US has not allowed a refinery to be constructed in a generation. So much of the oil imported is refined rather than crude.”

    but that’s not what establishes the price… and the availability…

    and so it’s misleading… in my view..

    coal and oil – no matter what country they are found and extracted on are sold for what they are worth on the world market…

    we could build 50 more refineries but how would that make oil cheaper?

    isn’t that what Friedman is also saying?

  19. Anonymous Avatar

    Of course refinery availability and capacity affects price. there ae other factors, but this is a big one. And refining overseas means more dollar go overseas, and at the price of today’s dollars that means a big impact at the pump.

    Of course we also get to fight global pollution by exporting the pollution from the refineries we dont have, and pay others to operate.

    If you have your refinery here,you can adjsut the output in response to demand and price of the various products. If not, you wait for a shipment while the price goes crazy.


  20. Larry Gross Avatar
    Larry Gross


    every day.. the price of oil goes up and every day the price of gasoline goes up in lock-step…

    if the price oil goes down, the price of gasoline goes down.

    I’m not buying the refinery angle until it is shown how fits into the picture.

    For instance, show me the countries that sell gasoline for less than us because they have more refineries…

    they buy the same oil on the same world market..for the same price and because they have more refineries..their gasoline is cheaper.than ours.. ???

    eehhhhh.. I don’t think so…

    but convince me…

  21. Larry Gross Avatar
    Larry Gross

    just FYI – refining costs are about 11% of the price.

    … maybe 38 cents per gallon…

    I can see where if there were more refineries.. PERHAPS it might have a single digit impact.. on the 11%…

    but you talking about a few pennies at most…

  22. Anonymous Avatar

    You are correct, in the long run.

    But you are missing out on several important points.

    1) per capita national enery usage is distorted if the energy used in distillation is carried out overseas.

    2) All those dollars (or other currency) spent for offshore distllation add to the currency drain.

    3) You are forgetting about the time involved in placing and getting a shpment for a particular product from overseas, vs having the flexibility to produce here.

    4) What happened after Katrina, when refinery capacity was cut? What happens every time there is a refinery disruption? There is a real cost in not having ENOUGH peak capacity. Whether it is roads, electricity, or refineries.

    Look at the map, and think about places that have refineries and don’t.

    (And Bagdad, $1.19 per gallon? You think maybe there is a subsidy involved?)


  23. Anonymous Avatar

    Energy is “cheap” according to what it will buy you (plus some capital expenditure) compared to the alternative.

    Suppose I can mow all the hay on my farm in ten days, and the alternative is standing behind a a scythe for four months……

    How much does fuel have to go up relative to the value of my labor before “alternative energy” makes sense?

    Look at it another way. As energy becomes more expensive, the labor to replace it will become in short supply, and more expensive.

    Do I hear anyone compaining about illegal aliens?


  24. Anonymous Avatar

    Thinking of Bagdad.

    You think maybe if we had more roadside bombs, the demand for fuel would go down (and the price)?


  25. Larry Gross Avatar
    Larry Gross

    “There is a real cost in not having ENOUGH peak capacity. Whether it is roads, electricity, or refineries.”

    there is a real cost when peak usage is subsidized instead of letting the folks who want peak usage pay for it.

    We subsidize consumption.

    Let’s give everyone the first 5 gallons a week – at 2 bucks a gallon.

    the next 5 gallons is 3 bucks

    anything over that is $5 bucks.

    presto changeo – no more need for more refineries….

    Right now – we penalize everyone no matter how much they conserve because our system subsidizes those who want peak supply.

  26. Anonymous Avatar

    “”There is a real cost in not having ENOUGH peak capacity. Whether it is roads, electricity, or refineries.”

    there is a real cost when peak usage is subsidized instead of letting the folks who want peak usage pay for it.”

    Yep, that too. Those two ideas are not mutually exclusive.

    Too much one way OR THE OTHER and costs go up.

    We could wind up with a system where we penalize everyone no matter how much they really need more supply because we subsidize those that want conservation – at any price.

    These are mirror image situations, and if one kind of subsidy is wrong, so is the other.


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