Crying All The Way To The Bank
By Steve Haner
After a long, expensive and contentious legal battle producing a huge case record, the State Corporation Commission left Dominion Energy Virginia’s authorized profit margin unchanged Thursday. The return on equity figure did not go higher, as the utility demanded, and did not go lower, as just about everybody else involved in case demanded.
The SCC order is here.
You will see report after report in news media now that the authorized return is 9.2%, such as this one. This is wrong. The authorized return, because of Virginia’s uniquely pro-stockholder state law, is really 9.9%. The law allows the utility to keep 100 percent of the first 70 basis points of excess profit above the stated allowed profit. With the large amounts involved over multiple years, that extra 70 basis points is real money out of your pockets.
And once the profits exceed even that level, the utility still keeps part of it, with the ratepayer potentially getting refunds of 70 percent and the utility keeping 30 percent. If you see any signs of distress on the part of the utility executives that its demand for 10.75% (really 11.45%) was refused, understand they are crying on their way to the bank. The last SCC report showed the real profit well above that ROE now with no signs of abating.
The profit margin is stated as return on equity (ROE) because it is based on the shareholder equity invested in the various capital assets producing electricity. Dominion was arguing, with a straight face, it needed 10.75% (really 11.45%) to get anybody to buy its stock. In this low-interest rate environment, there is no rational basis for that, and the commission’s opinion spends a fair amount of space dismantling it.
In part the utility remains unfazed by no change in its ROE because, thanks to the Ratepayer Bill Transformation Act of 2018, ratepayers won’t even get back that paltry 70% of the excess above 70 basis points. The company may keep it all, as long as it uses those ratepayer-provided dollars on various investments smiled upon by the General Assembly. The argument over ROE of 9.2% versus 10.75% was really just an argument about which of Dominion’s pockets would hold your money going forward. You will never see it back either way.
Sorry, is my cynicism bleeding through on this post? To add to it, please recall the Democratic effort to score election-year political points on this case, filing their own comment with the SCC seeking a ROE of 8.75% (really 9.45%). Anyone who voted for the Ratepayer Bill Transformation Act has zero credibility as a friend of the consumer. But in hindsight, they said something and the Republicans nothing, so score another one for the Democrats.
Their political message claimed that if the SCC had approved a lower ROE, it would have saved consumers substantial sums. That was at best partially true, because the ROE number does figure in the eleven stand-alone rate adjustment clauses on your electric bill. Those are set annually so a lower ROE would within a year adjust the revenue collected under those charges. There is also no ROE “collar” for those projects, so 9.2% really means 9.2%, and excess profits are plowed into a true-up for consumers.
But as long as the Ratepayer Bill Transformation Act remains in force, any claim that a lower ROE will lower customer base rates is tortured logic at best, and flat out wrong at worst. In 2021, for the first time, if and only if the law remains unchanged, the SCC will sort through the base rate and the profits it generated for Dominion under the RBTA. Pro-consumer changes in that law are possible before then, but unlikely.
Since 2007, a part of these reviews is the Game of Peers, wherein Dominion is allowed to argue other utility companies with similar capital structures are earning higher returns and it should get a raise. But the SCC is allowed to pick and choose among the peers and is usually presented with reams of high-paid expert testimony looking at the same data producing diverging results. It gets equally dense economist testimony on the fair cost of capital.
In the end, it appears the commission simply noted that the current 9.2% (really 9.9%) was working just fine at attracting investors, in line with the other companies, with absolutely no reason to raise it, no compelling evidence to lower it, and proved once again the power of inertia. Under current state law, one way or the other, Dominion keeps it all.
