Ignore the ROE Decision. Dominion Gets It All.

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.

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21 responses to “Ignore the ROE Decision. Dominion Gets It All.”

  1. Peter Galuszka Avatar
    Peter Galuszka

    Interesting story. Txs

  2. LarrytheG Avatar

    Steve’s posts often leave my head spinning, so a simple question, what kind of ‘real money’ , say on a$100 dollar bill are we talking about?

  3. Steve Haner Avatar
    Steve Haner

    If Dominion really were held to a 9.2% profit margin, with any excess returned to ratepayers as credits or a rate reduction, maybe a couple or three bucks on a monthly 1000 kWh residential bill. The SCC report I linked to said the rebates would have been $400 million if allowed, but that’s under the rules that allow them to keep up to 9.9%, and return only a portion of the excess over 9.9%. If it were a hard 9.2%, the rebates would be far higher. Would everybody get excited over $3 a month? $36 a year? $144 over four years? Much, much more for commercial and industrial of course, and plenty of residential customers use more than 1000 kWh.

  4. Steve,

    I thought I read something in the GTSA that said when the first real rate review occurs in 2021, no matter how much over-recovery is found to have occurred, the first rebate to customers will be capped at $50 million. Can you confirm that?

    1. Steve Haner Avatar
      Steve Haner

      “…bars the SCC, in the first triennial review proceeding conducted after January 1, 2021, from ordering a rate increase for DEV and from ordering a rate decrease of more than $50 million; ”

      Pulled that from the official summary. And help me out with the branding here, it’s the Ratepayer Bill Transformation Act (RBTA.) 🙂 They will have no problem pointing to sufficient investments to prevent any chance of a rebate, unless for some reason Dominion would rather not use ratepayer money. At least the ratepayer dollars invested do not become rate base (unlike under the bill as introduced.)

  5. Peter Galuszka Avatar
    Peter Galuszka

    Steve. I am missing something. Why isn’t D held to 9.2 percent? Sounds like rabbit hole

  6. Steve Haner Avatar
    Steve Haner

    Per state law, as they go above 9.2%:

    The first 70 basis points, up to 9.9%, they keep 100 percent. So I argue that is the real ROE target.

    As they go above 9.9%, under the 2013 revisions to the code, 70 percent of any excess should be rebates and 30 percent is retained by the utility. BUT, with the 2018 revisions to the law, Dominion can keep even that 70 percent it might otherwise rebate, IF the money is invested in things like solar, wind, the grid modifications, etc. Of course that is what they will do so — Dominion keeps it all!

    The SCC report earlier this year put the current ROE close to 14 percent. With that 2018 law on the books, this exercise really only matters for those projects covered by a rate adjustment clause rider. There Dominion is held to 9.2%.

    Yes, very Alice in Wonderland worthy. I doubt six legislators understood this and after all this time, maybe ten do now.

  7. John Harvie Avatar
    John Harvie

    Perhaps you’d prefer the type of electric service a bankrupt utility like PG&E provides in CA?

    Get real and recognize you have one of the best, most reliable utilities in the USA and be grateful they are profitable. Stop swatting at gnats, guys.

    During my 40 years in Tidewater the outages probably amounted to less than one brief one per year. Same for 30 previous years in NOVA.

    1. Steve Haner Avatar
      Steve Haner

      I bet you pay list price for a new car off the lot, too. 🙂 This is a state sanctioned monopoly. Absent a process like this to argue over cost and profit, how would you expect a monopoly to behave? I agree the company basically does a fine job but so do plenty of others who have not corrupted the review process and who not earn a real ROE of close to 14%.

  8. LarrytheG Avatar

    When we talk about electricity in Virginia, it’s often all about Dominion but in reality, it looks like this:


    and many of these others are supposed to be “customer-owned”

    Would be interesting to see some comparatives in terms of up-times and costs.

    My impression is that the Co-operatives charge more even though they are not making a profit.

    No sure about AEC either.

    Electricity is much more expensive in California – but the interesting thing is that they also use a lot less per capita than we do.


    1. Larry, you are correct, there are multiple retail electricity providers in Virginia; each one has an assigned service territory in which it has the exclusive right to serve at retail. If a customer doesn’t like it he can only complain to the GA which repealed most “retail access” competition in Virginia in ’06.

      Now, that retail cost of service has three components: generation, transmission, and distribution/billing. The transmission charge is identical for all retail providers in the Dominion Zone, which includes all of Virginia and part of eastern NC. The generation charge would be identical from all these providers if they bought all their energy and capacity in the wholesale marketplace, but each of them buys a portion from other resources — for example, REC has a contract with ODEC for power from ODEC’s own generation, and Dominion charges its customers for power from generators it owns. The distribution/billing charge is the part that depends entirely on the local utility’s services. REC owns its own distribution system and also provides its own customer services including billing. You are correct that some coops “charge more [for distribution and billing] even though they are not making a profit.” The coop has no control over the transmission or generation charges other than, potentially, by cutting a better contractual bargain with ODEC for its piece of the generation charge.

  9. Steve, you say, “The last SCC report showed the real profit well above that ROE now with no signs of abating.” The test year underlying that last one was filed, I believe, pre-RBTA; is DE still required to do annual updates of its achieved ROE at all between base rate cases? Second q, what is going on concerning Herring’s poor staffing of the Office of Consumer Counsel?

    1. Steve Haner Avatar
      Steve Haner

      The SCC annual report linked in my post is from this year. It was also linked in today’s SCC news release. Based on DEV’s most recent informational filings. Follow the link and see the opening summary.

      Don’t know of any recent developments or changes at OAG. JLARC has a report coming soon on that office but don’t know if it will focus on that section.

    2. Once upon a time the AG’s consumer counsel was a good stepping stone to the Commission — e.g., Hully Moore, Jimmie Dimitri. Apparently that office has declined in influence. Where has it been hiding recently during the GA’s deconstruction of the SCC’s ratemaking authority? (You may treat that as a rhetorical lament aimed at the AG himself.)

      1. Steve Haner Avatar
        Steve Haner

        The role of the AG’s office in all this is a long story, complicated in my case by my former employment there and some remaining friendships. The current section chief, Meade Browder, would have made (and might still make) an excellent addition to the SCC.

  10. The OAG has a set of dedicated and smart attorneys who do a good job in the cases they participate in. What the OAG does not have is a staff of accountants, economists and engineers who can dissect dense utility filings and formulate reasonable alternatives. They have to retain outside consultants and can’t do that in every case.

    AC, Hullie Moore did not work at the OAG; he was an attorney for the big industrial customers at Christian Barton. Jimmy Dimitri started at OAG, then went to CB with Hullie, then, after Hullie got elected Commissioner followed him to the Commission. He eventually became the General Counsel there, His predecessor in that post, Tony Gambardella, also came to the SCC from the OAG. On the other hand, the current Consumer Counsel, Meade Browder, originally worked for the Commission.

    1. Yes of course — I conflated Moore and Gambardella — very unfair to both! I remember CFUR as the able large-commercial protester group assembled and nourished by AC Epps with his CB team; AC trained some excellent utility rate lawyers and made one legendary allusion-filled closing argument against Lewis Minter that I’ll never forget.

      Can’t comment as to under-staffing the OAG these days but it strikes me as counterproductive and a missed opportunity for the AG politically. The “Office of People’s Counsel” or equivalent elsewhere makes a real contribution by keeping the applicant and even Staff on their toes with that third voice, a role CFUR also used to play sometimes when it came to big-dollar decisions.

  11. LarrytheG Avatar

    re: ” You are correct that some coops “charge more [for distribution and billing] even though they are not making a profit.” The coop has no control over the transmission or generation charges other than, potentially, by cutting a better contractual bargain with ODEC for its piece of the generation charge.”

    so a couple of things:

    1. – my understanding (from Steve) is that Dominion cannot make a profit on power they get from PJM and I think about a third of Dominion’s power comes from PJM.

    2. – The rural Co-ops have a lot higher percentage of powerline infrastructure to customer, i.e. less dense so that probably adds to costs.

    3. – If If Dominion can and does buy power from PJM, can the Co-ops or are they contractually required to get from ODEC?

    4. – Even though the rural Co-ops have less dense customer bases – the map seems to show that Dominion’s territory is not a large compact district but scattered – unlike AEC which is much more intact.

    I presume that it is not possible to re-jigger the service territories so that they are more compact – which would (in theory) save money on maintaining the infrastructure but it sure looks like a type of gerrymandering!

  12. 1. Dominion Virginia Power does not make a profit on purchased power. It does not buy anywhere near 1/3 of its power from PJM, that is, other suppliers selling into PJM. You are probably thinking of the canard that 1/3 of its power is “imported.”

    2. You are correct that the rural co-ops have higher costs of service due to the nature of their customer base (being spread out).

    3. Co-ops can buy a small % of power from the market, but they have little reason to do so–they OWN ODEC and want to use the ODEC resources to the maximum possible.

    4. Co-op territories intermingle with DVP’s more than they do with Apco, correct. It is possible but not easy nor logical to “re-jigger the service territories.” Each entity has made considerable investment to serve its own customers.

    1. Why do you say imports are a canard ?
      That Va. does not really import, or Dominion does not?

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