New Industrial Rate Still Challenged By Microsoft

Outdoor data modules at Microsoft’s Boydton, VA server facility. Photo: Microsoft

A hearing on Dominion Energy Virginia’s proposal for a new market-based electricity rate for its largest customers opened Thursday with the announcement it had settled its differences with the State Corporation Commission staff and that part of the dispute was over.  (The case file is here.)

As the SCC staff lined up with the utility, one of Dominion’s competitors – which has intervened in the case – took a harder line against proposal.  Direct Energy Services LLC’s attorney Cliona M. Robb complained this is not a true market-based rate, but “a means for Dominion to negotiate special deals” without the SCC oversight usually required on single-company contracts.

One of the huge customers Dominion and Direct Energy are fighting over, Microsoft with its Virginia server farms, showed no enthusiasm for the compromise the SCC staff had negotiated.  Microsoft is the only Dominion customer taking an active role in the dispute.  It complains that the new rules are too vague and too favorable to the utility.  It wants them to be much clearer, adding an “or else.” 

“Without this transparency, customers like Microsoft will not have the predictability and certainty they need to continue to invest in Virginia,” wrote Leroy Ho, an energy project manager from its Redmond, Washington headquarters, in pre-filed testimony.  Virginia very much wants Microsoft and other energy-hungry tech companies continuing to invest in Virginia.

A market-based rate ties the cost of energy consumed, hour by hour, to the wholesale cost of energy for sale through PJM Interconnect LLC, the multi state electricity marketplace that includes the Dominion territory.  Virginia law allows competitive service providers, such as Direct Energy, to offer energy on similar terms to large-demand customers at or above 5 megawatts.

Recently the hourly wholesale price has been far lower than the fixed charge for generation under standard utility billing, but it does fluctuate and there are times when it goes higher. The other parts of the electric bill, mainly for transmission and distribution, continue to be collected as from everybody.

Dominion has offered a market-based rate for large users for several years, but it has been a bust, according to testimony.  Right now only three customers use it, one of them Microsoft.  Dominion claims this new rate has easier qualification requirements, meaning 143 customers will be eligible.  Dominion reported that all 143 are eligible now to use a competitive service provider and seven have made the switch in the past two years, taking away almost 42 megawatts of load.

Along with being easier to qualify for, the new MBR rate better tracks the wholesale markets than the old MBR and has a much lower margin adder, an extra charge to cover the administrative side of the arrangement.  Whether the margin charge includes a profit won’t be clear until the company’s results are examined in a future rate case, but the SCC staff sees the margin charge as a way to prevent Dominion from losing money on this new rate.

A key consideration for the SCC is whether the special rate is so low it shifts utility costs over to other customers, in effect creating a subsidy for the large users.  In her written testimony, staff utility analyst Allison F. Samuel said it might, but also noted that all 143 of those potential MBR rate customers already have a legal option to leave for a competitive service provider, and their departure would have an even greater potential to shift costs.

The staff’s solution to limit the subsidy risk was to make this an experimental rate, available for only three years and subject to annual financial reporting.  Anybody who does sign up must commit for three years, and no more than 400 megawatts of total load can shift to the new rate structure.  Those were the terms Dominion accepted the day before the hearing.

The hearing highlighted two other issues still being challenged by Direct Energy and Microsoft, which hearing examiner D. Mathias Roussy, Jr. will have to address in his recommendation to the full Commission.

Along with the margin charge the company also adds on what is calls a minimum demand charge, a guaranteed monthly minimum payment should the customer have a period of low or no demand.  Dominion claims it recovers the cost of facilities needed to serve that customer.  Microsoft’s witness Ho complained in his written testimony and again in person that the way that is calculated is not spelled out, and there is a strong possibility it would far exceed any costs Dominion suffered to serve that idle customer.  He did not, however, use the phrase double-dip again, even though to a lay listener the justifications for the margin charge and minimum charge sounded extremely similar.

“Dominion does not provide any such accounting of the facilities and associated costs recovered through the Minimum Charge.  As a result, Microsoft is unable to verify the costs of those facilities or the Minimum Charges that are assessed. Microsoft is concerned that this type of “black box” accounting is open to abuse and discriminatory use and could result in over-recovery,” Ho wrote.

The minimum charge assessed under this MBR tariff is also charged to customers of the competitive service providers, so Direct Energy complained even more strongly about it.  It joined Microsoft in asking the SCC to simply disallow the minimum charge, at least until Dominion establishes exactly why it needs the money and how the charge will go away once those costs are recovered.  If not granted that, it asked the SCC to limit the margin charge to nothing but actual distribution facility costs (the wires).

The other argument – and this one had examiner Roussy engaged – involved the practice of financial hedging against those inevitable wide swings in energy prices under a market-based pricing scheme.  Dominion admitted it might engage in hedging directly with the MBR customer, and that had Direct Energy complaining it then is no longer a market-based rate.

“That’s a special contract,” Direct Energy’s consultant Frank Lacey testified.

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4 responses to “New Industrial Rate Still Challenged By Microsoft

  1. Basically Microsoft wants 100% renewable to appease the enviros but also they can probably get 100% renewable cheaper than Dominion. But that’s because our elected officials have given Dominion nice profit margin. Frustrating. So Microsoft is saying let the public pay the profit margin to Dominon, and let us off the hook.

  2. It’s not readily apparent what is driving Microsoft’s complaints besides some unspecified level of money and without that, it’s hard to know if this is a battle between two monopolistic titans or Microsoft has some real issues that affect other businesses also and in turn, affect decisions to locate (or not) in Virginia.

    I can imagine at some point Microsoft goes to our General Assembly and says that Virginia is NOT “business friendly” and they’ll locate elsewhere when/if they can.

    Is this about simply money alone or also about the circumstances of how Microsoft gets electricity in other states and they expect Virginia to compete on that basis?

    Microsoft is not Facebook or Google , they’re more of a software company and so is this also about software development jobs versus large data centers with minimal staffs?

    I think we know what this is to Dominion. They intend to get every penny of value they can out of their monopoly and they’ll fight for it tooth and nail at the SCC and the GA – even against the likes of Microsoft and other big employers.

    I think part of this is just about Dominion having such a stranglehold on energy in Va that they can and do get to set up all kinds of funky tariff arrangements and companies like Microsoft look at it and they can’t even quantify the impacts to their own bottom lines AND they feel that Dominion is trying to individually negotiate each agreement with each company and that does not sit well especially in terms of longer-term contracts into the future.

    But I also wonder about REC Co-ops in Virginia – some in NoVa and others in exurbs – why would Microsoft not go to them to see if they can get better and just go around Dominion?

    I bet there is more to this story on that basis?

  3. Well, to be served by a co-op you must be in its territory. And co-ops I think can and do offer market based rate products. The one in Northern Virginia serves quite a few of the server farms. That may play a role in why it departed ODEC and does its own acquisition of wholesale energy

    No question, when Microsoft, Dominion and Direct Energy are stomping around the “little guy” consumer is not the central focus. Big bucks on the line all around. The case matters to us little guys because of that subsidy risk, and because as the big guys benefit from retail competition, the clamor grows for it at the residential and small commercial level.

  4. Steve, you said, “the company also adds on what is calls a minimum demand charge, a guaranteed monthly minimum payment should the customer have a period of low or no demand. Dominion claims it recovers the cost of facilities needed to serve that customer.” The only facilities involved in serving this customer are distribution facilities already covered by the distribution charge on the customer’s bill. There is no rationale for a minimum energy charge in addition to that.

    And you say, “A key consideration for the SCC is whether the special rate is so low it shifts utility costs over to other customers, in effect creating a subsidy for the large users. In her written testimony, staff utility analyst Allison F. Samuel said it might, but also noted that all 143 of those potential MBR rate customers already have a legal option to leave for a competitive service provider, and their departure would have an even greater potential to shift costs.” We continue to hear this from the SCC about how allowing this customer to be served by a CSP will cause even greater cost shifting. If the costs of transmission, distribution and billing are properly allocated to those respective charges and the departing customer only saves by eliminating Dominion’s generation charge, there is no cost shifting. Any excess capacity freed up by the departing retail load can be sold in the wholesale markets the same as before, but now there’s no offsetting payment to the PJM energy market by Dominion’s LSE division, Vepco, to serve this customer. Why Dominion is going through all these gyrations to keep on serving this customer at a discounted rate looks strongly like the rest of Dominion’s customers are being asked to subsidize Dominion’s effort to justify placing so much generation cost in the retail customers’ rate-base — even as retail customers try to leave because of it. I think the SCC staff misconstrues how costs are shifted differently by retail access with versus without ratebasing.

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