Ratepayers Cover $760,000 Line for One Customer?

Highest cost projects from DEV underground line program phase three,with lifetime revenue requirement from ratepayers. Source: SCC pre-filed testimony.

The State Corporation Commission staff audit of Dominion Energy’s ongoing effort to place residential and small business electric service tap lines underground has turned up some expensive examples.  A handful of lines will cost ratepayers hundreds of thousands of dollars over time to serve a single residence.

The average cost for the first 18,000 customers getting new lines is about $50,000 each based on my own calculation.

Those are the all-in costs for planning and constructing the lines, then adding the interest cost or profit margin depending on how the utility financed it. The projection uses the current 9.2 percent return on equity. The money is collected over the estimated useful life of the new lines, about 40 years.  For phases one, two and three the total cost with financing is about $921 million, according to the SCC staff analysis.

The SCC staff compared the full capitalized cost of installing the highest-cost lines to home values.  “This means it is possible in some instances that the company could have purchased the customer’s homes at a lower cost than undergrounding their tap lines,” testified David J. Dalton of the SCC staff.

This program to expand underground lines is something else paid for with a specific monthly charge on everyone’s bill, a rate adjustment clause known as Rider U.  It is also something else that the General Assembly has deemed to be in the public interest and virtually off-limits to SCC challenge.

Photo: Dominion

The annual review of the program to adjust the billing charge is underway now and was the subject of a hearing at the SCC Tuesday. With big questions settled by the legislature, the discussion is focused on minor issues such as accounting changes or how the costs are allocated between various classes of customer.

The largest industrial customers are exempt but everybody else under the SCC’s jurisdiction pays, including the 600,000 customers who already have underground service (and paid for it themselves) and the unknown number who will never get underground service.  For that mythical average residential customer using 1,000 kwh per month, the current charge is 55 cents per month and Dominion is asking to raise it to $1.98 as of next February.

The legislature has authorized this to go until at least 2028, and Dominion expects to place 4,000 miles of lines underground in 12 phases at a direct cost of $2 billion and a fully-capitalized cost of almost $6 billion.  At that point the residential charge will be more like $5 per month.  The charge for commercial or small industrial customers was not reported.

Spending other people’s money is very popular.  The record on this case includes favorable comments from Senator Glen Sturtevant (R-Richmond), Delegate Vivian Watts (D-Fairfax) and several local officials where the program is active.  A spokesman for the American Red Cross attended Tuesday’s hearing in person to testify about that organization’s support, noting how wonderful it is not to have your power go out.  At the end he said his own house has already been upgraded under the program.

SCC estimate of rate impact of various rider changes pending.

One point for consumers:  Unlike the transmission rate adjustment clause Rider T, Rider U accounting has been adjusted to reflect the lower 21 percent federal income tax rate that went into effect January 1.

The Commission staff raised other questions about the criteria being used to decide where to do this and encouraged more focus on lines that serve larger numbers of customers.  Some of its accounting corrections were accepted by Dominion and some others will be up to the judges.  This case, however, lacks the drama of earlier face-offs when the SCC staff aggressively challenged this whole idea as a poor investment.

Because of its skepticism, the SCC in 2017 told Dominion to limit phase two to $40 million, but the company blew past that to spend about $100 million.  It then wrote into the new statute that it had to be paid for any underground lines installed after September 1, 2016, effectively voiding the SCC’s order.

The SCC is also monitoring the impact of the program, even though the legislature has already decided it is a good deal for customers without waiting for data.  Staff is also asking the commission to direct Dominion to provide more info on the benefits to the whole system.

In the long run fewer or shorter outages will increase the company’s revenue and reduce its repair costs.  Both of those improve the bottom line on the company’s operations at zero cost or risk to the company.  Under traditional electricity ratemaking, if the company’s costs are going down that eventually should lead to lower base rates for everybody.  Under Virginia’s 2007 regulatory scheme, the savings might be shared with customers as credits.

But with Dominion Energy’s basic financial operations also off limits to the SCC, per General Assembly orders, and its base rates prevented from going down, any financial benefit from the extra reliability paid for by ratepayers flows to the stockholders.

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25 responses to “Ratepayers Cover $760,000 Line for One Customer?

  1. This is ridiculous. It’s common in the utility industry to have a set limit as to how much a utility must spend in extending lines to new or unserved homes. Generally, costs beyond that are paid by the prospective customer and financed either by the customer or on his/her bill by the utility as an extra charge including interest on the capital advanced.

  2. $200,000 to $300,000 to bury the line for a single customer seems crazy, no matter how outage-prone that line is. I’m surprised Dominion included four such lines in its plan. While I approve of the line-burial plan in concept, surely individual projects must meet some rational cost-benefit test. Hopefully, the SCC staff can articulate reasonable guidelines.

  3. The legislature capped the program at $20,000 per customer or $750,000 per mile, but that’s initial cap ex – not the full capitalized costs over time — AND ITS AN AVERAGE! Its like somebody wrote a loophole in the bill. Guess who.

  4. Makes me wonder if all those folks hollering up in NoVa would still want the lines buried if they had to pay those costs!

    Also – consider rural – farms – where both roads and electric are extended to sparsely settled places… we already know the answer to that – the Rural Electrification program.. right?

    • Well, yes – most of them are served by the rural coops, not the investor owned utilities Apco or Dom.

      • did you say taxpayer-subsidized co-ops? 😉

        what changed America was farm-to-market roads, public education and rural electrification… all taxpayer-subsidized programs, right?

        The big electric companies much like the modern-day cable companies for TV/Internet wanted no part of providing service to rural. Correct?

  5. Rural electrification was one of the great achievements of the New Deal era. They truly are co-ops, run not for profit and owned by the customers. I can’t remember the details of how the government encouraged or subsidized this, and they may have some special treatment beyond being non profit. The financial model behind the urban systems, needing a substantial return on equity for stockholders, was not spreading out to the countryside understandably.

    But that’s not what we’re here to talk about Larry. With the filing now of so many new ways for the utility to fleece us under this new legislation, my point is go change out your lights to LED’s and move back to the 32 inch TV, because your monthly bill is about to go sky high. The SCC points out how we are being ripped off and Virginia just snoozes on.

    I wrote this and then had one of those midnight insights – even I can’t believe the legislature is this dense. Dominion will collect $760,000 on building a single tap line for $260,000 in cap ex – forty years of profit! Even with the average lifetime revenue requirement of $50,000 this is so outrageous a business professor would use it as a case study of gross venality.

  6. re: ” But that’s not what we’re here to talk about Larry. blah blah blah The SCC points out how we are being ripped off and Virginia just snoozes on.

    Actually it is in a bigger context and that is why do we have 10 or so non-profit, customer-focused RECs and 2 investor-owned monopolies that are committed to maximum profit and monopoly powers and not truly serving ratepayers like the non-profit, public-interest corporations do???

    why do we put up with one outrage after another rather than convert Dominion to a REC-like corporation that is responsible and accountable to ratepayers and not just who gets lobby and campaign money in the GA?

    We have the worst of both worlds right now.

    • Yes, in many ways we do. No need to try to buy Dominion away from its owner-investors, which would break the state’s bank, and which I would never support. We just need the legislature to understand that it is being lied to, bamboozled, and has sold out the people for a few measly campaign dollars and some public relations flackery. But note: are you reading about this in the Times-Dispatch, the Pilot or the Post? Uh, no…..(they take ad dollars too!)

      • I do not have a problem with for-profit ventures at all… but I also don’t have a problem with employee-owned public interest corporations either.

        What I have a problem with is companies with govt-granted monopoly power who ALSO influence legislators to go along with behaviors far beyond their monopoly status AND who have no problem influencing legislators to neuter the agencies that regulate them.

        I have zero problems with media that report their activities. I never rely on one to get the facts. I rely on a variety of sources to understand what is the truth – and not.

        You keep saying we need the legislature to “realize”. I think they already do and they are okay with it especially the ones who receive thousands of dollars of campaign money and are more receptive to Dominion lobbyists than public interest lobbyists who genuinely in most cases are working on behalf of consumers and the environment – no matter their source of funding. Dominion and AP on the other hand – see such money as “investments” to better their financial bottom line and stock prices – even when it clearly is not serving the best interests of the ratepayers and taxpayers. You don’t “try to convince” the legislators about this – they already know and they have made their choices; few of them, even the ones who don’t take money, have the courage to directly challenge the status quo… until now… it seems.

        Surely your career as a lobbyist has not jaded you to the point where you accept the current relationship between Dominion and the GA as one in which the GA just needs to “understand”… I hope… 😉

      • The Ministry doesn’t care about the impact of anything on ordinary people, especially those in Virginia cuz we don’t pay enough taxes and some people don’t want more illegal immigrants. Hell, the Post has supported higher tolls on the DTR to fund Metro that gave the Tysons landowners hundreds of millions in profits and the rest of us cut-through traffic that has reached a point where VDOT is considering shutting down the northbound entrance ramp to the Inner-Loop at Georgetown Pike from 1 pm to 7 pm.

  7. Quelle Surprise, Dominion’s 2018 Contributions To Date
    One through four should be no surprise, particularly No. 1

    $22,500 Saslaw for Senate – Richard
    $7,500 Norment for Senate – Thomas
    $5,000 Cox for Delegate – Kirk
    $5,000 Wagner for Senate – Frank
    $2,500 Lucas for Senate – Louise
    $2,000 Northam Inaugural Committee 2018
    $2,000 Stanley for Senate – Bill
    $1,250 Spruill for Senate – Lionell Sr
    $1,000 Herring for Delegate – Charniele
    $1,000 Lindsey for Delegate – Joseph
    $1,000 Ransone for Delegate – Margaret
    $1,000 Sickles for Delegate – Mark
    $1,000 Surovell for Senate – Scott
    $1,000 Torian for Delegate – Luke
    $1,000 Watts for Delegate – Vivian
    $927 Adams for Delegate – Les
    $927 Rush for Delegate – Nick
    $527 Marsden for Senate – David
    $500 Boysko for Delegate – Jennifer
    $500 Hayes for Delegate – Cliff
    $500 Jones for Delegate – Jay

  8. even worse if you look at the total over the years:

    Legislators whose campaigns have received more than $50,000 from Dominion (lifetime)

    Recipient Party District number and region Total $

    Sen. Saslaw D 35 NoVa (Fairfax/Falls Church) 298,008
    Del. Kilgore R 1 Southwest 162,000
    Sen. Deeds D 25 Piedmont 109,700
    Sen. Norment R 3 Middle Peninsula/Tidewater 107,740
    Del. Cox* R 66 Central 90,799
    Sen. Wagner R 7 Tidewater 79,735

  9. Updated Numbers
    Sen. Saslaw D $350,508
    Del. Kilgore R $173,391
    Sen. Norment R $124,240
    Del. Cox* R $111,711
    Sen. Deeds D $109,700
    Sen. Wagner R $102,235

  10. Oh, a bargain, trust me. The company gets no better return on investment on any dollar it spends.

    • So you’re saying our State officials are not only corrupt but they are cheap. But we knew that, just look at Delegate Hayseed’s, err, Kilgore’s wardrobe, Richard Petty chic, or is that his attempt at a moustache?

      • Well, those are your words, not mine. But the campaign contributions do have a major impact, a measurable “see no evil, hear no evil, speak no evil” outcome. (SNEHNESNE?) They just don’t want to believe those nice people might be taking advantage of the rest of us. Given a plausible alternative they will go with Dominion’s point of view. Only an election consequence would matter.

  11. Steve,

    Is that “lifetime revenue required” number the total of the 40-year stream of payments, or is it the net present value of that 40-year stream of payments?

    The one number I checked was about 2.5 times the original investment. The gross calculations that I have done on power plants show an amount paid by ratepayers to be closer to 4 times the original investment. If the 40-year total was expressed as a net present value that would explain the difference.

    What has been lost upon the legislature and the other policymakers in Virginia is that the Utility Compact that has functioned for over 100 years is based on the award of a monopoly in exchange for fair rates for customers and a fair return for shareholders.

    In the state energy policies of the past several years the new requirements provide much higher revenues to the utilities at the expense of the ratepayers.

    This should come as no surprise. The policies are coming from the utility holding company, a for-profit entity whose executives see that it is their primary duty to increase shareholder value. About two decades ago, Dominion’s holding company obtained about 40% of their revenues from regulated sources. This was when Virginia was exploring a change in its utility regulation that would have decoupled generation from retail sales (and opened those up too). I suspect that the holding company thought they could earn more profits in the open market, but soon found out that the wholesale energy market was more competitive than they had hoped for

    They soon sought cover under the comfortable wing of state (re-)regulation that allowed customer subsidies of generation by putting it in the rate base. It appears that the new strategy was to invest in the legislative and regulatory process to increase profits. Presently, Dominion Energy obtains over 80% of its revenues from regulated sources.

    This is a legitimate way for a company to increase profits as long as it is within the law.

    What surprises me is that the legislative representatives keep making laws that are against the interests of their constituents and the state economy when it comes to energy issues. It seems that having lots of campaign contributions is a more effective way to get re-elected than it is to look out for the well being of your constituents. To be fair, it is only recently that significant numbers of people started paying attention to energy issues.

    The monopoly only really applies to the wires. About 40% of our states have successfully decoupled generation from retail sales and all have maintained functioning utilities.

    The fair rates have not held up as well recently. The states that surround us all have lower rates than Virginia. The only one higher is Maryland. But they are embarking on designing a modern energy system and have lowered their rates in the past year.

    Many other states lowered their rates too, in response to lower wholesale electric rates and the contribution of cheaper renewables. Virginia has kept our rates locked into the base rates established during 2007 when energy prices and wholesale electric rates were at their peak.

    Other factors such as the cost of storm damage are based on those old assumptions. So even if undergrounding lines provides a savings, those savings will go only to the shareholders. The ratepayers will pay for it, but receive no benefit. Just as with the smart meters.

    As a utility guy, I am baffled by this type of policymaking. Appropriate utility projects are supposed to be good for both the shareholders and the ratepayers. We have a very tilted one-way street here in Virginia.

    Although the utilities gain by this initially, I am concerned that it will have a long-term negative effect. There are an increasing number of ways to reduce your energy usage, including self-generating some of your own power. Customers that can afford to do so, will gradually choose to use less energy from the grid. There will be fewer customers left to pay for rising costs. And they will be the ones most economically challenged to do that.

    We will have created a downward spiral for our utilities and a second-tier state economy.

    All of this can be avoided by creating ways for utilities to prosper by doing what is good for their customers. Other states are doing it and we are already several years behind. If we extend the 20th century 30 years into the 21st (as our current energy policy directs) we will suffer the consequences.

    • I think those projections use 2018 dollars to pay off the principle and the present ROE, meaning inflation ROE adjustments could move either way. For the interest I assume if is based on the initial rate. I can check. There is an annual review and true-up. Bottom line is it’s like a whole new power plant in the rate base.

  12. Dominion spokesperson Le-Ha Anderson has submitted the following comment:

    Q. How does undergrounding the most outage prone tap lines benefit all customers? Why spend so much money to help just a few customers on a small circuit vs. a large neighborhood?

    A: Our data shows that approximately 35% of the outage work locations are repaired in the last half of a restoration effort. That’s partly because many of these tap lines are in areas where access is difficult.

    What’s important to keep in mind is the number of outage events (work locations) we are able to eliminate in future weather events is much more relevant than simply the number of customers converted to underground. A reduction in outage events reduces the number of work repair locations and leads to shorter restoration times for all customers.

    There is the same value in undergrounding a tap line that may only serve a few customers vs one that serves many in a subdivision. The amount of labor intensive time it takes to repair a pole, replace a cross-arm, or re-pull a span of wire is the same regardless of the number of customers served by that line.

  13. I greatly appreciate the response and perhaps at some relevant point we should continue this with a new post. Nobody involved in this on any side disagrees there is a benefit to the entire system, but the SCC has asked for more information on the location choices focused on things like duration of previous outages. Staff testimony indicates they would like more evidence on some of those very issues, which would better quantify the benefit side. The cost is enormous and just like with a house mortgage or any other long term amortized investment using other people’s money, heavily weighted to interest and profit.

  14. These are exactly the issues that the SCC should consider and did consider before they did not approve some of the proposals that were presented to them earlier before the GA intervened and said this was in the public interest.

    Investments in outage reductions have a point of diminishing returns. At some point investing more to reduce outages by that next unit of time does not pay off. This should be what is identified by Dominion’s data and evaluated by the SCC.

    Other considerations should include the fact that underground lines have half of the service life of above ground lines because they are exposed to higher heat. And when underground lines have a problem it takes much longer and is much more expensive to fix. Ultimately, this boils down to an economic tradeoff as long as the data is accurate and the evaluation is good.

    My problem with this is that it will be a large additional expense for ratepayers, but no cost savings for them as long as the current energy bill is in force (2028). Those locations with underground lines will have fewer storm damage incurred outages as long as they have feeds from lines that are not down. But I think this is intended more as a revenue source and cost reduction measure for the utility. That’s the way the response that Jim’s post reads. “The amount of labor intensive time it takes to repair a pole, replace a cross-arm, or re-pull a span of wire is the same regardless of the number of customers served by that line.”

    Investments in digital monitoring and reporting (software) for the entire service area might be more cost-effective and have more value for all customers. This would identify specifically where lines were down and save crews time looking for where the damaged portion of the line is. In other states, this has been shown to significantly reduce outage time.

    If all customers are going to pay for all of this, they should receive the benefit from it.

    Utilities throughout the nation have cut back on tree trimming activities to increase profits. Squirrels and trees are still the primary cause of outages, even in good weather. The 2003 blackout that took out power in 9 states was caused by hot weather. Sagging lines touched trees that had grown too tall because tree trimming maintenance was postponed for ten years.

    Again, this evaluation should be a balance of shareholder and ratepayer interests.

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