Rider E Case Shows Many Flaws With This Process

Key operating data on some Dominion Virginia coal plants, important to the Rider E case but hidden from us. Source: Office of Attorney General testimony.  Click for larger view. 

Dominion Energy Virginia’s pending application for a new charge on electric bills for coal ash remediation is both a fairly routine request and an illustration of what is deeply wrong with Virginia’s electricity regulation.

When the major investor-owned utilities negotiated a return to regulation in 2007, the ability to create and collect these stand-alone add-on charges (“rate adjustment clauses”) was one of their demands.  It was the other major Virginia utility, Appalachian Power Company, that was most concerned about the ability to collect the cost of environmental compliance and it has had a rider on its bills for that purpose for some time. 

Now 12 years later, Dominion is finally getting around to requesting Rider E, seeking to collect $302 million in capital costs for coal ash disposal at three major facilities, plus financing costs, plus a profit margin, possibly amortized over decades.  At least some of the coal-burning power plants involved are already closed, and the others are under deep financial strain with closure on the horizon.

The $302 million involved has been spent already to meet federal environmental rules, most of it at the Chesterfield coal plant.  But the 2019 General Assembly authorized massive additional spending on enhanced storage and recycling of coal ash, using clean-up standards that exceed existing federal rules, so the $302 million involved in this case is just the start.  The $2 or so it will add to the monthly residential bill for 1,000 kWh is also just the start.

The record on the case has been building over the spring, with some fairly sharp disagreements between the utility, consumer advocates and environmental advocates.  The Office of the Attorney General’s outside expert, Scott Norwood, is challenging some of the money spent as imprudent and unnecessary (here), and the State Corporation Commission’s staff has complained Dominion’s actions haven’t conformed with plans it filed with the SCC.  Here is a Richmond Times-Dispatch summary from a few weeks back.

Even environmental witnesses are arguing some of the spending was unneeded.  Devi Glick of Synapse Energy Economics, on behalf of Sierra Club, makes the same points as Norwood that much of Dominion’s spending at Chesterfield was not necessary and should not be charged to ratepayers.

In rebuttal testimony filed recently (here), Dominion Vice President for Generation Construction Mark Mitchell responds that the wastewater treatment facility and new landfill which are also part of the 2016 Rider E improvements will continue to be needed, despite the parts of the Chesterfield plant already closed.

“Respondents seem to suggest that the prudence of the Projects that were initiated in 2015 should be analyzed based on current, 2019 information. No one can predict the future with 100% accuracy and that is not the appropriate standard to review these projects,” Mitchell wrote.

The disagreements in the filed testimony will probably lead to interesting exchanges when the SCC holds a hearing June 11.  The law favors creation of riders, so Rider E is likely coming to your bill in some form, destined to grow in coming years.  What makes this case interesting?  What are the problems with our existing process highlighted by this case (and frankly many of the cases reviewed in the past year on Bacon’s Rebellion?)

Widespread Secrecy.  Far too much of the information in these filings (and most other cases) is declared by the utility to be confidential and hidden from view, with the SCC’s blessing.  Only participants can see it after promising not to reveal it.  Most of the data behind the argument that these coal plants were obviously uneconomical and slated for closing is redacted.  A chart pulled from Norwood’s testimony used above shows the problem.  Why should such data be secret?  It is wrong that we who pay can’t know what we’re paying for.

Breakdown of Trust.   Here’s what the SCC’s Gregory Abbott, deputy director of the utility regulation division, included in his written testimony:

“There appears to be a troubling pattern of the Company telling the Commission one thing in its Integrated Resource Plan (“IRP”) filings while almost simultaneously taking actions contrary to its IRP representations in its real-world decision making.  In the case of the 2015 IRP, this is particularly concerning.  In 2015, the Company had actually executed two multi-million dollar contracts for the continued operation of  Chesterfield Units 3 and 4 in the two months immediately preceding the 2015 IRP filing  and failed to disclose this information to the Commission while concurrently representing to the Commission that Chesterfield Units 3 and 4 were likely going to be retired in 2020.”

This builds on earlier comments in the current integrated resource planning case, where Commissioner Mark Christie complained from the bench that what Dominion had filed didn’t match what it was telling Wall Street analysts in an investor presentation.  Neither the SCC nor an investor forum are locations where dissembling are allowed.  Who wasn’t being given the right story?

All of us need to be concerned when the level of trust has gotten this bad, especially when so much crucial data is hidden from public view.

The Interplay of Riders and Base Rates.  As noted, this is Dominion’s first rider for specific environmental compliance, despite the millions it has spent on those requirements year after year.  To date the money was apparently baked into base rates, part of maintenance capital or operating expenses of the various plants in the rate base.  Given what is known about the company’s finances, those base rates have so far covered those costs and left plenty of profit, profit suspected of being far in excess of the allowed return on equity.

But this is an area where the law allows the utility, on its own motion, to propose a new RAC and pull those operating costs out of base rates.  That would be fine if the SCC had full authority to adjust the base rates down in compensation, but the General Assembly has foolishly interfered with that process.  The state law specifically prohibits the SCC from looking at other aspects of the company’s finances when considering these new RACs, which is deeply unfair to consumers.

Perverse Incentives.  One of the allegations in testimony from Sierra Club witness Jeremy Fisher is that Dominion pushed ahead with the improvements, knowing the coal plants might not be open long, because of its ability to collect a profit margin year after year on any capital investment.  This is from his testimony, yet again with the key portion redacted.

“Q.  What is your evidence that the Company saw the CHIA Projects as an investment opportunity?

A.  The Company provided detailed presentations provided to various management committees prior to and during the construction of the CHIA Projects. In one particular presentation to the [BEGIN CONFIDENTIAL] [END CONFIDENTIAL]”

Fisher spends much of his testimony (here) arguing the coal plants are not viable long term, but again is unable to reveal much of his data. Would Dominion have made the investments if the plants were owned, not by an integrated company with captive ratepayers, but by an independent generation entity that had to meet a competitive price in the market?  Would it have done these things with no guarantee of a return on equity for its stockholders?  We’ll never know.

(Note:   An earlier version of this story attributed that final allegation about profit motive to the Attorney General’s witness Scott Norwood, an error on my part.  SDH)

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21 responses to “Rider E Case Shows Many Flaws With This Process

  1. The more we hear, the more outrageous it is – and to think before Steve showed up here at BR, most, if not all of us, were woefully ignorant of the scope and scale of the investor-owned utilities in Virginia are allowed to make a profit on EVERYTHING they do – including environmental remediation.

    And I think it is charitable to call the presentation of materially different information in different public and private venues as “flawed” especially when decisions are made in those different venues based on information that is not consistent.

  2. I totally agree with Steve that the system needs to be transparent, I am uncomfortable with a legislative/regulatory regime that allows Dominioni to retain profits over and above the return normally allowed by law, and I share Steve’s concern that Dominion (and Apco) can pick and choose between the different types of rate setting schemes (base rates, RACs, fuel cost adjustments) that maximizes their profits. On the other hand, I do not share Larry’s ire that Dominion is “allowed to make a profit on EVERYTHING they do — including environmental remediation.”

    Environmental remediation requires the expenditure most every year of hundreds of millions of dollars of capital. If government compels a utility to invest that capital, the utility should be entitled to a fair return, just like any other investment.

    The effect of Larry’s vision over the long run would be to drive utilities into bankruptcy. It would serve no one well for Dominion to join California’s PG&E in the ranks of failed utilities that cannot adequately fund routine system maintenance, and whose cost of capital is so high that ratepayers are dunned twice — once for the cost of capital investment and again for the risk premium on interest rates charged by financial markets.

    • Agreed. A fair return on capital is a valid part of a just regulatory scheme. As noted, my main beef with the proliferation of RACs is there is never any back-adjustment of the base rates to prevent double recovery of a cost. Otherwise RACs are transparent and there really is not chance of excessive profits because they are reviewed and adjusted annually.

      • In theory that makes sense, but complicate the RAC with deferred unrecovered balances and front-loaded amortization offsets and deferred tax refund adjustments and mismatched timing of the rolling-in of construction costs and the absence of similar RAC treatment of retirements — and you have an opaque mess! If the utility wants a cost recovered in an RAC the Commission has to ask why, and tailor the remedy narrowly without losing sight of the overall big picture. Do all those annual adjustments under DOM’s RACs really recapture for consumers the same benefits they’d have received with frequent comprehensive updates of base rates and no RACs? And would the utility’s parent company really have received the investment downrating it probably touts to intimidate its regulators? Or if downrating is threatened, is it because the utility is so egregiously over-recoving its costs and the market sees the end to a good thing?

    • Yes, an investment for coal ash removal or other environmental improvements is just as much an investment of capital as for new generation, and should be treated identically. The standard ratemaking formula is total rate revenue (over a period of time such as a “test year”) should equal the sum of (1) utility operating expenses less revenues, plus (2) the carrying cost of investment in utility assets (a) deemed used and useful and (b) to the extent not depreciated, where the carrying cost consists of the direct cost of debt and preferred stock and the estimated cost of equity (i.e., what level of return on investment, or profit, do investors expect of a utility in order to continue to buy the utility’s stock at a reasonable price?) as measured by comparable investment opportunities in the nation’s stock markets. Whether the debt or equity is sold to raise capital for environmental investment or something else, and whether that profit is associated with environmental investment or something else, and to what extent that profit is reinvested by the utility or paid out to investors as dividends, is totally beside the point when it comes to setting “just and reasonable rates.”

  3. Dominion was going to have coal ash remediation cost in the base case, because EPA regs required capping in place. The Dems wanted to go the extra mile and promise to excavate and relocate the coal ash at considerable extra expense. But I am not clear on how much $$ over the base case the Democrat solution is costing. As far as I can see, no other state is doing this except in some special risk cases, NC is doing. So now we hear NC and some other states elected officials asking for excavation of all sites like Va…. interesting to watch, and also contradicts the Dem argument we had in Va., that everyone else was doing this.

    • TBILL – if you read the POLLS – it’s not just Dems that want the coal cleaned up. Even some GOP do!

      • The votes below are way more than just Dems:

        “RICHMOND, Va. — Two bills are headed to the governor’s desk requiring Dominion Energy to clean up millions of tons of coal ash at four Virginia power plants in the Chesapeake Bay watershed.

        SB 1355, introduced by Republican Sen. Frank Wagner of Virginia Beach, was approved by the House 93-2 on Friday. The bill’s passage comes a day after the Senate approved an identical bill, HB 2786, 38-2.”

      • I’m convinced that the utility saw the handwriting on coal ash when it devised this request for Rider E in 2018, and probably expects to fold the cost of that new 2019 bill into Rider E in the future, but for the moment the two are separate issues. Larry of course is right (happens now and then!) that some of the loudest demands for the 2019 legislation came from Republicans. They were in the front row at the news conference. Those in Chesterfield County and perhaps some in the coalfields may only now be waking up to the reality that these added “external” costs just mean the end of coal and the related jobs that much more quickly. I’ll always remember the Chesterfield County Administrator demonstrating his ignorance on these issues in 2015, as he loudly testified in favor of that stupid rate suspension bill. Now this case is revealing that even in 2015, the end of that plant in his county was clearly in sight.

        • Well no, Larry was just trying to correct the oft-repeated falsehood here in BR about the coal ash being a “Dem” or “Green” idea that got forced on people against their will.

          I’s okay to have partisan views – we all do – but misinformation/disinformation about who supports something is not.

          Nowdays – it’s becoming more and more common for people to justify their partisan views on purposeful false premises or “beliefs” regardless of the actual facts.

          So when I see that – I call it – and in the coal ash thing -that false thing was being repeated over and over even when it was pointed out that that was not true – so I had to go get the legislative vote totals themselves to bring us back to the truth – which is – a majority of people of all political views – support it – and those views have been reflected by those elected in the GA who did vote that way.

          The simple bottom line is that a majority of people support the coal ash cleanup and our legislators reflect that majority with almost unanimous votes in the GA.

        • Yes I heard it was a bipartisan champaigne celebration party of the deal with Dominion to haul away the coal ash. But still it is frivolous expense probably, capping in place could be better eco-solution, and haul away to new landfills may be problematic to accomplish.

        • Yes I heard it was a bipartisan champaigne celebration party of the deal with Dominion to haul away the coal ash. But still it is frivolous expense probably, capping in place could be better eco-solution, and haul away to new landfills may be problematic to accomplish.

  4. Yeah, I’m NOT advocating that we remove the profit from their core monopoly. They should continue to make their full allowed profit on generation, distribution, etc but other stuff like environmental remediation and other RACs should NOT charge more than the actual costs.

    I do NOT think they should get a profit from coal cleanup. That’s a cost to all that should be for the actual costs but not a profit. You really don’t need money up front to do that anyhow – you just need a stream of revenues to pay for ongoing removal.

    so NO – Dominion should NOT make a profit on the RACs… and you can see why they are submitting so many of them – it’s a “profitable” business. But again – most of these RACs don’t require up-front money. They will be pay-as-you-go from ratepayers. The monthly bill generates the money to pay for the work.

    Also – what happens to the electric cooperatives on these issues? Where do they get up-front money for environmental remediation? My perspective is they add on such costs to the monthly bills and it does not include profit – and Jim – the co-ops do not “go broke” they basically recoup costs as encountered and I’ll take that utility model any day over Dominions rape and pillage.

  5. As far as I’m concerned, the entire state of Virginia could operate like the Co-ops do – and in the bigger scheme of things – why not?

    The California utilities did not go broke because they failed to make a “profit” no more or less than other utilities like the Co-ops in Virginia which basically make enough money to pay for costs -and they are in terms of quality and reliability – no different than Dominion.

    NOVEC – a co-op that is independent and not connected to Dominion nor ODEC manages to provide reliable power to it’s customers buy buying power from PJM and passing those costs onto the ratepayers with no where near the “profit” that Dominion is getting from it’s customers in NoVa – adjacent to the NOVEC territory!

    what’s not to like about NOVEC?

  6. So what if all the anti-Dominion people started pushing for referenda to displace Dominion pursuant to Virginia Code § 15.2-2109? It would be a PR and political nightmare for Dominion. Sometimes, you don’t need to win every battle to win the war.

  7. Steve, amidst your list of horribles, the most egregious specific thing you point out about the state of rate regulation in Virginia because it’s so easily fixed is this: Virginia “law allows the utility, on its own motion, to propose a new RAC and pull those operating costs out of base rates. That would be fine if the SCC had full authority to adjust the base rates down in compensation, but the General Assembly has foolishly interfered with that process.”

    (1) RACs are devilishly complicated when it comes to matching them with base rates; of course the SCC should be allowed to update base rates instead (or at the same time) whenever it feels it should, to prevent overlapping recovery and timing gimmicks that only the utility understands! Ratemaking is hard enough without tracking all these moving parts. Most utility commissions will concede one exception, for the “fuel and interchange” rider used by many, many electric utilities with their own generation and wholesale purchases and sales, in order to keep track of the rapidly fluctuating prices of fuel and interchange costs, with rate adjustments on a monthly basis. But even such rapid changes as fuel costs can be (and in some states have been) dealt with by means of a large balancing account plus provision for rapid, periodic Commission corrective action anytime the balancing account gets out of an acceptable range.

    (2) RACs in general are and should be forbidden; any utility that wants to roll new investment into rate base should have to submit its entire set of rates to the Commission for review, and in general the Commission should make a one time change to the base rates themselves. Utility plant is not built in a vacuum; usually when a new generator or transformer goes into service it replaces an old one and so many work force assignments and other costs are changed. But in Virginia, whenever DOM builds new plant today it simply files another new RAC and expects that isolated cost to be approved in a vacuum. Rates are usually based on a “test year” but that year should be adjusted to make it “forward looking” based on the utility’s reasonable projections of costs, including construction costs. It’s only common sense that all plant retirements (as well as plant additions) and all changes in labor and other operating expenses associated with those expected changes in plant — in short, everything that has changed (and is expected to change near-term) since the last base rate case — should all be updated and reflected in new rates simultaneously.

    • RACs are not a creature of rate “regulation” in Virginia, AC, they are a creature of Virginia LAW, enacted by Dominion’s friends in the General Assembly. The Commission had nothing to do with the creation of the ratemaking mechanism known as the RAC.

      You are dead on as to their detrimental effect on ratemaking, however.

  8. Compare how Dominion is operating with all these RACs that are beyond the original core monopoly – not only to other States like California – AND Texas but also to how the Co-Ops operate in Virginia – the 12 that are associated with ODEC and NOVEC whis operates independently.

    Can those cooperatives bring RACs in front of the SCC like Dominion is doing?

    My impression with my own provider is that their core business – providing electricity and distributing it – is controlled and it appears on my bill as essentially “metered” service plus a charge for the capital facilities infrastructure. Anything beyond that is a voluntary fee-for-service the OFFER. It’s NOT put on everyone’s bill much less with a separate guaranteed profit.

    It works this way pretty much across Virginia in a dozen other co-operative districts and not at all like Dominion is operating with all these RACs.

    I get my electricity just like Dominion customers do. It’s reliable and the fix it promptly when it goes down.

    A question I have asked here and not sure I’ve seen an answer is how will the Co-ops handle the coal ash remediation?

    • Only Dominion and Apco have access to the RAC statute, Larry. It does not apply to any of the electric cooperative, nor to the other investor-owned utility that operates in Virginia, Old Dominon Power Company, a subsidiary of Kentucky Utilities that operates in far western Virginia.

      As for the coops and coal ash remediation, as far as I know, ODEC the generation cooperative has only 1 coal asset in Virginia, the Clover plant which it co-owns with Dominion. I expect whatever Dominion gets to do with its half of the coal ash, ODEC will get to do with its half.

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