SCC Examiner Rejects Dominion Tax Argument

A State Corporation Commission hearing examiner has rejected Dominion Energy Virginia’s arguments that it was correct to ignore a lower federal income tax rate in calculating transmission costs for 2018 and is recommending that the full commission give ratepayers the benefit of the lower tax rate immediately.

Chief Hearing Examiner Deborah V. Ellenberg’s ruling was issued July 9, following a June 29 hearing where Dominion employees said it had to use the 35 percent tax rate in calculating bills running into 2019, even though the federal corporate income tax rate had dropped to 21 percent effective January 1 of this year.  This was the subject of an earlier Bacon’s Rebellion post.

At issue is the rate adjustment clause (RAC) known at Rider T1, which passes along to customers the utility’s cost for transmission services.  It is one of several elements on monthly bills and the utility was seeking a substantial increase.  Dominion had put the higher monthly cost for a residential customer using 1,000 kilowatt hours at more than $4, with higher amounts hitting larger customers.

At the hearing Dominion argued that the T1 rate is driven by a formula approved by the Federal Energy Regulatory Commission (FERC) that includes as a factor the base federal rate, and it had to plug in the higher previous tax rate because it hadn’t consulted with stakeholders since the tax rate had changed.   Consumer advocates at the hearing said there was no prohibition on correcting the rates based on the new tax rate.   The hearing officer agreed.

“I find it disappointing that the Company has taken the position that the revenue requirement should include a 35% federal income tax rate that is no longer in effect rather than incorporate the significantly lower tax rate made effective even before the Company made its informational filing with the FERC in January 2018, and well before it filed this Application in May 2018,” she wrote. “It could, and should have, like other utilities, revised its annual filing to include the known and certain tax rate change. I recommend the Commission direct the Company to file a corrected annual filing with FERC effective January 1, 2018.”

The RAC tariff in question is due to be adjusted September 1 and stay in place 12 months.   Ellenberg suggested that the full commission adjust the new rate to reflect the lower taxes, saving consumers $71 million during the period.  She also suggested an additional reduction of $46 million to reflect the lower tax liability during the first eight months of 2018.  Dominion was arguing that consumers would have to wait until the true-up process in future cases to see rates adjusted to reflect the lower tax rates.

Ellenberg ruled against Dominion on a second point, involving a $13 million credit being paid to Dominion by the regional transmission organization PJM.  Dominion argued that payment was for generation services at its Yorktown plant, which is staying open longer than planned.  Ellenberg agreed with the SCC staff, the Attorney General and other consumer advocates that the payment was for transmission services and should reduce the revenue requirement for Rider T1.  The cost of operating Yorktown is fully recovered in base rates and the fuel charge.

If the full commission adopts her recommendations, Dominion’s request for $755 million for Rider T1 over the next 12 months will be reduced to $625 million, which is about the same as was approved a year ago.  That wipes out the 20 percent increase requested by the utility, with any increase in transmission costs being balanced by the lower taxes.

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12 responses to “SCC Examiner Rejects Dominion Tax Argument

  1. We can bet that if the federal tax rate had increased that the company would have sought immediate increase. The Hearing Examiner’s stance should be accepted by all.

  2. Dominion is pursuing what is in the interests of it’s investors. I’m not sure why that is such a revelation but am grateful that someone at the SCC has the backbone to continue to advocate for the ratepayers despite efforts to neuter them.

    • I get and support the idea Dominion needs to advocate what is best for the Company and its shareowners. But advocating for the use of a tax rate that is not imposed is totally inconsistent with regulatory law, unreasonable and likely done in bad faith.

      American Bar Association Model Rules for Professional Conduct Rule 3.1 provides in applicable part: “A lawyer shall not bring or defend a proceeding, or assert or controvert an issue therein, unless there is a basis in law and fact for doing so that is not frivolous, which includes a good faith argument for an extension, modification or reversal of existing law.”

      I just don’t see how Dominion’s claim the proper federal corporate tax rate no longer in effect as a matter of law passes this test. I would hope the Virginia state bar would investigate this situation.

  3. It’s not quite as simple as that. The problem here is that FERC now (like the SCC used to) uses “test year” based ratemaking; and in the case of transmission rates, goes beyond the original test year with a “formula based” rate which adjusts for certain specific cost factors as they are updated from time to time — but not for others. And the SCC has approved a Rider T1 which passes along the FERC-approved rate exactly, neither more nor less.

    The correct response here would be for Dominion to update its FERC formula rate, which would automatically trickle down to Virginia’s retail customers. Here, the Hearing Examiner has decided she isn’t going to wait around for that as, for whatever reason, Dominion or FERC hasn’t acted. She is going to impute the tax rate change as a “known and certain” adjustment to FERC’s rate even though FERC hasn’t made that adjustment yet. Maybe Dominion is guilty of footdragging, and maybe not; the timing may be entirely out of their hands.

    I haven’t researched what is going on at FERC with regard to the lowering of the federal corporate income tax rate, which affects the FREC transmission rates of every transmission facilities owner in the Nation. Usually changes that affect every jurisdictional company in the same way are dealt with by a blanket rulemaking, and may even be retroactive. Meanwhile, I can understand Dominion’s reluctance to impute changes to Rider T1 in this SCC proceeding in advance of their approval by FERC. Would the SCC be so willing to impute T1 changes that moved in the other direction? Not likely.

    • One always adjusts test year data for known developments such as changes in a tax rate. Alternatively, Dominion should be required to put the difference between rates calculated with the old and higher tax rate and rates calculated with the new, correct and lower tax rate into escrow earning at the same RoR as is permitted on the rate base. Once FERC rates are to passed through Dominion makes refunds that include interest at its allowed RoR. That would likely cause Dominion to move to amend its test year data.

      This one is so corrupt that it needs to be stopped.

    • There’s a potential regulatory whipsaw here due to the different jurisdictions involved. Suppose FERC adjusts all formula transmission rates later this year, by rule, retroactive to the date the new tax rate took effect, and orders refunds of the prior overcharge to transmission customers through a prospective rate credit for, say, one year. DE’s transmission subsidiary must then comply. Meanwhile, thanks to the SCC, DE’s retail subsidiary (Va. Power) may not have been paying DE’s transmission subsidiary the higher transmission rate that’s being refunded. Or if it did, it didn’t collect that amount through Rider T1. Result: DE transmission or DE retail is out a bucket of dollars and DE’s retail customers get the income tax reduction twice for the first year. DE couldn’t go back to FERC and get any relief there, because FERC likely would say “we don’t care, that’s your problem with your State regulator, just do what we say as to the rates we control and lower your transmission rate so as to effect a full refund to transmission customers; your retail customers’ rates are not ours to fix.” I don’t know this is what has happened here but I suspect so. If this is the bind DE is in they’ve handled it very badly p.r.-wise but I have some sympathy for these kinds of regulatory complications.

  4. OK, now I’ve actually read the Hearing Examiner’s proposed order and yes, there is a FERC formula transmission rate involved. But the issue is not a future refund, but the higher income tax rate that was included in the last, past update of the formula inputs by Dominion. FERC arguably should not have accepted the formula update the way it did; but now Dominion is holding onto the fact that FERC goofed in an unseemly way, months after Dominion could have fixed this issue by an amended update. So, no remaining sympathy here from me.

  5. FERC is taking action against companies, such as AEP, whose formula rates incorporated a “35% federal income tax rate” as an input to the formula. It issued show cause orders against AEP and approximately 30 other transmission providers with similarly fixed federal tax rates. However, Appalachian Power, in its transmission rider case at the Commission, volunteered to have the Commission implement retail rates that incorporated the current 21% rate well before FERC sat up and took notice. The Commission’s order set Appalachian rates using the 21% rate in a decision earlier this year.

    Dominion, by contrast, has a formula whose input merely reads “the corporate income tax rate currently in effect,” which, as of January 1, was 21%. On January 13, Dominion filed its formula, containing the 35% rate no longer in effect. One presumes FERC will eventually notice this and require the amendment of the wholesale transmission formula rate. In the meantime, the Examiner has found no reason for the Commission to use an outdated income tax rate to set Dominion’s retail rates. Comments on the Examiner’s report are due to the Commission next Monday. Stay tuned.

  6. The contrast between APCO and VEPCO is an untold story. I’ve had differences with the folks at Appalachian, and their customers also go into the SCC arena to fight vigorously over rate hikes, but I’ve always found them professional and reasonable. I’ve never been lied to or lied about by them. This instance is a perfect example because it probably never occurred to APCO to try to claim it was due a higher rate because of the former tax rate. They would never think that was fair.

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