Three Lessons From Dominion’s Income Tax Case

If you thought the tax conformity debate took too long at the General Assembly, check out the fight at the State Corporation Commission over Dominion Energy Virginia’s corporate income tax bill.  The SCC still hasn’t decided how much to cut Dominion’s base rates to reflect its lower income tax payments, but a decision is close.

There are three reasons why this case is worth exploring.  

First, a battle over how to account for a small amount, $67 million, is a wonderful demonstration of how obscure phrases buried in legislation written by the utility come back to bite its customers in their wallets.

Second, the tax cut is going to produce something Virginians haven’t seen in a very long time, an actual reduction in Dominion’s sacred, never-to-be-touched base rates.  Preventing that has been its legislative obsession for decades.

Third, Dominion does pay significant federal and state corporate income taxes.  There is this common misconception that big companies don’t, and most really do, Dominion included.  Dominion isn’t the only company that just passes its tax costs to customers.  Had the General Assembly cut the state corporate income tax rate as part of its conformity response (as some proposed) your electric rates would be been reduced by that, too.

Traditional utility ratemaking allows utilities to fully collect taxes from their customers.  Soon after passage of the federal Tax Cuts and Jobs Act, with its 40 percent cut in the corporate income tax rate, the State Corporation Commission noted that the savings should promptly flow to customers.  The same thing was happening around the country.

Before the SCC could act, however, Dominion intervened with its omnibus Ratepayer Bill Transformation Act, which included a $125 million per year rate reduction to go into effect later in 2018, with an SCC proceeding to follow to determine the exact amount.  That’s the case going on now which has produced reams of testimony and legal briefs, and is now before the full commission for a final ruling.

After almost a year of wrestling, Dominion’s position is the base rate cut should be $171 million and the SCC staff and others have set the figure at $190 million.  A hearing examiner issued a ruling January 31 that provided his recommendation on some of the remaining disputes and set his figure at $187 million.

Senior Hearing Examiner Alexander Skirpan agreed with the SCC staff and the Office of the Attorney General on the dispute over that $67 million.

The $67 million in question is not taxes.  Another provision of the Ratepayer Bill Transformation Act provided $200 million in credits to ratepayer bills, in two tranches, to in effect return some of the excess profits the company earned when the SCC was stopped from doing rate cases.  The first payment of $133 million credit was delivered on a summer 2018 bill and you received the other $67 million earlier this year.

But the two payments were ordered in two separate enactment clauses, and they were not worded the same.  The first payment, the bill read, “shall not be included in any earnings test after July 1, 2018.”  The second payment, the bill stated, “shall be included in the earnings test for the utility in its first triennial review after January 1, 2019.”

Odds are few who read the long bill noted that one provision said “shall not” and he next said “shall,” and fewer still might catch the meaning.  No legislator was likely to.

It means, and this alone is irritating, that one third of the compensation for the excess profits earned before the bill passed was be paid out using excess profits earned after the bill passed.  It will reduce any future credits.  But there’s more.  Dominion also claims it means the $67 million refund is really part of its cost of service, and not a share of excess profits.

If it is a cost of service, then it constitutes a deduction against its earnings, and thus produces a lower income tax bill.  On that basis, Dominion argued that the base rate reduction should be $12 million less than the SCC staff estimated. It is that argument which the hearing examiner rejected and is now before the SCC.

Should Dominion’s position prevail, its base rates will be $12 million higher and each year it will get back almost 18 percent of that rebate.  Maintaining its base rates against any drop is always Dominion’s goal, so over the course of several years it will get the entire $67 million back and then start coming out ahead.

The impact of the fine print in the Ratepayer Bill Transformation Act continues to unfold. When it initially offered a $133 million rebate for previous excess profits, Dominion was pressured to sweeten the offer.  It did, but with a language tweak that basically made it a rebate out of of future excess profits.

And now it has found a clever way to try get it back again.

Additional tax savings from TCJA are flowing back to Dominion ratepayers in the various rate adjustment clauses for individual generation plants or other capital expenses.  The cases involving Appalachian Power Company’s tax reductions are not proving as dramatic.  It did not have any credits for excess profits to play games with, not sharing Dominion’s success over the years in collecting them.

Taxes are not the only costs buried in Dominion’s base rates which are going down.  They are just the only shrinking costs the General Assembly has seen fit to share with the utility’s customers.  All the other ways we are being overcharged remain protected from SCC review and adjustment by the legislature.

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7 responses to “Three Lessons From Dominion’s Income Tax Case”

  1. LarrytheG Avatar

    I much appreciate your non-racial animosity tomes early in the morn!

    Refreshing and welcome!

    And once again, as you are now pointing out – all those GA folks crying about the unjust tax conformity issue that is harming Va taxpayers – those same guys who find no problem putting off (forever) , legislation to overrule the SCC who apparently has no problem twiddling their thumbs while they “fiddle” over these Dominion taxes being passed on to customers. Where is that urgency? These folks are in LA LA Land.

    Good Lord – it’s unbelievable.

    Finally – all this talk about making health care more “transparent” for folks just pales in comparison to the ruminations of the SCC.

    I bet not one person in a thousand has a clue as to the SCC “deliberations” and so called RACs – clearly the “dominion” of lobbyists and other in-the-weeds types.

    And we actually now have some insight into this whack-a-doodle world with the welcome appearance of Mr. Haner.

    Thank you and I am forever wondering how you can be a GOP given the way the SCC and GA “work” on the Dominion/electricity issue.

    And yes – you can get a “rise” out of me – as can I you… waiting for it…


    1. Once again, Larry, you take an unfounded cheap shot at the SCC. The legislation that Steve writes about here mandates that the second tax reduction takes place on April 1, 2019.

      The SCC is not dillying around and leaving $$ on the table.

  2. Reed Fawell 3rd Avatar
    Reed Fawell 3rd

    Good article, Steve –

    But the good news is that electricity in Virginia still works. Most else doen’t. And if our Green Friends get their way, our electricity won’t work either, while our land and sanity will disappear along with reliable affordable electricity. Translated: electricity is going the way of health care. Costs go up; quality, reliability, and ethics, plummet.

  3. Thank you, SH, for a wonderful illustration of why the VSCC should be, and should remain, empowered to address the totality of Dominion’s retail rates every time it adjusts any aspect of them. This is why we have a utility rate regulatory commission: the GA does not have the time (and should not attempt to try) to parse out every word of these complicated pieces of ratemaking legislation. And it’s bad public policy for the utility to be allowed (let alone encouraged) to do one end run after another around the Commission’s regulatory process.

  4. LarrytheG Avatar

    My problem with the SCC is why is it taking so long to require a refund to ratepayers .. this thing has dragged on for far too long… and it’s two things – the fed tax rebate as well as the excess profits from the rate “freeze”.

    Why has this not already happened?

    1. The SCC entered an order on January 8, 2018, directing all jurisdictional electric and gas utilities to create regulatory assets to capture the anticipated savings from the tax cut that took place on January 1, 2018.

      What slackers!

  5. […] did not take Dominion Energy Virginia’s side on the argument over that disputed $67 million.  As reported last month, Dominion was claiming a $67 million credit it paid out as a rebate for excess profits […]

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