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Complex Energy Bill Will Raise Costs to Customers

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The headlines in the coming General Assembly may be captured by fights over abortion and taxes, but the deepest reach into your pockets will involve your energy bills. The state’s dominant electric utility appears to once again be seeking to amend Virginia’s regulatory and ratemaking process to its benefit.  

draft bill circulating among energy issue observers, not officially identified yet as Dominion Energy Virginia’s handiwork, would drastically change the rules on consumer choice, the process for determining utility profit margins, and the treatment of any excess profits beyond those allowed returns on equity. The changes are likely to increase the monopoly’s hold on the market and its profits. 

A provision would also reverse a major element of the 2020 Virginia Clean Economy Act by eliminating the mandate to close all remaining fossil fuel plants by the 2040s.  Instead, the State Corporation Commission would have to approve proposed closures after reviewing their impact on system reliability. Much will probably be made of nearby Duke Energy’s unprecedented brownouts last month as its solar assets proved worthless during bitter winter nights. 

Rumors have circulated for weeks that Dominion has a major bill in the works, with two people who met with them to discuss the effort confirming that to me. One tied the effort to the company’s recently announced top-to-bottom review of its operations to improve “shareholder value.” 

There will be many other bills, but two deserve mention in this analysis.

The draft presumed to be Dominion’s effort makes no mention of the small modular nuclear reactor technology which Governor Glenn Youngkin (R) wants the state to pursue.  A separate bill on that topic is expected, one that so far has not leaked out. The Governor’s nuclear aspirations may be compatible with the utility’s plans to rewire the regulatory process and could be incorporated into one bill.  

Also, a news conference has been called for Tuesday by four legislators, three Democrats and a Republican, to announce their so-called Affordable Energy Act. “This bipartisan bill seeks to address rising energy bills in Virginia and customer overcharges from electric utilities by restoring regulatory authority to the State Corporation Commission,” an advisory states.

Their bill reasserting traditional SCC autonomy over rates and profit margins is totally incompatible with the utility’s approach. That bill is simple, short and clear. The utility draft is long, complex and obscure. If a real debate is allowed to materialize the contrast could be useful, and legislators will face a real choice if both bills advance.  

In his 2021 campaign and in his 2022 energy plan document, Youngkin has made controlling consumer cost, increasing choice and competition, and returning SCC authority his stated goals. Much of this Dominion draft moves in the other direction.  

It does return both Dominion and Appalachian Power Company, serving Western Virginia, to two-year rate review schedules, something in the Governor’s energy plan. Dominion would have to file its next case later this year, reviewing the expenses and profits from 2021 and 2022.

It also calls for some of the rate adjustment clauses, now separate bill elements tied to specific purposes or power plants, to be rolled into the base rates. Youngkin also called for that.  But the SCC is still directed to consider each activity independently, without regard to costs and profits elsewhere in its operation, so it is a meaningless change.  The SCC’s hands remain tied in a way they are not under true “cost of service” regulation.   

The bill maintains what is called the return on equity (ROE) collar. Dominion’s current authorized ROE is 9.35%, but it really is allowed another 50 basis points and can earn 9.85% before being deemed to have earned excess profits. Excess profits are then divided 70% to customers and 30% to the company.

This bill going forward raises that collar to 70 basis points and the authorized ROE would really be 10.05%, probably an important milestone for Wall Street analysts.  And, as noted, that is 10.05% plus 30% of any excess.

But the change that may provide the greatest benefit to the company, and cost to consumers, involves the language guaranteeing that the profit margin will be set equal to or higher than the authorized profit margins at “peer” utilities.  Unique in the industry when created in 2007, at least the peer comparison standard gave the SCC some leeway in choosing the members of the peer group. That discretion is taken away in this draft.  

This is the most obscure element in the draft, but it is likely to produce a higher ROE over time. Dominion, worried as it is about its reputation with investors, isn’t going to propose a method that would produce a lower ROE ceiling. Which is also why it will reject the proposal from the four legislators which gives the decision back to the SCC.

Should the new peer comparison process produce an ROE floor above 10%, remember there is still that 70 basis point collar allowing the utility to make and keep even more, plus its claim on 30% of every dollar earned above that.

The return on equity is a percentage of the company’s capital invested in its assets, and they get it every year. The more stockholder funds it uses to build things, the more profit it can keep.  An additional 1% annual ROE on the $10-$14 billion Coastal Virginia Offshore Wind project, for example, will add up to more cost to consumers for that energy.  In its recent approval of the project the SCC stressed that it doubles the company’s rate base subject to ROE. 

It will be interesting to see how all this is pitched as good for consumers, and who helps with the messaging. 

Stephen D. Haner is Senior Fellow for State and Local Tax Policy at the Thomas Jefferson Institute for Public Policy.He may be reached at steve@thomasjeffersoninst.org.


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