A watershed moment in Virginia’s energy politics

Last week the Virginia General Assembly and Governor Northam signed off on massive changes to electric utility rate structure and energy policy for the next decade. The bill (SB 966) is long and complex, and the story behind it is long and complex. But in remarks just before the final Senate vote, Senator J. Chapman “Chap” Petersen (D-Fairfax City) summed it up very simply:

“Consumers have a right to not be overcharged for basic necessities like power. … In my opinion, this legislation, much like the rate freeze law, will give Dominion, or Appalachian Power depending on where you live, a license to overcharge for electricity for literally the foreseeable future.”

The bill, written by and for Dominion Energy Virginia, passed in the end, but not without unprecedented resistance from lawmakers and their constituents. For decades, Dominion has instructed Richmond how to make energy policy. But there is a rising tide of consumer-populism and a healthy dose of skepticism taking hold in Virginia. Due to this groundswell of constituent pressure and hard work by a variety of consumer and environmental advocates, more and more legislators now are asking: “Should a monopoly utility write the laws that govern monopoly utilities?” The answer of course is “no.”

What’s in the bill?

First, some understanding of how electric utilities in Virginia are currently regulated is required. Since 2007 (and for decades prior, except for a brief experiment in “deregulation”), Virginia has granted state-sponsored monopolies in electric distribution to two investor-owned utilities: Dominion Energy Virginia (which has approximately 2.5 million Virginia customers) and Appalachian Power Co. (which has approximately 500,000 Virginia customers).

Until 2015, these utilities were subject to biennial rate reviews. Every other year, the SCC would examine the total cost of providing electric distribution service to customers and determine whether the companies had charged customers enough money to cover the cost of service, plus an approved return on equity, usually around 10%. If the companies collected more than that, the SCC was authorized to order refunds to customers. If the SCC found the companies overcharged in two consecutive rate reviews, the Commission was authorized to lower base rates (so every four years).

In 2015, the General Assembly passed the “rate freeze” bill, which stripped the SCC’s authority to determine the rates Dominion and Appalachian Power can charge customers for a period of several years. Dominion’s narrative was that complying with the federal Clean Power Plan would increase the cost of electric service so much that rates needed to be “frozen” in place to protect customers. In practice, it meant that the SCC could not order the utilities to issue customer refunds or lower electric rates. The utilities ended up overcharging their ratepayers hundreds of millions of dollars.

Fast forward to 2018. The prospect of implementing the Clean Power Plan has disappeared, and therefore so has Dominion’s rationale for the rate freeze. So we have Senate Bill 966, just signed by the Governor.

The bill does a lot more than simply end the rate freeze (though it’s arguable whether that is truly accomplished here – more on this later). Several bells and whistles were rolled into this legislation in order to secure support from lawmakers and various stakeholders. Here’s a list of some of those sweeteners.

Promoting Renewable Energy

• 5,000 megawatts of solar and wind are declared “in the public interest,” which means these projects are more likely — but not guaranteed — to be approved by the SCC.
• Of that amount, 50 megawatts must be rooftop solar, as opposed to utility-scale solar farms.
• The 16-megawatt offshore wind pilot project is also declared to be “in the public interest.”

Investments in Energy Efficiency

• The two utilities must to apply to the SCC for approximately $1 billion combined in energy efficiency programs over the next decade, though again, there is no guarantee the SCC will approve the programs.
• The SCC no longer is required to rely on the Ratepayer Impact Measure (RIM test) when evaluating efficiency programs, but it may still rely on that analysis. The RIM test has historically been a stumbling block for efficiency programs at the SCC.
• Dominion must increase its annual spending on energy assistance and weatherization programs for low-income, elderly, and disabled populations to $13 million. (Dominion’s website says it spent $5 million on its EnergyShare program last year). Appalachian Power’s assistance program remains funded at the current level. These programs are funded by tax-deductible, voluntary contributions from ratepayers and company shareholders, so the SCC does not regulate these expenditures.

Customer Refunds

• Dominion customers will receive approximately $200 million in refunds for the years 2015 and 2016 combined. Appalachian Power customers will receive $10 million in fuel credits. This would not have happened under the rate freeze. However, these numbers are not the result of an SCC audit of earnings over those years. The SCC did estimate in annual status reports that Dominion’s overcharges during this period were between $300 and $700 million and that Appalachian Power’s overcharges during this period were between $93 and $99 million.
• The SCC will review utility earnings from 2017-2020. This would not have happened under the rate freeze.
• Customers will receive an immediate refund reflecting the recent federal corporate tax cut. This would have eventually been ordered by the SCC anyway, but customers will see this money sooner than if the rate freeze persisted.

Burying Power Lines Underground

While frequently found by the SCC not to be cost-effective, many will be pleased that this legislation forces certain local distribution power lines and two large high voltage transmission lines to be buried underground.

What other things are in the bill?

Now let’s take a look at the ways the legislation does — and does not — end the rate freeze and restore authority to the SCC. The bill:

Reinstates rate reviews by the SCC. However, rate reviews will occur every three years instead of every two years.

— The SCC will review Dominion’s earnings for years 2017-2020 in 2021.
— The SCC will review Appalachian Power’s earnings for years 2017-2019 in 2020.

Allows utilities to front-load some costs into one review period instead of spreading them out over several years. This gives the utilities significant control over what the SCC will find to be the cost of service during the review period.

— This makes it unlikely that the SCC will be able to issue refunds or lower rates over the next decade (other than the initial 2015-16 refund and tax-savings pass through included in the legislation – customers will see those savings in 2018-19).

Allows the utilities to reinvest 100% of overcharges in grid modernization, grid hardening, renewable energy and energy efficiency projects instead of issuing refunds. This is the so-called Customer Credit Reinvestment Offset.

— This gives the companies additional flexibility to ensure that base rates will not be lowered by the SCC, though the projects themselves must be pre-approved by the SCC.
— If the utilities choose to issue refunds instead of reinvesting, they will keep 30% of the overcharges and refund 70% of the money (this is current law).

Creates the possibility of lowering base rates in every single rate case (every three years). Under the old law, the SCC had to find overearnings in two consecutive rate reviews in order to lower rates (so lowered rates were only possible every four years).

— However, any rate reduction in Dominion’s first rate review after this bill passes is capped at $50 million.
— As noted above, the utilities have so much accounting latitude that the likelihood that the SCC will lower rates is severely diminished.

Requires certain power lines to be buried underground. I mentioned this above as a “sweetener,” and for people who are not cost-conscious, it is. However, two sections of the bill dealing with undergrounding set dangerous legal precedents in terms of SCC authority:

— The SCC must approve certain distribution line undergrounding projects, without regard to cost-effectiveness. The only limitation is that costs may not exceed 5% of the distribution rate base, which in Dominion territory means the utility can spend roughly $200 million per year in undergrounding every year for the next ten years. The bill strips the SCC of its long-standing authority to determine whether the costs of these projects are “reasonable and prudent.”
— The SCC must approve two pilot projects for placing high voltage transmission lines underground. Costs for these two projects are not capped.

As noted at the outset, this legislation is long and complex. While there are several promising provisions that could help modernize the grid and promote investment in renewable energy and energy efficiency, it is important to note that these investments are not mandatory. The SCC could still reject companies’ applications for these (mostly good) projects.

The only investments that are mandated are the distribution line undergrounding projects (which are pre-authorized for $200 million per year), the large transmission line undergrounding projects (costs are not capped), and the increased funding for low-income assistance programs (which comes from shareholders and customer donations, so the SCC is not involved).

While regular rate reviews are ostensibly reinstated, there are also unprecedented rollbacks of the SCC’s authority to regulate the costs monopoly utilities pass on to their customers — who do not get to choose their electricity company. Allowing the utilities to expense the costs of certain large investments within a single period instead of spreading them out severely hampers the SCC’s ability to do a proper accounting of costs and determine what rates should be. Repealing the SCC’s authority to determine whether the costs of undergrounding projects are “reasonable and prudent” means that — for a limited set of projects — we essentially have unregulated monopolies.

How did we get here?

Heading into the 2018 General Assembly session, it was apparent that the 2015 rate freeze was no longer tenable politically or from a public relations standpoint, so the utility companies and legislators alike were determined to end the rate freeze this session.

Dominion used this urgency as an opportunity to secure approval of its new chosen rate structure (the “reinvestment model”). But to get this policy, the company had to ensure that attempts to simply end the rate freeze and restore SCC authority failed. Dominion’s allies on the Commerce and Labor committees in both chambers made it easy: Senator Petersen’s repeal bill was killed 13-1, and Delegate Sam Rasoul’s repeal bill was killed 6-3 in an energy subcommittee. This ensured that if the House and Senate wanted to end the rate freeze, they would only have one vehicle: Dominion’s bill.

At the same time, Dominion had to dress up its anti-regulatory bill with a different narrative: that this was really about creating a clean, modern, secure electric grid (all worthy goals!). Dominion brought several different interests to the negotiating table in order to gain broad support. Governor Ralph Northam also convened a stakeholder group during session to work on the legislation. This approach ensured that ending the rate freeze would be complex rather than simple, and it forced stakeholders and legislators to seriously consider whether the positives out-weighed the negatives when taken together.

Early versions of the bill were rife with giveaways to the utilities and rollbacks of SCC authority. Even after major improvements, the bill still contained an egregious provision that would have allowed the utilities to charge customers twice for grid modernization investments, a ploy that was dubbed the “double dip.” That is, a utility could reinvest what would have been a customer refund in a grid modernization project (payment #1), and then add the value of that asset to the company’s cost of service in a future rate review (payment #2).

On February 12, House Minority Leader David Toscano introduced an amendment to remove the double dip from the bill. The House voted 55-41 to adopt the amendment, though other rollbacks of monopoly oversight remained.

Shortly thereafter, Delegate Sam Rasoul introduced another amendment to improve the bill, this one aimed at controlling the pre-approved costs of undergrounding power lines. A motion to kill the Rasoul amendment barely passed in a 49-46 vote.

Despite successfully removing the double dip, the bill that finally passed includes several rollbacks of SCC authority as outlined above. The SCC itself was asked about the bill’s potential impact on ratepayers, and in a series of letters responding to lawmaker requests (here and here), the Commission concluded that this legislation will potentially costs ratepayers billions of extra dollars.

What should have happened? What could have happened? And what does this mean going forward?

This didn’t have to be so complicated. The General Assembly could have simply ended the rate freeze in one straightforward bill. In fact, this approach was attempted: Senator Petersen and Delegate Rasoul each introduced “clean” repeal bills in their respective chambers, but these bills did not get the traction they deserved.

If all of the “sweeteners” thrown into SB 966 are such good policies — and I would argue that the provisions favoring investment in energy efficiency are very good policies — the General Assembly should have been able to pass them on their own merit, not merely as a way to make rollback of SCC authority more palatable.

In fact, Delegate Rasoul sought a floor amendment that would provide his colleagues with just such an option: he filed a floor amendment that started with a simple “clean repeal” of the rate freeze as a foundation, then added all the bells and whistles. The idea was to present his colleagues with a simple choice: you can choose (1) further erosion of SCC authority plus some good things, or (2) restoration of SCC authority plus those same good things. Here was the House of Delegates’ chance to end the rate freeze and also vote for those other policies many felt were too good to pass up. But unfortunately, the amendment was never pursued on the floor.

At the end of the day, Dominion got most of what it wanted in this legislation. But it wasn’t without a very loud and public fight. The issue of regulating powerful monopolies is now front and center in the eyes of lawmakers and their constituents. Several veteran lawmakers opposed the legislation from the start and never waivered.

Delegate Lee Ware (R-Powhatan): “How should a monopoly utility be regulated? … Historically, the General Assembly has set what the strike zone is, and we’ve let the State Corporation Commission call balls and strikes. What we’re doing, what we’re fixing to do is to … almost to get rid of the strike zone. It’s going to be very difficult for the State Corporation Commission to do what it needs to do. And I really ask the question, ‘Will it be the regulated that becomes the regulator?’”

Delegate Mark Keam (D-Fairfax) said: “We made the decision a long time ago … that … since electric utilities are such a difficult thing for private sector to offer on its own, we the government will help you by giving you a license to be a monopoly, giving you the chance to serve everybody, and that we will guarantee a profit in exchange. All we ask is that you follow some rules. … Since 2007 and at least since the time I’ve been here, I’ve not seen a single time … when this General Assembly let the SCC do its job the way we told them to do it.”

Delegate Steve Landes (R-Augusta) said: “For some of us, that State Corporation Commission plays an important role. It de-politicizes. It also provides independent oversight, separate from the legislative branch and the executive branch, to these issues. … they’re complicated legal and regulatory issues. That is why we elect three judges to render and determine those types of cases and issues. So I would just remind the House … we are not restoring any real authority to the State Corporation Commission. We either give them the authority that they constitutionally and statutorily have, or we don’t.”

Delegate Sam Rasoul (D-Roanoke) said: “There is a very specific piece in here that for one reason or another has not been on the negotiating table with the utilities, and it has been a non-starter. And it has to do with cost recovery. This will essentially allow .. the utility to front-end and overload expenses, therefore being able to come up with very, very fudgy accounting, and adversely impact ratepayers, in my opinion. There are a lot of good things in this bill, and there are some good reasons for people to vote for the bill. The question that came up earlier about SCC authority — there is a little bit of SCC authority that is restored, but there is a lot that is not restored, specifically with the ‘reasonable and prudent’ language around the undergrounding. This allows the utility to be able to move forward without needing to meet that threshold. We’ve already predetermined that a lot of these investments are in the public interest in this bill, without having to go through a real ‘reasonable and prudent’ approach.”

Senator David Suetterlein (R-Roanoke County) said: “The fundamental reason why I oppose it… is that Virginia families and businesses have been overcharged since the rate freeze went into effect. And what we’ve tried to do is give them a refund going forward. This legislation will prevent refunds in the future by encouraging the utility monopolies to spend down all of the excess earnings into projects. And several of those are worthwhile projects, but those projects should be reviewed by the State Corporation Commission… the fundamental question is: should people receive refunds when they’re overcharged? And should the State Corporation Commission make the decisions when these projects are being done, allegedly, in the public interest?”

Senator Chap Petersen (D-Fairfax) said: “We’re consigning our consumers to going forward in a future in which they will be permanently overpaying for electricity. … I don’t believe in giving anybody a blank check … People say this is pro-business. This ain’t business. This ain’t the free enterprise system. There ain’t no risk here. This is an industry that avoids risk at all costs. That’s why we get bills like this.”

The votes of the General Assembly in 2018 reflect a trend: lawmakers are less willing to simply accept the expertise of Dominion at face value. Instead, lawmakers appear willing to dig deeper into the bill text and listen to input and analysis from other stakeholders. In 2015, the rate freeze passed the Senate by a 5-to-1 margin (32-6), and the House by a 3-to-1 margin (72-24). Three years later, this rate restructure bill passed both houses by a 2-to-1 margin (Senate 27-13, and House 65-31.) This is progress.

Moreover, the House was able to pass a significant amendment on the floor that Dominion and the bill patrons opposed. If the amendment to fix the double dip had not passed, one could speculate that the cons may have outweighed the pros for enough delegates that the bill would not have passed the House. Importantly, that amendment received 55 votes (then 96 on a redo), signaling that a majority of the delegates had serious concerns about the bill.

In addition, the 2017 election for Virginia’s House of Delegates saw a consumer-populist wave, with 13 victorious delegates (12 of them freshmen) pledging not to accept campaign donations from Dominion or Appalachian Power. Other lawmakers in Richmond have already foregone donations from regulated utilities even if they haven’t signed a pledge (see Delegate Keam’s op-ed). The significance of this cannot be underestimated; it amounts to a disruption of business as usual in Richmond.

As citizens, we must not be satisfied that our representatives passed a bad bill just because it was dressed up with soft commitments to renewable energy and efficiency, and one of the most egregious provisions was removed (the double dip). Dominion should have been investing in renewables and efficiency all along.

Monopoly utilities like Dominion and Appalachian Power are public service companies. They are charged not only with providing reliable electric power service, but also with providing that service in a sustainable manner and at the lowest possible cost to customers. That is the social contract: companies that are granted monopolies do not have to compete or bear risk in the marketplace; in return they agree to submit to a regulatory authority that protects us from monopoly prices and other abuses.

This is a watershed moment in a movement that citizens have been building for years. When ratepayers stand up, we can force the legislature to place the public interest above monopoly shareholders’ interests. Even though this bill purports to set energy policy for the next decade, our lawmakers can get to work fixing the problems in this legislation right now.

We have the momentum. Now is the time to keep the pressure on.