Protesters outside of Dominion Energy's offices in downtown Richmond called for the utility to refund $278 million in over earnings identified by state regulators. (Ned Oliver/Virginia Mercury)

Over seven hours of testimony spanning two days, Virginia’s largest utility and a diverse array of consumer protection, business and government groups battled before the State Corporation Commission over whether Dominion Energy investors should get a bump in their guaranteed profits.

The case, which Dominion attorney Joseph Reid noted had sparked “a lot of charged comments,” concerned whether the return on equity guaranteed to Dominion Energy Virginia investors should be raised from 9.2 to 10.75 percent for projects paid for through rate adjustment clauses, more commonly known as riders.

As lawyers during Tuesday and Wednesday’s hearings pointed out, returns on investment in regulated utilities like Dominion aren’t the same as returns on investment in private business ventures. While investors in the latter are at the mercy of the markets, investors in the former are authorized to receive a certain rate of return. In Virginia, this rate is set by the SCC, which maintains oversight of utilities as a counterbalance to the monopolies they enjoy in their service territories.

While complex, the case has received heightened interest in the commonwealth, particularly in the wake of the SCC’s Aug. 29 finding that in 2018 Dominion took in almost $278 million more in earnings than authorized, while its investors enjoyed an actual rate of return of 13.47 percent.

About 300 Virginia residents filed comments with the commission opposing the hike, as did 36 Democrats in the General Assembly — a fact alluded to by Reid during his opening arguments Tuesday in an unusual political reference in a courtroom where the words “Democrat” and “Republican” are rarely part of the debate.

“The commission’s job is to evaluate the evidence, (and) come to a reasoned decision consistent with the law regardless of what (regulatory) observers say, regardless of what the forum commenters say in this case and frankly regardless of what half the Democrats in the General Assembly say to the commission,” Reid said.

In its filings, Dominion has defended the need for a higher rate of return on the basis of the $11 billion in capital expenditures it plans to make between 2019 and 2021. In a March presentation to Wall Street investors regarding $17 billion in planned capital expenditures through 2023, about $4.8 billion was earmarked for solar and offshore wind development, $1.2 billion for operating license extensions at the Surry nuclear plant and $800 million for the undergrounding of distribution lines.

According to Robert Hevert, Dominion’s main witness and the formulator of the 10.75 percent figure, the immediate plan “will place additional pressure on (the company’s) cash flows, making regulatory support more important in terms of (its) ability to finance these expenditures and earn a reasonable return on its planned investments.”

In court, however, the utility’s lawyers leaned more heavily on the argument that the company already has one of the lowest authorized rates of return in the country among comparable utilities, one that has fallen two and a half times faster than the national average, and that it’s therefore “entirely appropriate” that the SCC raise it.

“The fact of the matter is that the company’s peers in the Southeast are earning more,” said Reid.

But while the utility has requested that its rate be raised to 10.75 percent — which the company acknowledged would be the second-highest rate of return awarded to a regulated utility in the U.S. over the past five years — its testimony indicated that it would be willing to settle for less.

“Of course the 10.75 is an ask,” said Reid during opening arguments. “I’m not aware of any instance where this commission or any other has awarded a utility 100 percent of its ask, although we think it’s supported here.”

The comment later sparked a pointed question from Virginia Poverty Law Center attorney Will Reisinger, who asked Hevert, “Is that part of the game here? That witnesses for regulated utilities come in high with the understanding that they will be knocked down a little bit by the state commission?”

“I don’t know what you mean by ‘a game,’” Hevert shot back. “When I provide testimony, I provide testimony based on what I believe the facts and circumstances are. This is my opinion as to the cost of equity.”

Other opinions ranged widely. The U.S. Navy, participating on behalf of the federal executive agencies, argued that Dominion’s return on equity should be 9.36 percent. Walmart, after being pressed by Judge Mark Christie, said it favored the status quo of 9.2. The Office of the Attorney General’s Division of Consumer Counsel proposed 8.75 or 9.09 depending on the commission’s decision on peer group methodology. And SCC staff came in at the basement, contending it should be in the range of 8.1 to 9.1, or, if required to give a specific number, 8.6.

The latter recommendation was characterized by Reid as both legally impermissible and “dangerous” because of the effects such a low number could have on investor confidence in Virginia’s regulatory climate.

“The financial community is watching this case, there’s no doubt about that, and a move that they see as negative could have profound negative consequences, including an increase in borrowing costs,” Reid warned.

In response, Reisinger claimed that the financial community was also aware that “most if not all of these capital expenditures can be recovered through riders, which guarantee cost recovery,” leaving “no justification” for Dominion to be granted a higher return on equity.

“The investment community understands that Dominion operates in a very favorable legal environment,” he said.

Exactly how risky a prospect Dominion would seem to investors was disputed. J. Randall Woolridge, a professor of finance at Penn State who testified for the Attorney General’s Office, told the commission that the utility industry “has become less risky in recent years” because of the introduction of mechanisms like riders. But when asked by Judge Christie why a monopoly utility would need to offer investors a rate of return more than five times the current 2.1 percent rate associated with 30-year U.S. Treasury bonds, Hevert responded that “the perceived risk has increased.”

“Utilities generally are able to” attract capital, Hevert said later in the hearing. “The question becomes at what terms and at what costs.”

Perhaps the thorniest question debated before the commission Tuesday and Wednesday was what impact a higher return on equity would have on customers’ bills.

The utility was adamant that under current law, customer base rates are prohibited from changing and cannot be increased until 2025.

“In no event is there a rate increase,” said John Ingram, Dominion’s director of regulation. “In no event would customers experience an increase in their monthly bills.”

But Carol Myers, the deputy director of the SCC’s Division of Utility Accounting and Finance, called such portrayals “misleading” and said that it was “fundamentally untrue” that changing the company’s return on equity would have no impact on customers’ monthly bills. Base rates are just one component of customers’ bills, along with riders and fuel charges.

“There’s two things,” said Myers. “There are customer rates and there are customer bills. I realize that the company is precluded from seeking an increase to base rates in the first triennial review, but that does not mean there will be no impact to customer bills.”

Quoting her own prefiled testimony stating that the costs of an increase would not be passed on to customers “in a straight forward manner,” Myers pointed out that the rate of return used by the commission will become the benchmark used during its triennial review of Dominion’s earnings, scheduled for 2021. Because raising the rate of return would increase the amount of earnings Dominion is allowed to keep, it would at the same time decrease the amount of earnings that could be returned to customers as refunds — a point that Dominion lawyer Reid said “we don’t disagree on.”

Myers’ prefiled testimony says Dominon’s request would create an increase in Dominion’s annual revenue requirement of about $147.4 million, which “translates to a potential $2.89 increase in a monthly bill for a residential customer using 1,000 kilowatt hours.”

The increase would also affect the amount of funds available for customer credit reinvestment offsets, a mechanism established by the 2018 Grid Transformation and Security Act that allows utilities to invest certain overearnings in solar, wind and grid transformation projects rather than refunding them to customers.

The average bill for a Dominion customer using 1,000 kilowatt hours a month has gone up more than 25 percent since 2007, largely as a result of riders, the SCC reported last month.

The commission will have until Nov. 30 to rule on the case. Because the SCC opted to have participants file closing briefs rather than make closing arguments and set a deadline for those briefs of Oct. 18, a decision isn’t expected until November.

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Sarah Vogelsong
Sarah is originally from McLean and has spent over a decade in the fields of journalism and academic publishing. Most recently she covered environmental issues in Central Virginia for Chesapeake Bay Journal; prior to that, she worked at the Progress-Index in Petersburg and the Caroline Progress in Caroline County, as well as writing for multiple regional publications. In 2017, she was honored as one of Gatehouse’s Feature Writers of the Year, and she has been the recipient of numerous awards from the Virginia Press Association. She is a graduate of the College of William & Mary.