The State Corporation Commission
The State Corporation Commission regulates Virginia electric utilities. (Ned Oliver/ Virginia Mercury)

With state regulators resuming their review of Virginia’s monopoly electric utility rates for the first time since 2014, Appalachian Power is seeking to raise customer rates by about 6.5 percent while also increasing shareholder returns going forward. 

The company, whose territory covers most of Southwestern Virginia, argues that its rates have been flat for roughly a decade, falling slightly below the national average, and that with major investments on the horizon for utilities as they transition to more clean energy sources and heightened uncertainty in the markets, investors will need bigger inducements.

“The threat posed by the coronavirus pandemic has led to extreme volatility in the capital markets as investors dramatically revise their risk perceptions and return requirements in the face of the severe disruptions to commerce and the world economy,” said utility consultant Adrien McKenzie in prefiled testimony for Appalachian Power. 

But environmental and consumer advocates, as well as the Office of the Attorney General, contend that the monopoly utility’s request for a rate bump rests on an inappropriate last-minute accounting trick that allows the company to claim it significantly under-earned in 2019 by expensing in December of that year the retirement costs for eight coal-fired units that were closed in 2014 and 2015. 

This “extraordinary adjustment to its earnings,” wrote consultant Ralph Smith for the Office of the Attorney General’s Division of Consumer Counsel, “… creates a substantial distortion of APCo’s earnings in the 2017-2019 review period, and should not be permitted.”

“But for this extraordinary impairment write-off that was purportedly made pursuant to the provisions of the [2018 Grid Transformation and Security Act], the Company would be unable to justify its request to increase the rates paid by its customers,” he concluded.

Six years of upheaval 

The State Corporation Commission’s review of Appalachian Power’s rates is being closely watched by policymakers as the first test of how major new laws governing electric utilities passed by the General Assembly in 2015, 2018 and 2020 will affect captive ratepayers. 

In Virginia, where electric utilities Dominion Energy and, to a lesser extent, Appalachian Power have long exerted outsized power, major overhauls of the state’s regulatory system have occurred repeatedly over the past decade as the companies have jockeyed to increase their earnings, producing what one Office of the Attorney General filing calls a “convoluted rate structure.”

According to standard ratemaking principles, a utility is allowed to recoup its costs from customers, plus an approved rate of return for investors to ensure the company can raise money for large projects and maintain stable financial ratings.

Between 2007 and 2014, rates were reviewed by the State Corporation Commission every two years. In the 2014 review, the commission set Appalachian Power’s rate of return on equity at 9.4 percent and found it had overearned by about $24 million in 2012-2013. But while the SCC found customers were entitled to refunds of almost $6 million, it could not cut rates because of a provision in the law that only allowed rates to be reduced if regulators found the utility had overearned in two consecutive reviews.

For Appalachian Power, that second review never happened. In 2015, the General Assembly enacted a rate freeze for both Dominion and Appalachian Power, stripping the SCC of the right to review the companies’ rates and earnings. The commission’s authority wasn’t restored until the passage of the Grid Transformation and Security Act, when reviews were reinstituted every three years, with Appalachian Power’s review of 2017-2019 rates scheduled for 2020. 

That, of course, left a gap: the years of 2014, 2015 and 2016. It was during this time that Appalachian Power, facing tightened environmental regulations governing coal generation and a flood of cheaper natural gas, decided to retire the eight coal-fired units early, at a cost of roughly $88 million. 

The 2020 rate review is the first chance Appalachian Power has had since 2014 to account for the early closure of those plants. In filed testimony, the utility argues that under the Grid Transformation and Security Act, it has the right to include the expense in the 2017-2019 review, even though the closures occurred several years before the review period. 

The effect of the decision isn’t minor: by recording the $88 million expense as a loss on its books in December 2019, Appalachian Power calculated its return on equity for the year as a mere 3.78 percent — so low that despite overearning by tens of millions in both 2017 and 2018, the utility can claim it under-earned during the three-year period as a whole and should be allowed to increase more than half a million Virginia customers’ rates by 6.5 percent. 

The Attorney General’s Office, SCC staff and other groups have balked at what Smith in prefiled testimony called a “highly unreasonable, and indeed unconscionable” move. 

The $88 million write-off “creates a substantial distortion of APCo’s earnings in the 2017-2019 review period, and should not be permitted,” Smith wrote. “APCo’s last minute earnings test adjustment is not appropriate from an accounting perspective nor is it in the interest of APCo’s ratepayers.”

Smith also pointed in his testimony to reports filed by Appalachian Power with the SCC during the rate freeze that stated the utility had overearned in both 2015 and 2016, taking in “tens, if not hundreds, of millions of dollars above the bottom of its authorized return on equity during this period.”

Appalachian Power spokeswoman Teresa Hamilton Hall said that while the company “respectfully disagrees” with the Attorney General’s Office view, it will not comment further because the case is still pending before the SCC.

Complicating the question is HB 528, a law that passed unexpectedly during the past session allowing the SCC to determine the period of time over which an electric utility can recover the costs of power generation facilities that are retired early. The Virginia Poverty Law Center has asked the commission to rule on whether the legislation applies to the rate case.

A host of issues to resolve

While the coal plant retirements may be the biggest issue facing Appalachian Power’s rate review, a range of others are set to be litigated as the rate case proceeds.

Among them are the company’s new return on equity, which Appalachian has requested be set at 9.9 percent and the Office of the Attorney General advocates should be 8.75 percent, and a proposal by the utility to establish a new rider, or bill add-on, to pay for early plant retirements in the event the SCC doesn’t approve the requested rate increase. 

The latter, Appalachian explained, “is, in essence, a savings account that is based on the Commonwealth’s move towards clean energy resources.”

Opponents, however, characterize the proposal as unnecessary, particularly given that the utility has not yet scheduled firm closure dates for the two plants in question, the Amos and Mountaineer facilities in West Virginia, and the legislature has granted authority over early retirement decisions to the SCC under HB 528.

The “Commission possesses all the flexibility it needs to appropriately address ratemaking treatment for early retirements of fossil fueled generation when the details of actual planned retirements become known,” wrote Justin Barnes, a researcher with EQ Research in testimony filed on behalf of Appalachian Voices.