A law that cleared the General Assembly this spring over the objections of Virginia’s powerful electric utilities and both Democrat and Republican leaders of the Senate has become a flashpoint in regulators’ first review of Appalachian Power’s rates in six years.
The legislation, HB 528 sponsored by freshman Del. Suhas Subramanyam, D-Loudoun, restored the State Corporation Commission’s power to set the schedule for utilities to recover the remaining costs of electric plants that are retired early, a right that was stripped from the body as part of the 2018 Grid Transformation and Security Act. At issue are hundreds of millions of dollars that directly affect Dominion and Appalachian Power customers’ bills.
Appalachian Power, which has more than 500,000 customers in Virginia, mostly in the southwestern part of the state, staunchly insists that because the law didn’t go into effect until July 1, three months after the utility filed its application to increase customer rates by 6.5 percent, it doesn’t apply to its current rate case and shouldn’t be considered law as part of regulators’ review.
“Without question, HB 528 was not the law in effect at the time this case began,” the utility argued in a brief filed Friday. “For HB 528 to apply retroactively to this case, it must contain explicit language demonstrating that the General Assembly intended to give the statute retroactive effect. HB 528 is well short of meeting that requirement.”
Not everyone agrees. After the Virginia Poverty Law Center in July asked the SCC to issue a ruling on whether or not Subramanyam’s law applies to the case, the Office of the Attorney General submitted a lengthy legal memo contending that it does, a stance shared by the legal center. In it, the office claimed that the language of the law indicates “the General Assembly squarely intended” for the law “to apply retroactively to this proceeding.”
Subramanyam told the Mercury that his law “was intended to apply” to Appalachian Power’s current rate review.
“It should apply to it. I would be disappointed if it doesn’t apply to this case,” he said. “Ratepayers deserve to have fair rates without utility companies playing accounting games.”
Subramanyam’s bill was short, just over 100 words. It declared that “notwithstanding any other provision of law, the State Corporation Commission shall determine the amortization period for recovery of any appropriate costs due to the early retirement of any electric generation facilities owned or operated by” Dominion or Appalachian Power and laid out a three-step process for regulators’ review.
The technical language masks an issue that has become increasingly contentious in Virginia over the past few years: utility earnings, which a growing number of groups and lawmakers — in addition to state regulators — say have been excessive.
Dominion has taken most of the spotlight in this discussion — one recent finding by regulators found its over-earnings for the 2017-2019 period were more than half a billion dollars — but Appalachian has not avoided fire either. The utility is recording over-earnings in the present rate case for 2017 and 2018, and Office of the Attorney General consultant Ralph Smith argues in commission filings that during the rate freeze, “it is clear that APCo earned in excess of its authorized return on equity,” to the tune of tens of millions of dollars.
How has that happened? Under traditional ratemaking, utilities are allowed to recoup their costs and then collect a certain return on equity as a way to attract investment. Between 2007 and 2014, Virginia regulators reviewed electric utility rates and earnings every two years. If they found a utility had earned above its allowed rate in two subsequent reviews — that is, for four years running — they could order that rates be reduced and that 70 percent of the over-earnings be returned to customers as credits or refunds.
In 2015, however, at the urging of Dominion and Appalachian Power, the General Assembly froze rates and suspended rate reviews in response to the utilities’ concerns about big costs they said the Obama administration’s Clean Power Plan would usher in.
That plan never went into effect, but the legislature didn’t lift the freeze until 2018, when it also reworked the rate review system as part of the Grid Transformation and Security Act. Among other changes, now reviews would be conducted every three years, rather than two, utilities were granted expansive power to recover certain types of costs and they were given the right to set the timeline for how they would recover the costs left over when plants were shut down early.
That latter two decisions have big impacts for customer bills — and utility earnings. When a utility writes down the remaining value of a plant that is retired early, an amount usually in the tens of millions, that expense drives down its earnings. If this depreciation occurs in a single year, the impact can be hefty, erasing all or a portion of any over-earnings that have otherwise occurred and blocking customers from receiving statutorily mandated refunds.
Subramanyam’s law sought to reverse that, putting decision-making back in the hands of the State Corporation Commission when it came to deciding the timeline for how the remaining costs of prematurely retired plants should be paid off.
The utilities lobbied hard against the change, and particularly objected to its inclusion of the “Notwithstanding any other provision of the law” clause, which they said would override part of the Grid Transformation and Security Act. At one Senate committee meeting, Dominion lobbyist John Watkins, a former state legislator, ominously described the language as “a term that those of us who have been in the legislature for a while often quake at.”
Still, the law passed, garnering bipartisan support in the Senate. In a March floor debate, Sen. Richard Stuart, R-Stafford, described “the whole point of the bill” as “attempting … to give fairness back to the ratepayers.”
Roughly four weeks later, Appalachian filed its mandatory rate review application, seeking to stick to the prior system, counting as a 2019 expense $88 million in retirement costs for eight coal-fired units closed in 2014 and 2015.
A lot of money is at stake: Not only do the depreciation costs booked by the company offset its over-earnings from the 2017-2019 period, but they push the utility’s total period earnings below the authorized level, justifying its request for a rate increase.
That, says Appalachian in its recent filings, is perfectly legal and is in fact a right state code guaranteed an electric utility at the time of its application.
This “plain text,” Appalachian argues, “reflects the policy decision made by the General Assembly … to allow utilities to write down expenses against earnings in a test period.”
“Unless changes to statutory language specify otherwise, the law in effect at the time a proceeding is filed will determine the rights of the parties involved,” the company wrote.
A question of intent
Whether lawmakers intended HB 528 to apply to Appalachian’s rate review is a question threaded through the litigation surrounding the case and embedded in the Virginia Poverty Law Center’s request for the commission to weigh in on the matter.
Appalachian, for its part, said Subramanyam’s law contains no indication that lawmakers intended it to affect the 2020 review. Unlike other utility regulation bills from the last session that specified that new rules would apply to cases after a certain date, Subramanyam’s bill is silent on that point, the company noted, meaning legislators would have assumed it would not take effect until July 1.
“If the General Assembly intends for a law to be applied retroactively to already-pending cases, it must express that intent explicitly,” the utility claimed. “Absent such an ‘express manifestation of intent,’ a court may not infer that the legislature intended that a law be applied retroactively, and ‘the general rule is that statutes are to be construed to operate prospectively only unless a contrary intention is manifest and plain.’ The General Assembly did not give any express manifestation of intent that it intended HB 528 to apply retroactively to the Application, an already pending case.”
The Office of the Attorney General has dismissed that logic.
“When the General Assembly passed HB 528, it was aware that APCo’s [rate review] application would be filed on March 31, 2020. This is because the General Assembly previously had enacted law requiring that APCo file its [rate review] with the Commission on March 31, 2020,” it argued in its July memo to the commission. “The legislature is presumed to know the law when enacting subsequent legislation.”
While lawmakers did not discuss specific utilities in their debate over the new law during the past session, members of both parties who supported the measure clearly cast it as a corrective to portions of the Grid Transformation and Security Act.
“This is a pro-ratepayer measure that corrects something that we did two years ago,” said Sen. Chap Petersen, D-Fairfax City, in one impassioned speech. “To the extent that we have elected new members to this body and we are bringing this bill back and correcting what I believe was a mistake two years ago, I say, more power to us.”
Sen. David Suetterlein, R-Roanoke City, too declared, “I don’t think there’s anything wrong with us taking a policy that might be contrary to a policy that we’ve previously adopted. That’s what we do here every year. This is just one of the rare times that it’s to the benefit of the ratepayer.”
The SCC has no deadline for its ruling, although the Virginia Poverty Law Center had urged it to issue one prior to the start of a special session this week in Richmond largely devoted to dealing with the fallout of the COVID-19 pandemic and criminal justice reform.
“In order for the General Assembly to evaluate legislative options to protect the economic health of Virginians, including any legislative changes that may be necessary to protect consumers during the coronavirus pandemic, the legislature should have full knowledge of Appalachian’s pending rate proceeding,” the law center said in its initial request. “That includes full knowledge of the law that applies to this case.”
Two days into the session, though, no decision had been handed down, and other grounds of dispute have emerged that may allow the commission to avoid handing down a decisive ruling on HB 528.
SCC staff for their part have contended that the plant retirements in question weren’t early at all and therefore the whole thing is irrelevant. Appalachian has argued that for the commission to issue a ruling on HB 528’s applicability would go against a long tradition of Virginia courts not issuing advisory opinions. And both the utility and, ironically, the Office of the Attorney General have said that the issue is better litigated as part of the months-long rate review process rather than in a single motion.
The latter, said the Office of the Attorney General last week, is unnecessary.
“Quite simply, the General Assembly has clearly spoken on this issue,” the office wrote in a filing. “The General Assembly has already enacted HB 528, which applies to this proceeding, and there is no further need for the General Assembly to act to ensure that the ultimate issue is resolved in a manner that is beneficial for ratepayers.”