It’s not over yet.
The Virginia State Corporation Commission this November denied Appalachian Power Company’s request to increase its electric rates and both the utility and the Office of the Attorney General are challenging the ruling.
Their aims are exactly opposite: Appalachian says regulators erred in rejecting the rate hike, while Virginia’s top attorney says regulators incorrectly calculated the utility’s earnings, which means customers could be entitled to refunds.
Appalachian has argued that the commission’s failure to raise rates means it won’t earn enough revenue over the next three years to cover its costs as well as give shareholders a fair return on their investment. By “depriv(ing) the Company of its fundamental right to just compensation for the public’s use of the Company’s private property,” the utility says, the commission has violated the Fifth and 14th Amendments of the U.S. Constitution as well as protections in the state Constitution.
In its defense the company has marshaled testimony from commission staff given during virtual hearings on its rates and earnings this fall. In particular, SCC utility accountant Sean Welsh told commissioners that Appalachian’s earnings could fall short by $17 million a year; in the final accounting accepted by the SCC, the utility has calculated the shortfall will be as much as $25 million annually.
“The clear evidence in this case from both Appalachian and staff confirms that rates must increase by tens of millions of dollars, on an annual basis, to ensure that the company has any chance of earning a fair return,” attorneys for the utility wrote in their challenge to the SCC decision Dec. 14.
Perhaps more critically, though, the petition for the SCC to reconsider its decision strikes at a complicated part of Virginia’s laws governing electric utility regulation: the earnings band.
This statutory provision — which a Virginia Poverty Law Center analysis found exists in no other comparable state — says that if an electric utility’s base rate earnings are more than 0.7 percent above its authorized rate of return, the company must offer refunds to customers, and if they are more than 0.7 percent below that return, the SCC must order a rate increase.
In its ruling on Appalachian’s rates this November, the commission found Appalachian over the past three years earned a rate of return that exceeded its allowed rate by only 0.06 percent. What that meant, many of the attorneys and witnesses involved in the case argued, was that the commission couldn’t order a rate increase. One exchange between Judge Judith Jagdmann and Welsh summed up the conclusion:
JAGDMANN: Staff’s belief of how the statute should be interpreted, looking forward, Staff, as I read it, acknowledges that the company will underearn, but that — but that hands are tied because of the way the statute is written; is that correct? Is my understanding correct?
WELSH: Yeah, that’s correct. We calculate a $17 million increase that is needed. … And our understanding of the law is that increase cannot be implemented because of the earnings test results.
The SCC accepted that stance in its final ruling: “Once the reasonable earned return is determined, the next steps attendant to this case are dictated by statute,” the judges wrote.
Now Appalachian is challenging that conclusion. The utility has asked the commissioners to clarify whether they believe they lack the authority to increase rates if earnings fall within the earnings band. If they do conclude state law strips them of that authority, Appalachian writes, “then this means that the statute, as applied, is unconstitutional as it effects a taking of private property for public use without just compensation.”
The utility has already signaled in filings that it’s prepared to take the case to the Supreme Court of Virginia, although the SCC on Tuesday agreed to reconsider its ruling “for the purpose of continuing jurisdiction over the matter.”
That reconsideration will include not only Appalachian’s challenges, but an opposite push by Attorney General Mark Herring’s office, which is contending that the commission made several errors in its decision that impact how the company’s costs — and therefore customer rates and bills — are calculated.
Key among the attorney general’s concerns is the commission’s decision to let Appalachian recover the costs of a number of coal-fired plants closed in 2014 and 2015 over a 10-year period spanning 2015 to 2025. According to Herring’s office, that decision added about $28 million to the company’s costs over the past three years and will cost customers roughly $12 million going forward — offsetting company revenues in present and future accountings of its earnings.
The attorney general’s office has complained that while the SCC accepted the proposal by staff to recover the retirement costs over a 10-year period, staff failed to analyze whether Appalachian had in fact already recovered those costs.
“Without applying such a test, the commission cannot ensure the commonsense ratepayer protection that ‘no cost that has been actually recovered should continue to be deferred on the company’s books,’” Assistant Attorney General Mitch Burton wrote in a petition to the SCC.
Other groups during hearings argued vigorously that Appalachian has overearned for years.
“The commission should consider this history when evaluating, for example, whether certain … costs have been fully recovered through rates and whether the recommendations of the parties would result in rates that are ‘unfair’ or ‘punitive’ to Appalachian,” Virginia Poverty Law Center attorney Will Reisinger wrote in an October brief.
“Appalachian’s history of overearnings during the last decade is in the record and is not in dispute,” he continued. “All parties to the company’s last base rate case — including Appalachian — agreed that the company’s rates were designed to produce a going-forward revenue sufficiency of at least $42 million per year.”