Transmission lines in Louisa County. (Ned Oliver/ Virginia Mercury)

Appalachian Power Company is appealing state regulators’ denial of a base rate increase to the Supreme Court of Virginia in a case that could challenge the constitutionality of state law governing the earnings of both Appalachian and Dominion Energy.

That denial of a rate increase last year “results in a taking of private property for public use without just compensation in violation” of both the Virginia and U.S. constitutions, the utility wrote in a petition to the Supreme Court of Virginia March 24. 

Appalachian’s appeal primarily stems from the determination by the State Corporation Commission, which regulates Virginia utilities, to not let the utility increase its electric rates even though commission staff found it would be short $17 million in revenues annually going forward. The utility argues the SCC has the “obligation to evaluate going-forward rates” as part of its rate review. 

State and federal law, as well as longstanding legal precedent from the U.S. Supreme Court in the Bluefield and Hope cases, guarantee all utilities the right to recoup their costs from customers, as well as a fair rate of return.

Virginia regulators, however, have insisted “highly prescriptive directives” crafted by the General Assembly in state law limit their reviews to “historic” earnings — in this case, between 2017 and 2019 — and only allow reviews of future rates under specific conditions that Appalachian did not meet. 

Furthermore, the SCC contended, Appalachian has since 2014 taken “inconsistent” or “contradictory” positions on the validity of Virginia’s ratemaking system. 

“Contrary to its current constitutional position, Appalachian previously argued to this Commission (and to the Supreme Court of Virginia) that the General Assembly’s decision to prohibit going-forward rate cases for a period of years … is a policy decision within the General Assembly’s constitutional authority,” the SCC wrote in a March 26 order upholding its earlier stance. 

Appalachian is still reviewing the March 26 decision and will “likely” appeal it to the Supreme Court as well, said utility spokesperson Teresa Hall in an email. “Accordingly,” she added, “we cannot comment on any of the holdings at this time.”

How much leeway do regulators have?

The case now headed to the Supreme Court of Virginia will take up a range of objections by both Appalachian and the Office of the Attorney General to the commission’s November ruling, which is disputing a variety of accounting decisions the SCC accepted in its ruling.

Attorney General Mark Herring “thinks that the SCC got some legal issues wrong to the detriment of ratepayers, and the triennial review will have lasting impacts on rates for consumers in the APCo service area,” wrote Herring spokesperson Charlotte Gomer in an email. 

But the question that will likely loom largest is the constitutionality claim being put forward by Appalachian. 

Virginia’s system of utility regulation is notoriously complex, the product of not only an increasingly sophisticated energy landscape but also years of legislative intervention, much of it encouraged by Appalachian and Dominion. The two investor-owned electric utilities are the largest in the state and since 2007 have been regulated under a different set of rules than all other utilities.

Among the rules set down by the General Assembly are those laying out when Appalachian and Dominion can or cannot be granted a rate increase. 

According to law, if the utility’s base rate earnings fall within a 0.7 percent range of the rate of return the SCC has authorized, electric rates cannot change. If earnings exceed the upper limit of that range, 70 percent of those excess earnings have to be given back to customers. If they fall below the bottom limit, the commission must order a rate increase. 

In Appalachian’s 2020 rate case, which covered earnings from 2017 to 2019, the SCC found the utility had earned a 9.48 percent rate of return. Because that was more than the authorized 9.42 percent rate, the commission ordered no change to base rates. 

“Once the reasonable earned return is determined, the next steps attendant to this case are dictated by statute,” the commissioners wrote in their final order.   

Appalachian disagrees. 

State code requires the SCC to do “more than just a retrospective look-back into the past,” the utility argued in a Jan. 29 brief. “It also requires, at the very least, an inquiry into whether the utility’s rates going forward will allow the utility to recover its prudently incurred costs and earn a fair rate of return.” 

That approach “also is consistent with the commission’s broader responsibilities as Virginia’s public utilities regulator,” it continued. “In setting utility rates, the commission has a duty to protect not only the interests of customers, but also the interests of utilities.” 

Appalachian has previously taken a different stance on whether the commission is obligated to evaluate future rates, several case participants pointed out in briefs. 

Commission staff wrote that the utility had not challenged a 2015 law that froze base rates for both Appalachian and Dominion but instead “vigorously defended the constitutionality of that legislation.” 

In that case Appalachian argued that the Virginia Supreme Court had previously upheld the right of the General Assembly to limit the SCC’s authority “even to the point of removing the commission’s authority over certain rates.” 

“Policy arguments should be directed to the General Assembly,” the utility wrote at the time before going on to quote other SCOVA rulings. “It is the General Assembly who formulates public policy because those ‘policy decisions are subject to, and properly evaluated by, the political will of the people, and we have no authority to override such political decisions.’ … Accordingly, the Court ‘will not usurp the General Assembly’s prerogative to write the laws and fix public policy.’”

Commission staff highlighted the latter statement in their January brief on the dispute. 

“If enacting a temporary rate freeze is to ‘fix public policy,’ then defining when and how Appalachian may receive a base rate increase is also a matter of fixing public policy,” they wrote. 

The implications of unconstitutionality

It is not unusual in Virginia for rate cases to be brought before the Supreme Court, which acts as the appeals court for all cases involving the State Corporation Commission. 

But while challenges to SCC decisions must overcome a presumption established by the court in favor of the commission’s “correctness,” SCOVA has previously overturned that body’s decisions. In 2012, it partly ruled in favor of Appalachian against a commission decision prohibiting the utility from recovering certain environmental costs. And in 2015 it struck down a ruling related to a controversial transmission line Dominion has since built across the James River near Surry.

If the court were to find that the SCC’s decision constituted an unconstitutional taking of Appalachian’s property by barring it from recouping its future costs, “the implications would be significant,” wrote Will Reisinger, an attorney for the Virginia Poverty Law Center, in a court filing.

“Such a finding would cast doubt on prior orders when excessive rates were not decreased in order to protect customers,” he wrote. 

While the case has not yet been formally docketed by the Supreme Court, it is expected to be heard sometime this summer or fall. 

Simultaneously, the commission will be conducting its first review of Dominion’s base rates since 2013. The utility filed its application March 31, and regulators are required by law to issue a ruling by Nov. 30.