Appalachian Power rates will rise after Supreme Court of Virginia ruling
Power transmission lines. (Ned Oliver/Virginia Mercury)
Electricity rates for Appalachian Power Company customers are poised to go up after the Supreme Court of Virginia reversed part of a decision by state regulators that was key to keeping the utility’s rates unchanged.
“Customers can expect a rate increase, but the amount and timing are undetermined at this time,” said Appalachian Power spokeswoman Teresa Hall in an email.
The court found that the State Corporation Commission, the body that oversees Virginia’s electric utilities, didn’t have the authority last year to decide whether it was reasonable for Appalachian Power to include costs linked to the closure of several coal-fired plants in its accounting of expenses between 2017 and 2019.
The plants were retired in 2015.
In its Thursday ruling, the court said that amendments to state law passed in 2013 and through the 2018 Grid Transformation and Security Act “took away any such regulatory discretion” by the State Corporation Commission.
Those amendments “changed, not clarified, existing law by expressly limiting the commission’s broad scope of regulatory discretion,” Justice D. Arthur Kelsey wrote in the majority opinion.
Not all justices agreed.
In a dissent, Senior Justice William C. Mims and Justice Cleo E. Powell said the decision “takes away the commission’s ability to protect rate payers from potentially unreasonable accounting practices that will result in rate increases.”
The costs of coal plant retirements
Much of the court’s ruling focuses on how Appalachian Power should have treated costs associated with eight coal-fired power plants in its accounting of expenses and revenues between 2017 and 2019.
In Virginia, Appalachian Power and Dominion Energy are regulated according to a highly complex set of laws that are regularly tweaked and overhauled by lawmakers.
Under the current system of regulation, both undergo “triennial reviews,” during which regulators assess what the utilities earned over the prior three years and determine whether rates should be adjusted.
If earnings are below a lower threshold, regulators are required to authorize the company to increase its rates. If they are above an upper threshold, the utility must refund 70% of its excess earnings to customers. (Shareholders keep the rest.) And if the earnings fall within the band in between the lower and upper thresholds, rates continue unchanged.
Certain large expenses incurred by the utility can also by law be used to offset excess earnings, reducing the likelihood the company will be forced to provide refunds.
In the 2017-19 review, Appalachian Power asked to include in its expenses $88 million in costs associated with retiring eight coal-fired plants in 2015, two years prior to the review period.
The company argued that under a change to state law made by the Grid Transformation and Security Act, it was allowed to recover “costs associated with asset impairments related to early retirement determinations made by the utility” for coal units if those costs were recorded by the utility on its books during the review period.
The impact of allowing the $88 million to count as expenses in the review is significant.
When the costs aren’t included — as regulators initially ruled they should not be — the company’s earnings fell within the state-defined range, meaning customer rates would not increase.
But when they are included, the company’s earnings drop below the lower threshold, triggering a mandatory rate increase.
Appalachian argued that according to “the plain and unambiguous language of the code,” it was allowed to count those costs as expenses to be recovered during the 2017-19 period.
The SCC is “not entitled to second-guess the financial reporting” of the electric utility, company attorney Robert Rolfe told Supreme Court judges in a March hearing.
The State Corporation Commission disagreed, arguing that a different part of state code gives them the authority to determine “the reasonableness and prudence of any cost incurred or projected to be incurred, by a utility in connection with the subject of the proceeding.”
Consequently, the SCC ruled that the costs couldn’t be wholly recovered in the 2017-19 period but should instead be spread out over 10 years. Appalachian Power then appealed the case to the Supreme Court of Virginia.
The court sided with Appalachian Power. The later amendments to state code “have removed the commission’s discretion” to decide whether such costs could be recovered, the judges found.
Appalachian spokeswoman Hall said the company “is pleased with the court’s careful consideration of the issues and application of the statutes.”
Will Cleveland, an attorney with the Southern Environmental Law Center, said the court ruling “confirms the need for comprehensive reform of utility laws to ensure the SCC has the necessary authority to set fair and reasonable rates for customers.”
“Legislation that handcuffs the commission … almost universally benefits utilities’ profit margins to their customers’ detriment,” he said.
Victoria LaCivita, a spokesperson for Attorney General Jason Miyares, said Miyares was “disappointed that the court found the SCC lacked the legal tools needed to ensure that Appalachian Power’s customers pay only what is reasonable when a power plant is retired early.”
The average monthly bill for a residential customer of Appalachian Power has increased from $115 in 2017 to $132 today, she added.
Andy Farmer, a spokesperson for the State Corporation Commission, said the commission could not comment on the ruling.
“The SCC will comply with the Supreme Court’s directive and will issue an order in the near future reopening the proceeding,” he said.
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