Despite negotiation impasse, Dominion rate reform bill advances to Senate

Longtime political powerhouse Dominion Energy is facing pushback on a bill the utility says will allow it to raise more capital but opponents say would unnecessarily increase its profit margin.

On Monday, the Dominion-backed Senate Bill 1265, patroned by Senate Majority Leader Dick Saslaw, D-Fairfax, advanced out of committee to the Senate floor. A similar bill from Majority Leader Terry Kilgore, R-Scott, is being carried in the House.

But despite its passage by the powerful Senate Commerce and Labor Committee, negotiations on the bill continue behind closed doors, with the legislation facing immense pushback from environmental and ratepayer advocates. The major sticking point, say parties involved in the discussions, is whether state law should dictate utility profits or whether the State Corporation Commission, which regulates Virginia utilities, should have the discretion to set the level of those profits, known as the return on equity.

“Neither side is moving,” said Albert Pollard, a former delegate now lobbying for the Virginia Poverty Law Center. “There’s a basic philosophical impasse as to who should set the profit margin: Should the SCC set it, or should the General Assembly set it?”

The company says the legislation would lower rates, restore authority to the SCC and provide stability in setting future rates. Having a higher profit margin would also better position the company to “strengthen the grid and to fulfill the various needs of the system and legislative mandates we operate under,” Bill Murray, Dominion Energy senior vice president of corporate affairs and communications, told the Senate Commerce and Labor Committee Monday.

But opponents say the change allows Dominion and Appalachian Power Company rather than regulators to set the amount of profits they can earn and will increase costs of the transition to more renewable energy sources. 

“The commission should not be punitive, but the commission should be the one setting [the profit margin], not Dominion,” said Will Cleveland, senior attorney with the Southern Environmental Law Center and a long-time lobbyist for rate reform. “What’s the point in having a monopoly regulation if the monopoly sets its own profit?”

Utility profits

Under current law, the SCC sets the return on equity, or profit margin, for Dominion and Appalachian Power during regular rate reviews. The ROE is currently determined by averaging the returns on equity set for a group of utilities similar to Dominion or Appalachian Power, also known as a peer group, after removing the two highest and two lowest ROEs. In the most recent rate cases, regulators set Dominion’s ROE at 9.35% and Appalachian Power’s at 9.2%.

Dominion and Appalachian Power are then allowed to earn profits within a range surrounding that profit level. If regulators find their prior earnings fell within that range, then the base rates charged to customers remain the same. If their earnings were below the range’s floor, then base rates can increase. If they are over the range’s ceiling, then some of those excess earnings must be returned to customers as refunds. 

Saslaw’s bill would change how regulators are allowed to calculate the profit margin by requiring them to average the ROEs of all the utilities in the peer group, without eliminating the top and bottom two. 

Dominion says calculating the ROE in such a way would provide certainty and stability and would ensure rates are set more accurately. The company says that when combined with another proposal in the bill that would roll $300 million of riders — extra charges the company can add to bills to recover costs for particular projects — into the base rates without increasing those rates, average residential bills could decrease by $5 to $7 a month as soon as this summer. 

But critics of Saslaw’s bill caution the new approach to setting the ROE will make bills go up.  

In a Jan. 27 letter to Dels. Rip Sullivan, D-Arlington, and Lee Ware, R-Powhatan, Kim Pate, SCC director of utility accounting and finance, wrote that the proposed peer group change would result in an ROE for Dominion of 10.07%. Pate also found the new approach to setting the ROEs would increase average residential bills by $1.75 a month. 

“We view this bill as a shareholder bill,” said Connor Kish, legislative and political director for the Virginia chapter of the Sierra Club.

Dominion officials refute the SCC’s bill impact estimate, saying it is based solely on the change in how the ROE is calculated and doesn’t account for a $6 to $7 monthly bill reduction that would result from moving riders into base rates without asking for an associated base rate increase. 

A second letter dated Feb. 1 from the SCC to Kilgore confirms Dominion’s argument that rolling a revised rider total of $350 million into base rates without a rate increase will decrease bills by $7 to $8 a month. The ROE increase will cause the remaining riders not rolled into the base rates to go up by $0.83, resulting in a net bill reduction of $6.17 to $7.17 a month, the letter adds.

Ratepayer advocates say the utilities don’t need legislation to pursue some of the changes they are seeking. Cleveland of the Southern Environmental Law Center argued Dominion already has the ability to petition the SCC for a higher return if they need it to account for inflation and other factors, although there’s the chance the regulators will deny the effort. And other groups say Dominion has the ability to fold $300 million of riders into base rates at any time, as it did when it asked regulators to suspend the rider covering the costs of participation in the Regional Greenhouse Gas Initiative last year. Dominion has since reversed course and asked regulators to reinstate the RGGI rider.

Negotiations still not resolved

While discussions over how the ROE should be set remain stuck, the company presented a new amendment Monday that would give the SCC the authority to allow Dominion to issue $1.6 billion in bonds to cover fuel cost increases linked to the Ukraine war and other factors.

The costs to customers of repaying the bonds would be spread out over 10 years to minimize the bill impact from about $17 extra per month to $2.50 per month, a company official said. The concept is called fuel securitization. 

The fuel securitization proposal is copied from an approach in North Carolina. There and in South Carolina, Duke Energy used the concept to account for hurricane costs, Dominion executive Murray explained.

Amid global energy price spikes, Dominion customers’ bills could rise between 12 and 20 percent

Critics remain skeptical.

“The concept of securitization can be a useful tool,” said Cleveland. But because the concept relies on complex financial principals, he said he’s “nervous” about including it in the bill a week before crossover, the midpoint of the session when both chambers have to complete all of their business before passing successful bills to the other chamber. And still, “there’s nothing in this bill” that changes Dominion’s proposal for how the ROE should be calculated, Cleveland said.

Other amendments have also been made over the course of the session. A ban on giving large retail customers the option to get their energy from a company other than Dominion has been stripped out. Another amendment would decrease the percentage of overearnings that utilities are allowed to keep from 30% to 15%. A third removed a provision giving the SCC the ability to determine plant retirement dates on its own.

But those changes have still not swayed opponents, who have continued to testify against the bill. More than 35 groups and businesses from across the political and business spectrum, including Amazon Web Solutions, Google, Wegmans, Advanced Energy United, the League of Conservation Voters and Americans for Prosperity, have also signed onto a letter opposing Dominion’s bill.

Another utility regulation proposal

Saslaw and Kilgore’s proposal isn’t the only one before the General Assembly this year. Another proposal from Sen. Jennifer McClellan, D-Richmond, would explicitly give authority to the SCC to adjust rates going forward at its discretion if it determines the company has overearned in prior years.

Her bill would allow regulators to determine if Dominion overearned in previous years; conduct a future cost analysis that takes into account investments into distribution, transmission and capital projects; and set the rates as they see fit.

McClellan’s bill applies to both Dominion and Appalachian Power Company. Saslaw’s bill includes McClellan’s provisions, but her bill remains separate.

While state code does not explicitly prohibit the SCC from lowering base rates, legislative changes throughout the years have given Dominion and Appalachian Power broad latitude to reduce earnings calculations, preventing the SCC from lowering base rates even when they find the companies have earned above their profit margins. 

“This is a reaction to the times when the State Corporation Commission has found one or more or both of the electric utilities have earned more than the reasonable profit and costs recovered (and) they said their hands were tied and they couldn’t do anything about it,” said McClellan during a press conference on the bill Tuesday.

McClellan’s bill also advanced out of committee.

Lagging stock

The push from Dominion to change the utility regulation law comes after Dominion President, CEO and Chair Bob Blue told investors during an earnings call that the company was initiating a top-down business review in response to lagging stock prices, which have fallen from about $88 a share in April to about $62 a share today. 

A Dominion official acknowledged the proposed reform is part of the company’s business review but said the utility also believes it will provide customers relief. 

Whether the bill can make it through a divided legislature where every seat is up for election this November remains uncertain. Several utility allies, including Saslaw, are not expected to seek reelection, and many younger members in both parties have increasingly voiced skepticism of or outright hostility to Dominion and Appalachian Power. 

When asked if Kilgore’s bill, the House version of Saslaw’s, will advance out of the House, House GOP spokesperson Garren Shipley said he had “no idea.” When asked about the chance of a House version of McClellan’s proposal passing, Shipley said, “They’re all complicated with lots of moving parts.” 

Macaulay Porter, press secretary for Republican Gov. Glenn Youngkin, declined to comment on what he might like to see in rate reform legislation. In his State of the Commonwealth address this year, Youngkin called for lowering electricity rates. Last year, he called for a series of reforms to the state’s utility regulation law in his energy plan, stating, “Legislative changes to the energy framework over the last fifteen years have removed some of the regulatory controls previously in place to safeguard consumers.”

This story has been updated to include information about an additional SCC letter sent Feb. 1.