Dominion Energy offices in Richmond, Va. (Parker Michels-Boyce/ For The Virginia Mercury)
A staple of the Virginia General Assembly throughout the years has been lawmakers’ interest in tweaking energy regulation laws.
Those tweaks have led to major overhauls of how the State Corporation Commission, the regulators of Virginia’s electric utilities, sets the rates for investor-owned companies. Significant alterations happened in 2018 with the Grid Transformation Security Act, in 2015 with a rate freeze and in 2007 with the Re-Regulation Act.
The 2023 session culminated with yet another landmark piece of utility legislation. This year’s bill, the result of a last-minute deal involving Dominion Energy, the state’s largest electric utility, restored much of the SCC’s traditional authority to set rates.
Here’s a breakdown of what that legislation changes.
Rates are now reviewed every two years rather than three
Under current law, the SCC reviews the rates Dominion and Appalachian Power Company charge customers every three years.
During the reviews, the utilities present vast amounts of accounting information on how much they earned over the three-year period. The SCC then looks at what profit level it set for the utility in its previous review and determines if the company hit that mark or over- or underearned in order to change rates or issue customer refunds.
This year’s legislation changes the schedule of the reviews to every two years, with Dominion moving to the new timeline this summer. A separate bill that passed this General Assembly session untied Appalachian Power from the review framework that governs Dominion.
Rate adjustment clauses, or additional fees, can be folded into base rates
Customer bills comprise three forms of charges: base rates, the fuel factor and rate adjustment clauses, or RACs.
The base rates cover the cost of generation and distribution services — that is, the creation of the electricity and delivery of it to a user. The fuel factor is what the utility pays for fuel like natural gas and coal to generate its electricity. Those costs are passed onto the customer with no markup. RACs are the fees added onto bills for other investments, such as the construction of specific generation facilities or programs like coal ash cleanup.
Under current state code, base rates have largely remained unchanged for years. The fuel factor fluctuates with energy markets. RACs, however, can be added onto bills for each new project and represent the largest increase in customers’ monthly electricity expenses over the past 15 years.
In 2007, a bill for a typical residential customer using 1,000 kilowatts per month was $90.59, compared to a typical $136.93 bill in July 2022. Of that $46.34 monthly increase, 66% was due to RACs.
This year’s bill gives the SCC the ability to combine two or more RACs. Also, this summer, regulators will roll about $350 million of RACs into bas rates, creating what they estimate will be monthly savings of $6 to $7.
The legislation also specifies that Dominion can’t request an associated base rate increase to offset the costs of the consolidated RACs in its next review, although the limitation will only apply to this year.
The subset of utilities that regulators use to set Dominion’s profit, known as the peer group, will no longer be used
The profit margin that regulators set for utilities is based on the principle of the regulatory compact, an agreement to let a utility be the sole service provider for an area and earn a reasonable profit so long as it charges fair rates to achieve that profit.
In Virginia, regulators set the profit level, known as the return on equity, using an analysis of the profits earned by other utilities in the South of similar size to Dominion. That group of utilities is known as the “peer group.”
Before passage of this year’s bill, Virginia law directed the SCC to eliminate the utility with the highest profit level and the utility with the lowest profit level from the peer group, average what remained and set the utility’s profit level at a comparable mark.
Earlier in the session, Dominion lobbied for changes to the peer group calculation that would let it earn a higher profit margin, arguing the shift would boost its lagging stock and help it meet the investment demands of state-mandated grid changes.
The final legislation dictates that Dominion’s profit level will increase from 9.35% to 9.7% for the two years after this summer’s rate case. After that, the peer group analysis will be eliminated altogether, and the SCC will be allowed to increase or decrease Dominion’s return on equity by 50 basis points based on performance.
The SCC has until 2027 to formulate the performance metrics.
Regulators will no longer use a prescribed profit range, or ‘earnings collar,’ to determine whether Dominion has over-earned
The profit range spelled out in state code that defines how much Dominion is allowed to earn is going away too after this summer’s case.
The range, which stretched from 0.7 percentage points below the return on equity to 0.7 percentage points above it, has been critical to SCC determinations of whether utility rates should stay the same or increase. If the utilities earned within the range, the rates stayed the same. If the earnings were above it, refunds were issued to customers. If the earnings were below the range, then the rates had to increase.
Without the earnings collar, which dictated what regulators could and could not do, the SCC will simply look at whether Dominion hit the profit level and take the same actions.
The collar will be used in this summer’s rate case, and then goes away.
Accounting tools that let Dominion cover certain investments or severe weather costs using excess earnings are gone
Current state law lets Dominion recover costs associated with severe storm recovery efforts and grid upgrades. If the costs are above a certain amount, the company can recover them over a future time period.
Those accounting tools have been used by the utility to decrease the amount of excess earnings it has to refund to customers. Critics have been especially unhappy with what are known as customer credit reinvestment offsets, or CCROs, a mechanism created by the 2018 Grid Transformation and Security Act.
The new legislation states that the write-offs “shall not” be more than an amount that would allow the company to overearn. It also says that federal guidance from the Institute of Electrical and Electronic Engineers will define what a severe weather event is to ensure storms such as hurricanes or tornadoes are eligible — not strong wind days. It further says all existing CCRO’s must be used before July 1 of this year, before Dominion’s next rate case.
Dominion is allowed to keep less of any excess earnings
In the case that Dominion does overearn, current law lets the company keep 30% of its excess earnings and refund the remaining 70% to customers.
But under the new bill, Dominion can keep only 15% of its over earnings and must issue the remaining 85% in refunds. The change was made after immense pushback from environmental and ratepayer advocates early in the legislative session.
The new legislation also contains a provision that if the company earns more than 150 basis points above the authorized profit level all excess revenues must be refunded.
The SCC is explicitly given the authority to reduce rates as it sees fit
This year’s bill streamlines the SCC’s ability to adjust rates by giving it explicit power to determine if Dominion overearned, analyze future costs and set new rates accordingly.
A separate bill, carried by former Sen. Jennifer McClellan, D-Richmond, and Del. Lee Ware, R-Powhatan, also made the same changes, mandating that the SCC “shall order any reductions or increases, as applicable and necessary, to such base rates that it deems appropriate”
The broader utility legislation ultimately incorporated the language of the McClellan-Ware bill, which passed both chambers unanimously.
Dominion is allowed to pay for fuel costs upfront and charge customers a smaller amount over a longer period of time
Amid the war in Ukraine, natural gas costs have gone up and down. The SCC in the fall granted Dominion’s request to increase monthly bills by an average of $14.93 for residential customers to cover fuel increases.
This year’s legislation includes a ‘fuel securitization’ provision copying state code from North Carolina, that allows Dominion to issue $1.6 million in bonds to pay for the fuel upfront.
Dominion says securitization will prevent customers from seeing a $17 monthly bill spike over the summer as a result of the volatile fuel market. Instead, the utility says monthly bills will increase by $2.50, because it will be able to recoup its upfront investment over 10 years.
Critics say the measure means bills will still increase over a longer period of time.
The SCC will include more detail on reliability concerns in its annual report to the General Assembly
Current law directs the SCC to submit a report to the General Assembly every year by Sept. 1 on policy recommendations.
In last year’s report, the SCC voiced concern that it lacked proactive authority to ensure grid reliability in the face of fossil fuel plant retirements mandated by the 2020 Virginia Clean Economy Act. Republicans have decried the plant retirement dates set by the VCEA, saying they will lead to service interruptions, while supporters of the law say Virginia faces no real issue because it is part of the regional grid managed by PJM Interconnection.
An earlier version of this year’s bill included language altering the retirement timelines set by the VCEA. The final legislation does not include those changes and instead requires the SCC to include in its annual report any information about how retirements could impact reliability and purchases of power from outside the state’s jurisdiction.
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