Virginia regulators to weigh Appalachian Power Company rate increase

Appalachian Power Company, Virginia’s second-largest electric utility, is asking regulators for a big rate increase, citing inadequate revenues over the past three years and rising costs.

If the State Corporation Commission agrees to the rate hike, it would increase the average monthly residential bill by about $20.

Because of how much the company says it has underearned over the last three years, rates will almost certainly increase over the next year. But other groups including the Office of the Attorney General are pushing back against the size of the utility’s request, and particularly its desire to see a major rise in the profits it’s allowed to earn.

The rate case is when the SCC reviews what the company has earned and sets the rates customers will pay going forward as well as the company’s new profit level. In the current case, Appalachian Power is asking to earn an additional $212 million annually, a 14.3% increase from what it was previously allowed to earn. It is also seeking approval of a new profit level of 10.6%, a jump from its current level of 9.2%.

In an additional twist on an already complicated review, this year’s rate case is the last one that will occur under a system that reviews Appalachian Power’s rates every three years. Legislation this past session reset reviews to every two years starting in March 2024 while also changing the power regulators have to raise or reduce rates as they see fit.

An in-person hearing in the case is scheduled for Wednesday.

Rates likely required to rise

Because of how much Appalachian Power underearned, a rate increase of some amount is likely required.

State law currently requires regulators to increase Appalachian Power’s electric rates when its earnings fall below a certain threshold. The threshold is based around the profit level the commission set for the review period. If the company’s actual profits fell within a 0.7 percentage point range of the allowed profit level, rates stay the same. If they were below the bottom end of that range, rates must go up. If they were above the upper end, regulators can choose to lower rates and issue refunds to customers.

Currently, Appalachian Power has an authorized profit level of 9.2%. But the company says its average profit level over the past three years was 5.39%, far below that. 

The fact that Appalachian Power underearned isn’t disputed. SCC staff concluded the company earned a 5.49% rate of return. Other parties involved in the case, including the Office of the Attorney General, aren’t offering any arguments that the actual profit level was higher.

The utility says its low earnings are due to a shrinking customer base, lost revenues from the COVID-19 pandemic, including losses from the state’s suspension of late fees, and global economic pressures. Those pressures include high energy prices linked to the Russia/Ukraine conflict and longer delivery times and higher costs for transmission and distribution supplies.

“I am aware that this request comes at a time when various economic factors are causing customers to face increases in the cost of living,” said Appalachian Power President and CEO Aaron Walker in testimony to the commission. “Those same economic forces affect the Company and its ability to fulfill its obligations to the public.”

The utility also says it needs a rate increase because it will need an additional $47.8 million for vegetation management, driven by a nearly 14% rise in labor costs from the company it contracts with, and an extra $37 million to cover the costs of storm recovery that it previously put off. 

To mitigate the overall increase, the company is proposing to remove a $7.96 basic service charge for low-income customers, identified as those receiving some form of state assistance. The removal would apply to about 7% of residential customers and decrease the utility’s request by about $3 million.

Disputes over future earnings

But while no one is disagreeing that Appalachian Power’s earnings were too low previously, the Office of the Attorney General, regulatory staff and other groups do disagree with the company on what the new profit level should be.

Both the Office of the Attorney General and Walmart are recommending the utility’s profit rate should stay the same, at 9.2%, while SCC staff are suggesting an increase to 9.4%. Environmental nonprofit Appalachian Voices hasn’t made any recommendation on what the profit level should be.

The main disagreement between the attorney general’s office and Appalachian Power concerns state law that allows the commission to set the profit level compared to those in place for similarly sized utilities, known as a peer group.

Both the attorney general’s office and the utility agree that the lowest the profit level could be set is 9.12%, based on the peer group analysis. But while Appalachian Power asks the SCC to use its discretion to set a 10.6% level, just below the highest allowed mark of 10.62%, the attorney general’s office is asking for the utility to receive the same 9.2% allowance it has now.

Walmart, meanwhile, contends that a higher profit level will cause customer bills to rise too much. And SCC staff argue that Appalachian Power should only be able to recover an extra $24.7 million for vegetation management using past data of what management has cost rather than the future projections the utility uses.

Future vegetation management costs are “difficult to predict,” said Sean Welsh, a senior manager with the SCC’s Division of Utility Accounting of Finance, in testimony. However, he continued, “staff believes actual historical data is generally more reliable as a predictor of Rate Year costs than projected costs that are subject to changing labor market conditions and are not locked-in by long-term contracts at this time.”

Amos plant retirement

Three groups — Appalachian Voices, the attorney general’s office and Walmart — are also challenging the date Appalachian Power should use in calculating the costs customers should pay for its coal-fired Amos plant.

Planned retirement dates impact customer costs in that earlier dates mean customers pay more now, while later ones mean costs are spread out over more time and future customers.

The utility is using a retirement date of 2032-33 in calculating customer costs for Amos, which is located in West Virginia. That date was chosen in 2014 proceedings, when SCC staff argued the plant was unlikely to operate until 2040.

But Appalachian Voices, which has long advocated for the replacement of fossil fuels with renewables, said much has changed since 2014, and a 2040 retirement date should be used.

“All the planning documents suggest they’re running until 2040,” said Josephus Allmond, an attorney with the Southern Environmental Law Center, which is representing Appalachian Voices in the case.

Appalachian Voices says that while it would be happy to see the units retire earlier, a 2032-33 retirement would cause significant capacity concerns — Amos’ 2,900 megawatts are about 39% of the utility’s generation capacity — and job losses. There’s been no plan submitted to address those concerns, the nonprofit argues.

Appalachian Power to face new regulatory system

The group also notes that in the event of an early retirement, House Bill 528 passed in 2020 would allow Appalachian Power to still recover the costs of the closure, but regulators would have the authority to set a recovery period that reduces ratepayer impact. 

Appalachian Power didn’t outright reject using the 2040 retirement date in its rebuttal, saying it provided an analysis of how rates would change in that scenario.

“Even though circumstances around the Amos Plant continue to evolve, the study using 2032-33 end dates was prepared at my request because the history of Amos depreciation rates in Virginia suggested to me that the Commission might prefer to continue to use those dates,” Director of Regulatory Services William Castle told the commission. 

Changing rates and changing reviews

The impacts of this year’s rate review may be short-lived. As a result of legislation passed during the 2023 session, Appalachian Power will undergo another rate review next year under a different system.

The new system will conduct reviews every two years, which ratepayer advocates say will allow more frequent adjustments to rates that will minimize customer impacts. It also will give the SCC wider latitude to set rates that commissioners feel are reasonable. 

The quick turnaround means the March review may be more of a tune-up to the rates being set now rather than a major overhaul. The rates set in the current case will be in effect until a decision in the next case is finalized, which could be anytime in the summer or fall of next year. Those rates would then be in effect until the next biennial case in 2026.

“Hopefully it’s a minor change,” said Southern Environmental Law Center Senior Attorney Will Cleveland.