This document provides findings and recommendations from the Virginia Electric Utility Regulatory Work Group regarding electric utility regulation in Virginia. It discusses the history of regulation in Virginia including a period of rate caps from 1999-2004 during anticipated utility competition, and reregulation in 2007. It analyzes problems with the current system including excessive returns and lack of consumer protections. The Work Group recommends reverting to basic prior regulation or adding balance and fairness to the current system to ensure fair, just and reasonable rates.
2. 1
Table of Contents
Introduction.................................................................................................................................... 1
Why Study Electric Utility Regulation in Virginia...................................................................... 2
THE STEEL DYNAMICS INC. EXPERIENCE................................................................. 3
THE VAUGHAN-BASSETT EXPERIENCE....................................................................... 4
THE RESIDENTIAL CUSTOMER EXPERIENCE........................................................... 5
Recent History of VA Electric Utility Regulation ........................................................................ 6
What are the problems/specific failings of the current regulatory system ................................ 9
Peer Group Return on Equity (ROE) ........................................................................................ 9
Risk and Rate Adjustment Clauses......................................................................................... 12
Markups and Excess Returns.................................................................................................. 14
Rebundling................................................................................................................................ 18
Consumer Protections .............................................................................................................. 19
Trends if action is not taken........................................................................................................ 21
Key Policy Changes...................................................................................................................... 22
Risk............................................................................................................................................ 22
Consumer Protections .............................................................................................................. 22
Recommendations of the Work Group ........................................................................................ 23
Revert Back to Basic Chapter 10 Regulation ......................................................................... 24
Attempt to add Balance and Fairness to the Current System .............................................. 25
Reaction from Utilities............................................................................................................. 26
Conclusion .................................................................................................................................... 30
Appendix A..................................................................................................................................... ii
Appendix B...................................................................................................................................... i
Endnotes.........................................................................................................................................A
3. 1
INTRODUCTION
The Virginia Electric Utility Regulatory Work Group was formed in May of 2010
to review the current electric utility regulatory scheme in Virginia, produce a
report of its findings, and develop new legislation to address identifiable problems
regarding lack of consumer protections and escalating energy costs to
consumers.
The bi-partisan work group included current and former legislators, former State
Corporation Commission (SCC) commissioners, consumer advocates, certified
rate of return analysts, former electric utility executives, residents and business
leaders.
The Work Group met throughout the summer to study the evolution of electric
utility regulation in Virginia over the last decade, Virginia’s current regulatory law,
and regulations in place in other states. The work group examined problems and
shortcomings in Virginia’s current regulatory standards as they relate to the high
cost of electric service and limited protections for consumers.
The Work Group adopted the following Guiding Statement for its work: The goal
of electric utility regulation in general, and ratemaking in particular, is to have
financially strong, well-managed utilities that consistently, safely, and reliably
produce and deliver electricity in an environmentally responsible manner at rates
that are fair, just, and reasonable.
The following report will present the findings and recommendations of the Work
Group including:
A history of contemporary electric
utility regulation in Virginia.
An analysis of the current
regulatory scheme and how it
affects both utilities and all three
consumer classifications:
residential, commercial, and
industrial.
Projected trends if action is not
taken.
Recommendations for
improvement to ensure rates that
are fair, just, and reasonable.
Ω
The goal of electric utility regulation
in general, and ratemaking in
particular, is to have financially
strong, well-managed utilities that
consistently, safely, and reliably
produce and deliver electricity in an
environmentally responsible manner
at rates that are fair, just, and
reasonable.
4. 2
WHY STUDY ELECTRIC UTILITY REGULATION IN VIRGINIA
Historically, Virginians have laid claim to some of the lowest electric rates
nationwide. According to the Edison Electric Institute (“EEI”), based on overall
rates, Virginia had the 11th lowest electric rates in the country in 2007.1
Yet the
last three years have seen dramatic
increases in electric costs for all
consumer classes: residential,
commercial, and industrial.
Residential customers of Dominion
Virginia Power (VEPCo) have seen
their rates go up more than 24%
since 2007 according to EEI.2
And,
Appalachian Power Company’s
(APCo) residential rates soared by
more than 33% during the same
period.3
From 2007 to 2009, average commercial rates for APCo experienced a 34%
increase and VEPCo’ commercial rates rose by 33%.4
APCo’s industrial rates increased almost 43% from 2007 to 2009,5
and Dominion
Virginia Power’s industrial rates increased over 38%; and, for the first time in
recent years, and perhaps ever, in 2009 Dominion Virginia Power’s industrial
rates were above the national average.6
But nowhere has the increase in rates been more dramatic or deeply felt than in
the APCo service area. The sharp and rapid increase in electric utility rates that
Virginia’s APCo customers have faced over the past few years have resulted in
public outcry from both residential and business customers.
According to statistics provided by the State Corporation Commission (SCC), ten
of the eleven rate increases requested by Appalachian Power and approved by
the SCC since December of 2006 have been regulated under the 2004 or 2007
legislation as cited in the application and/or final order. [Chart A]
The following customer experiences illustrate just a few examples of the troubles
that residential, commercial, and industrial electric customers are facing as a
result of rapidly increasing electricity prices.
These statistics and the stories from electric customers across the
Commonwealth point to a systemic problem in the way Virginia currently
regulates utilities that must be addressed.
Residential customers of Dominion
Virginia Power have seen their rates go
up more than 24% since 2007 according
to EEI. And, Appalachian Power
Company’s residential rates soared by
more than 90% during the same period.
6. 3
THE STEEL DYNAMICS INC. EXPERIENCE
Steel Dynamics Inc., headquartered in Ft. Wayne, Indiana, is one of the largest steel
producers and metal recyclers in the United States. The Steel Division consists of
five producing mills – three in Indiana, one in West Virginia and the Roanoke Bar
Division, located in Roanoke, Virginia. The Roanoke Bar Division sells semi-finished
“billets” and merchant steel products both domestically and in the world market.
The Roanoke Bar Division, which operated from 1955 to 2006 as Roanoke Electric
Steel Corporation, was acquired by Steel Dynamics in April 2006. This division
currently has approximately 400 employees and annual sales of around $300 million.
In 2006, when acquired by Steel Dynamics, the Roanoke Bar Division had the lowest
power rates per kilowatt hour of any of the other four producing mills within Steel
Dynamics, which was a contributing factor in Steel Dynamics’ acquisition of Roanoke.
Since then and through 2009, our power rates increased over 80% to the highest
level in all of Steel Dynamics. Effective August 2010, we realized a net reduction in
rates of approximately 8%, as the base rate increased and the fuel factor decreased.
In addition, effective January 1, 2011, we will save an additional 5% with the
elimination of the Environmental & Reliability rider. These reductions still result in the
overall rate increases experienced since 2006 being approximately 68%. Most
importantly, these rate increases have occurred in the most difficult economy and
steel industry downturn experienced in our Division’s 55-year history, contributing to
poor results and an annual Corporate loss by Steel Dynamics in 2009. This also
occurred in the same timeframe that American Electric Power reported earnings in
the billions of dollars.
--Joe Crawford, Vice President and General Manager, Roanoke Bar Division
Photo Courtesy of Joe Crawford
7. 4
THE VAUGHAN-BASSETT EXPERIENCE
Vaughan-Bassett Furniture Company is the largest wooden bedroom maker in
the United States, with sales of over $85 million in 2009. Founded in 1919, we
employ about 700 workers, over 90% of them working out of our main factory
and headquarters in Galax, Virginia and the rest at our facilities in North
Carolina. We are the largest employer within at least a 25-mile radius of our
factory in Galax.
In 2007, our utility bill with Appalachian Power was $833,000. By 2009, the bill
had exploded to $1.3 million and we are on track to pay over $1.5 million in
2010. Over the last three years, our usage is up slightly – by about 20% -- but
the vast majority of our increased utility bill is the result of the 48% increase in
the kilowatt/hour rate charged by Appalachian.
In contrast, Duke Power has increased its rate in North Carolina by less than
10% during the last three years. Three years ago, Appalachian Power in
Virginia and Duke Power in North Carolina charged its industrial users like
Vaughan-Bassett almost identical rates. Appalachian now charges industrial
users like Vaughan-Bassett about 45% more than Duke Power charges
industrial users our size in North Carolina.
--Doug Bassett, Executive Vice President and COO
Photo Courtesy of Doug Bassett
8. 5
Ω
THE RESIDENTIAL CUSTOMER EXPERIENCE
“Last winter I kept my heat at 66 degrees to conserve energy and keep my
electric bill costs down. My highest bill prior was $218, my Dec bill was almost
$500.00. Also I am a single person household living on a fixed income in a well
insulated house and burn firewood.”
“My electric bill has gone up again just this month we were paying $180 per
month and now starting in august we will pay $212 per month. We are on the
budget plan.”
“The APCO bills are 3 to 4 times higher than the last time I received a raise over
5 years ago. My July bill was $500 and August bill was $389. I have had to turn
the AC off.”
--Residential Customers, submitted via website www.wardarmstrong.com
Stock Photo
9. 6
RECENT HISTORY OF VA ELECTRIC UTILITY REGULATION
In the mid to late 1990’s overall electric rates for Virginia’s investor-owned utilities
were below the national average, with Appalachian Power Company’s (APCo)
rates being lower than those in all but a handful of states. Commercial and
industrial customers fared even better with Virginia being ranked in the lowest
cost quartile.7
In 1999, the General Assembly
opted for competition with the
intense support and lobbying of
the regulated electric utilities. To
protect consumers while waiting
for competition to become an
effective regulator, the Assembly
turned to “capped rates.” While
the statues referred to capped
rates, the effect of the Assembly’s
action was not to cap electric
rates, because rate reductions
could not be required. Base rates
were, in effect, frozen, and fuel
costs were allowed to continue to
flow through to ratepayers.8
The
rationale was that the utilities “might” have some “stranded costs,”9
and any extra
profits the utilities earned during the phase-in to competition would offset these
costs.10
While some states awarded customers stranded benefits, it was decided
that Virginia would not do this. In fact, unlike many states, Virginia did not even
attempt to quantify these costs. This was a costly choice for Virginia and her
citizens. There were no stranded costs, so excess earnings were simply excess
profits for the monopoly utilities.
From 2001 through 2004, Dominion Virginia Power’s Virginia jurisdictional return
on average common equity on a regulatory basis ranged from 9.8% to 23.31%
and averaged over 15.75%.11
According to the Attorney General’s report to the
Commission on Electric Utility Restructuring, during this four-year period,
Dominion Virginia Power received $1.06 billion in excess of the level of
authorized earnings for the utility “if it were regulated under traditional methods
used prior to the passage of the Virginia Electric Utility Restructuring Act . . . .”12
For 2008, Dominion Virginia Power calculated its average equity return at
17.26%; SCC Staff found the return to be 19.12%.13
According to the SCC Staff,
Dominion Virginia Power had excess earnings in 2008 of over $525 million.14
APCo did not fare as well as Dominion Virginia Power, but it, too, over-earned
during the same period. From 2001 through 2004, APCo’s equity returns ranged
. . . the 2007 reregulation statutes
reduce drastically the ability of the
State Corporation Commission to
set rates fairly and effectively,
essentially guarantee recovery of
all costs and returns, and
encourage and provide for
excessive returns for APCo and
Dominion Virginia Power.
10. 7
from 6.53% to 13.96%15
and it
collected almost $59 million of excess
earnings according to the Attorney
General.16
In 2007, after it became obvious that
competition would not develop, the
General Assembly “reregulated”
electric utilities. As will be described
in some detail later in this report, the
2007 reregulation statutes reduce
drastically the ability of the State
Corporation Commission to set rates
fairly and effectively, essentially
guarantee recovery of all costs and
returns, and encourage and provide
for excessive returns for APCo and Dominion Virginia Power. The new law is just
beginning to impact rates and the results are startling and disturbing, especially
compared to rates in other states.
According to the Edison Electric Institute (“EEI”), based on overall rates, Virginia
dropped from having the 11th lowest electric rates in 2007 to 17th lowest in 2008
and 25th in 2009.17
EEI reports that from 2008 to 2009, overall electric rates in
the country increased about 0.6%; Virginia’s average rates increased 10.8%;
Dominion Virginia Power’s increased 7.6%, and APCo’s average rates were up
by 30%.18
For residential rates, Virginia fell
from 13th least expensive in the
nation in 2007 to 16th in 2008 and
28th in 2009.19
Specifically,
residential customers of Dominion
Virginia Power have seen their rates
go up more than 24% since 2007
according to EEI.20
And, APCo’s
residential rates soared by more than 90% during the same period.21
Commercial rates saw significant increases as well. From 2007 to 2009,
according to EEI, average commercial rates for Virginia increased 33%, with
APCo experiencing a 34% increase and Dominion Virginia Power’s commercial
rates rising by 33%.22
For large businesses, the story is particularly troubling. EEI reports Virginia’s
industrial rates were the 7th and 9th least expensive as recently as 2006
and 2007.23
Virginia’s average industrial electric rates in those years were below
those of North Carolina, Alabama, Mississippi, Georgia, Louisiana, Kentucky,
EEI reports that from 2008 to
2009, overall electric rates in the
country increased about 0.6%;
Virginia’s average rates increased
10.8%; Dominion Virginia Power’s
increased 7.6%, and APCo’s
average rates were up by 30%.
Based on overall rates, Virginia
dropped from having the 11th lowest
electric rates in 2007 to 17th lowest
in 2008 and 25th in 2009.
11. 8
South Carolina and Florida.24
In the South, only Tennessee and West Virginia
had lower average industrial rates during this period.25
Virginia’s ranking fell to
11th in 2008 and 29th in 2009.
26
As of 2009, every state in the South except
Florida has industrial electric rates that average less than those in the
Commonwealth.
27
In 2005, APCo’s average industrial rates were the lowest in the nation.28
By 2008,
APCo was about equal to the average industrial rate of the 7th least expensive
state.29
From 2008 to 2009, APCo fell from about equal to the 7th, to more
expensive than the 26th least expensive state.30
APCo’s industrial rates
increased almost 43% from 2007 to 2009.31
The EEI report for Dominion
Virginia Power is also telling.
From 2007 to 2009, Dominion
Virginia Power’s industrial rates
increased over 38% and, for
the first time in recent years,
and perhaps ever, in 2009
Dominion Virginia Power’s
industrial rates were above
the national average.32
The dramatic increases in rates over the last several years in both absolute
and relative terms make bringing new industry and jobs to the
Commonwealth much more difficult. The sharp rate hikes, however, should
come as no surprise. They are not the result of cost increases that
bypassed the rest of the South and occurred only in Virginia. The increases
are rather the result of the 2007 reregulation statutes that allow and
encourage excess earnings for Virginia’s investor-owned electric utilities.
Ω
As of 2009, every state in the South
except Florida has industrial electric
rates that average less than those in
the Commonwealth.
12. 9
WHAT ARE THE PROBLEMS/SPECIFIC FAILINGS OF THE
CURRENT REGULATORY SYSTEM
When the General Assembly decided to “reregulate” electric utilities in 2007, it
did not return electric utilities to the rate base / rate of return regime that had
been in place for decades, had served Virginia and her utilities and ratepayers
well, and was relatively short and understandable. Instead, a complex, massive
(§§56-585.1 and .2 alone contain almost 8,000 words) new regulatory scheme
was developed. It was untested and even today, no other state has adopted it.
The new law applies only to
Appalachian Power Company
(“APCo”) and Virginia Electric and
Power Company (“VEPCo”);
Kentucky Utilities was exempted, and
Potomac Edison opted to transfer its
service territory to two electric
cooperatives. Electric cooperatives’
rates were essentially deregulated as
long as rates for distribution service
do not increase or decrease more
than 5% in any three-year period.
The lengthy, complex new law makes fundamental changes to electric utility
ratemaking that reduce drastically the ability of the State Corporation
Commission to set rates fairly and effectively, essentially guarantee recovery of
all costs (unless found imprudent)33
and returns for these utilities, provide
numerous opportunities for VEPCo and APCo to earn excessive returns, and
generally tip the balance heavily in favor of utilities to the detriment of the
businesses and citizens of the Commonwealth. Several of these major changes
will be discussed below.
Peer Group Return on Equity (ROE)
Under the 2007 legislation new law, the SCC cannot set the authorized
return on equity for an electric utility below a “floor” that is established
based on the average rate of return of a strict, statutorily proscribed group
of so-called “peer” companies. The floor rate of return is the average of a
majority of these “peers” after removing the two companies with the
The lengthy, complex new law
makes fundamental changes to
electric utility ratemaking that
reduce drastically the ability of the
State Corporation Commission to
set rates fairly and effectively.
13. 10
highest returns and the two with the lowest, and the cap is 300 basis
points above the average34
. This peer group rate of return on equity (ROE)
is a different concept from the “cost of equity” that regulatory commissions
traditionally set for utilities. To our knowledge, no other state uses this
methodology.
This artificial floor has resulted in SCC
recommended rates that are higher
than they would have been under
previous regulation. During APCo’s
most recent base rate increase in July
of 2010, the SCC recommended a
higher rate of return than they would
have recommended were it not for the
floor established by the 2007
legislation. Under previous regulation
the SCC staff would have allowed
APCo to earn a 10 percent profit for
the coming year.
However, due to the “floor” required by the 2007 legislation the SCC staff was
required to recommend a profit of 10.53 percent. While that may not appear to
be significant, it costs the rate payers $1.5 million.35
From an economic and financial perspective, the ROE for a company
reflects a ratio of two accounting entries taken from the historic financial
records of that company – the “net income” (from the income statement)
and the “common equity” (from the balance sheet). The resulting ratio –
rate of return on equity – is thus an accounting concept and is mechanical
in nature.
The cost of equity, in contrast, is a forward-looking concept that focuses not on
accounting records but rather on financial market conditions. The cost of equity,
unlike the rate of return, cannot be measured (from accounting records) but
rather is estimated using financial models and capital market data.
It is improper to restrict the cost of capital by reference to the ROE for a peer
group. Such a restriction, in essence, equates the accounting concept of ROE
with the economic/financial concept of cost of capital. These are different
concepts that are only equal by chance.
In addition, under the current 2007 law, every two years the SCC may
increase or decrease the return on equity by up to 100 basis points based
During APCo’s most recent base
rate increase in July of 2010, the
SCC recommended a higher rate of
return than they would have
recommended were it not for the
floor established by the 2007
legislation-an increase of $1.5
million.
14. 11
on performance.36
Also, each utility’s return on equity may be increased by
50 basis points if it meets the renewable goals set in §56-585.2. Further, if
the utility qualifies for the renewables’ 50 basis points and it has a
negative performance adjustment, the positive 50 basis points replace the
negative adjustment. If the performance adjustment is positive and higher
than the 50 point renewable award, the higher award applies, but is not
added to the renewable award. If a utility has a negative 100 basis point
adjustment for performance and qualifies for the renewable 50 point
adjustment, the 100 point decrease is eliminated and the base return
increased by the 50 basis point renewable award. In that case, the
renewable adjustment would, in reality, be 150 basis points, not 50. For
VEPCo, the extra 100 basis points would cost ratepayers about $65
million per year.
Section 56-585.1A6 provides long term “incentive” additions to the basic
return on equity for investments in the construction of almost any kind of
power plant other than a combustion turbine. These incentives may also
be provided for “a project whose purpose is to reduce the need for
construction of new generation facilities by enabling the continued
operation of existing generation facilities.”37
These “incentives” range from
100 to 200 basis points and apply for 5 to 25 years.
Electric utilities are monopolies that have their rates set to give the companies an
opportunity to earn a fair profit. In return, the companies have an obligation to
provide adequate, reliable, and safe service. As will be discussed in some detail
in the next section of this report, return on equity for investments should be
based on risk; a utility should not receive an ”incentive” simply to meet its public
service obligations. If construction
of a new power plant increases the
risk to a utility, that fact will be
reflected in the overall return on
equity. Under the 2007 law,
however, the risk would be
reflected in the return on equity
established by the SCC and, in
addition, the company could earn
up to 200 basis points on its equity
in the particular facility.
For example, if VEPCo were to construct a $10 billion nuclear power plant, the
risk associated with that action would be reflected in its return set by the SCC.
Return on equity for investments
should be based on risk; a utility
should not receive an “incentive”
simply to meet its public service
obligations.
15. 12
Then, in addition, the company would receive an ”incentive” of 200 basis points
on its equity investment in its nuclear power plant. Just that “incentive,” after
being grossed-up for taxes, would cost ratepayers over $125 million per
year when the plant goes into service.
Risk and Rate Adjustment
Clauses
It is a fundamental principal of
economics and finance that risk
and return are directly related – as
the perceived risk of an entity or
project increases, the expected or
required return (i.e., cost of capital)
increases. This basic concept
carries forward into the regulation
of electric utilities, as the costs of
debt and common equity for a
particular utility may vary from that
of other utilities and unregulated
firms that may be examined for
comparative purposes.
There are a number of measures
of risk for all types of companies
(e.g., bond ratings, “safety”
rankings, betas) and these, as well
as qualitative factors, are
considered in estimating the cost
of capital for individual utilities.
The common financial models
used in estimating the cost of
equity for electric utilities –
discounted cash flow (DCF),
capital asset pricing model
(CAPM), comparable earnings method (CEM) and risk premium method (RP) –
all focus on both the concepts of risk/reward and financial market indicators.
Rate Adjustment Clauses
Permissible under the 2007
Regulation:
Fuel
Generation
Transmission Lines
Reliability/Environmental
Peak Shaving Programs
Energy Efficiency
Programs
Renewable Energy
Portfolio Standards
Environmental Programs
16. 13
A regulatory commission, such as the Virginia State Corporation Commission,
can and does consider such factors in making determinations of the cost of
equity for a utility which is then embedded in the rates the utility is allowed to
charge its customers. One significant set of risk factors that is important in
assessing the risk of a particular utility is the “regulatory mechanisms” prevalent
in the jurisdiction. Examples of regulatory mechanisms include automatic
adjustment mechanisms that allow utilities to change rates in an automatic or
expedited manner. In Virginia, examples of this type of regulatory mechanisms
include the Rate Adjustment Clauses (RACs) that have been authorized by the
General Assembly. These RACs, in conjunction with other regulatory
mechanisms in Virginia, clearly have the impact of reducing risk to Virginia
utilities.
Sections 56-585.1A4, 5, and 6 allow
APCo and VEPCo to file an
unlimited number of independent
Rate Adjustment Clause (“RAC”)
cases for any number of new
projects, from transmission facilities,
to modifications of current
generation facilities, to compliance
with environmental laws, to new
power plants. It is difficult to think of
many major expenses not covered
by the RACs. Together APCo and
VEPCo have already filed six RACs,
and VEPCo recently filed an
increase update request for one of
its previously filed RACs.
These RACs are based on
estimated expenses, with all expenses and returns essentially guaranteed. For
example, the companies are allowed to defer all expenses for a project until the
RAC can begin to collect them. Also, over-earnings in other areas of the
company cannot be considered to reduce the size of, or the necessity for, a RAC.
Nor can any excess earnings of the RACs be considered when base rates are
reviewed. By “silo-ing” or separating these filings, a system has been created
where the SCC cannot look at the entire company's operation when
determining rates, resulting in decreased risk and increased profits for the
utility and increased costs to consumers.
Rate Adjustment Clauses or
RAC’s are based on estimated
expenses, with all expenses and
returns essentially guaranteed.
Also, over-earnings in other areas
of the company cannot be
considered to reduce the size of, or
the necessity for, a RAC. Nor can
any excess earnings of the RACs
be considered when base rates are
reviewed.
17. 14
Markups and Excess Returns
In addition, the statute allows the utility a “margin,” or markup, on its operating
expenses for energy efficiency programs equal to the allowed return on equity.38
The return on the utility’s actual equity investment with the added “margins” could
be extreme. Profits are considered to be after taxes for ratemaking and must be
“grossed-up” for taxes. The tax
gross-up would put the “margin”
at over 17.5% if the allowed
equity return is 10.53%, as
APCo’s is. That means that, if the
company has an energy efficiency
program with operating expenses
of $200 million, the operating
expense would increase to over
$235 million per year to provide
the “margin” and APCo would still
be guaranteed its equity return for
its actual investment in the
program. Depending on the size
of the capital investment, the
extra “margin” could greatly
increase the actual return on
equity.
Base rates are reviewed every
two years under the new law. The
SCC is to determine “fair rates of
return on common equity applicable separately to the generation and distribution
services of such utility, and for the two services combined . . ....” 39
According to
the statute, a rate increase will be allowed during a biennial review only if the
utility “during the test period or periods under review, considered as a whole,
earned more than 50 basis points below a fair combined rate of return on both
its generation and distribution services . . ..”40
There does not, however,
appear to be any prohibition to the utility filing for a base rate increase each year,
independent of the biennial review and without the requirement that earnings be
more than 50 basis points below the authorized return on equity.41
If the biennial review finds that the utility “during the test period or test periods
under review, considered as a whole, earned more than 50 basis points above a
Under the 2007 law, although the
SCC is required to credit
customers’ bills 60% of the excess
above the 50 basis points above
the authorized return, the
Commission must leave in place
the rates that produced the excess
returns. Only if the utility over-
earns in excess of 50 basis points
above the authorized return for
both generation and distribution
services for two consecutive
biennial reviews may the SCC
consider reducing rates
18. 15
fair combined rate of return on both generation and distribution services . . .,”
the SCC is required to credit to customers’ bills 60% of the excess above the 50
basis points above the authorized return, but the Commission must leave in
place the rates that produced the excess returns.42
For example, for VEPCo,
based on its current rate base and capital structure, if it over-earned $100 million
per year, it would keep about $60 million43
of that amount and the excessive
rates would stay in effect. Only if the utility over-earns in excess of 50 basis
points above the authorized return for both generation and distribution
services for two consecutive biennial reviews may the SCC consider
reducing rates.44
Except for this situation, it does not appear that the SCC may
consider reducing base rates. Also, remember that the RAC’s are not considered
as part of this. Their rates of return are set and guaranteed outside of these
reviews,
While the security analysts and rating agencies did not discuss the details of the
new law, it was clear from the beginning that the 2007 law was extraordinary.
This was evident even with the conservative, staid language of the reviewers. For
example, the December 10, 2007, Credit Suisse Equity Research review of
Dominion Resources concluded:
The Citigroup January 3, 2008, Global Markets Equity Research, Company
Focus (apparently written in late 2007) said:
With the passage of reregulation legislation
earlier this year, VEPCO now appears to
enjoy one of the more constructive
regulatory frameworks in the country.
VEPCO has negotiated one of the best regulatory deals in the
industry, offering good returns . . . and project specific regulatory
treatment through riders for new plants that should reduce lag.
19. 16
The reviewers were correct that the new law is the most favorable in the nation
for electric utilities. The reviewers, however, failed to note, and perhaps were
unaware of, the unfairness and overreaching nature of many aspects of the
system adopted in 2007.
The reduction in risk has been recognized by rating agencies, such as Moody’s
Investors Service, in their description of Virginia regulation and related ratings of
Virginia utilities. For an example, see Moody’s June 6, 2008 “Credit Opinion” on
Virginia Electric and Power Company in Appendix B.
In a traditional regulatory environment, the VA SCC could consider the risk-
reducing regulatory mechanisms in determining the cost of capital for the electric
utilities it regulates. In particular, to the extent that Virginia utilities are more
“favored” by such mechanisms than are the “proxy” utilities which are used to
estimate the cost of equity (via use of DCF, CAPM, etc.), an “adjustment” to the
cost of equity for the proxy utilities could and under traditional regulation, would
be made.
However, the 2007 Legislation precludes the VA SCC from making such an
adjustment. This is the case since the “peer group” earned return on equity
(ROE) provides a “floor” to the
cost of equity which the VA SCC
can find as appropriate for the
electric utilities it regulates. This
peer group ROE floor clearly
runs counter to the risk-return
relationship that is
fundamental to the economic
and financial principles that
normally impact both regulated
and unregulated firms.
To achieve the goal of fair and
responsible electric utility
ratemaking, the SCC must be
able to look at each utility as a
whole and determine its risks to
establish a fair return on equity
and determine if the company is
over-earning or under-earning.
. . . a utility could, for example, over-
earn more than 50 basis points for
generation every year, and over-earn
above 50 basis points every other
biennial period for distribution
service, and the SCC could not even
consider reducing rates even when
the evidence clearly shows that the
over-earning will continue in the
future . . . This means the utilities
may retain hundreds of millions of
excess earnings over a period of just
three or four years.
20. 17
Under the new law, for almost any project, the utility can create a RAC, defer
costs until the new clause is in place, and have all expenses and returns
guaranteed. As noted above, if the utility believes that base rates are too low, it
may file a rate case, independent of the biennial review and the 50 basis point
limit, and obtain a rate increase.
On the other hand, a utility
could, for example, over-
earn more than 50 basis
points for generation every
year, and over-earn above
50 basis points every other
biennial period for
distribution service, and the
SCC could not even
consider reducing rates even
when the evidence clearly
shows that the over-earning
will continue in the future.
A utility can manage its expenses from year to year to greatly minimize the
chance of over-earning by more than 50 basis points in a particular
biennium, especially when such action will prevent the Commission from even
considering reducing rates. Moreover, when one considers that refunds do not
start until the excess earnings exceed 50 basis points above the authorized
return on equity and include only 60% of the excess above that, the utilities may
retain the majority of excess earnings. This means the utilities may retain
hundreds of millions of excess earnings over a period of just three or four years.
This does not make sense, nor is it fair. The SCC must be able to look at the
entire utility and determine if it is over-earning or under-earning. If the company
as a whole under-earns and it shows that the under-earning will continue, its
rates should be increased. On the other hand, if the company is under-earning a
small amount on its distribution service and this is more than offset by excess
earnings from generation and that situation is to continue, no increase in rates is
needed and a rate decrease should be considered.
To achieve the goal of electric utility
ratemaking, the SCC must be able to
look at each utility as a whole and
determine its risks to establish a fair
return on equity and determine if the
company is over-earning or under-
earning.
21. 18
Rebundling
Electric utilities, as regulated monopolies, have a long history of being
“integrated” – as the functions of generation, transmission, and distribution are
lumped into a single service and are provided by a single entity (i.e., the electric
utility). This differs, for example, from the automobile industry where they are
manufactured by one set of entities (i.e., auto manufacturers), are transported by
a second set of entities (i.e., railroads) and are distributed by a third set of
entities (i.e., dealerships). This corporate structure of electric utilities, in turn,
carried over into the financial and ownership attributes of utilities. One cannot,
for example, buy shares in the generation assets of a utility, as the utility is a
single entity and ownership accrues to the entire integrated entity. Likewise,
bond investors do not lend the utility money in a manner that is secured by
specific assets, as even first mortgage bonds are secured by all of the assets of
the utility. In a similar manner, rating agencies and security analysts focus on the
combined entity in evaluating utilities – again because the investment in these
entities focuses on the total company.
The regulation of electric utilities has historically followed this same practice, and
the utility was regarded as a provider of all three functions (i.e., generation,
transmission and distribution). In this regard, utility services were “priced” as a
single product – the provision of electric energy to the ultimate consumer. All
aspects of utility pricing – revenue requirements, cost of capital, depreciation,
and cost of service/rate design – were performed on a total company basis. This
practice is now known as “coupling” – the antithesis of “decoupling” – and means
that the three functions of electric utilities are provided for and priced on a total
company basis. This is also known as “bundled” rates as opposed to
“unbundled” rates.
The concept of “decoupling” only came into being in the 1990s during the short-
lived and failed concept of electric deregulation. Since the generation of electric
power was then erroneously considered to be more optimal as a competitive
function, deregulation focused on unbundling of the “wires” functions (i.e.,
transmission and distribution) from the generation function. This un-bundling
was carried forward into the regulatory arena in the late 1990s-early 2000s and
likewise found itself prevalent in the Virginia Statues governing the regulation of
electric utilities.45
Now that “deregulation is dead” there is no longer any compelling reason to
continue to focus on electric utilities in a decoupled/unbundled framework. Just
22. 19
as investors focus on electric utilities as integrated entities, it makes more sense
for regulators to again focus on them as integrated entities
Consumer Protections
The 2007 legislation reduced Virginia’s already limited consumer protection,
replacing it with utility guarantees and utility control. From the outset, the 2007
legislation was referred to as hybrid re-regulation. The utilities complained that
traditional regulation gave the SCC too much flexibility and power and them too
much uncertainty in costs and schedule and the outcomes desired by utilities
were not sufficiently assured or timely. The 2007 law was designed by utilities to
resolve those problems. It did not address consumer protection and in fact,
reduced it.
Neither the process that led
to implementation of the
2007 law, nor the law itself,
protect consumers. In fact,
the playing field has been
significantly tilted to favor
utilities and disadvantage
consumers. While most
states that went through this
process began with rate
cases designed to assure
that utilities were earning a
fair return, Virginia skipped
this step. Base rates were frozen and fuel costs were allowed to continue to flow
through to consumers. The Assembly accepted the utilities’ proposal that they be
allowed to keep any extra earnings to compensate them for stranded costs.
Customers were deemed to have no stranded benefits. The Assembly’s action
allowed utilities to over-earn by hundreds of millions of dollars as described
earlier in this report. For example, when VEPCo's customers finished reimbursing
the utility for the cost of the abandoned North Anna Nuclear Unit 3, because
rates were, in effect, frozen rather than capped, the utility continued to collect the
money.
As a result of the 2007 legislation, consumer involvement in the decision making
processes is reduced. Neither individual consumers nor consumer groups have
the resources to participate in the number and frequency of cases that result
This situation has been especially
difficult for low income residential
customers and those facing financial
challenges since, unlike most other
states; Virginia has no systematic and
guaranteed safety net for residential
customers who have difficulty paying
their utility bills.
23. 20
from the 2007 legislation. The schedule requires multiple cases to proceed at
once and there is no break when the legislature is in session, which reduces the
consumer resources available for either cases or legislative involvement. Further
limiting consumer protection is the fact that the Division of Consumer Counsel of
the Attorney General’s office has a relatively small staff for a state the size of
Virginia.
This situation has been especially difficult for low income residential customers
and those facing financial challenges since, unlike many other states, Virginia
has no systematic and guaranteed safety net for residential customers who have
difficulty paying their utility bills. Instead, utilities make voluntary and varied
contributions to funds they also encourage customers to contribute to for the
benefit of customers with financial problems. Families depend upon the federal
LIHEAP funds, with occasional supplements of state tax funds made by Virginia
governors, and privately funded local efforts to support citizens with low incomes
and financial problems.
Ω
24. 21
TRENDS IF ACTION IS NOT TAKEN
As detailed earlier in this report, the 2007 reregulation statutes reduce drastically
the ability of the State Corporation Commission to set rates fairly and effectively.
The utilities are essentially guaranteed recovery of most costs and returns, and
the statute encourages and provides for excessive returns for APCo and VEPCo.
The new law has only just begun to impact rates with startling and disturbing
results. Virginia’s current regulatory system has permitted dramatic increases of
of electric bills in just a two year period. This is a problem that affects citizens
and businesses all across the Commonwealth and will only continue to grow.
Since 2007 Virginia’s investor-owned electric rates have risen dramatically
across the board:
Residential rates have fallen from the 13th least expensive in the nation to
the 28th.46
Commercial rates have increased by an average of 33%.47
Industrial rates have fallen from the 9th least expensive in the nation to the
29th
.48 As of 2009, every state in the South except Florida has industrial
electric rates that average less than those in the Commonwealth.49
Overall, Virginia dropped from having the 11th lowest electric rates in
2007 to 25th in 2009.50
While overall electric rates in the country have increased about 0.6% from
2008 to 2009; Virginia’s average rates increased 10.8%.51
Unless the regulatory process for electric utilities is reformed, the current double
digit utility inflation rate will only get worse. Investor owned electric utilities will
undoubtedly take full advantage of the guarantees and profit margins provided to
them under Virginia law.
The electric utilities have, up to now, only filed a relatively small number of rate
adjustment clause requests. With a number of large power plant and
environmental projects on the drawing board, including nuclear plants, future
RAC requests will require billions of dollars, all of which will essentially be
guaranteed. Under such a scenario, Virginia's electric utility rates have the
potential to quickly become among the highest in the nation.
The dramatic increases in rates over the last several years in both absolute and
relative terms has made bringing new industry and jobs to the Commonwealth
much more difficult. If electric utility regulation in Virginia maintains its current
form, these trends will continue to place the Commonwealth at an economic
disadvantage.
Ω
25. 22
KEY POLICY CHANGES
Any changes to Virginia’s investor-owned electric utility regulation will only be
effective if they solve key failings in current legislation and return to a regulatory
system that both protects consumers and properly balances risk and reward for
the utilities.
Key policy changes that are needed include:
Risk
Allowing the SCC to look at each utility as a whole and determine its risks
to establish a fair return on equity and determine if the company is over-
earning or under-earning. This ability to look at the utility as a whole must
include the re-bundling of generation, transmission, and distribution as
well as the elimination of silo-ing rate adjustment clauses.
Elimination of the arbitrary “floor and cap” rates of return as an average of
the majority of a statutorily proscribed group of so-called “peer”
companies. This peer group rate of return on equity (ROE) is a different
concept from the “cost of equity” that regulatory commissions traditionally
set for utilities.
Eliminate massive incentives for utilities to meet their standard public
service duties.
Consumer Protections
Requiring that all rate adjustment clauses and base rates occur in a
single, annual proceeding in order to establish rate stability for the
customer and decrease the number of rate increases.
Return overearnings that exceed a fair rate of return by more than 50
basis points to the customers.
Eliminate provisions that prevent the SCC from lowering rates if they
determine that a utility is over earning.
Ω
26. 23
RECOMMENDATIONS OF THE WORK GROUP
Given the fundamental lack of balance and fairness in the 2007 reregulation
statutes, changes are necessary. The initial question is whether to repeal the
2007 legislation to the extent
possible and revert back to the
basic Chapter 10 rate base / rate
of return regulatory framework
that had been in place for many
decades in the Commonwealth
or to try to add balance and
fairness to the current system
that basically guarantees the
utilities full recovery of all
expenses not found to be
imprudent plus a guaranteed
return on equity that may include
adders for performance and
other factors.
There are several reasons why repealing the 2007 reregulation system is far
better than simply trying to make the law more balanced and fair. The first reason
relates to service quality and safety. Under the pre-competition framework, if a
utility cut maintenance or other operating expenses, in the next rate case, the
new, lower level of expenses would become the basis for rates in the future. The
utility could keep the “savings” until the new rates went into effect, but, long term,
reducing expenses would reduce rates. Under the new legislation, the utility is
allowed to keep a very significant portion of excess earnings. For example, for
VEPCo, based on its current rate base and capital structure, if it over-earned
$100 million per year, it would keep about $60 million52
of that amount and the
excessive rates would stay in effect. Thus, there is a much greater incentive for
the utility to cut costs under the new statute; it gets to keep most of the savings
almost indefinitely.
Such cuts, of course, can reduce quality of service. It is difficult for regulators to
see changes in quality of service until it has declined significantly and then
service quality can be hard and often expensive, to improve. Also, if that
happens, the ratepayers may lose in two ways. They will pay higher rates for
poor service until the utility is required to improve, and then, perhaps, pay extra
because catching up may cost more. As far as safety is concerned, cuts to
maintenance and other items tend to build over time. While management never
The primary differences between
these proposals and the current
law are that, with the revisions,
the law will be more balanced and
SCC will have the authority to
apply basic regulatory principles
fairly, without a heavy hand on the
scales in favor of the utilities.
27. 24
intentionally or specifically requires a cut that it knows will create a catastrophic
failure, there are numerous examples where, over time, the reductions did impact
safety with drastic consequences. The 2007 legislation provides great incentive
to cut costs. That incentive can lead to reduced service quality and reduced
safety. And, the ratepayers would be providing excessive profits to the utility
while quality of service and safety declined.
While there is an increased incentive to cut operating costs, there is the opposite
incentive with regard to capital investment. For example, for a base coal or
combined-cycle power plant, a utility will receive a 100 basis point increase in its
equity return for investment in the plant. VEPCo’s equity return for its next
biennial review is set at 11.9%. The 100 point “incentive” combined with its high
normal return provides a strong incentive (a 12.9% guaranteed return on equity)
to over-invest in such a plant. The 12.9% return is after taxes and must be
“grossed-up” for taxes so ratepayers actually pay, and the company actually
receives, a pre-tax 21.5% return on the equity investment. While the company
must pay taxes on this income, current taxes actually paid by the company will
be far less than the amount provided by the gross-up. When a plant is going to
cost $2 billion, gold-plating an extra $200 million would be hard to detect53
and
would mean significant income for the utility. For VEPCo, as an example, the
added revenue on equity alone for this would be over $21 million per year per
$100 million of equity. When the 21.5% return per year is guaranteed for many
years, there is little incentive to be frugal and a great incentive to over-invest.
In the 2007 reregulation statutes, the General Assembly created a number of
incentives. Some of these, such as incentives for excellent performance, can
benefit the utility and its customers. Other incentives, such as the “margin” on
operating expenses for energy efficiency programs, encourage excessive
spending that can make a program less cost-effective and increase rates
unnecessarily.
Revert Back to Basic Chapter 10 Regulation
The first option would be to reinstate much of the system under which investor-
owned electric utilities were regulated prior to 1999. This measure would repeal
the Virginia Electric Utility Regulation Act of 2007 and reenact provisions relating
to State Corporation Commission (SCC) ratemaking, including provisions
addressing the recovery of fuel and purchased power costs, that existed prior to
the 2007 legislation that re-regulated most of Virginia's investor-owned electric
utilities. Existing provisions of the Virginia Electric Utility Regulation Act
pertaining to ratemaking for electric cooperatives, to net energy metering, to
consumer education programs, and to interconnections by farms would be
28. 25
relocated to other chapters in Title 56. Existing rate adjustment clauses approved
by the SCC under the 2007 legislation would remain in effect as set forth in an
enactment clause.
Attempt to add Balance and Fairness to the Current System
The second option would attempt to add balance and farness to the current
system which is in place as a result of the 2007 legislation. This option would
rebundle charges for the transmission, distribution, and generation services into
the base rates of investor-owned electric utilities and revise the system enacted
in 2007 by which rates of investor-owned electric utilities are to be set.
The measure would restore the State Corporation Commission's authority to set
the utility's authorized rate of return on equity at a level that reflects the utility's
risk, allows the utility to attract capital, and will be fair to ratepayers. Existing
provisions of the Virginia Electric Utility Regulation Act that establish floors on a
utility's rate of return based on returns reported by peer group utilities in other
Southeastern states would be repealed.
Other key provisions would do the following:
(i) Require the Commission to consider all rate adjustment clause
petitions in single annual proceedings in order to limit the number of
rate increases;
(ii) Provide that costs recoverable through rate adjustment clauses may
be deferred; and if the utility has over earned on base rates, excess
base rate earnings may be credited to under recovered RACs.
(iii) Direct that a utility that has earned more than 50 basis points above its
fair rate of return in a biennium, (after crediting any overage that has
been used to offset under collections in a RAC ), shall credit the
overage to customers;
(iv) Excess earnings used to offset under recovered RAC’s may not reduce
the earned rate of return below the fair rate of return established by the
SCC;
(v) Eliminate a provision that limits the Commission's authority to lower a
utility's rates to cases where the utility has earned more than 50 basis
points above a fair rate of return for two consecutive biennia;
(vi) Eliminate the ability of a utility to earn a margin on operating expenses
for energy efficiency programs;
(vii) Limit the incentive for participation in the renewable energy portfolio
program to an additional 50 basis points above the otherwise-available
29. 26
rate of return on new renewable energy generation facilities, in lieu of
the existing provision that grants participating utilities a 50 basis point
increase in its rate of return on all of its equity;
(viii) Authorize the Commission to increase the allowed return on equity for
certain investments by up to 200 basis points for a period between 5
and 25 years based on the risk of the project, not otherwise reflected in
the return established by the Commission, in lieu of the existing
provision that establishes incentives with specific ranges and durations
based on the type of project;
(ix) Permit the Commission to extend the period for its review in cases by
up to nine months, provided that the utility may place its proposed rate
increase in effect subject to refund at the end of the original period;
(x) Delete provisions requiring stand-alone determinations of income tax
costs in ratemaking proceedings.
If the second option be selected, a future review of the performance of this
legislation should be undertaken to ensure fairness and make adjustments as
needed, as this is a much more complex undertaking.
The Work Group proposes returning Virginia to the Chapter 10 regulation that
was in effect prior to deregulation in 1999, but with the aforementioned updates.
It is the belief of the Work Group that this proposal would give the State
Corporation Commission the appropriate discretion in setting rates. Under this
proposal, like the pre-1999 regulatory system, electric utilities would be allowed
to make only base rate petitions as well as request fuel rate adjustments if their
fuel costs went up or down.
However, the Work Group also endorses as a “Plan B” the rewriting of the code
to attempt to add balance and fairness to the current system, replacing and
repairing the 2007 legislation.
Reaction from Utilities
The reaction by the utilities to the changes proposed by the Electric Utility
Regulatory Work Group may be that the revisions are unnecessary, and that just
making the proposals increases the risks for the companies. They may argue
that the General Assembly determined several years ago how electric utilities
would be treated for ratemaking and, even though the first biennial review has
just been completed, the treatment may change such that the utilities will not be
30. 27
able to count on all of the procedures and rules to which the Assembly agreed. It
will be explained that this increased risk can have a negative impact on the
securities of the utilities.
The utilities will be correct in that any change that is not favorable to the utilities
will be viewed negatively by the investment community. Thus, there may, in fact,
be a negative short-term reaction by the investment world.
There are several responses to these assertions:
First, and most importantly, the current law is grossly unfair to the
businesses and citizens of Virginia and must be balanced. By overreaching
so much in 2007, the utilities brought these changes on themselves.
Second, under Plan B, the substantive essence of the advantages for
utilities in the current law remains with the proposed changes. The ability to
defer RAC expenses until collection begins would remain available and the
opportunities for increased equity returns for RACs for risk (up to 200 basis
points), for performance (up to 100 basis points), and for renewables (50 basis
points) would stay in the statute. Also, the revisions would make clear what the
current law only implies, the guaranteed recovery of all prudent costs and returns
under the RACs. In addition, the utilities would still be able to retain a portion of
excess earnings, though not as much as is allowed under the current statute.
The primary differences between these proposals and the current law are that,
with the revisions, the law will be more balanced and SCC will have the authority
to apply basic regulatory principles fairly, without a heavy hand on the scales in
favor of the utilities.
The Edison Electric Institute’s EEI Q12010 Financial Update provided to the
Work Group listed what amounts to a wish list of utilities during the first part of
the year.
Requests by utilities to implement tracking mechanisms,
adjustment clauses and related rate structures also played a
large role in the quarter’s filings.
With regard to regulatory lag, the EEI Report said:
Commissions can allow utilities to moderate regulatory lag in
several ways, including adjustment clauses, interim rate
increases, construction work-in-progress (allowing the utility
to recover costs of construction before a project comes
online) and the use of projected costs in rate cases.
The EEI Report also noted:
31. 28
Another driver of filed cases during Q1, and a frequent
driver of filed cases in general, was the attempt by utilities to
implement adjustment clauses, riders, trackers and other
interim rate mechanisms, with a number of companies eager
to implement several trackers.
Almost all of the items listed in the EEI Report would remain in the revised
law. Even after the revisions, Virginia’s regulatory regime would be
beyond the wildest dreams of almost every utility executive and retain the
advantages sought by EEI members and cited by the security analysts
and rating agencies: an unlimited number of RACs can be filed for almost
any conceivable project or plant; deferral of expenses until collection
begins so not a penny is left behind; guaranteed recovery of all expenses
and the allowed equity return; an opportunity for a higher equity return
based on performance that would also be guaranteed; an opportunity for a
guaranteed higher equity return for a risky project; use of projected costs
for establishing the RACs; allowance of a return on construction work-in-
progress prior to the operation of the project or power plant; and
allowance for the utility to keep the first 50 basis points of excess
earnings. The investment community, like the utility executives, will see
the tremendous advantages of the proposal.
Third, revisions of regulations are not that unusual within the first
few years of a major regulatory change as the regulator and others
involved see how things will work in practice. This is particularly true
here where the General Assembly essentially took over the role of
regulator from the SCC in 2007 by including numerous requirements and
limits in the statutes so the Commission cannot make adjustments as
needed. An example of this is HB 1308 addressing interim rates that
passed the House and Senate earlier this year without a negative vote;
the perceived need for the change clearly flowed from the operation of the
2007 reregulation statutes. Obviously all agreed that a change was
needed; the change, however, either has been, or probably will be, viewed
negatively by investment commentators. Many changes and adjustments
can be avoided by restoring to the SCC the responsibility to regulate
again; if done correctly this can also remove, to a significant extent,
politics from regulation. The Commission was established so that it would
be insulated from politics, but that advantage is lost when the Assembly
becomes the regulator.
32. 29
Finally, when the need for more reform is reduced, the stability of the
Virginia system and the Commission will be seen as an advantage,
as it was in the decades before the foray into competition in the late
1990s.
Ω
33. 30
CONCLUSION
A regulatory system that permits the dramatic and unnecessary increase
of electric bills in a two year period is flawed. This is a problem that affects
citizens and businesses all across the Commonwealth and will only continue to
grow if we do not take action now.
The last several years have been hard on Virginia; businesses are suffering and
unemployment is up. State and local governments have seen revenues decline
and services cut. The General Assembly has refrained from increasing taxes for
fear of hurting taxpayers further. Citizens,
businesses, and state and local
governments have no guarantees upon
which to rely to make ends meet. Only
VEPCo and APCo have built-in
guarantees. Only VEPCo and APCo can
file for RACs with recovery of all
expenses and profits guaranteed. The
analysts agree these utilities have the
best deal in the country. Those facts are
hard to take in the current economic
environment.
In addition to the many guarantees, the current law also allows and encourages
excess profits so the utilities earn more than their allowed returns. And, the
utilities are allowed to keep much of the excess. Furthermore, under the law, the
overcharging rates cannot be reduced for years. At least these excesses need
not be tolerated. The General Assembly approved the current law and is
responsible for its results. The excess charges provided for in the 2007 law are
the equivalent of a tax on every home and business in the Commonwealth. The
charges are, in essence, a utility tax; the only difference is the utilities keep the
money. This tax does not pay a single teacher or policeman.
Finally, remember that the United States Constitution protects utilities; rates set
too low may be found to deprive the utility of its property without due process in
violation of the fourteenth amendment. Consumers, however, have no such
protection. They must rely on the General Assembly and, to the extent allowed,
the State Corporation Commission to ensure that rates are not set unreasonably
high.
If the General Assembly does not make changes to Virginia’s electric utility
regulatory laws to ensure rates are fair, just, and reasonable, the Commonwealth
The excess charges
provided for in the 2007
law are the equivalent
of a tax on every home
and business in the
Commonwealth.
34. 31
is destined to join the group of states with the highest electric rates in the nation;
thereby placing our citizens and businesses at a regrettable, and ultimately
preventable, economic disadvantage.
Ω
35. ii
APPENDIX A
ELECTRIC UTILITY WORK GROUP MEMBER BIOGRAPHIES
The Hon. John Chichester represented the 28th district in the State Senate from
1978 to 2008. He also served as the Senate’s President pro tempore, a position
he held from 2000 to 2008.
Senator Chichester has received widespread recognition for his distinguished
service to the Commonwealth and has been honored by organizations
in Virginia and throughout the nation. Most notably, he was selected as one of
Governing Magazine’s Public Officials of the Year in 2004. In 2005, he received
the prestigious Excellence in State Legislative Leadership Award from the
National Conference of State Legislatures and the State Legislative Leaders
Foundation.
Senator Chichester is past chairman of both the Southern Legislative Conference
and the Council of State Governments. He served on the Board of Directors of
the State Legislative Leaders Foundation and the Senate Presidents’ Forum.
Sen. Chichester was also a gubernatorial appointee to the Southern Regional
Education Board and a member of the National Conference of State Legislatures’
Blue Ribbon Commission on Higher Education.
Outside of the Senate, Chichester has been active in business and his local
community. He served on the Board of Directors of the Northern Neck Insurance
Company, and he is a member and past president of the Fredericksburg Rotary
Club. He was a member of the Board of Directors of the National Bank of
Fredericksburg from 1984 to 2007, serving as the Board’s chairman from 2003 to
2007.
Senator Chichester is a graduate of Virginia Tech.
The Hon. Mary Christian represented the 92nd
district in the Virginia General
Assembly from 1986 to 2004, where she championed legislation on education,
healthcare and prescription drugs. During her time in the General Assembly, she
served as Chair of several subcommittees including a Labor & Commerce
Subcommittee.
For more than twenty five years, Christian was a professor at Hampton University
in the School of Education, where she served as Director of the School of
Education, rising to Dean of the School of Liberal Arts and Education.
Delegate Christian is the recipient of numerous awards for her community and
humanitarian service including the NAACP Merit Award for Community Services,
the Outstanding Service Award from the, NAACP, Virginia State Conference, and
the Outstanding Educators of America Award and Christian R. and Mary L.
36. iii
Lindback Award for Distinguished Teaching from Hampton University. She is also
a member of the Hampton-Newport News Service Boards Hall of Fame.
Delegate Christian received an undergraduate degree in Elementary Education
from Hampton Institute (now Hampton University), a graduate degree in Speech
and Drama from Columbia University and her Ph.D. in Elementary Education
from Michigan State University.
The Hon. Theodore “Ted” Morrison Jr. retired as Chairman of the Virginia State
Corporation Commission on January 1, 2008. During his 19 years of service he
supervised the regulation of various industries including electric, gas and water
utilities, insurance, securities and retail franchising, ship pilot rates, corporate and
business entity formation and compliance. Judge Morrison also participated in
the regulation of state chartered banks, credit unions, mortgage lender/brokers,
and telecommunications companies. He served on the board of directors of
NARUC.
Prior to his State Corporation Commission service, Mr. Morrison maintained a
general law practice in Newport News and represented that city in the Virginia
House of Delegates (1968-1988). His General Assembly committee
assignments included Finance (chairman), Courts of Justice (vice-chairman),
Rules, Privileges and Elections, and Corporations, Insurance, and
Banking. Having been a member of the Virginia Code Commission for 21 years,
he served as its chairman four years. He was a member of the Joint Legislative
Audit and Review Commission (vice-chairman), the State Crime Commission,
and the Committee on District Courts.
Mr. Morrison served in the United States Army. He was awarded B.A., LL.B, and
LL.D degrees from Emory University and he holds active member status in the
Virginia State Bar.
The Hon. Hullihen Williams Moore served as a member of the State Corporation
Commission of Virginia for twelve years, from 1992 through January of 2004.
Prior to his first election to the Commission in February, 1992, Moore practiced
law for 25 years in Richmond, Virginia, concentrating in administrative and public
utility law. Mr. Moore also taught public utility law and economic regulation at the
law schools of the College of William and Mary, Washington and Lee University,
and the University of Virginia.
Mr. Moore is a past President of the Mid-Atlantic Conference of Regulatory
Utilities Commissioners (1997) and a past President of the Southeastern
Association of Regulatory Utility Commissioners (1994-1995). In addition, Mr.
Moore was a member of the Board of Directors and the Committee on Electricity
of the National Association of Regulatory Utility Commissioners. He also served
as a member of the Advisory Council of the Electric Power Research Institute.
37. iv
Mr. Moore currently serves on the Board of Directors of Union First Market
Bankshares Corporation, a Virginia multi-bank holding company. The company is
the largest banking organization headquartered in Virginia.
In addition, Mr. Moore serves as Chair of the Virginia State Air Pollution Control
Board.
Mr. Moore also is a member of the Board of Trustees of the Shenandoah
National Park Trust. The Trust supports the preservation of the beauty, habitat,
and cultural heritage of Shenandoah National Park.
Mr. Moore is a graduate of Washington and Lee University with a major in
philosophy. He received his law degree from the University of Virginia where he
served on the Editorial Board of the Virginia Law Review. He also served as Editor
of The Virginia Lawyer and authored numerous articles in the regulatory law area.
Vincent D’Amelio retired from Consolidated Edison in New York City as Vice
President Customer Service in September of 1999. He now resides at Smith
Mountain Lake near Roanoke Virginia.
Mr. D’Amelio joined Con Edison in February 1997 with full operations
responsibility as Vice President, Staten Island Service and as special assistant to
Con Ed’s president to provide advice and counsel on issues associated with
deregulation of the electric industry in New York State. In October 1997 he was
appointed to the position of Vice President, Service, responsible for Con Edison’s
Northern Region, comprised of Westchester County and the Bronx. He has
overall responsibility for the operation of the electric distribution system and
customer service operation. He is on the Board of Directors of Con Edison’s
telecommunication subsidiary, Con Edison Communications.
At Sprint, he was Director-Service, Staff Operations beginning in 1993, where he
reported to the Consumer ServicesGroup, Chief Operating Officer, managing the
combined Customer Service and Accounts Receivable Corporate Staff. He
joined Sprint in 1988 as Director of Staff Operations, charged with reorganizing
their national Accounts Receivable and Customer Service operations.
In 1985 he was appointed Assistant Treasurer of AT&T Communications,
Managing their Accounts Receivable and cash flow. Prior to that, he had held
the position of Division Manager-Financial Programs, in AT&T’s Business
Marketing Organization, establishing the financial control’s architecture and
implementation plans for AT&T’s newly formed, deregulated, equipment
subsidiary. He had previously been responsible for AT&T’s Business market,
sales forecast, revenue, expense and product planning results analysis.
After completing assignments in Marketing, Product Development, Customer
Service, Financial Analysis, Capital Budgeting, Tax Planning, Information
Systems Design, and Corporate Planning, he was appointed to the position of
Executive Assistant to the Business Marketing Development Vice President in
1979.
38. v
His more than 25 years in telecommunications began with AT&T in New York in
1970 as a Staff Analyst in the Management Sciences Division of the Office of the
Chairman before being promoted to District Manager, Financial and Economic
Studies in AT&T’s Business Research Unit in 1974.
Prior to joining AT&T, he held positions at General Electric’s Missile and Space
Division in engineering and marketing capacities.
Mr. D’Amelio completed his undergraduate work at the State University of New
York at Buffalo, in Chemical Engineering and his Masters of Business
Administration in Finance, at New York University.
David Parcell is President of Richmond based Technical Associates Inc., and is
an expert in Financial; Insurance; Transportation; Franchise, Merger & Anti-Trust;
and Utility Economics. He has performed numerous financial studies of regulated
public utilities and testified in over 450 cases before some fifty state and federal
regulatory agencies including the Federal Energy Regulatory Commission and
Federal Power Commission.
Mr. Parcell has prepared numerous rate of return studies incorporating cost of
equity determination based on DCF, CAPM, comparable earnings and other
models. In addition he has developed procedures for identifying differential risk
characteristics by nuclear construction and other factors.
Mr. Parcell has conducted studies with respect to cost of service and indexing for
determining utility rates, the development of annual review procedures for
regulatory control of utilities, fuel and power plant cost recovery adjustment
clauses, power supply agreements among affiliates, utility franchise fees, and
use of short-term debt in capital structure.
He has published articles in law reviews and other periodicals on the theory and
purpose of regulation and other regulatory subjects.
Mr. Parcell is a Certified Rate of Return Analyst and a member of the American
Economic Association, Virginia Association of Economists, Richmond Society of
Financial Analysts, and Financial Analysts Federation. In addition he served on
the Board of Directors of the Society of Utility and Regulatory Financial
Analysts from 1992-2000, during which time he served
as Secretary/Treasurer from 1994-1998 and President from 1998-2000.
He completed both his undergraduate and graduate work in economics at
Virginia Tech and received an MBA from Virginia Commonwealth University.
39. vi
Irene Leech is an Associate Professor at Virginia Tech and leading Consumer
Advocate with an emphasis on Electric Utility Regulation. She has written
regularly on electric utility regulation and deregulation in Virginia and testified
frequently on the consumer perspective on electric deregulation in Virginia before
Legislative and Regulatory bodies.
Ms. Leech has served on the Governor’s Energy Policy Advisory Committee from
2007- 2010 and was appointed to the Post-Capped Rates Subcommittee of the
Virginia General Assembly’s Commission on Electric Utility Restructuring in
2006. She served on the Task Force convened by the Virginia Attorney General’s
Office to review Dominion’s proposed hybrid electric regulation legislation in
2007. Leech was a co-Primary Investigator on a National Science Foundation
funded research project, A Holistic Approach to the Design and Management of
a Secure and Efficient Distributed Generation Power System from 2003-2007
and presented the work of the Virginia Tech team at NSF project conference s in
2003, 2004, and 2005.
Ms. Leech has held numerous professional memberships and leadership
positions including with the American Association of Family and Consumer
Sciences, American Council on Consumer Interests, Consumer Federation of
America, National Consumers League, Take Back the Power, Virginia Citizens
Consumer Council, Virginia Department of Agriculture and Consumer Services’
Consumer Advisory Committee, the Virginia State Corporation Commission’s
Energy Choice Education Committee and Virginia Energy Sense Consumer
Education Committee.
She is a graduate of Virginia Tech where she received her bachelor’s,
master’s and doctoral degrees.
Donnette Leonard is a resident of Cana, VA and has been locally active on behalf
of area residents affected by increases in electric utility costs.
Ms. Leonard has been active in organizing local town halls on rising utility rates
and circulating a petition against rate increases that amassed over 1800
signatures. Her opinion columns on the topic of increasing electric costs from the
perspective of Virginia residents have been published in several newspapers
including the Roanoke Times and The Carroll News.
Ms. Leonard continues to work to keep residents engaged around the issue of
electric utility regulation and to shine a spotlight on the personal and economic
impacts that high rates have on both residents and businesses.
Ms. Leonard is also active with veterans and military organizations where she
has served as coordinator for Wake Forest University’s 2008 Welcome Home
Warrior Program and the University’s Annual Military Family Reunion.
She attended East Tennessee State University where she studied Psychology.
40. vii
Doug Bassett is the Executive Vice President and COO of Vaughan-Bassett
Furniture Company, which is based in Galax, VA. With sales of over $85 million
and with over 700 employees, Vaughan-Bassett is the largest wooden adult
bedroom manufacturer in the United States.
Mr. Bassett graduated from the University of Virginia in 1988 and was the first
legislative director for Congressman Richard Burr (R-N-C) in 1995 and
1996. Burr is now North Carolina’s senior senator. He was press secretary for
Congressman Charles Taylor (R-N-C) in 1991 and 1992 and was campaign
manager for Taylor’s 1992 re-election campaign.
Mr. Bassett is a member of the Board of Directors and sits on the Executive
Committee of the High Point Market Authority. He also sits on the Board of
Directors of Webb Furniture Company.
The Hon. Wm. Roscoe Reynolds currently represents the 20th Senate district,
made up of four counties and parts of two others in southwestern Virginia, plus
the cities of Galax and Martinsville. Previously Reynolds served in the Virginia
House of Delegates from 1986–1997. Prior to his election to the House of
Delegates, Reynolds served as Commonwealth's Attorney for Henry County.
Senator Reynolds has been a long-time champion for consumers and outspoken
advocate against increasing electric rates, testifying numerous times before the
State Corporation Commission.
In addition, he has sponsored legislation to return full regulatory discretion to the
SCC and require that rates be set based on the entire operations of a company,
not by individual costs.
Senator Reynolds received his undergraduate degree from Duke University and
his law degree from Washington and Lee University.
The Hon. Ward Armstrong was elected to the House of Delegates in 1992 and
currently serves as Minority Leader, a position he was elected to in 2007.
Delegate Armstrong has sent numerous letters and contributed in person
testimony at SCC hearings in opposition to Appalachian Power Company’s most
recent rate requests of the past several years. In addition, Armstrong has worked
to provide greater opportunities for citizens to show their opposition and attend
rate hearings in person.
During the 2010 General Assembly Session Armstrong submitted legislation to
return Appalachian Power to the regulatory standards that were in place prior to
deregulation. He has held town hall meetings throughout southwest and
41. viii
Southside Virginia on regulatory reform and has circulated a petition against
Appalachian Power’s rate increases, which to date has received over 8000
signatures.
Delegate Armstrong received an undergraduate degree in business from Duke
University and his law degree from the University of Richmond.
42. i
APPENDIX B
Extracted from Moody’s June 6, 2008 “Credit Opinion” on
Virginia Electric and Power Company
“The key drivers of VEPCO’s ratings are:
- Regulatory and political supportiveness
The vast majority of VEPCO’s revenues are regulated by the
Virginia State Corporation Commission (VA SCC) and the
North Carolina Public Service Commission (NCPSC). In
general, Moody’s views the regulatory and political
environments in both Virginia and North Carolina as a
credit positive, given the region’s overall supportiveness
to long-term credit quality and the established legislative
framework to maintain a financially strong and healthy
utility sector. The regulatory and political
supportiveness represents a significant positive ratings
driver for VEPCO.
- VA SCC jurisdictional boundaries
In Virginia, VEPCO’s primary service territory, it is our
opinion that the legislature has been extremely supportive
in maintaining a sound, financially health electric utility
sector. As evidence, Moody’s observes that legislation has
been passed on numerous occasions designed to tackle the
changing fundamentals and market environment in the region,
to address the recovery of rising costs and to provide
financial incentives to make necessary infrastructure
investments. In effect, Virginia has transitioned from
being quasi-deregulated to fully re-regulated, a credit
positive. More importantly, the VA SCC’s role, as a
judicial branch of government tasked to enforce the laws
enacted by the legislature, is well regarded, in our
opinion, due to their deliberate and measured
interpretation of the existing legislation. While this
43. ii
arrangement is viewed as a material credit positive, we
observe the dramatic changes associated with the 2007
Virginia Restructuring Act, which had an effect that
eliminated historical legal precedents. As a result, there
could be occasions in the future where the interpretation
of the legislature’s intent behind the restructuring law
could emerge potentially introducing lengthy legal or
regulatory delays Moody’s notes that the first significant
test under this new regulatory framework – the approval of
the cost riders associated with the proposed construction
of the Virginia City Hybrid Energy Center, a coal-fired
generation facility located in southwestern Virginia – was
completed without any of the interpretation risks we have
highlighted in this section. From a credit perspective, we
incorporate a view that the Virginia legislature will
continue to remain supportive to the long term financial
health of the utility sector and towards the utilities in
the state that they indirectly regulate.
- Fuel clause recoveries
As expected, in early May 2008, VEPCO filed with the VA SCC
a plan to revise its fuel factor pursuant to Virginia Code
56-249.6 (case number PUE-2008-000.39). VEPCO’s fuel
factor is forward looking, as opposed to historical, which
is neither positive nor negative to credit as long as
adequate liquidity availability is maintained. In the
filing, VEPCO proposes raising its fuel factor rate, which
is a pass-through item, to 4.245 cents per kilowatt hour
(kwh) from 2.232 cents per kwh, beginning on July 1, 2008,
an increase of roughly $1.3 billion above its 2007-2008
fuel cost recovery level. As part of its filing, VEPCO
also proposed to defer approximately $700 million of under-
collected fuel expenses for the period July 1, 2007 through
June 30, 2008, thereby moderating, to some degree, the
impact of even higher rates on consumer bills. Moody’s
observes that VEPCO reported approximately $2.5 billion of
electric fuel and energy purchases for the year ended 2007.
In addition, we note that in the order establishing the
fuel factor proceeding the VA SCC is allowing the
44. iii
“submission of legal memoranda that may address, among
other issues, the legal permissibility” of VEPCO’s offer to
defer the $700 million under-recovered balance. It is our
understanding that the VA SCC will review the testimony
from interested parties in mid-June and a hearing has been
scheduled for June 24, 2008.
In our opinion, the pass-through nature of VEPCO’s fuel
factor is generally viewed as a credit positive. While the
framework for fuel recoveries has changed over the past few
years (from an annual adjustment, to a multi-year freeze
and back to an annual adjustment – see regulatory
supportiveness above), we believe the regulatory procedural
process is relatively straightforward, and that VEPCO will
be allowed to recover the vast majority of its increased
fuel and purchased power expenses over a reasonably timely
basis. In addition, we incorporate a view that most of the
major industrial interveners recognize that the costs are
directly related to rising commodity prices, and so any
disputes will most likely revolve around the composition of
the forward fuel price assumptions.
- Significant capital investment plans
VEPCO has a very significant capital expenditure plan,
which includes both near term and longer term
infrastructure investments. For the year ended 2007, VEPCO
reported approximately $1.3 billion in capital
expenditures, up from the approximately $1.0 billion spent
in 2006 and the roughly $0.9 billion noted in 2005. These
investments are expected to enjoy the attractive recovery
incentives embodied in the 2007 Virginia Restructuring Act,
and include investment sin incremental generation supplies,
transmission and distribution upgrades, new connections and
environmental enhancements. Over the longer-term horizon,
VEPCO is planning a significant amount of investment into
new base load generation supplies, including new coal and
nuclear facilities. In addition, VEPCO is planning on
investing a significant amount of capital (approximately
$500 million per year over the next several years) into new
transmission and distribution projects. From a credit
45. iv
perspective, we view investment additions into regulated
rate base positively. We observe that VEPCO has been
authorized to commence collecting, through a rate rider
(the framework of which was established in the 2007
Virginia Restructuring Act), the cost associated with its
southwest Virginia Coal-fired project (Virginia City),
beginning in January 2009. Moody’s anticipates that VEPCO
will avail itself of similar rider-collection authority
with respect to the mounting costs associated with a
prospective new nuclear facility.”
46. A
ENDNOTES
1 EEI Average Overall Rates, 2007, 2008, 2009.
2 EEI Average Residential Rates, 2007, 2009. According to EEI Dominion Virginia
Power‟s average residential rate increased from $.0865 in 2007 to $.1075 in 2009, an
increase of 24.3%.
3 EEI Average Residential Rates, 2007, 2009. According to EEI, APCo‟s average
residential rate increased from $.0484 in 2007 to $.0923 in 2009, an increase of 90.7%.
4 EEI Average Commercial Rates, 2007, 2009. According to EEI, Virginia‟s average
commercial rates increased from $.0620 in 2007 to $.0825 in 2009, or 33.1%. APCo‟s
commercial rates increased from $.0572 in 2007 to $.0769 in 2009, or 34.4%. Dominion
Virginia Power‟s commercial rates increased from $.0626 in 2007 to $.0833 in 2009, or
33.1%.
5 EEI Average Industrial Rates, 2007, 2009. According to EEI, APCo‟s average industrial
rate increased from $.0435 in 2007 to $.0622 in 2009, an increase of 43%.
6 EEI Average Industrial Rates 2007, 2008, 2009. Dominion Virginia Power‟s industrial
rates increased from $.0484 in 2007 to $.0672 in 2009, or 38.8%. The national average
industrial rate in 2009 was $.0663.
7 State Corporation Commission Staff Response to August 2, 2010, Requests for
Information from Delegate Ward L. Armstrong included average rate information from
the “Edison Electric Institute‟s („EEI‟) Periodic Typical Bills and Average Rates
Reports.” These data provide the following: EEI Average Rates, Overall Rates Ranked
from Lowest to Highest State Annually for 1995-1997 and 2003-2009 (“EEI Average
Overall Rates”); EEI Average Rates, Residential Rates Ranked from Lowest to Highest
State Annually for 1995-1998 and 2003-2009 (“EEI Average Residential Rates”); EEI
Average Rates, Commercial Rates Ranked from Lowest to Highest State Annually for
1995-1997 and 2003-2009 (“EEI Average Commercial Rates”); and EEI Average Rates,
Industrial Rates Ranked from Lowest to Highest State Annually for 1995-1998 and 2003-
2009 (“EEI Average Industrial Rates”). For example, Virginia ranked 13th
, 12th
and 12th
for lowest Average Commercial Rates in 1995, 1996, and 1997, and APCo‟s average
residential rates were slightly higher than the 3rd
and 4th
ranked states during this period.
8 See §56-582. Note that while the headings refer to rate “caps,” there is no provision to
reduce base rates. Also, Subsection B provides a number of ways rates could be
increased.
9 “Stranded Cost” was the term coined to define the loss in value of generation assets
caused when the market price of electricity is lower than that necessary to recover the
47. B
actual cost of investment plus a reasonable return. Since competition and the market
never developed and the utilities set rates based on costs, there are not, and have not
been, any stranded costs.
10 See §56-584.
11 State Corporation Commission Report to the Commission on Electric Utility
Restructuring of the Virginia General Assembly and the Governor of the Commonwealth
of Virginia; Status Report: The Development of a Competitive Retail Market for Electric
Generation within the Commonwealth of Virginia, September 1, 2007 (“2007 SCC
Report”). At page 35, the report states the following with regard to earnings of Virginia‟s
investor-owned electric utilities for the period 2001-2005:
Each investor-owned utility operating in Virginia with annual
revenues in excess of $1,000,000, is required to make an Annual
Informational Filing (“AIF”) with the Commission. The purpose of these
filings is to allow the Commission to, among other things, monitor the
earnings generated by currently approved tariff rates. One section of the
AIF, referred to as the Earnings Test Analysis, assesses current earnings
on a regulatory basis by making limited adjustments to the utility‟s
financial records. Staff conducts a review of each filing and prepares a
report to the Commission stating its findings. The following chart shows
the calendar year 2001, 2002, 2003, 2004 and 2005 earnings of each
investor-owned electric utility based on Staff‟s review of the earnings test
analysis included in each company‟s AIF. The earnings reflect the
bundled (generation, transmission and distribution) Virginia jurisdictional
return on average common equity adjusted to a regulatory basis.
Dominion Virginia Power‟s 2005 return on equity was 6.88%. The return was lowered
significantly by the fact that the Company voluntarily agreed to freeze its 2004 fuel factor
for future years. Fuel costs increased and profits declined. The fuel clause was reinstated
as of July 1, 2007 and excess earnings soared again. See note 8, supra.
12 Report on the Status of Stranded Cost Recoveries by Virginia Incumbent Electric
Utilities, 2001-2005 for the Commission on Electric Utility Restructuring of the Virginia
General Assembly by Division of Consumer Counsel, Virginia Office of the Attorney
General, September 1, 2006, Revised 9/12/06, at 1-2. (“2006 Attorney General Report”).
48. C
13 SCC Case No. PUE-2009-00019, Testimony of Kimberly B. Pate dated December 8,
2009, at 4-5 and 18.
14 SCC Case No. PUE-2009-00019, Testimony of Kimberly B. Pate dated December 8,
2009, at 18. SCC Staff found that earnings were “approximately $527.7 million higher
than necessary to achieve a 10.20% return on average equity, as supported by Staff
witness Oliver.” The Commission ultimately found the appropriate equity return to be
11.3%. The SCC Staff advised the Work Group that 100 basis points increase in equity
equates to about $40 million after taxes and $65 million of revenue requirement for
Dominion Virginia Power. Accordingly, if the excess earnings were based on a return
requirement of 11.3% rather than 10.20%, the excess would still be at least $450 million.
15 2007 SCC Report at 35.
16 2006 Attorney General Report at 1-2.
17 EEI Average Overall Rates, 2007, 2008, 2009.
18 EEI Average Overall Rates, 2008, 2009. USA overall average rates increased from
$.0977 to $.0983 (0.6%); Virginia‟s overall average rates increased from $.0769 to
$.0852 (10.8%); Dominion Virginia Power‟s overall average rates increased from $.0807
to $0868 (7.6%); APCo‟s overall average rates increased from $.0608 to $.0791 (30.1%).
19 EEI Average Residential Rates, 2007, 2008, 2009.
20 EEI Average Residential Rates, 2007, 2009. According to EEI Dominion Virginia
Power‟s average residential rate increased from $.0865 in 2007 to $.1075 in 2009, an
increase of 24.3%.
21 EEI Average Residential Rates, 2007, 2009. According to EEI, APCo‟s average
residential rate increased from $.0484 in 2007 to $.0923 in 2009, an increase of 90.7%.
22 EEI Average Commercial Rates, 2007, 2009. According to EEI, Virginia‟s average
commercial rates increased from $.0620 in 2007 to $.0825 in 2009, or 33.1%. APCo‟s
commercial rates increased from $.0572 in 2007 to $.0769 in 2009, or 34.4%. Dominion
Virginia Power‟s commercial rates increased from $.0626 in 2007 to $.0833 in 2009, or
33.1%.
23 EEI Average Industrial Rates, 2006, 2007.
24 EEI Average Industrial Rates, 2006, 2007. Virginia ranked 7th
and 9th
least expensive in
2006 and 2007 respectively. Other states ranked as follows for 2006 and 2007
respectively: North Carolina (17th
and 16th
), Alabama (13th
and 20th
), Mississippi (30th
and 27th
), Georgia (22nd
and 22nd
), Louisiana (33rd
and 31st
), Kentucky (8th
and 10th
),
South Carolina (9th
and 11th
), and Florida (36th
and 35th
).
49. D
25 EEI Average Industrial Rates, 2006, 2007. Tennessee was 3rd
least expensive in 2006
and ranked 1st
in 2007. West Virginia ranked 2nd
and 3rd
respectively in 2006 and 2007.
26 EEI Average Industrial Rates, 2008, 2009.
27 EEI Average Industrial Rates, 2009.
28 EEI Average Industrial Rates, 2005. APCo‟s rate was $.0340.
29 EEI Average Industrial Rates, 2008. Wyoming‟s rate was $.0455 and APCo‟s was
$.0460.
30 EEI Average Industrial Rates, 2009. Arkansas‟s rate was $.0617 and APCo‟s was
$.0622.
31 EEI Average Industrial Rates, 2007, 2009. According to EEI, APCo‟s average
industrial rate increased from $.0435 in 2007 to $.0622 in 2009, an increase of 43%.
32 EEI Average Industrial Rates 2007, 2008, 2009. Dominion Virginia Power‟s industrial
rates increased from $.0484 in 2007 to $.0672 in 2009, or 38.8%. The national average
industrial rate in 2009 was $.0663.
33 Generally, unless otherwise provided by statute, the utility is not required to prove
affirmatively its utility expenses are prudent unless they involve affiliates; such non-
affiliate expenses are presumed prudent unless there is a contrary showing.
34
§56-585.1A2.
35
SCC Case Number: PUE-2009-00030 , Final Order, p10.
The News and Advance. “Lawmakers examine utility rate regulations.” April 21, 2010.
36
§56-585.1A2c.
37
§56-585.1A5e.
38
§56-585.1A5c.
39
§56-585.1A2.
40
§56-585.1A8(i).
41
§56-585.1B.
42
§56-585.1A8(ii).
43
The utility is allowed to keep the first 50 basis point excess, about $32.5 million for
VEPCO, and credit 60% of the remainder to customers and retain the rest, about $27
million for VEPCo.
50. E
44
§56-585.1A8(iii) and 9.
45 §56-585.1.
46 EEI Average Residential Rates, 2007, 2008, 2009.
47 EEI Average Commercial Rates, 2007, 2009. According to EEI, Virginia‟s average
commercial rates increased from $.0620 in 2007 to $.0825 in 2009, or 33.1%. APCo‟s
commercial rates increased from $.0572 in 2007 to $.0769 in 2009, or 34.4%. Dominion
Virginia Power‟s commercial rates increased from $.0626 in 2007 to $.0833 in 2009, or
33.1%.
48 EEI Average Industrial Rates, 2008, 2009.
49 EEI Average Industrial Rates, 2009.
50 EEI Average Overall Rates, 2007, 2008, 2009.
51 EEI Average Overall Rates, 2008, 2009. USA overall average rates increased from
$.0977 to $.0983 (0.6%); Virginia‟s overall average rates increased from $.0769 to
$.0852 (10.8%); Dominion Virginia Power‟s overall average rates increased from $.0807
to $0868 (7.6%); APCo‟s overall average rates increased from $.0608 to $.0791 (30.1%).
52 The utility is allowed to keep the first 50 basis point excess, about $32.5 million for
VEPCO, and credit 60% of the remainder to customers and retain the rest, about $27
million for VEPCo
53 Unless the investments involve an affiliate or the statutes require otherwise,
investments by utilities are generally presumed to be reasonably made unless the contrary
is shown. Moreover, the issue probably will not be “prudence” but a matter of judgment,
making the “incentive” more important.
