Electric Charge

Dominion sheds light on the complex legislation behind its scheduled price hike. So why are some still in the dark?

By Travis Hicks

Remember the phrase, “Even the best laid plans of mice and men often go awry”?

The commonly heard couplet might apply to the Virginia General Assembly’s efforts to deregulate the monopoly of shareholder-owned electric utilities. The goal? Encourage competition among electric providers, giving customers options for service and rates.

Sometimes though, when good ideas go wrong, there are unintended consequences. And that, according to some observers, is exactly what happened in Virginia when the legislation tried to put the deregulation genie back in the proverbial bottle.

Fears of electric price surges spurred state lawmakers to pull the plug on their deregulation experiment. But there is concern that their attempt to “re-regulate” the industry may hurt customers—the very group regulation is meant to protect.

On the other hand, Dominion Power, Virginia’s largest electric provider, argues that the legislature’s revamped model for regulating the rates of electric utilities will promote more efficient and reliable service throughout the state. Further, the company asserts that those efficiencies will result in the state conserving energy and reducing its dependence on fossil fuel-generated electricity.

As a result of fuel increases last summer, Dominion’s rates climbed, on average, 18 percent. The rate hike was only the company’s second fuel-related jump since 1999.

But for the first time in a decade, Dominion this year may request a hike in the base rate it charges customers. Whether Dominion seeks and receives approval to boost the base rate for the state’s 2.3 million customers—including expenditures for maintenance, infrastructure and power delivery—remains to be seen. David Botkins, Dominion’s director of media relations, said it’s “premature to speculate” prior to the March 31 deadline.

Regardless of the company’s approach, however, the very nature of the General Assembly’s 2007 legislative changes alters the utility landscape. Yet the complicated nature of the legislation has left the vast majority of the public—and, say some, the state legislature—in the dark.

Failure of Deregulation
The history of Virginia overseeing electric utilities shifted dramatically in 1999 when the General Assembly elected to deregulate the industry. Following the lead of California and neighboring Maryland, the state legislature hoped to promote competition among utility suppliers and, ultimately, lower prices and enhance service. Throughout the deregulated period, the legislature capped with some exceptions the rates utilities could charge.

Prior to deregulation, the State Corporation Commission (SCC) in Richmond oversaw all public utilities, which were de facto monopolies. The goal of regulating the shareholder-owned utilities in the pre-1999 system was to provide reliable service at reasonable rates, while ensuring the power companies earned a reasonable return on their investments.

In the end, however, the consensus among lawmakers and the utilities was that deregulation was a failure. Competition never developed and the legislature, concerned that electric rates could skyrocket as they did in Maryland, looked to return to a regulated framework. But lawmakers didn’t want more of the same; instead they wanted a new regulatory scheme that would grant power companies incentives for investing in renewable energy and new generation capacity.

“We don’t like the fact that electricity’s a monopoly,” said Del. Ken Plum, a Reston Democrat. “We tried like the dickens to get some competition. But it didn’t work here, and it didn’t work other places.”

So, in December 2006, the legislature got the ball rolling, tasking the attorney general’s office with convening stakeholder meetings that included representatives from Dominion and Appalachian power, the governor’s office, electric coops, large industrial consumers and the SCC. The attorney general’s office also conducted numerous public hearings and opened an email account dedicated to public input.

Irene Leech, president of the Virginia Citizen’s Consumer Council, nonetheless alleges that the legislation was “designed by Dominion for Dominion.” But chief deputy attorney general, Bill Mims, says there was a concerted effort to weigh all public input and add consumer protections aimed at preventing “rate shock.”
“The process was as open as it possibly could be,” says Mims, 51. “It was specifically looking at the long terms and trying to ensure that there were predictable rates, predictable sources of electricity and a predictable model looking out 50 years and beyond.”

The electric utilities successfully argued that they would need a higher rate of return than typically allowed under traditional regulation in order to compete for and attract the capital needed to provide the reliable service sought by the legislature. The legislation also encouraged electric utilities to implement programs that result in electricity conservation or shifting power use to off-peak periods. As part of this effort, electric utilities may seek rate designs that ensure a consistent revenue stream, even though customers are using less electricity on a monthly basis.

The legislation approved by the General Assembly in early 2007 also altered how the SCC reviews utility companies’ rate cases. The SCC must conduct a full review of Dominion’s rates every two years. But unlike the pre-deregulation analysis, the SCC must weigh the reported earnings of comparable utility companies in the region over a three-year period in setting the rate of return for Dominion. Under the traditional form of regulation prior to 1999, the SCC set rates that were specific to the operating costs of the company seeking rate relief, including an allowable return deemed appropriate for that company alone. This process essentially is preserved, although the new regulatory schematic bars the SCC from setting the rates lower than the average three-year reported returns of at least a majority of peer electric utilities in the Southeast. The changes made by the state legislation also enabled power companies, like Dominion, to recoup costs related to the construction of new power plants, although those “add-ons” have to be approved by the SCC. Currently, Dominion has tacked $1.50 per month onto customers’ bills for the building of a new coal-fired plant in Wise County.

Consumer advocates allege that Virginia’s new regulatory framework is among the friendliest to electric utilities in the nation—a claim that is supported by the National Association of Regulatory Utility Commissioners, which called it “unique.” The new regulatory structure, say its opponents, effectively neuters the ability of the SCC to conduct its statutorily mandated oversight of electric utilities.

Steve Sinclair, vice chairman of the Virginia Energy Purchasing Governmental Association, likened the legislature’s 2007 restructuring as an attempt “to put Humpty Dumpty back together again … All the pieces were conveniently in place to re-regulate the industry as it had been regulated for over 50 years. However, the General Assembly chose to reassemble the industry with a decidedly unfriendly consumer face.”

“I don’t think members of the General Assembly fully understand what the implications of this are going to be,” added Sinclair, 57.

Dollar-for-Dollar Fuel Rate
The 18-percent fuel-rate hike in July 2008—pushing the average residential bill up nearly $17 a month—has pinched an already cash-strapped populace. The fuel cost is a straight dollar-for-dollar pass-through to the customer on which the power company cannot earn a profit. Since customers ultimately pay for the fuel used by the company to generate electricity, the SCC makes sure that the company minimizes its fuel costs as much as legally possible.

Fuels costs spiked tremendously over the last few years, leaving Dominion in a steep under-recover position. Dominion could have asked for a 22-percent increase, but chose to limit the impact. The company says it has been unable to recover as much as $1.6 billion in fuel costs because of rate caps.

Virginia Sen. Jim Webb opposed Dominion’s request for the fuel rate increase in June, saying in a letter to the SCC that an 18-percent hike would disproportionately impact low-income families and seniors living on fixed incomes.

Nonetheless, area businesses weren’t up in arms over the rate increase even though it had the potential to impact their bottom line.

“While nobody is making light of the economic impact in tight economic times of any cost increase, 18 percent was a far more manageable situation than what occurred in Maryland,” said Bill Lecos, president and CEO of the Fairfax Chamber of Commerce. “We think the 18 percent—while not everyone’s fondest wish—was a very prudent approach consistent with the Virginia way of doing business.”

Dominion’s Botkins, 43, emphasized that even with the increase, the cost to Virginia customers is still roughly six percent less than the national average—and potentially could be less when SCC members review the fuel costs again this year. “I’d like to be able to say that customers could potentially see a drop in costs on July 1, 2009, but with commodity prices being as wild as they are, it’s just hard to predict,” he said.

Prior to the fuel-rate increase, total electric costs in Maryland ran about 60 percent higher than in Virginia, while rates in the District of Columbia hovered at 77 percent more, according to a 2007 analysis by the Edison Electric Institute, an association representing shareholder-owned electric companies.

Ed Legge, spokesman for Edison, noted that electricity has stayed relatively inexpensive over the last 20 years compared to other goods and services.

“It [electricity] remains a very affordable necessity item. I mean it’s nothing compared to how the cost of gas has gone up,” he said. “But at the same time, we’re talking about an enormous physical infrastructure that has to be maintained for the utility to stay in business.”

Future Increases Possible
Yet the uncertainty of what will happen when the SCC revisits the base rate this year may dramatically offset any potential reductions in the fuel costs.

Traditionally, most states regulate the rate of return for electric companies based on a “just and reasonable” standard. Under this approach for regulated utility monopolies, state governing bodies apply a complicated formula that provides electric utilities with a reasonable profit in their investment while protecting consumers.

However, the new methodology approved in 2007 effectively eliminated the statutory requirement that rates be fair and limit the SCC’s ability to review all costs and revenues when weighing a potential rate increase, according to its detractors, including the former SCC chairman Theodore Morrison. The restructured process, warned Morrison in a March 9, 2007, letter to Gov. Tim Kaine, “represent[s] untried, untested methodologies” that “could produce unnecessarily high rates for consumers.”

Botkins challenges the concept that the SCC has lost any regulatory authority, reasoning that the “commission has the same authority it always has had in rate cases to question all expenses and disallow any expenses it does not believe are justified.”

A longtime consultant for the Virginia Energy Purchasing Governmental Association suggested in 2007 that the new regulatory framework will result in higher rate increases than under the pre-deregulatory scheme. Although the consultant conceded there are many uncertainties—including the cost of new facilities, renewable energy sources, etc.—he estimated that the impact could be rate hikes 10 percent or higher than they would have been under traditional rate of return regulation system.

Only time will tell. Until then, Leech, 50, will push for a return to more stringent regulation.

“I’m not saying it should be regulation exactly like it was before, but if the Commission had the ability and the authority to really look at the situation and do real regulation … It would be in the public interest.”

Key Players
Have more questions? Want to keep costs down? Tap the following resources for ideas and answers:

State Corporate Commission
Kenneth Schrad, director; 804-371-9141; Ken.Schrad@scc.virginia.gov
The SCC acts as a General Assembly watchdog, ensuring that business legislation is both economically and qualitatively fair to the consumer.

Dominion Power
http://e-conserve.blogspot.com
While residents lie in wait about changes to their utility bills, Dominion has provided a social networking arena for individuals to assume some control over their energy spending. The company’s new blog offers a forum in which visitors can trade ideas for energy conservation.

Sen. Tommy Norment (R-Williamsburg)
804-698-7503; district03@sov.state.va.us
Sen. Norment penned the most recent regulatory legislation, passed to date by both the House and the Senate.

Del. Harvey B. Morgan (R-Gloucester)
804-698-1098; DelHMorgan@house.state.va.us
Del. Morgan opposed the bill with the introduction of his own legislation, which laid ground for energy conservation incentives for utilities companies and consumers.

Jan. 1, 2009
Retail rate regulation re-established for most electricity customers in the Commonwealth.

Jan. 1, 2004
Statewide phase-in complete when 12 electric cooperatives around the state make choice available to their customers.

Jan. 1, 2002
Deregulation of electric generation occurs. Statewide phase-in of electric retail choice begins.

2001
Electric companies’ rates are capped in preparation for the transition to a competitive energy-supply market.

2001
Dominion’s pilot program expands to Northern Virginia (Fairfax County).

2000
Dominion begins pilot electric retail choice program in Richmond metropolitan area.

1999
– The Virginia Electric Utility Restructuring Act (Senate Bill 1269) is enacted into law.
– Senate Bill 1105 is enacted into law, authorizing gas utilities operating in Virginia to offer retail supply choice to all their customers.

1998
– State restructuring legislation (House Bill 1172) is enacted, establishing a schedule for retail competition to begin in January of 2002 and be completed by January of 2004.

1997
– SCC approves Columbia Gas of Virginia’s retail pilot program for Northern Virginia natural gas customers.
– SCC issues its study on electric industry restructuring and a model for competition, recommending a five-year transition to full retail access.

1994
SCC charged with responsibility of public utility rate regulation.

Critique of Electricity Deregulation in Virginia
The assumptions that support deregulation have been undermined by actual experience

The Assumptions (why Virginia should proceed with deregulation)	The Reality (why Virginia should reconsider deregulation)
Competition is good… Deregulation helps Virginia utilities become leaner, more efficient and better able to compete.	… for enriching shareholders and penalizing customers. Deregulation gives utilities the opportunity to increase rates while earning excessive revenues.
A deal is a deal… It is unfair to change the rules in the middle of the game.	… except when the utilities change the rules. The Restructuring Act has been selectively revised in ways that harm customers and help utilities.
Many states are further along in deregulation… Virginia will suffer competitively if it fails to deregulate while surrounding states are deregulating.	… and have suffered severe consequences. Neighbor states illustrate that deregulation has been disastrous for customers while regulation has been beneficial for customers.
Regulation is inefficient and sends the wrong price signals… The market will send the proper price signals for needed investment.	… when state regulation over retail rates is replaced by FERC regulation and PJM oversight over wholesale rates. The market is an invitation for price gouging.
Deregulation is a win-win proposition… Competition, free markets and customer choice will benefit everyone.	… for power producers and a lose-lose proposition for the general public. Producers earn record profits, consumers endure rate shock, and industry is crippled.

Energy rate increases in neighboring states that have implemented  market pricing:
Delaware 59% to 117%
Maryland 72%

States that did not deregulate:
North Carolina no more than 4.2%
West Virginia no more than 4.2%

(March 2009)

Tags: consumer, Dominion power, electricity, energy, power