Frank Nolen: Let the SCC set rates

Column by Frank Nolen
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In 2007 the General Assembly passed legislation that greatly reduced the ability of the State Corporation Commission (SCC) to set just and reasonable electric rates. The result has been a 60 percent increase in the electric rates paid by customers of the Appalachian Power Company and a 26 percent increase in rates for Dominion Virginia Power customers.

The 2007 legislature all but guaranteed the return on equity that Apco and Dominion can earn on investments, instead of leaving that decision up to the SCC based on expert testimony. It also allowed Apco and Dominion to be paid for new power plants through add-on rate riders as they are being built, instead of being paid through the general rates after we start receiving electricity from the new plant. And it allowed the power companies to impose other individual riders for specific costs, such as transmission or environmental compliance. The legislated return on equity and various rate riders combined are adding already to what we pay as customers, and in the future will add far more. 

The sad part is that many of our senators and delegates did not realize the consequences of the 2007 legislation. It was too complicated. But some of them are starting to realize that they share the blame for the recent cost increases to homeowners and businesses.

Just in the past few days, both the appropriate House and Senate committees considered and rejected similar bills to return the power companies to the regulatory structure that existed for decades. The bills sponsored by among others Del. Ward Armstrong of Henry County and Sen. Roscoe Reynolds of Martinsville returned full discretion over power company profit margins to the SCC and required they set rates based on the entire operation of the company, not by looking at individual riders for individual costs like a new plant or environmental compliance.

Some on the committee wanted a guarantee that the bills would immediately result in lower rates. No one could make that guarantee. This is evidence that the legislators still do not understand the issue, because the question that needed to be asked was, “Will this lower our rates over the next ten years?” And the answer to that would be a resounding, “YES!”

My friends, you have not seen anything yet when it comes to rate increases:

The 2007 legislation contains numerous powerful “incentives” for utilities to increase their costs and profits; provides numerous opportunities for utilities to increase their rates; and hobbles the SCC’s ability to make sure that rates are just and reasonable. Once the SCC sets a new profit target within the range dictated by the legislation, the companies get bonus profits for building new plants or using more expensive renewable power.

The law was even amended in 2009 to guarantee they will still get paid for power they no longer sell if their efficiency programs succeed.

Evidence already abounds that the 2007 legislation has and will result in higher rates than those that would result from customary regulation. For example, in a 2007 rate decision, the SCC determined in a footnote that the 2007 legislation would have increased Appalachian Power’s rates approximately $72 million per year greater than the increase actually found to be just and reasonable under customary regulation.

In a 2009 rate case, the 2007 legislation required the SCC to approve a $77.9 million increase in Virginia Power’s rates through a separate rate adjustment clause (RAC) to collect transmission-related costs. The SCC simply lacked the legal authority to deny the Virginia Power’s request for this rate increase even though Virginia Power’s overall operation in 2008 had generated a return on common equity of approximately 17 percent – greatly in excess of the rates of return of around 10 percent that had been found to be reasonable for other Virginia utilities, resulting in a $77.9 million increase. Those excess profits should have been used to cover the transmission costs – and under the old regulator set up, they would have been.

These rate hikes to date do not begin to reflect what’s in store for us, their customers. In 2009 alone, Dominion Virginia Power filed for five separate rate adjustment “riders” and Appalachian Power applied for four of them.

If Virginia Power builds a nuclear plant, the 2007 legislation would also require a 200 basis points (ROE) bonus on a plant that could cost billions of dollars and result in customers paying hundreds of millions of dollars more per year.

Some of the harshest criticism of the 2007 legislation has come from one of the Dominion’s largest customers, and one that passes its entire electric bill on to the taxpayer – the Department of Defense. In recent SCC testimony the Navy’s expert witness complained that the 2007 legislation would guarantee Dominion a profit margin of at least 10.55 percent, when he estimated it should be no higher than 9.5 percent.

The Navy witness concluded: “In the current economic environment, with unemployment nearing the 10 percent mark, requiring ratepayers to provide extraordinary monetary rewards to the company — rewards above and beyond a reasonable profit — does not balance the interests of ratepayers [and] the company.”

What is the General Assembly thinking?

For more information go to: www.energyva.org.


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