Little-known fees that state regulators approved for Dominion Virginia Power to pay for power plant construction and conversion projects now account for nearly 9 percent of a typical customer’s monthly bill.
The base rate that Dominion Virginia Power is allowed to charge customers for electricity, and that provides the regulated monopoly with its profit margin, has remained unchanged since the 1990s. Dominion Virginia Power persuaded the Virginia General Assembly earlier this year to freeze its base rate until 2022 in exchange for less scrutiny from the State Corporation Commission, which reviews earnings for the utility.
State regulators also allow the utility to charge a fuel factor that compensates for the varying costs of producing electricity, as well as an adjustment for the cost of electricity transmission.
But the relatively small, tacked-on charges called riders have been the largest driver of increases in the utility’s rates since 2007, when Virginia ended its eight-year experiment with deregulation.
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Since then, the bill for a typical residential consumer using 1,000 kilowatt hours per month has increased more than 20 percent, with more than half of that increase coming from the generation-rate riders, which have been allowed since 2009.
“These riders on an individual basis look innocent enough, but when you look at them collectively they are having a significant impact on the bill,” said Ken Schrad, a spokesman for the State Corporation Commission.
The riders allow Dominion Virginia Power to recover expenses for specific projects without changing the base rate, and the SCC has to consider them on their own merits, without gauging the company’s overall level of earnings.
The riders currently approved are paying for the construction of the Virginia City Hybrid Energy Center in Wise County, the Brunswick County Power station, the Warren County Power Station and the Bear Garden Generating Station in Buckingham County, as well as biomass conversions at other facilities.
Although the utility’s base rate provides for a regulated rate of return up to about 10 percent, the riders guarantee a 10 percent return. With the base rate frozen, new riders offer Dominion Virginia Power an opportunity to increase its profitability.
Fuel and transmission rates also change, but they are pass-through charges that do not allow for a profit margin.
Dominion Virginia Power is in the process of getting approval to build another gas-powered generating plant in Greensville County and for construction of the planned Remington solar farm in Fauquier County, with riders to pay for the new construction.
Rate riders are regularly adjusted over the life of the facilities, depending on their cost and performance. Four adjustments for already-built power plants, proposed to take effect in 2016, would have a net effect of raising the average bill by about 50 cents.
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The SCC recently rejected one requested rider, to pay for a Dominion Virginia Power plan to bury its most vulnerable power lines.
The SCC’s rejection noted that customers “face the continuing pressure of higher rates in the future for increases” related to riders.
Del. G. Manoli Loupassi, R-Richmond, who sponsored the underground-lines legislation, said he didn’t want to second-guess the SCC’s decision. He said neighborhoods in his district are affected every time there’s a storm, so burying the lines to reduce outages and save money on service crews makes sense.
And, while he commended Dominion Virginia Power for having low rates compared with the rest of the country, Loupassi said the General Assembly and SCC will need to keep an eye on any rate-rider increases that start to push customer bills higher.
“That’s obviously something that we’re going to pay attention to and would be of concern to us,” Loupassi said. “Part of the reason why we froze the rates was to provide stability to the customers for the next few years.”
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Dominion Virginia Power officials say customers would have to pay for the new plants one way or another: If not for the riders, they say, the company’s base rate would have had to increase substantially.
“We’re building infrastructure that’s much needed,” company spokesman David Botkins said. “We’re in a building mode and have been for some time.”
Dominion Virginia Power officials say the setup allows the utility to begin recouping its investment in smaller chunks as it builds new plants, instead of the old way that required it to finish construction, and would result in a larger increase for power bills.
That system also made it more difficult to get financing and complete needed projects, they say. And they note that Dominion Virginia Power’s rates remain 20 percent below national averages.
With the new federal Clean Power Plan requiring utilities to build cleaner power sources, more rider requests are likely on the horizon.
“We have to build these plants because Dominion is a net importer in Virginia,” Botkins said. “Growth is on the incline. We have to meet the demand. You can only meet it one of two ways: build it or buy it. And buying it on the open market is more expensive than building it. The rider system has a lot of upside for everybody, to include the commission, to include the customer and to include the company.”
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Earlier this year, SCC staff and an expert witness for the Virginia Attorney General’s Office testified that Dominion Virginia Power’s base rates are excessive. SCC staff said customers should get a $64 million refund for overpaying in 2013 and 2014.
Dominion Virginia Power denies it overcharged and said it plans to rebut the claims in testimony to the SCC.
SCC commissioners will determine later this year whether Dominion Virginia Power’s rates were too high in those years. But after that, the utility’s base rate — and the SCC’s ability to order refunds — will be frozen until 2022.
The Sierra Club opposed Dominion Virginia Power’s base-rate freeze deal with the General Assembly.
“We’re going to continue to see rate increases while the SCC’s hands are tied related to refunds,” said Sierra Club of Virginia Director Glen Besa, an outspoken critic of Dominion Virginia Power. “We kept trying to tell the legislature that (freezing base rates) didn’t set a ceiling. It set a floor.”
Albert V. Carr, a professor at Washington and Lee University School of Law who teaches a course in utility regulations, said the riders for new power plants seem like a good way for the utility to recoup its money and allow the SCC to focus only on those figures instead of looking through the company’s entire portfolio every time they approve a change.
“What the legislature may have had in mind is that going the rider route will give the regulator a much clearer focus on what amounts to additions to those base rates,” said Carr, who has 40 years of experience in the field, including 20 years with Duke Energy.
“It eliminates some of the problems we’ve had in the past with regulation. You don’t have to take the whole car apart to fix the window,” Carr said.