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Virginia Regulators Set an Example for Ratepayer Accountability

Virginia Regulators Set an Example for Ratepayer Accountability

Last Friday, the Virginia State Corporation Commission (SCC)—a regulatory agency that, among other things, oversees the state’s utilities—imposed a strict performance standard that carries financial consequences if a proposed offshore wind project from the state’s largest utility fails to perform.

This is a huge win for ratepayer accountability, and it has real implications for customers here in Colorado. But first, let me table set for a minute.

Virginia’s electric utilities, much like in Colorado, operate under a vertically-integrated investor-owned utility (IOU) model. That means the same company, shielded from competition by Government charter, owns and operates all levels of the electricity supply chain to include generation, transmission, and distribution to a certain subset of customers.

Under this configuration, utilities operate under a “cost of service” model in which they are guaranteed to make enough money to cover their initial capital investment and operating expenses, plus a guaranteed fixed profit approved by government regulators, typically of around 8-12%.

In other words, each time a utility proposes to build something, whether it be new generation facilities or transmission lines, ratepayers are on the hook for the bulk of the lifetime expense of said build—provided the state regulators approve a utility’s proposal (which they’re usually more than happy to do).

Meanwhile, utility investors enjoy risk free profits.

Enter Dominion Energy and the Virginia State Corporation Commission.

Dominion is the largest power provider in the Commonwealth of Virginia (think of it like their version of Xcel). Dominion has proposed a massive 2.6-GW offshore wind and transmission project slated to cost ratepayers $9.8 billion in upfront capital costs, and a staggering $21.5 billion in total project costs over the estimated 30 year life of the wind farm.

As is tradition, through government largesse the utility was granted a legal right to own, build, and operate the entire project without the need for competitive bidding—all on captive ratepayers’ dime.

But there’s a catch.  According to Utility Dive:

The [State Corporation] Commission ordered Dominion Energy Virginia’s customers to be held harmless for any shortfall in energy production below the project’s expected 42% annual net capacity factor, measured on a three-year rolling average.

In other words, state regulators are holding the utility to its own word with regard to the reliability of the project. Any shortfall in generation capacity, as measured by the utility’s own projections, will have to be covered by the project’s shareholders rather than captive ratepayers.

Naturally, the utility is furious about being held to its own word in order to receive its government-granted blank check. Here’s Dominion CEO Robert Blue per Utility Dive:

The performance guarantee creates an unprecedented layer of financial one-way risk for the utility and is “inconsistent with the utility risk profile” expected by investors, Blue said.

 

“There are obviously factors that can affect the output of any generation facility, notwithstanding the reasonable and prudent actions of the operator, including natural disasters, acts of war or terrorism, changes in law or policy, regional transmission constraints or a host of other uncontrollable circumstances,” Blue said.

Blue expresses concern about his “utility risk profile”, but what about the risk profile of ratepayers who depend on reliable power and yet are expected to pony up for a massive boondoggle of intermittent generation?

I previously covered the failure of wind energy in Texas earlier this year when the state’s turbines were producing at only 8% capacity and nearly brought the electric grid to its knees during a scorching heatwave.

If ratepayers are expected to foot the bill for massive green projects that are only expected to work less than half the time (by the utility’s own admission!), then it isn’t too much to ask for shareholders to have some financial skin in the game when their gold-plated cash cow fails to produce.

Call it the social cost of failure. Or the renewable risk premium. As William Shakespeare noted, “that which we call a rose/by any other name would smell as sweet.”

The Virginia State Corporation Commission should be applauded for standing up for ratepayer concerns. And here in Colorado, the Public Utilities Commission (PUC) should take notice. So long as state officials continue to push headlong into wind and solar buildouts, which monopolies like Xcel are more than happy to accommodate (it’s all gravy for them after all), Colorado consumers must be shielded financially from the cost of intermittency.