Electricity Reregulation in Virginia H.B. 3068 and S.B. 1416

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This page features information about H.B. 3068 and S.B. 1416, commonly referred to as electricity “re-regulation” legislation, sponsored by Del. Clarke N. Hogan and Sen. Thomas K. Norment, respectively.  The bills affect Dominion and the provision of reliable electricity service in Virginia. They were given final approval by the General Assembly on April 4, 2007, when the legislature approved amendments submitted by Gov. Timothy M. Kaine. The two identical bills became law on July 1, 2007.

Bill Analysis and Summary   Major Points – HB 3068/SB 1416 – with Governor’s amendments   SCC Powers   Consumer Protections: Re-regulation Act   New Generation   Renewables/Conservation

Bill Analysis and Summary

Below is a brief summary of what the bills accomplish. The additional information on this page is helpful in analyzing the provisions of the legislation.

• The bills end Virginia's 10-year experiment with deregulation and electricity restructuring.
• They restore Virginia to full cost-of-service regulation by the State Corporation Commission.
• They add important new consumer protections that place certain restrictions on a utility's ability to raise its rates.
• They provide incentives for utilities to build new generation to meet growing demand and to add environmental equipment at their power stations — all subject to SCC review and approval.
• They also provide incentives for utilities to invest in renewable forms of energy and demand-side management and conservation programs.

As Virginia's largest electricity provider, Dominion supports these bills because they will help us meet growing demand, keep rates reasonable and make sure Virginia's economy has the power it needs for decades to come.

Contact us if you have any questions or comments. Additional information is available on the General Assembly Web site.

Major Points – HB 3068/SB 1416 – with Governor’s amendments

The final version of HB 3068/SB 1416, approved by the General Assembly on April 4, includes these major provisions:

1) Returns Virginia’s electric utilities to cost-of-service regulation under the State Corporation Commission.

• Not one cent can be added to customer rates without SCC approval – as was the case under traditional regulation.
• With a few modifications, the SCC will have the powers it historically exercised before Virginia’s deregulation process began.
• The SCC will have sweeping authority to set rates and review the books, records and costs of utilities.
• The Commission is authorized to “determine the reasonableness or prudence” of any cost the utility has incurred or may incur.

2) Limits substantially the fuel rate increase affecting Dominion customers in July 2007.

• The final version of HB 3068/SB1416 eliminated the possibility of “rate shock” through a change in Dominion’s fuel factor in 2007 – and helps Dominion’s customers transition back to fuel rates based on actual commodity prices. Dominion’s fuel factor has been frozen since January 1, 2004 by state law.
• The bills limited the 2007 fuel adjustment to no more than a 4 percent increase in residential rates. The cap guaranteed an increase of no more than $3.41 per month for the typical residential customer.
• The rest of the fuel increase that would have occurred during the summer of 2007 was deferred. It will be collected over the period from 2008 through 2010, subject to limits in the bills.
• Customers will pay no interest on the deferral.
• As has been the case for decades, the company is prohibited from earning a profit through the fuel rate. Fuel costs are passed through to customers on a dollar-for-dollar basis after full review by the State Corporation Commission.

3) Mandates a comprehensive "going-in" rate case – for Dominion and all other utilities – in 2009, immediately after capped rates expire. Based on its findings, the Commission may reduce base rates.

• If the Commission finds a utility’s actual returns exceeded its authorized return on equity (ROE) by at least .5 percent, the SCC may order reductions in the utility’s base rates.
• Alternatively, the Commission may order 60 percent of the earnings over this limit returned to customers through bill credits.
• This is a full-fledged rate case, with hearings and multiple opportunities for public comment and input.
• After the initial rate case, the Commission will review all electric utilities’ rates and returns on a regular schedule – every two years.
• Utility earnings above authorized levels will be shared with customers through bill credits, with the earnings returned over a 6 to-12 month period.

4) Provides Virginia utilities with an opportunity to earn returns competitive with those of their peers in the Southeastern U.S. The bills also create limits – based on the U.S. Consumer Price Index - on the returns that the Commission can authorize during its biennial reviews of utilities.

• To help ensure Virginia utilities can compete for capital and attract investors in a highly competitive market, the legislation establishes a floor for the returns on equity (ROE) authorized by the SCC. This floor is based on the average returns for peer utilities in the Southeastern U.S.
• HB 3068 and SB 1416 also prohibit the SCC from setting the authorized return for any utility more than 3 percentage points higher than the peer group average.
• Additionally, the legislation allows the SCC to limit any increase in a utility’s authorized return to the rate of inflation, regardless of peer group average returns. If the average has risen faster than the CPI, the Commission may limit the growth of the authorized return to the CPI increase.
• The legislation directs the SCC to work to maintain electric rates in Virginia that are competitive with those in the peer group states. This recognizes that Virginia’s electric rates, as well as the return it allows its utilities, must be competitive to maintain economic growth.
• HB 3068/SB 1416 also authorize the Commission to adjust a utility’s authorized return to reward it for good performance, including superior customer service, or penalize it for poor performance.

5) Offers powerful incentives for investment in urgently needed new generating resources for Virginia – but gives the Commission broad authority to determine the time frame for the incentives.

• The legislation provides incentives, in the form of higher authorized returns, for major new generation projects, especially those using nuclear, clean coal and renewable energy technologies, approved by the SCC.
• These enhanced returns will help Virginia utilities attract the capital they need to support ambitious construction programs. Dominion Virginia Power’s customers alone will require 4,000 megawatts of new generating capacity during the next decade.
• The Commission has broad discretion – within ranges contained in the substitute - to determine the number of years nuclear and coal projects will be eligible for these incentives.

6) Recognizes that Virginia must meet its growing energy needs in an environmentally sound manner – and provides the Commonwealth with tools to meet that goal.

• The legislation gives all retail customers, statewide, the right to buy “green” power from their incumbent utilities, or, if their incumbents do not offer such a program, from competitive suppliers.
• It also sets up an ambitious Renewable Portfolio Standard program to expand the use of renewable resources to meet the state’s demand for electricity. Participating utilities must pledge to furnish 12 percent of their electricity through renewable energy by 2022.
• Additionally, it creates an ambitious goal for reducing the Commonwealth’s energy usage. The legislation calls for a 10 percent reduction in electricity consumption by retail customers by 2022.
• The SCC is directed to issue its findings on how best to implement this goal by December 15.

SCC Powers

HB 3068 and SB 1416 reaffirm the SCC’s broad powers (Chapter 10) to regulate the rates and returns of Virginia’s electric utilities. The bills make only two significant changes in the SCC’s powers – both designed to help utilities compete for the massive amounts of capital needed for major infrastructure projects.

1) The bills require the SCC to benchmark Virginia utilities’ returns on equity (ROE) on the average returns for their peers in the southeastern U.S.

• Under most conditions, the authorized ROE can be set no lower than the peer group average. These peer utilities include some familiar and respected names—including Duke, Progress, and Southern Company—with some of the lowest rates in the U.S.
• This provision will enable Virginia utilities to compete effectively with their peers for the massive amounts of capital needed for new investments, especially base load generation.
• The legislation also gives the SCC authority to cap the ROE if the rate of growth of the peer group average outpaces the rate of inflation.
• Additionally, the SCC is charged with working to ensure that electric rates stay competitive with the peer group, recognizing that both utility returns and customer rates should be competitive with Southeast peers.

2) The bills provide an enhanced return on investments only for major generation projects. This will also help attract needed investment in base load generation.

• Only critically needed new generation projects would be eligible for the enhanced ROE – not the company as a whole.
• The enhanced ROE would require a two-step process – under the control of the Commission. First, the SCC would approve or disapprove proposed projects. Second, the SCC would determine, based on the specific authorized project, how long the enhanced return should last, in ranges set out by the legislation.

Other than these two provisions, the SCC will retain its traditional powers, including the power to lower rates; the power to review utility costs for reasonableness and prudence; the power to review and make adjustments to utility books; and the power to approve or disapprove utility projects. Additionally, the SCC will conduct a “going-in” rate case in 2009, with full authority to lower rates and order customer refunds.

Consumer Protections: Re-regulation Act

Not one cent can be added to customer bills without approval from the State Corporation Commission.

The legislation provides numerous specific protections:

Thorough and Frequent Reviews of Utility Costs and Books

• The SCC has ultimate authority to determine whether a utility’s costs are prudent and disallow those costs not meeting that standard.
• The SCC will conduct an initial rate case in 2009, with full review and potential for rate reductions. Thereafter, utilities will be fully reviewed every two years.

Rate Reductions

• The SCC has the power to reduce rates in the 2009 rate case and in future biennial reviews if utilities over-earn their authorized return in two consecutive reviews.

Rate-Based Refunds

• The SCC shall return all earnings more than .5 percent above the authorized ROE if rates (including fuel) rise faster than the pace of inflation.

Utility Earnings Sharing

• The legislation assures that consumers will share any increased utility earnings stemming from greater efficiency. Sixty percent of all earnings greater than .5 percent above the utility’s authorized ROE will be returned to customers through bill credits.

Inflation-based check on peer group

• To insure that the peer group average remains a safe benchmark for consumers, the SCC has the authority to adopt an alternative ROE floor, pegged to the rate of inflation, if the peer group average return rises faster than inflation.

Incentives for Superior Utility Operations

• The legislation allows the SCC to reward utilities for superior operations, including customer service, and punish them for poor operations by adjusting ROEs.

Reliable, Reasonably Priced Power for the Future

• The legislation helps ensure Virginia’s electric customers will have adequate, reliable, reasonably priced power in the future.
• The legislation promotes incentives to help Virginia’s utilities attract the significant amounts of capital they need to build new baseload generating units, including nuclear and coal. Baseload units using such lower-cost fuels are the key to holding down electricity prices for decades to come.

Renewable Energy/Energy Efficiency

• The legislation creates strong new incentives to achieve 12% of electric energy sales from renewable sources and sets statewide goal for 10% of electric demand to be met through conservation.

New Generation

Virginia faces a critical need for new baseload power stations to meet growing demand. The legislation promotes construction of such units and helps ensure electric reliability and rate stability for Virginia. Demand is growing faster in Dominion’s Virginia service territory than anywhere else in the 13 states served by PJM, the regional transmission organization which includes Dominion’s service area.

• PJM projects that the peak demand for electricity in Dominion’s service area will grow by almost 1,800 megawatts in just five years — the equivalent, in PJM’s estimation, of adding one million homes to the system.
• Dominion’s own studies project it will need 4000 MW of new capacity in ten years.
  
  
  • This amazing growth will impose severe strains on Virginia’s electric system — which must be met now with major new infrastructure investments.

The old cost-of-service regulatory system did not provide the certainty that investors require to invest the billions of dollars in new capital for generation construction. The new legislation will provide the assurances needed for utilities to undertake these critical new projects.

• Key federal incentives for nuclear power were passed in the 2005 Energy Policy Act.
  
  
  • These incentives include federal insurance and tax credits that substantially reduce construction costs.
  • These incentives go to the first few generators to apply to build new nuclear generation; there are already 14 quickly moving forward.
    
    
• Passage of the legislation ensures that Virginia utilities will be able to compete for these incentives. Delaying action would have left Virginia behind and also left these incentives for other states to enjoy.

To maintain stable electric rates and reliable electric service, Virginia needs to invest in new baseload generation. This generation will produce low-cost electricity to serve Virginia customers. HB 3068 and SB 1416 provide incentives to help Virginia utilities attract the billions of dollars in capital they will need for these projects.

Renewables/Conservation

HB 3068 and SB 1416 help Virginia sustain its growth through expanded use of renewable energy and conservation.

• The legislation provides an additional 2 percent return for utility investments in generating facilities using renewable energy – a strong incentive for construction of such facilities.
• The legislation also sets up a voluntary Renewable Portfolio Standard (RPS) program with the goal of meeting 12% of annual electric energy use by 2022 from renewable sources. This will help establish a growing market for renewable energy in Virginia and encourage investment in this resource.
• The RPS goals are 4% in 2010, 7% in 2016 and 12% in 2022. Participating utilities will be awarded an additional .5% on their authorized rate of return upon achieving and maintaining these goals.
• Eligible energy sources must be consistent with the existing definition in the Virginia Code. "Renewable energy" means energy derived from sunlight, wind, falling water, sustainable biomass, energy from waste, wave motion, tides, and geothermal power, and does not include energy derived from coal, oil, natural gas or nuclear power.
• The program limits most uses of renewable energy credits to new energy sources (built after July 1, 2007), to maximize the positive incentive to build new renewable energy generation in our region.
• To encourage the use of solar energy and wind power, these sources are given double credit towards meeting the RPS goals; however, use of certain forms of biomass is subject to an annual limit.
• RPS implementation will further diversify Virginia’s sources of electricity, contributing to energy security and benefiting the environment.
• Additionally, the bills promotes cost-effective energy conservation. In December, 2007, the SCC reported on a program to reduce overall electric energy demand by 10% through conservation by 2022.
• The 10% reduction in energy use, for Dominion alone, is comparable to the output of a good-sized power station (800-900 MW), and helps existing generating facilities serve a growing Commonwealth, with no additional burden on the environment.