Energy News

Q&A About the 2007 Electricity Legislation

 

        A number of questions have arisen about how much increases in electric utility bills can be attributed to enactment of energy legislation enacted in 2007 (“2007 Legislation”) and how much such increases can be attributed to other factors, such as the weather, the high cost of fuel consumed in power plants, and higher costs for environmental compliance.  There is no legitimate dispute, however, that: (1) the 2007 Legislation has the effect of making electricity rates higher than they otherwise would be under customary regulation, and (2) the full impact of the 2007 Legislation on rates has not yet been felt.  The longer the 2007 Legislation remains intact, the higher electricity rates will rise above levels that otherwise would be paid under customary legislation.  Below are some answers to frequently asked questions about the legislation and its effects.

(1)  How much have electricity rates risen in recent years?

        In the past four years, residential rates have increased approximately 26% for Virginia Power’s customers.[i]  Over the past several years, rates have increased approximately 60% for Appalachian Power’s customers.

(2) Would electricity rates rise even if customary regulation were in effect? 

        Yes, but the more relevant question is whether the amounts of the rate increases are just and reasonable.   A rise in fuel costs, the construction of new power plants and transmission lines, and more stringent environmental regulations could cause just and reasonable increases under customary regulation.  The 2007 Legislation results in increases that are not just and reasonable because it restricts the SCC’s customary rate-setting authority, so that it can no longer ensure that the amounts of electric rate increases are really necessary to pay for reliable service.

(3) Will rates be higher under the 2007 Legislation than under customary regulation?

        Yes.  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.

(4)  Is it too early to tell whether the 2007 Legislation does, in fact, result in higher rates?

        No.  Evidence already abounds that the 2007 Legislation results in higher rates than those that would result from customary regulation.  For example, in a 2007 rate decision, the SCC determined that the 2007 Legislation did not yet apply in setting the utility’s rates; however, the SCC also determined that, if the 2007 Legislation had applied, the increase in Appalachian Power’s rates would have been three times greater – or approximately $ 72 million per year greater -- than the increase actually found to be just and reasonable by the SCC under customary regulation.[ii]

        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.[iii]  The SCC simply lacked the legal authority to deny the Virginia Power’s request for this rate increase even though Virginia Power had conceded in another case pending at the time that its rates in 2008 had generated a return on common equity of approximately 17%, greatly in excess of the rates of return of around 10% that the SCC, in recent cases, had found to be reasonable for other Virginia utilities. In other words, the statute required the SCC to approve a $77.9 million increase for one type of cost even though the overall level of rates was excessive. 

        Notwithstanding recent rate increases for the state’s two largest electric utilities, their rates do not begin to reflect the full panoply of rate increases in store for customers.  In 2009 alone, Virginia Power filed for 5 separate RACs and Appalachian Power applied for 4 separate RACs.

(5)  Is the 2007 Legislation needed to ensure sufficient generation will be built in Virginia?                 No.  For decades, long before Virginia’s experiments with de-regulation and the subsequent 2007 Legislation, sufficient generation was built in Virginia under customary regulation.  As regulated monopolies, utilities have accepted a legal obligation – monitored and enforced by the SCC -- to provide adequate service.  The SCC has a long history of providing adequate incentives to ensure that necessary generating facilities are constructed. 

(6)  Why not wait until the 2007 Electricity Regulation has been fully implemented? 

        The 2007 legislation already is being implemented, as amply demonstrated by rising rates and numerous separate rate increase applications.  As Virginia’s economy still feels the effects of the economic downturn, now is time to start putting customers and utilities on a more level playing field by returning to customary regulation and restoring the SCC’s authority to set rates that are “just and reasonable” for both the utility and its customers. Waiting will simply ensure that customers pay needlessly higher rates. 

 

 

Evaluating Claims Concerning the 2007 Electricity Legislation 

 

Claims	Virginia Power’s assessment [iv]	What the legislation really does
Ensures new generation will be built in Virginia	·   Prior to the 2007 Legislation, there was a 4600 MW deficit as compared to peak demand.  ·   Recently PJM revised this to show a 5600 MW deficiency in the future (even though there has been a dip in the near term).  ·   Thanks to the 2007 Legislation, Virginia Power is building coal and natural gas units, has two wind units planned, and may build a nuclear unit.	·Under customary regulation, the SCC has the authority to ensure all needed generation is built in Virginia.  ·   The 2007 Legislation adds unnecessarily to the price tag.  ·   Thanks to 100 basis point bonuses on Virginia Power’s rate of return on equity (“ROE”) invested in new coal and natural gas plants, customers will pay tens of millions of dollars more per year than they would under customary regulation.  ·   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 more than a hundred  million\ dollars more per year on the plant.
Avoids deregulation price hikes and has resulted in lower rates	·   The 2007 Legislation avoided de-regulation rate hikes:  70% in Maryland and 30% in Illinois.  ·   Virginia Power’s current rates are lower than they were 2008, including all fuel adjustments.	·   In the past 4 years, Virginia Power’s rates have increased by 26% and Appalachian Power’s rates have increased by 60% ·   Virginia Power’s 2008 rates were inflated by high fuel costs, and its 2009 rates were reduced due to lower fuel costs ·   When fuel costs are removed, Virginia Power’s rates in 2009 are significantly higher than 2008 rates.
Provides Incentives  for efficiencies by utilities	Customary regulation allows for recovery of costs but provides no incentive for efficiencies.	Customary regulation generally affords a utility an opportunity, but not a guarantee, that it will recover its costs and a fair profit.  The 2007 Legislation, in contrast, undermines utility efficiency in numerous ways, by, among other things:  (i) affording utilities an unprecedented “right” to recover every nickel of their costs on vast new power plant construction projects; (ii) providing powerful incentives for utilities to undertake excessive investment in power plants and other facilities; and (iii) guaranteeing excessive profits on utility investments.
Maintains consumer protection	The SCC staff is aggressively litigating Virginia Power’s 2009 base rate case before the SCC.	The SCC staff’s ability to litigate the 2009 base rate case as much as it has is due to the SCC having sufficient time to scrutinize the application. For all future rate increases, the 2007 Legislation essentially cuts this time in half, making it virtually impossible for the SCC to properly scrutinize future rate increase applications.  In addition, the Staff’s ability to fully litigate the 2009 base rate case is constrained by the 2007 Legislation, which has resulted in   Virginia Power seeking 4 rate adjustment clauses (RACs)  in 2009 permitting rate increases even if its overall base rates are excessive.