Retire RACs to Keep VA Off the Top-5 Highest Power Bill List
(Third in our blog series examining why Virginia is just one spot away from the Top 5 list of the highest electric bills in the nation, when we could easily lower bills instead, with commonsense reforms that also lower climate pollution.)
As of last month, only five states in the country have higher household electricity bills than Virginia (we just passed Tennessee this year, and due to forthcoming "RAC" costs, we will likely pass Mississippi next year to enter the ignominious Top 5). That’s bad for Virginian families and small businesses trying to stay afloat. And it hits our low-income neighbors worst of all.
With Virginia’s economy now in a perpetually uncertain new normal, inflated energy costs are a commonsense place for lawmakers to trim unnecessary “drag” on our state’s economy. That includes reassessing whether Virginia’s monopoly-friendly rules of the road are unfair to Virginia households.
The indicators are not good, with swelling electric bills that contrast starkly to rock-bottom electric prices on our regional grid, which are currently at their lowest cost in history.
So, why are Virginians missing out on this cheap electricity, and instead paying so much?
A major offender—one that is ripe for reform—is the "RAC" (aka "rider"), a very special arrangement for Virginia utilities enshrined in state law—and a gross aberration from normal utility oversight elsewhere. RACs allow large utilities like Dominion Energy to indiscriminately use a highly-unusual accounting method to tack on extra increases to the bills you and I pay every month, while also avoiding any ongoing oversight or review of those thickly-padded costs.
How the Clever RAC-Rider Racket Works
RAC accounting, in a nutshell, is simply booking unreviewable costs outside of the regularly reviewed big bucket of costs we call “base rates.” RAC/riders are not used by any other state or utility to such an extreme extent as by Virginia monopolies, as doing so directly benefits those power monopolies at the expense of their captive customers. With rising bills and increasing economic strain, it’s growing high time for this to be fixed.
We briefly covered the RAC-racket in our last post (see that post's “Goody # 1: Dominion's Remunerative “RAC” Loophole”), but here’s how Virginia law allows Dominion to extract excessive earnings by tacking on a flurry of RAC surcharges onto our monthly electric bills, above and beyond the advertised per-kWh "low rates" that we are misled into believing is what we pay.
But first, how does normal electric utility regulation typically work elsewhere across America? It’s simple: utilities recover their cost to provide electricity by filing a “rate case,” where they open their books, note all expenses and costs to compare them to revenue, tabulate the necessary per kWh rate to charge to ensure they recover expected costs, and request a corresponding per kWh rate change as needed, all out in the open and before state regulators. (Virginia’s APCo just had one of these “rate cases” to review everything except APCo's RACs). If approved, utilities replace their old rates with new, updated rates, to reflect that most recent calculation of what they need to bill their customers, to cover their going forward costs, plus sufficient profit (or "return on equity") to attract investment as needed.
Pretty straightforward, right? Sadly, not so for beleaguered Dominion customers under Virginia’s one-of-a-kind, increasingly costly monopoly regulations. First, Dominion hasn’t been subjected to a true rate case and earnings review, one with no arcane accounting muzzle placed on the utility watchdogs at the SCC, since 1992.
Just as bad for Virginia's economy as this lack of an unfettered rate case, Dominion has repeatedly increased Virginians’ electricity bills by filing, outside of and in addition to "rates," the exotic RAC instrument for most of its new costs since 2007's regulatory re-write. And per the dictates of Virginia law, the State Corporation Commission has approved nearly every one of the RAC surcharge proposals. These scores of costly rider add-ons enable Dominion to tack a wide panoply of new costs onto our bills, all with no regard to the “big picture” impact on Dominion’s total, all-in cost of providing its basic utility service. That is by design in the 2007 reg re-write, with Virginia law even prohibiting state regulators from considering total, all-in cost-of-service when approving Dominion’s flurry of RAC surcharges (see lines 1063-1064).
This asinine accounting approach is akin to a small business, let’s say a bakery, keeping five separate accounting books, one book for flour purchases, one for buying equipment, another for packaging costs, one for delivery expenses, and the last for employee wages. This business, like our regulated monopolies, keeps a multitude of separate accounting metrics, rather than the standard single accounting book, with all costs-of-doing-business in one place, to balance them against total incoming revenues, to clearly assess how the business is performing.
The RAC approach, instead, is a labor-intensive morass of endless bookkeeping and one-off "true-ups," the perpetual wheel-spinning of which Virginians pay for twice: once by ratepayers for Dominion's accountants, and again by taxpayers for the SCC's accountants, with absolutely zero sense of just how inefficiently our high-cost utility is operating, or why, by simply balancing all costs against all revenues.
Dominion has booked literally dozens of these isolated, one-trick accounting ponies over the last decade, which stack and stick to our electric bills until fully paid off, regardless of their actual usefulness or overall cost-effectiveness.
These RAC-rider one-offs free Dominion from having to publicly defend, under clear-eyed, fully-vested regulatory scrutiny, those scores of one-off increases to Virginians' total electricity bills. Moreover, it has filed such an avalanche of riders that SCC regulators scramble to consider a new one or update an old one on an almost monthly basis, an outrageous and costly regulatory accounting burden no regulator faces elsewhere.
By using this piecemeal, blinders-on approach to tack on additional ratepayer costs outside of the usual “rates,” Dominion bills are now inflated well beyond what it should actually cost to simply provide basic electricity. That is because regulators are, again, literally disallowed by Virginia law to examine how any one new project fits within Dominion’s total cost of providing basic utility service (see lines 1063-1064).
The end result of RACs is akin to those way-too-good-to-be-true cell or cable service offers, where the total bill quickly shoots up once the various fee riders are crammed in. In Dominion’s case, those extra RAC fees make the tired claim that "but we have low rates!” as misleading as a time-share tout: with RAC surcharges comprising a full quarter of a Dominion electric bill (and growing), they cancel out, and then some, our supposedly "low rates," resulting, voila, some of the highest electric bills in America.
Make no mistake, riders do have a useful and very appropriate place under normal utility regulation elsewhere: utilities rightly use them to recoup costs from a single, unusual, unexpected, or larger-than-forecasted event or expense, like restoring the grid after a hurricane. That is an appropriate use of this accounting tool.
But back here in Virginia, Dominion has tacked 20-plus riders onto our bills, the vast majority of which are for run-of-the-mill projects to provide general electric service and which therefore belong squarely in the base rate, alongside all the other reviewable costs of doing business. Virginia could get back to normal-sized electric bills, ones enjoyed by every one of our neighboring states, all of whom enjoy lower bills, simply by returning to normal, cost-of-service based ratemaking.
Otherwise, the steep costs to Virginians will continue: the SCC determined that Dominion collected more than $500 million above its authorized earnings in 2017 and 2018 alone. And in 2020 the average Dominion household paid an average monthly bill of $129 for 1,100 kWh of electricity, which the SCC determined is a 30% increase since Virginia “re-regulated” with excessive RACs back in 2007. Of that 2020 electric bill, RACs comprise 25 percent of the total bill, meaning that a full quarter of Dominion’s electric bills are now literally unreviewable by the state’s watchdogs at the SCC.
That is not just absurd: it's not right, especially in our uncertain, belt-tightening new normal.
So, What's the Fix?
Lawmakers can cleanly and neatly cut our electric bills down to size, starting by simply by ending the runaway use of RAC-rider accounting by our regulated monopolies.
Simple: insert a provision into state code section 56-585.1 that sunsets RAC-based cost recovery for basic generation and related service costs moving forward, and move most existing RAC costs over into base rates where they belong. Only then will SCC watchdogs be fully capable of their charge to fully assess, and lower as appropriate, the rising cost our state economy—and you and me—pay for what should be a humdrum, basic feature of modern life.
(Pro tip: monopolies will howl that without RAC accounting their capital will dry up. When they do, lawmakers should simply ask two questions: first, what other monopoly utilities in the U.S. need RACs to secure capital? (Answer: none.) And second, what other states pay higher household electric bills than Virginia? (Answer: almost none.)
Dominion can—and will—thrive, if we do so (recall that we never, never let our regulated monopolies become unprofitable, much less go out of business). When Virginia gets back to normal, time-tested regulatory oversight under this commonsense reform, and then so too might our economy be assured of a more resilient prosperity.