The Christmas Tree: Dominion’s Rent-seeking “Re-Reg" of 2007

Despite the impenetrable thicket of dependent clauses, jargon, "notwithstandings," and "subject tos," that blinds even well-informed readers, any policymaker who cares about Virginia’s economy, energy policy, climate change, or basic consumer protections needs a working understanding of Virginia’s highly-unusual and highly-overpriced 2007 “Re-Regulation” package.

That monopoly-penned law is also known as “Chapter 23,” Virginia’s “Electric Utility Regulation Act,” and is nested in the larger Title 56.

This second-in-a-series blog attempts a brief, user-friendly tour of a few of its more eye-popping highlights, to help understand how our once sleepy, run-of-the-mill, steady-as-she-goes basic utility service provider, Dominion Energy, came to be a Wall Street juggernaut. That investor-oriented growth is based on unnecessarily inflated monthly bills collected from millions of everyday Virginians, ever since the 2007 "Re-Reg" law rigged up our monopoly’s lucrative business model in a manner so exotic, that it's not seen in any other regulated American state.

The last entry in this blog series on Virginia’s zany, expensive regulatory model detailed Virginia's traditional regulatory approach we used to rely on (and which is still standard-practice in other regulated states), and also covered our state's brief flirtation with a monopoly-friendly version of “deregulation.” Regardless of whether that “Deregulation Lite” of 1999-2006 was designed by industry lobbyists to fail (as it did), Dominion clearly held a firm pen on the even more elaborate 2007 “Re-Regulation” package. That law, sponsored by Senator Tommy Norment, passed a notably pliant legislature on a lopsided vote of 120-17. Compared to Chapter 10, which was the law of the land before the abandoned “De-Reg Lite” experiment, Dominion’s even more exotic creature of 2007 added 10,000+ additional words into state Code, with 200-word clauses of accounting legerdemain quite common; some sentences even stretched to over 300 words  long (see lines 1129-1148 for an eye-glazing example).

A dive into that dense legalese reveals that De-Reg Lite's dodging of any forced divestment of generation assets in 1999, to avoid real competition, was just a warm-up act:

The 2007 “Re-Regulation” package is Dominion’s true magnum opus, with a full complement of profit-rakers, spelled out in jaw-dropping (if arcane) detail the full capture of Virginia’s regulatory process at both the Legislature and over at the State Corporation Commission (SCC). The lobbyist-crafted package forks over everyday Virginians’ cash on a monthly basis, at such a rapid clip that Dominion bills, for straightforward, basic utility service, have increased by almost 30% since 2007 (with APCo’s increasing even more, by almost 64% percent).

With the passage of that long-and-winding 2007 law, Virginia in effect is not a “traditionally regulated" state. Instead, the 2007 legislature meekly acquiesced to a rent-seeking, Frankenstein-like cobbling together of economy-sapping, anti-consumer handouts. The result is a game-rigging far from the usual “regulatory compact” between a state and its designated monopolies, and instead enshrines in state code a byzantine, state-sanctioned Dominion profit-spinner.

Whatever 2007’s “Re-Reg” might be called, it was certainly not a return to the good ole’ Chapter 10 regulatory compact that we had pre-1999, and which is still the standard, time-honored approach not only in other regulated states, but also for most Virginia monopolies that are not named APCo or Dominion.

Dominion profit spinners are tucked into so many nooks and crannies of their 2007 “Re-Reg” package, that listing just a handful of them is the only practical way to convey their extent, creativity, and chutzpah.

So, here are the Top 5 monopoly goodies of Dominion’s 2007 Re-regulation Christmas Tree.

Goody # 1: Dominion's Remunerative “RAC” Loophole (lines 957-1085).

Goody # 2: The Free, Extra Cash for Dominion to Build Very Basic Utility Projects (lines 1024-1040).

Goody # 3: The Dominion Incentive to Overcharge Virginians, because It Can Keep All Overcharges Up to Its 0.7% Overcharge Limit (lines 1129-1145).

Goody # 4: The Additional Incentive to Overcharge Virginians beyond Goody # 3’s 0.7% Limit, Because Dominion Automatically Keeps Some of Those Overcharges As Well (lines 1113-1119).

Goody # 5: The SCC Could Not Reduce Excessive Rates, Unless Dominion Over-charged Virginians in at Least Four Consecutive Years (lines 1113-1119).

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Goody # 1: Dominion's Remunerative “RAC” Loophole (lines 957-1085).

Of the many perverse features in Dominion’s 2007 Christmas Tree, particularly striking is its indiscriminate deployment of the “Rate Adjustment Clause,” or “RAC.”

That pricey feature – used modestly by utilities in other states in very unique circumstances, such as for one-time mega-storm expenses – is so regularly used here, that RAC surcharges are the fastest-swelling component of our Dominion electric bills, a phenomenon totally unique to Virginia as dictated by 2007's law.

RACs are essentially surcharges (which is why they are also often called "riders"). RAC/riders are levied outside of "base rates," which is that large pot of basic ongoing expenses and costs that utilities draw from, to stay in business, and by which regulators set the "rates" utilities may charge in order to stay solvent and attractive-enough to investors who like to see a steady return securitized by the monthly electric bills that are the birthright of any electric monopoly.

By exisiting outside of the usual time-honored "base rate," RACS are now the regular way Dominion tacks on extra customer changes, outside of regular, ongoing rate reviews that occur everywhere else in the normal course of monopoly-regulation in other states. With RACs, rather than the traditional placement of significant costs of operating its system into “base rates,” which are periodically reviewed and potentially reduced if they get out of whack with a utility’s total costs.

Dominion RACs, by contrast, once approved, immediately hit your bill and are essentially shielded from further review. The 2007 law is very explicit on this “blinders on” approach, stating that RAC proposals must be reviewed “without regard to the other costs, revenues, investments, or earnings of the utility” (line 1064). These RAC fees must therefore be paid by customers, even when, as with Dominion’s VCHEC plant, the project ends up being a bad investment and possibly shuttered early, and therefore is undeserving of further payment. In other words, all risk for Virginians, all guaranteed reward for Dominion.

Unsurprisingly, with the proliferation of Dominion’s unreviewable RAC surcharges, “base rates” now comprise only just over half of a Dominion electric bill: RACs, on the other hand, are now Dominion’s preferred vehicle with which to tack on large monthly surcharges for large new projects.

Importantly, this over-reliance on RAC surcharges, rather than putting costs into rates like other regulated states do, is why Dominion can no longer credibly point to “low rates”: “rates” are now only one dwindling fraction of Dominion’s ever-swelling bills. (The other primary components being RACs, of course, and fuel charges, to pay for fracked gas, coal, oil, wood, and uranium, to run any non-renewable energy or battery-storage power plant).

Therefore, the oft-heard Dominion exclamation that “Dominion has low rates!!” is a Siren-like dissemblance. Virginians pay monthly bills, not rates. Therefore, Dominion’s claim of “low rates,” excluding as it does tacked-on RAC surcharges that exist outside of “rates,” is akin to cell phone ads that blare about impossibly cheap-sounding contracts. After you’re on the hook, costs rapidly swell, with the “cramming” of surcharges, data charges, taxes, and extras are added to the initially good-sounding advertised “base” cost, the total of which suddenly makes the initial promise of inexpensive cell service inaccurate and misleading. In other words, if Dominion’s “we have low rates!” seems too good to be true, in a state with the 7^th-highest monthly bills, that’s because it is.

RACs are also a unique, Virginia style departure from traditional ratemaking, in that RAC charges for any project are immediately charged to customers upon the SCC’s blinders-on approval, rather than the typical practice elsewhere, when costs may only be charged upon completion of a “used and useful” project. Virginia RACs are also collected on the backend, even when the underlying project is a bad investment. That is, even if the project is a boondoggle, like VCHEC, customers are on the hook to pay the entirety of the project via a RAC, regardless of whether the project is “used and useful” and still serving customers.

For those that are morbidly curious, here’s a list of Dominion’s dozen-plus RACs, nearly every one of which represents a non-reviewable monthly customer surcharge outside of rates.

Goody # 2: The Free, Extra Cash for Dominion to Build the Most Basic of Utility Projects (lines 1024-1040).

Buried in an initially-inscrutable word salad, Dominion also sprinkled their 2007 “Re-Reg” package with profit boosters, aka “bonuses,” to push their profits on spending customer dollars beyond their typical ~9-11% profit margin. Dominion collects bonus profits if they choose to build, subject to rarely-withheld SCC approval, just about any of the usual, humdrum power plants you might expect a typical utility to build in or soon after 2007, including your run of the mill coal or gas plant, which in 2007 were the standard means of providing basic electricity supply, with no profit “bonus” necessary.

Rewarding monopolies with free, extra cash from everyday Virginians in exchange for standard-operating-procedure is akin to awarding a year-end bonus to a lawyer for not committing malpractice, or to a firefighter for not napping through a housefire.

The extraneous reward for electric utility business-as-usual is phrased innocuously in the statute as an “enhanced rate of return” or additional “basis points.” (Subsequent legislation sensibly eliminated these profit boosters for most future projects.)

Dominion has taken great advantage of this free-cash-from-Virginians-for-doing-our-job handout, investing billions in a parade of new coal and gas power plants since 2007, thereby extracting from Virginians a bonus subsidy of an extra 1.0-2.0% profit (above and beyond their typical 9-11% rate of return) for each of these standard-issue projects.

Consider the VCHEC coal plant, for example, a very young coal plant (nonetheless already such a clunker and bad investment that it sits idle over three-quarters of the year, and is paid for by one of Dominion’s more egregious RAC surcharges, of about $5 per month on every Dominion customer’s monthly bill: see Goodie # 1 above). The total cost to build VCHEC, which came online in 2012, was about $1.8 billion, and the total construction and ongoing operations costs will be recovered from customers over the lift of the facility. In 2012, the Virginia Attorney General’s Office estimated that the 1.0% bonus applied to the VCHEC facility costs will result in $146 million in extra charges for Virginia consumers by 2023, when the bonus expires.

In any other regulated state in America, building something to meet customers’ basic need for a basic utility, be it electricity, water, gas, or once upon a time, phone, is simply standard operating procedure.  In Virginia, however, after Dominion’s 2007 “Re-Reg” coup, providing basic service apparently merits a gold star, in the form of a bonus profit, paid for every month by me and you.

[Note that lawmakers have since come to their senses, and struck from the law any new profit-sweeteners, moving forward -- but only after Dominion already locked in a raft of  unnecessary bonuses that we all continue to pay.]

Goody # 3: The Dominion Incentive to Overcharge Virginians Because It Can Keep All Overcharges Up to Its 0.7% Overcharge Limit (lines 1129-1145).

Under Virginia’s sui generis “Re-Reg” law of 2007, Dominion is allowed to overcharge customers in monthly bills by up to 0.5% (now 0.7%), and keep all of those excess charges.

That is, when Dominion overcharges customers in excess of “70 basis points,” or 0.7%, Virginia law permits Dominion to keep all of those overcharges, up to a ceiling of 0.7%.

For example, assume that Dominion is authorized by the SCC to recover a rate of return (or profit) of 10.0%. In this case, Dominion would be irrational if it didn’t attempt to over-bill customers to actually recover a total rate of return of at least 10.7%.In that situation, the updated 2007 law permits Dominion shareholders to keep 100% of the excess earnings that are between 10.0% and 10.7% (not to mention a portion (30%) of excess earnings on top of that: see Goody #4 below).

Goody # 4: The Additional Incentive to Overcharge Virginians beyond Goody # 3’s 0.7% Limit,  Because Dominion Automatically Keeps Some of Those Overcharges As Well (lines 1105-1107).

When Dominion crosses the 0.7% overcharging ceiling (or “earnings band”) specified by Goody #3 above, Dominion still yet keeps 30% of any excess overcharges above and beyond 0.7% overcharge ceiling.

Catch that? Neither, apparently, did many lawmakers in 2007.

Put another way, before Dominion is required to refund any of the excess dollars it overcharges in monthly electric bills, Dominion must first over-collect in excess of 0.7% above its authorized rate of return.(Anything overcharges below that, no customer refunds, remember? See Goody Number Three above.) But, even then, Dominion keeps not only that first 0.7% in overcharges, Dominion also gets to keep a bonus 30% of the overcharges that exceed their underlying bonus 0.7% overcharging threshold.

Bottom line, by law, Dominion always keeps a significant portion of the dollars it wrongfully overcharges its captive customers in Virginia.

Goody # 5: The SCC Was Disallowed from Reducing Excessive Dominion Rates, Until Dominion Over-charged Virginians at Least Four Years in a Row (lines 1113-1119).

In the rest of America, regulators typically order monopoly rate reductions when it finds a monopoly collected excess profit as a result of rates set too high. However, in Virginia, Dominion must first be found to be overearning in two consecutive biennial rate reviews.

In other words, after 2007, Virginia law literally incentives Dominion, not only to overcharge by up to 0.7% every year, per Goody # 3 above, it also had an incentive to exceed that 0.7% limit every other biennial review period, per Goody # 5: the SCC could not reduce their rates unless they exceed 0.7% two review periods in a row.

[Note: 2018 amendments to 2007 Re-Reg law sensibly changed this: rates can now be decreased after just a single finding of excess profits above the 0.7% “overearnings band.” In the 2021 review, however, the rate cut for Dominion is limited to just $50 million; we’ll cover this Dominion giveaway in a future installment.]

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The five varieties of Dominion giveaways described above demonstrate the extent to which not only is Virginia’s regulatory scheme quite exotic to the extent it differs from other states’ more straightforward rules-of-the-road to ensure low costs for a basic, everyday service. The smorgasbord also demonstrates the extent to which Virginia’s model is tilted in Dominion’s favor, and offers one clear answer to why we have the 7^th highest electric bills statewide, with an inequitable, higher-than-average low-income energy burden to boot.

The "Re-Reg" law works very well for Dominion, with its post-2007 spending and earnings spree ongoing, as far as the eye can see.

But the legislative giveaways to Virginia’s largest corporate campaign cash contributor did not stop in 2007.

In the next installment of this series, we’ll explore how the legislative giveaway continued well beyond Dominion’s 2007 magnum opus.