VA's Overly-Lucrative Monopoly Business Model Wears Thin

Amid Virginia’s budgetary upheaval and ongoing economic pain, our electric system's bloat remains a shock: the SCC’s just-released annual report details more than half a billion dollars in Dominion overcharges to Virginia's millions of Dominion customers. More than ever, we are overdue for a change to a gold-plated monopoly model that is wearing increasingly thin.

VA's Overly Lucrative Utility Business Model at the Cost of Virginia Families is Wearing Thin

(Credit: Creative Commons)

But it doesn’t look like this costliness will change any time soon, with little energy efficiency investment on the horizon and with even more bill increases to come. Given that everyday Virginians are the ones delivering, by law, boffo Wall Street earnings to what should be a non-controversial utility that exisits to simply deliver the most basic of public necessities, it’s time to take a fresh, comprehensive look at just how Virginia landed itself in such an extreme position, where its largest utility has managed to overcharge -- by law -- customers by over double the amount of Virginia’s current COVID budget hole.

Because it certainly doesn't have to be this way: everywhere else in America, the basic, even humdrum provision of electricity by public utilities is a low-stakes, straightforward exercise. But in Virginia, that otherwise simple function has mutated into an economy-sapping, multi-billion dollar rent-seeking long-game by the Commonwealth’s largest corporate contributor of political cash.

The “Virginia way” is often affectionately bandied as a complimentary description of the unique way “we do things around here.” When describing how we’ve come to accommodate Virginia’s largest monopoly, however, the “Virginia way” has a far different  meaning. Our rising electric costs, with an additional 45% increase in Dominion bills by the end of the decade, indicates something is out of whack with the “Virginia way” our largest monopolies operate.

This blog series lays out the blow-by-blow of exactly how we got here. Because when it comes to basic electric service, the "Virginia way" is anything but basic, and is instead quite bizarre and costly, when compared to the straightforward, uncomplicated, and lower-cost way most other states regulate their own monopolies.

If we did the same as the rest of the country here in Virginia, we could expect falling, not rising, bills, and better reflect the record low energy prices available everywhere else in our region.

How Most States Do This (It’s Just Not that Complicated)

Monopoly regulation is a time-tested, straightforward exercise: the state grants a monopoly, permitting a company to sell electricity (or other basic utility, like water), without any competition. In exchange, the state exercises ongoing oversight over that monopoly, to disallow extraction of excessive profits via unfair rates or billing, be it from mismanagement or greed, out of the pockets of “captive” Virginians that have nowhere else to shop for an essential.

That’s the basic principle: a monopoly with guaranteed profit via its exclusive service territory, in exchange for ongoing earnings and "prudency" oversight by regulators at the state commission (the PSC or PUC elsewhere, the SCC in Virginia).

Spoiler alert: that simple, straightforward tradeoff does not exist in Virginia when it comes to Dominion and APCo. The breadth and complexity of the Commonwealth’s regulatory regime is a challenge for even seasoned utility attorneys. The ever-growing word count for the primary section of Dominion-specific regulatory code by which Dominion makes its ever growing profit (Chapter 23 of the larger Title 56 of the state code), is over 61,000 words long, at nearly 110 single-spaced pages. (This does not include the dozens of uncodified acts of assembly, which, although not appearing in the Code of Virginia, nonetheless carry the force of law.) Dominion's Chapter 23 is a labyrinthine hall of self-serving regulatory mirrors, that only Dominion and perhaps 20 experts in Richmond can get through with a full grasp of what is going on in on any of its 110 pages.

Compare that leviathan length with the far more modest and familiar Chapter 10, which contains the traditional utility regulation everyone but Dominion and APCo is still regulated under. Chapter 10's more tried and true electric monopoly regulation provisions are a fraction of the length of Dominion's Chapter 23, clocking in at a mere 13,000 words or 22 single-spaced pages.

Why the disparity between Dominion’s own overcomplicated “Chapter 23” regime and the normal oversight most states rely on and contained in Virginia’s Chapter 10?

Because Chapter 10, like most of the rest of the country, approaches monopoly regulation in a very simple way, boiled down to a simple phrase: the “regulatory compact.”

Under the regulatory compact, the state grants an electric utility (or a gas utility, or a water utility, or in the recent past, a landline telephone or cable company) the aforementioned monopoly to be the only electricity provider in a defined, exclusive service territory.  Customers in that exclusive turf cannot buy electricity from anyone else, protecting the monopoly provider from any competitors. In exchange for that sweet, guaranteed monopoly deal, however, the state retains the right to protect its citizens’ interest, by regulating the monopoly. That is, by making sure the monopoly only charges its customers a fair amount (also known as “just and reasonable” rates) in a way that covers its costs, plus a fair profit (or “rate of return” or “return on equity”) to remain a healthy  business that attracts investors who feel confident they’ll see steady -- if not blockbuster -- returns. The regulator also oversees the large decisions the monopoly makes, like building a new, expensive power plant, to be sure it’s "prudent" and the least-cost manner of delivering electricity.

The dual desire to protect captive Virginia citizens and ensure the monopoly provider is a viable business for shareholder investors is the essence of the regulatory compact: Dominion gets a monopoly, but the Commonwealth, via our SCC, retains oversight authority to prevent Dominion from taking advantage of customers by incurring excess costs (e.g. building power plants or pipelines we don’t need) or charging more on electric bills than is necessary to keep the lights while also rewarding their investors with an appropriate return.

That straightforward, balanced regulatory compact, however, no longer exists when it comes to Dominion. Once-upon-a-time, it did: before it became the nationwide Wall Street juggernaut it is today, Dominion was like any other dependable, even sleepy utility investment (think gas, water, and back in the day, landline telephone service): they provided the reliable, mundane juice at everyone’s power socket, at a normal, reasonable price, in exchange for the steady-as-she-goes revenue and profit to stay in healthy business.

Those normal, reasonable prices were meant to appeal to everyone: customers, who pay them; present investors, who want to know they parked their capital with a going concern, capable of reliably delivering a stable if modest return, and future investors who will be called upon to supply ready capital for prudent investments necessary to maintain a power supply into perpetuity; and the power company itself, which wants both happy customers and happy investors, presumably in equal measure.

So, with Dominion’s ongoing annual overcharging of hundreds of millions and its blockbuster performance on Wall Street, and already-inflated monthly bills expected to rise by over 45% over the next ten years, what happened to Virginia’s regulatory compact?

Ironically enough, it all started with “de-regulation” back at the tail end of the last century, when Virginia very timidly dipped a toe into the de-regulatory waters of the late 90s.  The next section briefly covers that abbreviated era of 1999-2007, and then we’ll move on to cover Dominion’s 2007 “Re-Regulation Act” and its related giveaways, as well as the giveaways of 2013, 2014, 2015, 2017, and 2018.

Taken together, Dominion’s repeated rewrites, overwrites, and now-annual addendums of Virginia regulatory law have taken us out of the realm of normal monopoly regulation. This has morphed Virginia into among the most pro-monopoly states in the country (a dubious distinction celebrated by Wall Street scorekeepers, which regularly bestows upon Virginia the dubious distinction of having a “constructive" (read: profitable) regulations.

Only by understanding how we got here, with a comprehensive review of Dominion’s successive rewrites of its own regulations, can we see more clearly the way forward to healthier, less costly, and cleaner electricity in Virginia.

Sowing the Seeds of Excessive Dominion Profits: 1999’s Dominion-centric “De-Reg Lite”

Just before the new millennium, in the late 1990s, states around the country went on a deregulatory spree in the energy sector. States broke up “vertically integrated” electric monopolies with great zeal. These vertically-integrated monopolies, like Dominion today, controlled not just the smaller wires that deliver power direct to your house and business (the “distribution system”). Those electric monopolies also owned and controlled the upstream power plants that supply the distribution system (“generation”), as well as the high-voltage, interstate power lines that carry wholesale power in bulk amounts (“transmission”).

The deregulatory idea was to unleash competition and lower costs on the generation (i.e. power supply) side by letting anyone with a power plant into that market. The previously integrated utilities, rather than retain clunky, centralized control over all aspects of the market, would only retain a monopoly over the local “poles and wires” distribution system, with its end-use retail customers like you and me. Those end-use customers could now freely choose among competitors who produced the actual juice (generation).

Today, 17 states across the country are “deregulated” in this way, including much of the northeast along with California, Texas, and Montana. all the way from California up to Maine.

Virginia could still be one of those states today.

Virginia’s 2009 flirtation with deregulation did not last, however, because the heavily Dominion-influenced “De-Reg Lite” freed Dominion from any requirement that it actually divest their generation assets as would be expected in any other state that deregulated. (This “only-in-Virginia” precedent is in keeping with the very unique, and ultimately very costly, manner by which Virginia permits its monopolies to do business today.)

Other problems with “De-Reg Lite” included mandatory cost caps on in-state generators, i.e. Dominion, rather than letting the market determine real costs, as well as a lack of any firm deadlines to finalize the state’s transition to complete competition.

As a result, would be competitors that would otherwise spring up in a truly free market never materialized, as they lacked any assurance that Virginia would actually follow through on true deregulation, by forcing Dominion to divest the generation assets that it still retained, and that it must do so by a date certain. Therefore, with no competitors entering the market as they did in other states, Virginia’s brief Deregulation Lite experiment ended.

Crucially (and ominously) for everyday Virginians, this return to regular monopoly status set the stage for Dominion and its friends in the legislature to handcraft and pass as binding law what is very likely the most arcane, handout-littered, electric monopoly-friendly regulatory scheme in the nation. The post-“De-Reg” package of 2007 would have neither the benefit of open competition, nor any assurance of the traditional protections for captive customers that existed prior to deregulation (good ole “Chapter 10” regulation).

In our next blog in this series, we’ll outline the particulars of the 2007 rewrite that still stands today, with its smorgasbord of giveaways and game riggings that converted Dominion’s Virginia territory into the increasingly costly and carbon-intensive cash cow it remains today.

About the Authors

Walton Shepherd

Virginia Policy Director, Climate & Clean Energy Program

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