RD52 - Commission on Electric Utility Regulation Executive Summary of Interim Activity and Work - January 2016


    Executive Summary:
    The Commission on Electric Utility Regulation (the Commission) is established pursuant to Chapter 31 (§ 30-201 et seq.) of Title 30 of the Code of Virginia. The Commission is charged with:

    • Monitoring the work of the State Corporation Commission (SCC) in implementing Chapter 23 (§ 56-576 et seq.) of Title 56;

    • Examining generation, transmission, and distribution systems reliability concerns;

    • Establishing one or more subcommittees for any purpose within the scope of the duties prescribed to the Commission; and

    • Reporting annually with such recommendations as may be appropriate for legislative and administrative consideration in order to maintain reliable service in the Commonwealth while preserving the Commonwealth's position as a low-cost electricity market.

    Senator Thomas K. Norment, Jr. chairs the Commission and Delegate Jackson H. Miller serves as its vice-chairman. The Commission's other members are Senators John C. Watkins, Richard L. Saslaw, and L. Louise Lucas and Delegates Terry G. Kilgore, Kenneth R. Plum, Ronald A. Villanueva, and Matthew James.

    This executive summary of the interim activity and work of the Commission is submitted pursuant to § 30-207 of the Code of Virginia and is provided in lieu of an annual report.

    The Commission met on July 13, 2015, for the purpose of receiving an update on recent activities by investor-owned electric utilities and reviewing two items of legislation referred to it during the 2015 Session.

    A. Recent Activities by Investor-Owned Electric Utilities

    Dan Weekley, Vice President for Corporate Affairs at Dominion, reported to the Commission that, as a result of Dominion's implementation of Senate Bill 1396 of the 2015 Session, customers' rates were reduced on April 1 to reflect declining fuel prices. The monthly bill for a typical residential consumer using 1,000 kWh declined 5.6 percent to $109.48, 20 percent below the national average, 30 percent below the East Coast average, and 41 percent below the average of the rates of states participating in the Regional Greenhouse Gas Initiative (RGGI). The rate for an industrial customer with 1,000 kW demand and 650,000 kWh of usage fell 9.8 percent, from 6.1 cents/kWh to 5.5 cents/kWh. This rate is 40 percent below the national average, 55 percent below the East Coast average, and 64 percent below the average of the rates of states participating in the RGGI.

    Mr. Weekley also lauded his company's improvements in reliability. Excluding outages due to major storms, the average number of minutes a customer was without service, based on a three-year rolling average, fell to 111 minutes per year for 2012-2014. Part of the increase in reliability was attributed to the utility's 10-year strategic undergrounding program, under which it will spend approximately $15 million annually.

    With respect to new generation capacity, Mr. Weekley brought the Commission up to date on numerous projects that are under construction or planned, including natural gas fired combined cycle facilities in Brunswick and Greensville Counties and a solar facility in Remington. Per its Integrated Resource Plan filed July 1, 2015, Dominion is evaluating four alternative plans (solar, natural gas co-firing of eight coal powered units, additional nuclear, and wind) that will comply with the pending federal Clean Power Plan regulations.

    According to Mr. Weekley, the Commonwealth currently sits "in a doughnut hole" with regard to natural gas infrastructure, as demonstrated by the fact that the price paid by Dominion for natural gas on several occasions in February 2015 was up to 14 times higher than prices at the Gulf Coast hub. He reported that the route application for the Atlantic Coast Pipeline will be filed with the Federal Energy Regulatory Commission (FERC) in the fall of this year, and the pipeline is expected to be in service in late 2018. The pipeline is expected to bring 8,800 construction jobs, $243 million in annual energy savings, over $10 million in annual property tax revenue, and economic development. The percentage of miles in the pipeline's corridor for which surveying permission has been granted for Virginia localities ranges from 36.1 percent in Nelson County to 99 percent in Southampton County. In response to questioning from Senator Watkins, Mr. Weekley denied that the company had any plans to export natural gas transmitted via the pipeline to foreign customers.

    Ron Jefferson, Manager of External Affairs for Appalachian Power Company (APCO), focused his remarks on the utility's investments in generation facilities. APCO is in the process of converting two coal units at Clinch River to natural gas. The utility has finalized several power purchase agreements for wind and hydro energy. APCO's 2015 Integrated Resource Plan reveals that between 2015 and 2029, the share of the company's generating capacity from coal facilities is expected to decline from 72 percent to 52 percent. The decline will be offset by expected increases in energy from natural gas (from 14 to 23 percent) and wind (from one to 15 percent).

    Other major investments being undertaken by APCO include the expansion of transmission capacity at its Cloverdale Station and the implementation of its distribution line vegetation management program, which will reduce outages from tree damage. Mr. Jefferson reported that the utility's residential rates have remained stable over the 2010-2015 period, during which rates dropped from 11.56 cents/kWh to 11.49 cents/kWh. Its industrial rates, which average about 6.5 cents/kWh, were reported to be in line with the rates charged by utilities in North Carolina.

    B. Legislation Affecting Municipal Electric Utilities

    1. Senate Bill 1396

    Senate Bill 1396, which was passed by with letter in the Senate Local Government Committee, was patroned by Senator Bill Stanley, would authorize Danville and Martinsville, by ordinance adopted by an affirmative vote of two-thirds of all of its members, to abolish all or part of its utilities, sell all or part of its utilities (including all of its related assets) or transfer the functions thereof, to an investor-owned utility, a merchant utility service provider, or a cooperative regulated by the SCC, if it is found to be in the public interest. The bill contains a second enactment requiring the Commission, the SCC, and the Attorney General to report to the House and Senate Commerce and Labor Committees by November 22, 2015, on tax practices, return on investment practices, purchase power practices, regional congestion pricing practices, and general municipal utility efficiencies that have led to higher costs for some municipal electric utility and natural gas consumers compared with average statewide consumers.

    The Commission was advised that SB 1396 as introduced raises several legal and practical issues, including the apparent conflict with the requirement of Article VII, Section 9 of the Constitution of Virginia, which prohibits a city or town from selling its electric works except by vote of three-fourths of all elected members of the governing body. To the extent that the genesis of the legislation was concern with the electric service rates of municipals, staff provided comparisons of the residential, commercial, and industrial rates of Virginia's investor-owned, distribution cooperative, and municipal electric utilities. The figures for residential bills, based on a hypothetical customer with monthly usage of 1,000 kWh, show that of the 10 most expensive utilities, eight are cooperatives and two are municipals. Of the 10 least expensive utilities, eight are municipals, one is a cooperative, and one (KU) is investor-owned.

    For a hypothetical customer in the commercial class with 40 kW demand and consumption of 10,000 kWh, of the 10 most expensive utilities, five are cooperatives and five are municipals. Of the 10 least expensive utilities, four are cooperatives, three are municipals, and three are investor-owned.

    Tables were prepared for industrial customers at two usage levels. For the first, with a hypothetical customer in the industrial class with 1,000 kW demand and consumption of 400,000 kWh, seven of the 10 most expensive utilities are cooperatives and three are municipals. Of the 10 least expensive utilities, five are municipals, two are cooperatives, and three are investor-owned. The second level of industrial usage was for a larger hypothetical customer with the same demand (1,000 kW) but with consumption of 650,000 kWh. Of the 10 most expensive utilities, the distribution is the same as with the smaller industrial users: seven are cooperatives and three are municipals. Of the 10 least expensive utilities, six are municipals, one is a cooperative, and three are investor-owned. Seven of the 16 municipals did not have industrial customers in the two levels of usage.

    2. Senate Joint Resolution 300

    Senate Joint Resolution 300, which was also patroned by Senator Stanley, directs the Commission to study whether the SCC should have the authority to regulate the rates of municipal electric utilities. The measure was referred to the Commission by letter from the Senate Rules Committee. The resolution specifically tasks the Commission with determining:

    1. Whether SCC regulation or review of the rates charged by municipal electric utilities would be permitted under the Constitution of Virginia;

    2. If so, whether the General Assembly should direct the SCC to regulate such rates; and

    3. If not, whether the Constitution of Virginia should be amended to permit the SCC to regulate the rates charged by municipal electric utilities.

    The General Assembly's authority to make municipal utilities subject to regulation by the SCC was the subject of a formal opinion letter issued by the Attorney General to Senator Frank Wagner on July 2, 2015. Under Article IX, Section 2 of the Constitution of Virginia, the SCC, subject to requirements prescribed by law, is given the power and is charged with the duty of regulating the rates, charges, and services of electric companies. Article IX, Section 7 of the Constitution of Virginia states that the term "corporation" or "company" as used in Article IX shall exclude all municipal corporations, other political subdivisions, and public institutions owned or controlled by the Commonwealth. The Attorney General opined that Article IX, Section 7 is not a limitation on the power of the General Assembly, and that therefore the General Assembly may enact a general law requiring the SCC to regulate the rates, charges, and services of electric utilities operated by municipal corporations.

    Staff noted that if the Commission was persuaded that the Attorney General's opinion resolved the question of whether the General Assembly could direct the SCC to regulate municipal electric utilities, the question of whether it should do so poses a number of complex issues, ranging from whether the SCC's role would be to review the reasonableness of legislative decisions of municipal governments in setting rates to questions of what would be the appropriate methodologies to be used by the SCC in setting rates of a municipal utility.

    Senator Stanley recounted that the high electric rates charged by Danville and Martinsville were largely the result of their membership in Ohio-based American Municipal Power (AMP). AMP's ventures with the Prairie States and Miegs County plants, coupled with fees levied by systems operators as a result of grid congestion, have contributed to Danville's comparatively expensive power. High residential rates are a substantial burden on residents of a region with high rates of poverty and unemployment, and high commercial and industrial rates are preventing new businesses from locating in the area and threatening the viability of businesses that are currently operating in the city. Senator Stanley noted that Danville has explored the possibility of transferring a portion of its electric utility to APCO and explained that one objective of SB 1396 was to give municipalities the flexibility to dispose of part, but not all, of its utility.

    Brett Vassey of the Virginia Manufacturers Association spoke in favor of Senator Stanley's legislation. He suggested that the disparity in electricity prices for industrial and commercial users served by municipal utilities is not limited to Danville and that the municipalities would benefit from the SCC's resources. Mr. Vassey criticized rate designs that resulted in funds for the budgets of the localities and charging higher rates to customers outside the limits of the municipality. Other issues identified by Mr. Vassey as justifications for SCC oversight include dealing with regional transmission organizations, transparency in accounting procedures, conflicts of interest, cross-class subsidization, and contracting procedures. Economic development was also identified as an issue of concern.

    Connie G. Nyholm, co-owner and managing partner of Virginia International Raceway (VIR), testified that although her business was located in Halifax County, it was within Danville's service territory. Her support for SB 1396 was based on concerns with the high rates charged by the municipal utility. The ability of sites in North Carolina or other locales served by lower-cost electric utilities poses a barrier to the ability of facilities located at or near VIR, including the Global Center for Automotive Performance Simulation, the National Tire Research Center, and the Virginia Motorsports Technology Park, to attract new firms. Donnie Stevens of DVF Foods reported on the discrepancy in the costs of electricity provided to two of his company's facilities. While the facility in APCO' service territory is charged 8.2 cents/kWh, the facility service by Danville's municipal utility is charged 10.3 cents/kWh.

    Thomas Dick testified that none of the members of the Municipal Electric Power Association of Virginia supports SB 1396 or SJR 300. Local regulation of municipal utilities, he asserted, has worked well for a long period of time, and the systems under local government control do not view the system as being broken. The residential rates charged by nine of the 16 municipal electric utilities are lower than the rate charged by Dominion. Mr. Dick conceded that Danville has higher industrial rates, but noted that the city council has rejected proposals that it sell or otherwise dispose of the system. Municipal utilities, it was noted, have greater flexibility in dealing with certain types of issues than do utilities regulated by the SCC. There is not necessarily a correlation between the rates charged by a utility and who sets those rates.

    Mr. Dick introduced Brian O'Dell, general manager of the Harrisonburg Electric Commission, who noted that most municipal electric utilities purchase power at wholesale rates under contracts that are subject to regulation by the Federal Energy Regulatory Commission. Mr. O'Dell observed that municipal utilities are very reliable and generally have faster service outage restoration than neighboring utilities. The 16 public electric utilities in Virginia, 14 of which are operated by localities, one of which (Virginia Tech) is a state agency, and one of which (Bristol) is an authority, serve 4.5 percent of the Commonwealth's population.

    The ratemaking procedures and standards utilized by the municipal utilities include conducting cost of service studies, which is used in allocating costs to various classes of customers. Utility budgets usually involve transfers or payments in lieu of taxes to the local government's general fund, which effectively reduces the locality's property and machinery and tools taxes. The utility's budget is debated and acted upon, after public notice and public hearings, as part of the locality's local budgeting process.

    Mr. Dick cited steps taken by Manassas (which modified its franchise territory to allow Dominion to serve its largest industrial customer) and Bedford (which considered special power supply arrangements and rates for industrial customers) as examples of the flexibility and creativity exhibited by municipal electric utilities in addressing concerns of customers. State regulation, he contended, would not change the terms of long-term power contracts and would be contrary to the practice in the vast majority of states.

    Most municipal electric utilities generate less than five percent of the electricity sold to retail customers. These utilities resell to customers power that they purchase at wholesale from a variety of sources. Five municipals (Danville, Martinsville, Bedford, Front Royal, and Richlands) are members of American Municipal Power (AMP), a nonprofit wholesale power supplier and services provider for over 100 member municipal electric systems in eight states. Member municipalities purchase shares in generation projects undertaken by AMP.

    Three municipals (Radford, Salem, and Virginia Tech) purchase power from APCO. One municipal (Bristol-based BVU Authority) obtains power from the Tennessee Valley Authority. The remaining seven municipals (Blackstone, Culpeper, Elkton, Franklin, Harrisonburg, Manassas, and Wakefield) purchase power from Dominion.

    Recognizing that its electric rates have increased to levels above those of surrounding utilities, Danville conducted an assessment of its electric services. In January 2015, the city released a report detailing the reasons for its decision not to sell its electric utility. Though selling its utility would have produced near-term rate reductions for some customers, selling the utility was found not to be financially feasible for two reasons. First, the sales proceeds, net of the costs of retiring outstanding debt, fulfilling contractual commitments, and selling power already purchased, would be adequate to keep the city financially whole and would result in the loss of $11 million in annual general fund transfers and administrative fees. Second, it is unlikely that the city could unwind substantial commitments associated with several AMP generation projects. Danville participates in $510 million of AMP power generation projects. Each project is covered by a power sales contract, or shared generation arrangement, that commits the city to take a specific electric power outlet at a price that covers debt service and operating costs and to pay transmission and congestion charges to deliver the power to its distribution system. Danville's report identified options short of selling its utility to address concerns with its rates, including adjusting service boundaries, opening the system to other power providers, modifying rate structures, and installing generation facilities in its service territory.

    Roger C. Wiley, Esq., observed with respect to SB 1396 that a provision of Martinsville's city charter requires voter approval at a referendum prior to disposing of its utility, and he doubted that a charter amendment bill removing this requirement would be well received. In his view, the situation in Danville is not the same as in Martinsville, and SB 1396 opens an inquiry in other areas where such problems do not exist.

    With respect to the provisions of SJR 300 opening the question of the General Assembly's power to authorize the SCC to regulate municipal electric utilities, Mr. Wiley disagreed with the conclusions reached in the Attorney General's July 2 opinion. Local governments have always read Sections 2 and 7 of Article IX to say that the SCC has no authority to regulate municipal utilities. The General Assembly has apparently agreed with this conclusion by repeating the exclusory constitutional language in the statutory definition of a corporation in Code § 56-1. He concluded that the Attorney General's opinion glosses over the portion of Article IX, Section 2 that grants the SCC such other powers and duties "not inconsistent with" this Constitution as may be prescribed by law. In his view, giving the SCC statutory authority over municipal utilities would be inconsistent with the exclusion of those entities in Article IX, Section 7. He noted that opinions of the Attorney General do not have the force of law, and observed that the Commonwealth's courts have not issued a decision on this point.

    W. Scott Johnson, Esq., appearing on behalf of AMP, stated that the company opposed both SB 1396 and SJR 300. In response to a query by Senator Norment, Mr. Johnson agreed to identify suggestions to address the concerns that gave rise to the measures. He noted that Moody's has favorably cited local regulation of municipal utilities, and he expressed concern that the rating agency would not favor greater regulation.

    C. Meade Browder, Jr., Senior Assistant Attorney General, addressed issues relating to the July 2 opinion letter. In the opinion of the Attorney General, the exclusion in Article IX, Section 7 of municipal utilities from the scope of what constitutes a corporation or company is a limitation on the powers of the SCC, not on the General Assembly. An opinion of the Attorney General issued in 1975 regarding the constitutionality of legislation that would place the Fairfax County Water Authority under the regulation of the SCC reached the same conclusion.

    Following the July 13, 2005, meeting, the Commission adopted a report on Senate Bill 1396 and Senate Joint Resolution 300. The report includes the following observations:

    • As a general rule, the residential rates charged by most municipal electric utilities are not consistently and materially higher than the rates charged by distribution cooperatives and investor-owned utilities. While the relatively fewer number of commercial and industrial customers of municipal electric utilities makes it more difficult to compare their rates for commercial and industrial electric service with those of Virginia distribution cooperatives and investor-owned utilities, the rates charged by some municipal electric utilities for certain classes of commercial and industrial customers tend to be marginally higher than the rates of Virginia investor-owned utilities and comparable to those of most distribution cooperatives. It bears noting that none of the municipal electric utilities charged rates for industrial service at the demand and consumption levels surveyed that exceeded the national average charged by investor-owned utilities.

    • The costs of power provided by the Danville electric utility are at or near the top of the list of the most expensive municipal utilities in the Commonwealth. As noted by the reference to this city in SB 1396 and by the testimony provided at the Commission's meeting on July 13, 2015, Danville has been the focus of concerns about the rates changed by municipal utilities. However, it appears that Danville's situation has resulted in large part from its participation in several power generation projects as a member of AMP. Opponents to SB 1396 and SJR 300 have contended that the cost issues will ease over time as new generation facilities are completed, and that the long-term prospects are for lower electricity costs for the city's customers.

    • It is not apparent that authorizing the SCC to regulate municipal electric utilities would result in lower costs to customers. Adding regulatory requirements would increase costs, as putting on a rate case at the SCC entails substantial fees for attorneys, accountants, and consultants. State regulation would not change the terms of long-term power contracts, and it is not clear in all instances what entity would assume the municipal utility's financial obligations under these agreements. And as noted previously, the vast majority of the power provided by municipal electric utilities is purchased on the wholesale market. The FERC would still have regulatory authority over wholesale power purchases. Under Code § 56-249.6, regulated utilities are authorized to pass through their purchased power costs through the "fuel factor." Therefore, the net result of SCC rate regulation may not provide material immediate benefit to the customers of the municipal electric utilities.

    • One factor blamed for the rates charged by Danville's municipal electric utility is the assessment of transmission charges. AMP has reported that the decision by FirstEnergy and Duke-Ohio to move from the Midcontinent Independent System Operator (ISO) to the PJM Regional Transmission System (RTO) has created additional transmission costs and "seams" issues for participating members. In addition, RTO market rule changes have driven up costs. It is not apparent that subjecting municipal electric utilities that purchase wholesale power from other regions to SCC rate regulation will have any effect on these costs.

    • Subjecting municipal electric utilities to regulation by the SCC may have the unintended consequence of eliminating some of the flexibility these utilities currently have in structuring arrangements to address unique circumstances. Examples of localities with municipal flexibility include Manassas, which modified its franchise territory to allow Dominion to serve its largest industrial customer, and Bedford, which considered special power supply arrangements and rates for industrial customers. In addition, while a municipal electric utility may elect to allow a customer to purchase power from a competitive service provider, the customer of a utility that is subject to the Electric Utility Regulation Act (Code § 56-576 et seq.) does not have the same degree of flexibility. Code § 56-577, as amended in 2007, allows a regulated customer to purchase electric energy from any licensed retail supplier only if certain conditions are satisfied, such as having demand that exceeds five megawatts. Even if the conditions are satisfied by a customer that is located in the certificated service territory of a regulated electric utility, the customer is prohibited from buying electric power from any other regulated electric utility.

    • The issue of the constitutional authority of the General Assembly to empower the SCC to regulate municipal electric utilities has been addressed by a recent opinion of the Attorney General. While the Attorney General has opined that the General Assembly does have this power, a representative of the Municipal Electric Power Association of Virginia has taken issue with the opinion's conclusions. Absent a decision by the Virginia Supreme Court addressing this aspect of the Constitution of Virginia, neither side is likely to concede its position. The Commission, as a legislative body created for the purpose of monitoring the SCC's implementation of the Virginia Electric Utility Regulation Act, does not have the resources or statutory authority to interject itself into this long-running constitutional question. This is not an issue for which it is possible to unearth a conclusive answer through any amount of additional legal research. A recommendation by the Commission on the issue would not be binding on anyone. Accordingly, the Commission declines to offer an opinion on this issue.

    • Moreover, if the Commission were to conclude that the General Assembly did have the authority to require the SCC to regulate municipal electric utilities, SJR 300 would have the Commission determine whether the General Assembly should require the SCC to regulate these utilities. However, SCC regulation can take any one of many forms, each of which raises complex practical and legal issues. Rather than attempting to address the plethora of issues that would need to be explored in any legitimate effort to determine the appropriate scope of such regulation, the Commission declines to take a position on whether, or how, the General Assembly should make municipal electric utilities subject to SCC regulation.

    • Although it is beyond the capabilities of the Commission to determine whether the SCC can, or should, regulate the rates charged by municipal electric utilities to their customers, one aspect of the debate that may benefit from analysis is whether such utilities are appropriately setting rates for different customer classes. The objective of a rate structure is to enable the utility to collect its revenue requirement without creating inequity between customer classes that burdens one class for the benefit of another. Proper rate design results in rates for classes of customers that are proportionate to the cost of serving each class of customer and which serve to encourage efficient utilization of the system. The concern has been expressed that municipal utilities adopt rate distributions that require commercial and industrial customers to bear a greater proportion of the utility's revenue requirement than is borne by residential customers. Such an outcome may be a function of the fact that residents vote in greater numbers than owners and operators of businesses. It may be appropriate to determine whether the rate distributions adopted by municipalities allocate the revenue requirement among residential, commercial, and industrial classes of customers in ways that are consistent with standard regulatory principles and whether such allocations are materially different from the allocations among classes that are made by investor-owned utilities and distribution cooperatives. Such a study should be conducted by an agency, such as the SCC, that has the capabilities to gather the appropriate data and conduct the required analysis.

    • Although it is beyond the scope of the specific issues raised by SB 1396 and SJR 300, one issue that may bear scrutiny by the General Assembly if the opportunity arises involves the standard of review exercised by courts in cases involving decisions of local governing bodies in setting rates and fees for utility services within areas served by a public utility that are outside the locality's boundaries. Justice Russell's dissenting opinion in Town of Leesburg v. Gioradano contends that the "fairly debatable" standard should be applied in the ordinary situation in which a legislative body has made a decision operating upon its own constituency and affecting the territory it was elected to govern. The rationale underlying the "fairly debatable" standard is that the decision affects those who elected the legislators, empowering those elected to make decisions for them. If displeased by those decisions, the voters have a ready remedy at the next election. Such a remedy is not available to the utility's out-of-town customers. However, the legal issues raised are more appropriately addressed by the General Assembly's Committees for Courts of Justice.

    • Another issue that ranges beyond the scope of the specific issues raised by SB 1396 and SJR 300 is whether the standard for review of the rates of a municipal electric utility should be codified. Pursuant to Code § 15.2-2143, rates for water provided by municipal utilities are to be fair and reasonable. Pursuant to Code § 15.2-2119, rates for sewerage service provided by municipal utilities are to be practicable, equitable, and uniform. The Code of Virginia does not expressly set out a corresponding standard for the rates for electric service provided by municipal utilities. If the General Assembly sought to codify the standard to be applied in reviewing a municipal electric utility's rates, the issue would be within the jurisdiction of the House Committee on Counties, Cities and Towns and the Senate Committee on Local Government.

    Copies of the Commission's combined report on Senate Bill 1396 and Senate Joint Resolution 300 were submitted to the chairs of the Senate Committee on Local Government and Senate Committee on Rules, respectively, on October 9, 2015. A copy of the report has been posted to the Commission's website at http://dls.virginia.gov/commissions/eur.htm?x=rpt. In addition, the report is available as Report Document 322 (2015) on the Legislative Information System's compil
    h 









    h 









    ation of reports to the General Assembly.

    Additional information regarding the Commission's meeting in 2015 may be found on the Commission's website at http://dls.virginia.gov/commissions/eur.htm?x=mtg.h  








    h