RD419 - Assessing the Rates and Terms and Conditions of Incumbent Electric Utilities in the Commonwealth Pursuant to the Seventh Enactment Clause of Chapter 933 (SB 1416) of the 2007 Acts of Assembly – November 1, 2017


Executive Summary:
On April 4, 2007, the General Assembly of Virginia enacted House Bill 3068 and Senate Bill 1416, which became Chapters 888 and 933 of the 2007 Acts of Assembly (collectively, "Chapter 933 "). The Seventh Enactment Clause of Chapter 933, among other things, directs the State Corporation Commission ("Commission"), in consultation with the Office of Attorney General, to conduct a five-year assessment of "the rates and terms and conditions of incumbent electric utilities in the Commonwealth" including analysis of "the amount, reliability and type of generation facilities needed to serve Virginia native load compared to that available to serve such load." The following report describes the various provisions of Chapter 933 that potentially could influence Virginia's electric utility rates and service reliability and relates those provisions to numerous Commission proceedings and decisions involving Dominion Energy Virginia ("DEV")(*1), Appalachian Power Company ("APCo"), and the electric cooperatives.

Since Chapter 933 became effective on July 1, 2007, DEV, APCo, and the electric cooperatives have requested numerous rate changes or have undergone extensive rate reviews. During this period, DEV has been authorized net revenue increases totaling approximately $1.62 billion(*2) on an annual basis and currently has pending requests that would produce additional increases of approximately $59.5 million. It should be noted that many of the cost drivers that contributed to this increase may have existed in the absence of Chapter 933, and the level of increases that otherwise would have occurred cannot be determined. Certain increases likely would have occurred under other regulatory paradigms. For example, the $1.62 billion increase includes fuel-related increases of $396.0 million, much of which would have occurred with the previously scheduled expiration of capped rates on December 31, 2008. The combined effect of the approved increases for DEV has been to increase the monthly bill for a residential customer using 1,000 kilowatt-hours ("kWh") by $25.15, or approximately 27 .8%, since July 1, 2007. The $25.15 increase comprises a fuel cost increase of $1.51, transmission cost related increases totaling $8.69, new generation rate riders totaling $13.65, a new distribution underground related rider totaling $0.59, and demand-side management ("DSM") rate adjustments totaling $0.72. Appendix 2 to this report details the incremental changes in rates occurring since July 1, 2007, currently reflected in DEV's monthly bill for residential customers using 1,000 kWh, as well as the associated statutory provision through which each increment was authorized.

Since July 1, 2007, APCo has been authorized net revenue increases totaling approximately $690.4 million(*3) on an annual basis and currently has pending requests that would decrease revenues by approximately $15.2 million. As with DEV, many of the cost drivers that contributed to this increase may have existed in the absence of Chapter 933, and the level of increases that otherwise would have occurred cannot be determined. Certain increases likely would have occurred under other regulatory paradigms. For example, the $690.4 million increase includes fuel-related increases of $151.1 million, much of which would have occurred with the previously scheduled expiration of capped rates on December 31, 2008. The combined effect of the approved increases for APCo has been to increase the monthly bill for a residential customer using 1,000 kWh by $48.64, or approximately 73%, since July 1, 2007. The $48.64 increase comprises a base rate increases of $22.99, a fuel cost increase of $9.89, transmission cost related increases totaling $14.05, a new generation rate rider totaling $2.80, DSM rate adjustments totaling $0.75, and a decrease of $1.84 related a previous surcharge for environmental and reliability costs. Appendix 3 to this report details the incremental changes in rates occurring since July 1, 2007, currently reflected in APCo's monthly bill for residential customers using 1,000 kWh, and the associated statutory provision through which each increment was authorized.

Concerning the analysis of generation load, it is important to note that DEV, APCo, and the electric cooperatives are either directly, or indirectly through purchased power arrangements, members of PJM Interconnection, LLC ("PJM"), a regional transmission entity that, among other things, controls transmission facilities owned by DEV and APCo.(*4) PJM analyzes, forecasts, and plans for the future electricity needs of the region to ensure that the bulk power grid is sufficient for delivering power from available generation resources to loads within the PJM region. PJM also imposes generating capacity obligations on its load serving members, including DEV, APCo, and the electric cooperatives and requires that those members make forward commitments for meeting those obligations. Consequently, the "amount and reliability" of generation needed to serve Virginia load is directly impacted by PJM planning activities and membership requirements.

In 2008 the Virginia General Assembly enacted legislation (codified as Chapter 24, Electric Utility Integrated Resource Planning, of Title 56 to the Code) directing Virginia's investor-owned electric utilities to file integrated resource plans ("IRPs") with the Commission beginning on September 1, 2009, detailing their forecasts of load obligations and their plans to meet forecasted obligations through supply side and demand side resources over the ensuing 15 years to promote reasonable prices, reliable service, energy independence, and environmental responsibility.(*5) A subsequent law passed in 2015(*6) provides that utilities' IRPs evaluate "the effect of current and pending state and federal environmental regulations upon the continued operation of existing electric generation facilities or options for construction of new electric generation facilities" and "[t]he most cost-effective means of complying with current and pending state and federal environmental regulations." Each IRP is reviewed by the Commission in a public proceeding in which the Commission must ultimately determine whether the IRPs are "reasonable and in the public interest."(*7)

DEV relies on its generating resources, purchased power contracts, DSM initiatives, and short-term capacity purchases for satisfying its load serving obligations. DEV's internal capacity (i.e., its owned capacity, capacity acquired through long-term non-utility generation purchased power agreements and DSM reductions) has been sufficient for meeting its obligations since 2015. DEV has been building a substantial amount of new capacity in recent years. The Bear Garden and Virginia City Hybrid Energy Center generating facilities became operational in 2011 and 2012, respectively, and the Warren County facility, which became operational in 2015, essentially eliminated any existing capacity deficit at the time it became operational. Additionally, the Greensville County Power Station, with a summer capacity of 1,585 MW, is scheduled to become operational in late 2018. By constructing these facilities, DEV has reduced its internal capacity deficit and, in the near term, is able to meet its internal capacity requirements with few market purchases.

For more than 60 years APCo was a member of the American Electric Power ("AEP") system and relied on the AEP Interconnection Agreement with other AEP affiliates to satisfy its load serving obligations. On January 1, 2014, the AEP Interconnection Agreement was terminated. As a result, APCo is now a stand-alone entity and participant within PJM.(*8)

Like Dominion, as a participant in PJM, APCo relies on its generating resources, purchased power contracts, DSM initiatives and short-term energy purchases for satisfying its load serving obligations. APCo's internal capacity (owned capacity, capacity acquired through long-term non-utility generation purchased power agreements, and DSM reductions) is projected to be sufficient for meeting its capacity obligations through 2025. Because APCo is a winter-peaking utility, satisfying PJM capacity requirements, which are designed around a summer peak, can leave APCo unable to self-supply its entire energy need in the winter. This potential energy shortage can be satisfied through short-term purchases including purchases from the PJM market. There is ample available energy within PJM to satisfy these shortfalls, and the transmission system has had sufficient deliverability for these short-term purchases. As such, APCo's winter energy deficit has not posed, nor is it expected to pose, reliability concerns for Virginia.

Chapter 933 also requires that, for certain specified purposes, Virginia electric utilities be compared to "those in the peer group of such utilities that meet the criteria enumerated in subdivision A 2 of§ 56-585.1 of the Code of Virginia." The peer group utilities for DEV and APCo currently include: Alabama Power, Duke Energy Carolinas (North Carolina and South Carolina), Entergy Mississippi, Florida Power & Light Company, Georgia Power, Gulf Power, Mississippi Power, Duke Energy Progress Inc. (North Carolina and South Carolina), Duke Progress Energy Florida, Inc., South Carolina Electric & Gas, Tampa Electric Company, Kentucky Utilities, Inc. ("KU"), and Louisville Gas and Electric Company ("LG&E").(*9)

In response to the directive to conduct peer group comparisons, this report compares typical bill information for the peer group with that of DEV and APCo. Using data from various EEI publications, the Commission Staff developed typical rate comparisons for residential, commercial, and industrial customers for both July 1, 2007, when Chapter 933 became effective, and January 1, 2017. For purposes of this evaluation, a ranking closer to 1 equates with a lower, more competitive customer rate. For example, a customer of a utility with a ranking of 2 would have a lower rate than a customer of a utility with a ranking of 10.

DEV's January 1, 2017 annualized residential rates(*10) produce typical bills that rank DEV 11th out of the 20 companies(*11) examined and are below the U.S. and South Atlantic averages and slightly above EEI's average for the East South Central region.(*12) For residential customers using 1,000 kWh per month, DEV's bill rankings have declined five places (from a rank of 6 to a rank of 11) since July 1, 2007, to about the middle of the peer group. In other words, DEV's rates have become less competitive over the past ten years. DEV's commercial rates still remain competitive despite a slight decline in ranking for the largest commercial customers since July 1, 2007. DEV's January 1, 2017 annualized commercial rates produce typical bills that range from 4th to 3th out of the 20 companies examined and remain below the U.S., South Atlantic, and East South Central regional averages. DEV's industrial rates still appear generally competitive with the rates of the peer group, despite some declines in rank. DEV's January 1, 2017 annualized industrial rates produce bills that range from 2nd to 15th out of the 20 companies examined and are below the U.S. average and, for the most part, are below the South Atlantic and East South Central regional averages.

Similarly, for residential customers using 1,000 kWh per month, APCo's bill rankings have declined significantly (from a rank of 2, to a rank of 14, out of 20 companies) since July 1, 2007. In other words, APCo's rates have become less competitive over the past ten years. APCo's January 1, 2017 annualized residential rates are below the U.S. and South Atlantic regional averages, but above the East South Central Region average. APCo's commercial rates have become less competitive and also show a significant decline in rankings since July 1, 2007. APCo's January 1, 2017 annualized commercial rates produced typical bills that range from 3rd to 13th out of the 20 companies examined; however, they still are below the U.S., South Atlantic, and East South Central regional averages. APCo's January 1, 2017 industrial typical bills are ranked 6th to 13th out of the 20 companies examined, are below the U.S. and South Atlantic regional averages, and for the most part are near or below the East South Central region average. APCo's industrial bill rankings have declined overall since July 1, 2007.

It should be noted that publicly available reliability related information for the peer group is limited, and as such, any reliability differences could only be developed on a somewhat superficial level. A review of reliability related information for the peer group utilities did not show any discernible trends in reliability or any indication that DEV's or APCo's overall ability to serve native load was notably different from that of the peer group.

Separate financial reviews of DEV and APCo also were conducted by the Commission Staff; those results were included in the "Financial Reviews and Related Cases" section of the Commission's Status Report: Implementation of the Virginia Electric Utility Regulation Act Pursuant to § 56-596 B of the Code of Virginia, dated September 1, 2017. This report can be accessed through the Virginia Legislative Information System.
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(*1) In May 2017, Virginia Electric and Power Company changed its "doing business as" name from "Dominion Virginia Power" to "Dominion Energy Virginia."
(*2) As shown in Appendix 1, from July 2007 to July 2017 the monthly bill for a DEV customer using 1,000 kWh has increased from $90.59 to $117.20. This increase reflects the level of ongoing increases that currently are reflected in rates and excludes temporary base rate credits and certain increases or decreases that may have been in effect during a portion of this ten-year review period. For example, the current fuel factor and transmission-related charges were at times higher or lower during the review period than at the current time.
(*3) As shown in Appendix 1, from July 2007 to July 2017 the monthly bill for an AP Co customer using 1,000 kWh has increased from $66.61 to $115.25.
(*4) PJM's primary mission is to ensure the safety, reliability, and security of the bulk electric power system located in a 13-state area that encompasses portions of the United States' Midwest, Southeast and Northeast regions.
(*5) Code § 56-597 (definition of "Integrated Resource Plan").
(*6) 2015 Va. Acts ch. 6.
(*7) Code § 56-599 C.
(*8) APCo's participation in PJM's capacity market is through a method known as the Fixed Resource Requirement Alternative. Through this alternative, APCo submits a fixed resource requirement capacity plan and has opted out of PJM's Reliability Pricing Model capacity auction through the 2020/2021 delivery year.
(*9) In the Final Order in Dominion Energy Virginia's 2013 Biennial Review, the Commission found that KU and LG&E satisfied the requirements for inclusion in the peer group. Both KU and LG&E are a part of the Edison Electric Institute's ("EEI's") East South Central Region. Therefore, the averages for that region, as well as the data for both utilities, is now included in Appendices 4, 5, and 6. Application of Virginia Electric and Power Company, For a 2013 biennial review of the rates, terms and conditions for the provision of generation, distribution, and transmission services pursuant to§ 56-585.1 A of the Code of Virginia, Case No. PUE-2013-00020, 2013 S.C.C. Ann. Rept. 371, Final Order (Nov. 26, 2013). Appendices 4, 5, and 6 also include rates and ranking comparisons for Kentucky Utilities d/b/a Old Dominion Power Company located within Virginia (separately from Louisville Gas & Electric and from Kentucky Utilities located in Kentucky), Appalachian Power Company located in Virginia (separately from Appalachian Power Company located in West Virginia), and Dominion Virginia Power (separately from Dominion North Carolina Power located in North Carolina). These appendices refer to Dominion Virginia Power and Dominion North Carolina Power, as these were the names of the utilities at the time of the EEI report publication.
(*10) These rates are based on a residential customer using 1,000 kWh per month.
(*11) Many of the peer group companies serve in more than one state and have differing typical bills depending on the respective state. Consequently, the typical bill comparison may include multiple listings for certain peer group companies. For this year's report, three additional utilities were added to the appendices for comparison, Kentucky Utilities Inc., Kentucky Utilities d/b/a Old Dominion Power Company, and Louisville Gas and Electric Company. However, these three utilities did not provide complete data to EEI in July 2007; therefore, not all of their rankings could be assessed for that time period.
(*12) EEI's South Atlantic region includes Delaware, the District of Columbia, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia, and West Virginia. EEI's East South Central region includes Alabama, Kentucky, Mississippi, and Tennessee.