Norman B. Askew was an Englishman with a colorful way of telling Virginia legislators to go slow in deregulating the electric utility industry.
Askew — who would be the last chief executive solely to manage Virginia Power — advised lawmakers in September 1997 against “the blowtorch to the belly approach” sought by ardent advocates of deregulating electric utility monopolies.
Deregulation advocates — he called them the “do it tomorrow brigade”— wanted to open the monopoly electric business to retail competition, despite huge ratepayer investments in public utility networks for generating, transmitting and distributing power to homes and businesses.
Deregulation risked stranding those investments, as utilities prepared to compete to sell the electricity they generated to retail customers who would be given the choice of supplier.
Yet, three months after Askew’s speech to a subcommittee examining electric regulation, a group of Virginia Power officials visited the Bluefield office of Sen. Jackson E. Reasor Jr., D-Tazewell, the panel’s chairman, to ask his support for legislation in the impending General Assembly session to effectively take the blowtorch to the monopoly electric business.
“I asked them, ‘What’s happened between (September) and December?’” Reasor recalled. “They said, ‘Nothing has changed.’”
But Virginia Power itself had changed, and electric utility regulation was about to turn upside down.
Dominion Resources had taken firm control of the once-rebellious utility subsidiary, and Askew would be gone in less than two years. Now, 20 years later, the State Corporation Commission no longer fully exercises its traditional powers to regulate monopoly electric rates for millions of homes and businesses across the state.
The strongest hand charting the state’s course has been that of Virginia Electric & Power Co. and Dominion, which operates today as Dominion Energy, a national business with more than 2.5 million retail customers in the state and a dominating presence at the General Assembly.
Over the past 20 years, the path would lead to deregulation and — after retail competition failed to develop nationally and in Virginia — re-regulation under a new system devised largely by Dominion. The new system would spur utility construction of power plants and investments ranging from solar power to burying of power lines, while limiting the SCC’s power to set base rates for customers and reduce them if revenues are excessive.
Ultimately, the General Assembly and Gov. Terry McAuliffe would agree in 2015 to freeze base rate reviews under the new system for seven years, ostensibly to guard against the risks of federal regulation of carbon emissions by power plants. President Donald Trump has directed federal regulators to undercut the Clean Power Plan, but Dominion insists the risks remain.
The law raised a constitutional question that the Supreme Court of Virginia decided in mid-September: Who sets electric rates in Virginia, the General Assembly or the SCC?
The court, in a 6-1 ruling, said the legislature determines the SCC’s powers to set electric rates for monopoly utilities and enjoys the presumption that its actions are constitutional.
“This strong presumption reflects the breadth of legislative power in Virginia,” Justice Elizabeth A. McClanahan wrote in the majority opinion on Sept. 14.
But Justice William C. Mims, a former legislator and attorney general who played a central role in fashioning the re-regulation law in 2007, said in a 15-page dissent that the Virginia Constitution endows the SCC with the power to regulate monopoly electric rates.
“I reject the premise that the rate-making authority granted to the commission by the Constitution is subordinate to the General Assembly,” Mims said.
The SCC itself had found the law constitutional in a split decision, but Judge James C. Dimitri dissented and estimated that Dominion would over-earn by more than $1 billion over the life of the freeze, based on the most recent analyses by the Virginia Attorney General’s Office and the SCC.
Dominion Chairman and CEO Thomas F. Farrell II said critics ignore the $5.2 billion in expenses — from higher fuel costs to cleanup of coal ash ponds — the company’s regulated utility has not collected from customers since Virginia’s experiment with deregulation began almost 20 years ago. The uncollected expenses resulted from a rate freeze under deregulation and other legislative agreements.
Farrell also insisted that the SCC’s authority has not been diminished by legislation adopted in 2007 to return state electric utilities to regulation, even though the biennial rate reviews at the heart of the law have been suspended.
“The perception is all one-sided,” Farrell said. “It is completely wrong.”
The sea change began at Virginia Power in late 1997, soon after Askew replaced retired President James T. Rhodes Jr. and then-Dominion Chairman Thomas E. Capps consolidated his power over the utility to end a rancorous boardroom feud that had erupted between the companies and their leaders in 1994. Dominion tightened its grip on the power company and firmly set its course.
“Board consolidation is another important part of our long-term strategy for success,” Capps said then.
Virginia Power and other utilities were under pressure from industrial customers and national advocates for deregulation, as well as U.S. Rep. Thomas J. Bliley Jr., a Richmond Republican who headed the House Energy and Commerce Committee.
The company submitted its own plan to the legislature in 1998 to deregulate the industry — but without support from Reasor, who called the proposal a “rush to reckless action.”
Eva Teig Hardy, then-executive vice president of Dominion, said the company decided it couldn’t afford to wait.
“Our position did change when we completed internal studies which showed the company would be at a severe competitive disadvantage if we went slowly,” said Hardy, now retired but working as a strategic consultant to Farrell.
Reasor, then-chairman of the Joint Subcommittee on Electric Industry Restructuring, would help fashion a compromise in early 1998 that committed Virginia to a schedule for opening electric power generation to retail competition by Jan. 1, 2004, with the details to be “defined and determined” later by the General Assembly.
He left the Senate at the end of 1998 to become president and CEO of Old Dominion Electric Cooperative. Months later, the 1999 General Assembly adopted the Virginia Electric Utility Restructuring Act to provide the full legal framework for deregulating the industry, which would culminate by allowing all retail customers to choose an electric supplier in a competitive market by 2004.
“They’ve always been politically powerful, no question about it,” Reasor said of Dominion’s push in the legislature. “They understand the legislative process, and they know how to work the process. They have good people, and they spend the money to make it effective.”
Del. Kenneth R. Plum, D-Reston, a member of Reasor’s subcommittee, sponsored the legislation for Virginia Power that led to the initial state commitment to deregulation in 1998. Since 1996, Dominion has been his top political donor, contributing $105,750, according to the Virginia Public Access Project.
“I’ve never felt squeezed by them,” Plum said of the utility’s lobbying corps. “I have felt informed by them.”
A month after the legislature adjourned in 1998, Capps appeared before shareholders and blamed subpar profits for investors on SCC regulations that had limited the utility’s return on equity and would require Virginia Power to reduce rates. He praised the General Assembly’s commitment to deregulating power plants by 2002 and allowing retail competition two years later.
“We know how to make money,” Capps told shareholders. “All we have to do is get the regulators off our back.”
Askew retired in May 1999, and Farrell became the CEO of a new subsidiary, Dominion Generation, that would manage more than 100 power stations in the U.S. and abroad, including those owned by Virginia Power.
Virginia Power then proposed to sell or spin off $6.7 billion in ratepayer-financed power plants to a separate company that would compete to supply electricity to customers on a regional transmission grid.
The SCC said no, ruling on Dec. 18, 2001, that the proposed legal separation of the company’s generation, transmission and distribution systems “would impose unacceptable risks on the utility’s customers by reducing or eliminating many of the consumer protection measures” in the law.
Now leading the entire company, Farrell says he is thankful that the SCC denied the request because states that took that step could not go back when deregulation faltered and failed a decade ago.
“Everybody in the state should be happy that that happened,” Farrell said of the ruling.
William J. Hausman, an economist at the College of William & Mary who specializes in the electric utility business, said, “Virginia dodged a bullet.”
It would be one of the few times the General Assembly gave the SCC the final word on how best to regulate electric utilities in Virginia.
‘They attacked the messenger’
When the General Assembly began debating Virginia Power’s first deregulation proposal in 1998, SCC Judge Hullihen W. Moore appeared before a House of Delegates committee to make clear that the commission opposed the legislation.
“I want to state for the record we don’t endorse this bill in any way and ask you not to pass this bill,” Moore told the Committee on Corporations, Insurance and Banking, now called Commerce and Labor.
But Moore, a feisty former attorney for big industrial customers who appeared in his first electricity rate case in 1972, went further, using colored charts to show legislators the likely problems with deregulation in Virginia, where rates already were lower than surrounding states.
The lecture — dubbed “a course in Electricity 101” by veteran Dominion lobbyist William G. Thomas — did not sit well with legislators or bode well for the future relationship of the utility, the General Assembly and the SCC as the state tried to navigate a turbulent state and national debate over utility deregulation.
“The root of the lack of relationship with the commission (and the legislature) started with Hullie Moore and deteriorated,” Thomas said.
The appearance before the House committee was not the first time that Moore spoke his mind to legislators about deregulation, nor would it be the last, but his message and method of delivery grew increasingly unwelcome.
“Hullie was not subtle,” said former Sen. John C. Watkins, R-Powhatan, a member of Reasor’s joint subcommittee who had moved from the House to the Senate at the beginning of the 1998 legislative session. “Some people took it personally.”
Moore’s appearances particularly grated on Sen. Thomas K. Norment Jr., R-James City, now majority leader and the longtime chairman of legislative bodies that have overseen deregulation and re-regulation.
Norment declined to be interviewed for this story, deferring to other members of the Commission on Electric Industry Regulation, as it is now known. However, in a text message, he made clear his differences with Moore, an accomplished photographer who retired from the commission in 2004.
“I frequently disagreed with H Moore who was an antagonist who would have preferred the legislature to ‘mind its own business’ and let him decide, interpret and apply his public policy,” the majority leader texted in July. “We were better off when he decided to become a full-time photographer and could call all his own shots.”
Stephen D. Sinclair, a retired Fairfax County public utility rate expert, witnessed a confrontation in a Senate committee between Moore and Norment in 1999, when the senator was sponsoring the restructuring act to deregulate electric monopolies. Moore spoke against the bill, “visibly angering” Norment, the committee’s chairman, he said.
“The decision to speak out in opposition to this legislation would adversely affect the relations that certain key members of the General Assembly would have with the SCC and its staff for a number of years, to the extent that the advice of the SCC and its staff ... were rarely sought on legislative issues and impacts that affected public utilities and ratepayers,” Sinclair wrote in an unpublished paper on the conflict between the legislature and commission on rate-setting authority.
The consequence was a loss of legislative deference to the SCC on complex issues of energy regulation that required expert guidance, said Watkins, who had helped Norment craft the legislation adopted in 1999. “You could count on one hand the number of people in the House and Senate who really understood what was going on.”
The shift in attitude particularly pained SCC Judge Theodore V. Morrison Jr., who had represented Newport News in the House for 20 years before joining the commission in 1989.
“I saw it change,” he said. “It manifested itself when they passed deregulation against the advice of the commission.”
Morrison agreed with Moore’s message, but said, “He went about it the wrong way.”
Former SCC Judge Clinton Miller, another longtime delegate from Shenandoah County who served on the commission then, is sympathetic to Moore.
“He gave them the long-term perspective, and they ridiculed him,” Miller said. “They attacked the messenger.”
“I think it was all ill-advised,” he said of the push for deregulation. “The legislature in Virginia just bought it hook, line and sinker.”
Moore is unrepentant about his decision to challenge the direction the legislature was taking.
“I still think it was the right thing to do for me to go over there and tell them,” he said.
But he is troubled by what he describes as the legislature’s lack of curiosity about complex issues and unwillingness to seek independent, expert advice.
“It used to be the SCC,” he said. “It is not anymore. They don’t listen to them.”
Moore is not alone in his concern.
“There is an important reason why the SCC is in place and has the expertise it possesses,” said House Finance Chairman R. Lee Ware Jr., R-Powhatan, who voted against legislation in 2014 that allowed Dominion to write off hundreds of millions in expenses for a potential new North Anna nuclear unit and then recover the rest through rates. “I think we need to allow them to do their job.”
Regulation returns on new terms
Del. Harvey B. Morgan, R-Gloucester, never supported Virginia’s plunge into deregulation, so he was prepared to call for a change in course in 2007 as Maryland and other states dealt with crises from soaring electric rates because retail competition never emerged.
Morgan, who retired in 2012 after 32 years in the House, mentioned his plan to Farrell at a reception the night before the General Assembly would convene for its 2007 session.
“I told him I was going to put a bill in,” he said. “He said, ‘I agree with you. We’re going to put one in, too.’ I thought, ‘Oh boy, I’m done for.’”
The SCC had raised the alarm with a letter to then-Gov. Tim Kaine and Norment in September 2006 that voiced “cause for concern” about wholesale power markets and the cost of electricity for Virginians once caps on retail rates expired in 2010.
Competition certainly wasn’t going to regulate rates, the three commissioners said. “The factual evidence indicates that, to date, competition for retail electricity customers in Virginia has been and remains virtually nonexistent.”
Dominion also was concerned. The rate caps had taken effect in 2001 and originally were to expire in 2007, but the assembly adopted legislation in 2004 that extended them and froze fuel rates.
The company had bet on its ability to reduce costs and expand its profit margin under rate caps.
“We’ve always made money when things freeze,” Capps told Wall Street analysts in 2004.
But Dominion couldn’t have known then the price it would pay because of frozen fuel rates.
A spike in natural gas prices in the middle of the decade cost the company $1.7 billion more than expected from 2004 through 2007. The freeze meant Dominion, and its shareholders, would eat the loss instead of charging customers.
“That was a very tough pill to swallow here,” Farrell said.
Morgan wanted to return to traditional rate regulation in 2007, but Dominion had a different approach in mind. It proposed legislation that would re-regulate public utilities in Virginia but limit the SCC’s ability to reduce base electric rates in a system of reviews every two years.
At the same time, the legislation would create a series of rate adjustment clauses that would allow the utilities to charge customers for new power plants and other investments with larger guaranteed profit margins, ranging from 1 to 2 percent more than the approved return the SCC set.
In late 2012, then-Attorney General Ken Cuccinelli estimated that “the adders” the SCC had already approved for new generation would increase company revenues by $284 million over their terms. The enhanced return for new nuclear generation would add $1.8 billion to the cost for ratepayers, or an additional $351,000 for a larger industrial customer, the attorney general said.
The legislature subsequently limited those enhanced returns in a 2013 agreement with Cuccinelli. The limitations reserved an enhanced profit margin of 1 percent for nuclear and offshore wind energy projects, while eliminating the extra profit for other types of projects.
The SCC would review and act on the rate adjustments, including the guaranteed rate of return on investment, but the law dictated how it would set them. The commission would be required to weigh each proposal separately without taking the utility’s overall profits into consideration.
The legislation in 2007 removed the freeze on fuel costs and gave utilities financial incentives to build power plants, especially highly efficient combined-cycle units fueled by natural gas, and invest in programs to control demand and develop renewable sources of power, such as solar. It gave the company incentive to build base-load generation instead of relying on purchased power from out of state.
“The problem is we hadn’t built anything (big) for a long time,” said Thomas, a veteran lobbyist who was part of the Dominion push for re-regulation led by then-Executive Vice President Eva Teig Hardy and E. Paul Hilton, then the company’s senior vice president for rates and regulation.
Among other things, the legislation ensured that Dominion could recover the cost of a coal-fired power plant the legislature had declared in the public interest in 2004. The plant, ultimately built in Wise County outside of Dominion’s retail service territory, would cost more than $1.8 billion.
The company negotiated the legislation with a group of more than a dozen stakeholders, including big industrial customers, that was convened by Mims, then-deputy attorney general, later attorney general and now a justice on the Supreme Court of Virginia.
The legislation raised concerns at the SCC, especially with Morrison, who as chairman wrote a letter to Kaine that said the bills proposed by Norment and then-Del. Clarke N. Hogan, R-Halifax, “represent untried, untested methodologies that have never been attempted in Virginia or any other jurisdiction in the United States or elsewhere.”
“Moreover, they unfairly favor the interest of utilities over that of consumers,” Morrison wrote.
Over the next decade, the utilities’ big industrial customers came to the same conclusion.
The Virginia Committee for Fair Utility Rates and the Old Dominion Committee for Fair Utility Rates, representing big customers of Dominion and Appalachian Power, respectively, complained that the utilities were earning excessive profits in part by using the legislature to write off costs and effectively “rig the game” to reduce earnings in biennial reviews under the new law.
Under the initial rate case to carry out the law in 2009, Dominion headed off a potential reduction in its base rates by agreeing to refund $726 million in excess earnings to customers. Two years later, the company refunded $78.3 million, setting up a potential rate reduction in the next two-year review.
But instead, the General Assembly adopted legislation in 2013 and 2014 that allowed the company to effectively reduce its level of earnings by writing off big expenses, such as the cost of developing a new nuclear reactor at North Anna.
Louis R. Monacell and Edward L. Petrini, lawyers for the fair utility rate groups, argued at the SCC last year that the 2007 act “has resulted in excessive revenues for (Dominion and Appalachian); a significant wealth transfer from their Virginia customers to their shareholders; and a deterioration in the competitiveness of their electric rates in Virginia.”
In 2015, the General Assembly took a bigger step that set off a political firestorm. It suspended biennial reviews of Dominion and Appalachian’s rates through 2022 to help the utilities hedge against the potential costs of the Clean Power Plan adopted by the administration of then-President Barack Obama but stayed by the U.S. Supreme Court.
Farrell said the 2015 rate freeze was necessary because the federal plan could have forced the company to shut down big coal-fired units.
“The plants that would be affected would all be in base rates,” he said.
The final version of the Clean Power Plan would not have required Dominion to shutter any of its power plants, but Farrell said Trump’s election and order to regulators to dismantle the plan does not end the company’s legal obligation to address carbon pollution that scientists say is causing climate change.
“Carbon regulation is not going away,” he said. “It’s mandated by law.”
When the Virginia Supreme Court upheld the rate freeze law last month, Dominion defended the continued need for it by pointing out that McAuliffe had directed the state Department of Environmental Quality to begin assembling a carbon regulation and credit-trading system for Virginia.
But the SCC and other consumer critics say Dominion is still allowed under the 2007 statute to collect any environmental costs on existing power plants, with a profit margin.
“I couldn’t lose on that with a losing machine,” said Moore, the former SCC commissioner who clashed with lawmakers over deregulation.
Further, Moore said the freeze on rate reviews would lock in excessive earnings from the electric monopoly regardless of whether the company faces extraordinary costs from carbon regulation.
“They have over-earned by billions of dollars,” the former commissioner said in an interview at his home in western Henrico County. “What that is is a tax. You have to have the electricity. If they’re over-earning, it’s a tax.”
“It’s not a tax to pay police or educate children,” Moore said. “It’s a tax that goes into Dominion’s pocket.”
‘They’re not the problem; it’s the General Assembly’
Farrell’s ascendance to the top job at Dominion in 2007 coincided with one of the company’s biggest political triumphs — returning to regulation but in an entirely different form than the traditional model that set rates based on a utility’s revenues and prudent expenses.
The new law has been good for company shareholders, who faced a risk of losing 40 to 60 cents per share if the constitutional challenge had prevailed and Dominion’s profit margins were lowered to the levels allowed in most states, according to an analysis by Goldman Sachs Equity Research in June.
Dominion and its supporters say the new system has provided rate stability while allowing utilities to recover legitimate costs for a wide range of investments, including renewable energy technologies, with less “regulatory lag” and the accompanying cost of borrowing.
“I don’t see runaway rates,” said Del. Plum, who sponsored the company’s initial deregulation proposal in 1998.
Base rates have been flat since the late 1990s, and the fuel rate has fluctuated up and down, but the average residential customer’s bill also has increased because of a dozen “rate adjustment clauses” to pay for five new power plants, solar projects and energy-efficiency programs, transmission expenses and a hotly debated plan to bury power lines.
“They pluck the goose a few feathers at a time,” Moore said.
But Dominion and the SCC do not agree on how to compare the increase in power bills since regulation returned.
The SCC reported to legislators on Sept. 1 that Dominion’s average residential customer — using 1,000 kilowatt-hours of electricity a month — was paying $117.20 a month on July 1, compared with $90.59 a month a decade ago when the re-regulation statute became law. The 29 percent increase reflected a slight rise in the fuel factor, and an additional $25.10 a month from various rate adjustment clauses, the report states.
Dominion said the true comparison is between July 1, 2008, when the fuel rate cap was removed and the typical residential bill was $107.20 a month, and $115.74 a month on Oct. 1 this year. Today’s average bill is lower than average by almost 4 percent in the Southeast, 22 percent in the Mid-Atlantic and almost 14 percent nationally, the company said.
The SCC’s staff says the law removed much of the risk of recovering a utility’s investment, so raising capital costs less.
“These legislative enhancements have all but guaranteed Virginia Power that it will earn its authorized return on these potentially significant capital investments,” testified Lawrence T. “Tommy” Oliver, assistant director of economics and finance, at the first rate case under the new law in 2009.
But the General Assembly took away the law’s biggest protection for ratepayers when it suspended SCC rate reviews for seven years, beginning in 2015. The next scheduled review is in 2022, when the commission will examine earnings in the previous two years.
“If you’re going to regulate a utility, you have to look at all the revenues and all the expenses,” Moore said. “The commission can no longer regulate the rates.”
Former House Minority Leader Ward L. Armstrong, D-Henry, who led a fruitless push to restore traditional regulation in 2011, said, “Looking back on it, it was an obvious mistake of the General Assembly to force the SCC to abdicate that authority.”
“You can’t fault them for wanting to make the maximum profit they can,” Armstrong said of the state’s electric utilities. “They’re not the problem; it’s the General Assembly.”