The General Assembly could dramatically change the way Virginia regulates its two major power companies.
Dominion Virginia Power is proposing a trade: It will lock base rates in place until 2020 and cover the costs of any power plants it closes during the next five years.
In return, the Richmond-based company’s overall profits will not be reviewed by the State Corporation Commission, which is charged with regulating the company and reviewing its rates every two years. If the utility earns more than it should under current law, it must issue a partial refund to customers.
Two types of power — electrical and political — are mixing with large amounts of money and strict federal regulations. The way Dominion Virginia Power generates electricity for its 2.4 million customers is changing, as the company shifts slowly away from coal and more toward natural gas or renewable sources.
The changes come as the U.S. Environmental Protection Agency seeks to cut dramatically carbon dioxide emissions from power plants in the next 15 years. That would force Dominion Virginia Power, other utilities and state regulators to consider how to meet those targets while keeping the lights on.
The change in rules also would affect Appalachian Power, which serves about 1 million customers in western Virginia. Appalachian Power would see a rate freeze until 2018. It was not originally part of the rate-freeze proposal, but Senate Bill 1349 was amended to include the utility.
The bill cleared the Senate on a 32-6 vote Friday and now heads to the House of Delegates for consideration.
Sen. Frank W. Wagner, the Virginia Beach Republican who sponsored of the bill, and Dominion Virginia Power said the rate freeze will give the company time to develop a plan to comply with the strict EPA rules. Dominion Virginia Power has said it may have to close five of its coal-fired power plants to comply with the rules.
“Consumer group after consumer group after consumer group supported this bill, and I want to explain why,” Wagner said Friday on the Senate floor. “We are dealing with uncertainty the likes of which Virginia has never seen before.”
Yet Sen. Adam P. Ebbin, D-Alexandria, warned that Dominion Virginia Power essentially would be an unregulated monopoly if the legislation passes and is signed by Gov. Terry McAuliffe.
“The bill allows utilities to continue earning excess profits and deny rate reductions and credits to customers,” Ebbin said. “It could be a de facto rate increase on millions. And the money at issue is enormous.”
What utilities get
Though state regulators still would be required to approve any changes to fuel costs and power plant costs on a customer’s bill, those issues are much narrower in scope.
During base-rate cases, which occur every two years, the regulators have a chance to look at all of a utility’s operations and determine if its profits are “fair and reasonable.”
The regulators also set profit levels for the utilities. If Dominion Virginia Power or Appalachian Power earn more than they are allowed, customers get a refund.
Under a rate freeze, Dominion Virginia Power would not have to issue any refunds if it earns more than it should.
The bill also would require the SCC to approve the closure of any power plant, a new responsibility for the regulatory body.
By needing to get that approval, Dominion Virginia Power said it could slow the process of closing a plant and have a better chance of keeping coal-fired power plants open longer.
If plants close before 2020, the company’s shareholders must pay for those costs. If plants close after 2020, customers must pick up the costs.
What customers get
Base rates make up more than half of a customer’s bill, and they won’t go up during the next five years.
Dominion Virginia Power also has agreed to speed up its fuel cost filings, which are expected to lead to a 5 percent reduction in a residential customer’s bill and a 10 percent decrease in bills for big industrial customers. Industrial customers get a bigger price break, because fuel is a bigger part of their bill than it is for residential customers.
The fuel reduction would have occurred later this year, but Dominion Virginia Power is promising to make the filings in time for bills to decrease by April 1.
Dominion Virginia Power doesn’t make any profit on fuel costs. Customers are getting a reduction in their bills because the costs of coal, oil and natural gas have been lower than expected and are projected to stay low in the next two years.
The Clean Power Plan
Dominion Virginia Power, and state legislators, said the changes to state law are needed because of the EPA’s Clean Power Plan, which was introduced last year.
Final rules from the EPA will be issued this summer, and states would have to turn in their compliance plans by summer 2016.
The rules are designed to reduce carbon dioxide emissions from power plants by about 30 percent by the year 2030. Each state was assigned a reduction target.
Virginia would be forced to reduce its emissions by about 38 percent, and its emissions target is lower than that of neighboring states. West Virginia and Kentucky, for example, would be producing more than twice as much carbon dioxide per megawatt hour of power, compared with Virginia.
Though Virginia is the 12th-largest state by population, it is ranked only 30th in total emissions and 27th in power production.
That gap exists because Virginia buys power from neighboring states and because some of the power plants that exclusively serve Virginia customers are in West Virginia.
“The Clean Power Plan will put in place a consistent national framework that builds on work states are already doing to reduce carbon pollution — especially through programs that encourage renewable energy or energy efficiency,” EPA spokeswoman Enesta Jones said in an email.
Twelve states are suing the EPA over the rules.
State Sen. A. Benton “Ben” Chafin Jr., R-Russell, has urged the attorney general’s office on several occasions in recent weeks to join the suit. But attorneys from the office have said they don’t believe the state should join the lawsuit when the final rules have not yet been released.
Money on both sides
Dominion Virginia Power and environmental groups pour large amounts of money into state politics, where there are no restrictions on the size of campaign donations.
Dominion Resources Inc., the parent company of Dominion Virginia Power, gave $1.5 million to Virginia politicians in 2013 and 2014. About $700,000 went to Democrats and about $800,000 to Republicans, according to data compiled by the Virginia Public Access Project.
The Virginia Senate Republican Caucus was the largest recipient in the past two years with $101,000. The gubernatorial campaign of McAuliffe, a Democrat, received $75,000.
The leaders of both parties in the Senate received five-figure gifts: $45,000 for Minority Leader Richard L. Saslaw, D-Fairfax; and $20,250 for Majority Leader Thomas K. Norment Jr., R-James City.
Wagner, who is sponsoring the legislation, received $8,000.
Wagner also owned Dominion Resources stock valued $10,000 to $50,000. He sold the shares Tuesday and told The Associated Press he didn’t want anyone to think he would benefit from backing the legislation.
Norment owns $50,000 to $250,000 in Dominion Resources stock, as does Sen. Walter A. Stosch, R-Henrico. Both voted in favor of the bill when it was before the Senate’s Commerce and Labor Committee. Lt. Gov. Ralph S. Northam, a Democrat, reported owning $10,000 to $50,000 in stock.
The Sierra Club’s Virginia chapter handed out almost $500,000 in the past two years. All but $200 went to Democrats; the McAuliffe campaign received nearly $470,000.
The League of Conservation Voters raised just shy of $2 million and gave all but $10,000 to Democrats. McAuliffe’s campaign received $1.7 million; Northam’s campaign got $97,000; and Attorney General Mark Herring’s campaign received $111,000.
How do we get power?
Power companies must be prepared to deliver a relatively stable amount of power on most days, while also standing ready to handle spikes in use — say on a very hot or very cold day, when customers are using lots of energy to cool or heat buildings.
At Dominion Virginia Power, the company’s nuclear power plants in Louisa County and Surry County provided about one-third of the electricity used by customers in 2013, even though those plants represent about 17 percent of the company’s capacity if all plants are operating at the same time.
The difference occurs because nuclear plants are extremely expensive to build but relatively cheap to operate. It’s most efficient to leave nuclear reactors and coal-fired power plants running all day, every day. Natural gas- or oil-fired plants are easier to turn on and off when demand grows or shrinks.
The company also participates in a wholesale power market that stretches over several states in the Mid-Atlantic.
“We may buy power from the grid if it’s cheaper to use that power than turning on an expensive plant,” Dominion Virginia Power spokesman Dan Genest said. “So if we can buy generation for less than we can produce it, it saves our customers money.”
The company’s fleet of oil-powered plants is a good example of that practice. Those plants represent 11 percent of Dominion Virginia Power’s capacity but barely were used in 2013, when oil was expensive. Instead, the company purchased power from the wholesale market.
Every two years, Dominion Virginia Power files a lengthy Integrated Resource Plan with the State Corporation Commission.
The plan outlines what the company expects power demand to be during the next 15 years and explains how Dominion Virginia Power expects to meet that demand.
The 2014 resource plan outlined two paths the utility could take to meet future demand.
The cheapest option, Dominion Virginia Power said, is to build four large natural gas-fired plants from 2019 to 2029. The plants would generate about 4,000 megawatts combined.
Each is similar in size to one that opened about two months ago in Warren County, near Front Royal. A matching plant in Brunswick County should enter service late this year or early next year.
These two new natural gas-fired plants will replace coal-fired power stations in Chesapeake and Yorktown, with some new capacity to spare. The Chesapeake facility already has been retired, Genest said, and the Yorktown plant is slated to close this year.
But Dominion Virginia Power notes a risk to the natural gas option: as coal plants are retired, whether because of stricter EPA rules or other factors, the company could become heavily reliant on natural gas.
The company long has tried to ensure it generates power from a variety of sources, which helps protect customers if the price of one fuel — coal, gas or oil — jumps sharply higher.
Its 2013 energy mix reflects that goal. One-third of the power it generated was from nuclear plants. In addition, 30 percent came from coal, 16 percent from natural gas and 2 percent from renewable sources.
The rest of the power was purchased on the wholesale market (11 percent) or bought from independent power plants in Virginia that have long-term contracts with Dominion Virginia Power (9 percent).
To avoid relying too heavily on natural gas, Dominion Virginia Power also outlines a second plan in its 2014 filings.
The alternate plan calls for two new natural gas-fired plants.
It also calls for the company to build a third nuclear reactor at North Anna. The new reactor could produce 1,450 megawatts of power, about what one of the new natural gas-fired plants produces and slightly below the 1,890 megawatts generated by the two existing reactors at North Anna.
Company officials have told the state Senate in recent days that the earliest the new reactor could enter service would be 2028. The company doesn’t expect to have federal regulatory approval to build the new reactor until 2016 and at that point would make a final decision on whether to proceed with construction.
Dominion Virginia Power already has spent about $600 million preparing for the new reactor. Last year the General Assembly passed a law allowing the company to count that expense against its profits when state regulators determine if the company is earning too much money.
The company said the change in state law means it does not get to charge customers for profit on the North Anna expenses. But it also makes it easier for Dominion Virginia Power to avoid issuing refunds to customers.
Dominion Virginia Power’s alternate plan also calls for increased reliance on solar and wind energy.
The company said that it could build or purchase up to 1,000 megawatts of renewable power by 2030, but it said that only 320 megawatts of that power is considered “firm” capacity.
The company took a step along that path Thursday, when it announced plans to build 400 megawatts in new solar energy projects around Virginia. The company will spend $700 million building the facilities.
“Solar costs continue to decline, and the most cost-effective way to deploy solar is through large-scale projects,” the company said in a statement.
Last month, the company announced plans to build a 20-megawatt solar plant in Northern Virginia. When measured by the amount of power produced, that plant will cost about three times as much to build as the new natural gas-fired plant.
But once built, a solar plant does not need fuel to operate. The latest solar projects still must be approved by state regulators.
The company ultimately might adopt a strategy that mixes the two plans it submitted in 2014. New advances in energy efficiency might reduce demand, or faster-than-expected growth in the number of residential and industrial customers might mean future demand is higher than forecast.