Appalachian Power to face new regulatory system
Beginning this July, state regulators will review Appalachian Power Company’s rates and earnings every two years, following legislation that significantly changes how the utility is regulated in Virginia.
Appalachian Power says it sought the legislation to reduce the impact of fluctuating electric rates on ratepayers and make the process of collecting costs and the profit it’s allowed to earn more straightforward.
“Appalachian Power’s reason for introducing the legislation was twofold,” wrote company spokeswoman Teresa Hall in an email. “To provide relief to customers by minimizing the peaks and valleys associated with triennial reviews, and to provide the company with a clearer path to recovering its costs and authorized rate of return.”
Many of the changes ushered in by the new law, which will give the State Corporation Commission greater leeway in setting utility rates, are mirrored in other legislation that changed the regulatory framework for Dominion Energy, the state’s largest electric utility and a major power player in Richmond.
“There has been a broad shift among lawmakers, the administration and legislative advocates to having a consistent and fair approach to rate cases for the company,” said Brennan Gilmore, executive director of Clean Virginia, an advocacy group founded by Charlottesville millionaire Michael Bills to counter Dominion’s influence in the General Assembly.
Negotiators involved in the crafting of the Appalachian Power and Dominion bills have credited their passage to Republican Gov. Glenn Youngkin, who was involved in discussion of both.
“There’s no question that this governor produced a better outcome for ratepayers than anything I’ve seen in my time doing this,” said Will Cleveland, a senior attorney with the Southern Environmental Law Center.
Macaulay Porter, a spokeswoman for the governor, said Youngkin was focused on ensuring there were safeguards for ratepayers against rising electric bills and not jeopardizing power supply.
“The Governor collaborated closely with the House, Senate, and Attorney General to ensure that this legislation not only met but exceeded these objectives,” Porter said in a statement about the Appalachian Power legislation. “The result was a transformative reform in how utilities are governed, achieved through a strong bipartisan compromise.”
Ultimately, the legislation will also mean that Appalachian Power and Dominion will be regulated under different systems beginning this summer.
Since 2007, when Virginia returned to regulating its electric utilities after a brief experiment with deregulation, the two utilities’ rates and profits have been governed by Chapter 23 of Title 56 of the Virginia code, a portion of state law that has become increasingly complex due to regular legislative changes. Other utilities are regulated according to simpler rules laid out in Chapter 10 of the title.
“I think even APCo now realizes that Chapter 23 has gotten to be totally unwieldy and cumbersome,” said Cleveland. “The way that operated for Dominion was to prevent the Commission from reducing Dominion’s rates, even though those rates were too high. The way it played out for AppCo was that it prevented AppCo from getting a rate increase.”
The nuts and bolts of the changes
This session’s bills, carried by Sen. Frank Ruff, R-Mecklenburg, and Del. Israel O’Quinn, R-Bristol, shift Appalachian Power’s rate reviews to every two years instead of three and allow the SCC to set the company’s electric rates going forward as it sees fit.
“I think it’s obviously a good thing for the ratepayers to have the SCC conduct its analysis with a less fettered approach,” said Gilmore. “But I think it is also good for the company as well. It gives them and others the predictability the utility should have in setting the rates.”
Previously, state law laid out a complex system for when rates could and could not be increased. If Appalachian Power or Dominion earned within 0.7 percentage points of their allowed profit margin — a range known as the earnings collar — rates would stay the same. If their earnings were below the lower end of the earnings collar, rates had to increase. If they were above the upper end of the collar, part of the excess earnings had to be refunded to customers.
The bill keeps the collar system for Appalachian Power reviews to determine how to handle overearnings but expands its range, making it more difficult for the utility’s profits to trigger automatic rate increases or refunds. If the company is found to have overlearned, all excess earnings must now be returned to customers. Previously, only 70% had to be refunded.
Additionally, the law changes how the SCC sets the utility’s future profit level. Currently, state law requires regulators to compare Appalachian Power’s profit level against the profit levels for similar-sized companies, but the new law gives the SCC the ability to set the profit level according to what regulators believe is reasonable. Regulators will also be allowed to use performance-based metrics, such as how a utility fares on customer service ratings.
“If you do these good things that benefit the customer you will be compensated at the following rate, which should be a win-win,” said Sierra Club of Virginia Legislative and Political Director Connor Kish. “People are getting better service and the company will have higher profit. Which is a much better way of going at it than, ‘We declare the company should have a higher profit.’”
Finally, the company will be allowed to use a tool known as fuel securitization, a way to pay for fuel costs upfront and seek recovery from customers over a period of time, and it will no longer have to file regular Integrated Resource Plans, which outline the utility’s long-range plans based on projections of electricity demand.
Hall said Appalachian Power is “comfortable with the bill’s changes to the earnings collar and the refund provisions for over earnings.”
“Appalachian Power’s position throughout the negotiation process with respect to this bill was that it accomplish our authorized rate of return as set by the SCC, no more and no less,” she wrote.
A tumultuous 2020 rate case
The changes follow a rocky rate case for Appalachian Power in 2020.
That year, the utility sought a rate increase on the grounds that it had earned below its allowed profit level over the prior three years. Its determination was largely based on its inclusion of $88 million in remaining costs for eight coal units it closed in 2015, which put the company’s earnings in the negative.
Initially, the SCC said those underearnings couldn’t be counted, a decision that prevented a rate increase even though projections showed Appalachian wouldn’t earn enough going forward to cover its expenses and earn its allowed profit. The utility appealed the ruling to the Supreme Court of Virginia, which said Appalachian Power should be able to recover those costs.
“That was one of the big disagreements we had over the APCo bill,” said Cleveland. “What happens to past under-earnings: Do you automatically get made whole, or do you have to carry your burden of proof to show you should be made whole? It should not surprise you to learn that I was in the camp that they should have to carry their burden of proof.”
A regulatory split from Dominion
Albert Pollard, a former Democratic delegate who was involved in negotiations on the Appalachian Power bill this session as a lobbyist for the Virginia Poverty Law Center, said the legislation will help the utility cope with shrinking grid demand in its Southwest Virginia territory.
People are moving out of rural areas, and energy is being more efficiently used, leading the utility to supply less electricity and consistently earn less than it is allowed, Pollard said.
“When you have fixed costs for maintaining the lines, bills are going to grow,“ Pollard said. “By having the reviews more often, the jumps wouldn’t be as large.”
“This bill doesn’t alleviate [the problem], but it takes good steps,” he said.
Others involved with negotiations on the bill said Appalachian Power could also benefit from being decoupled from Dominion, which over the past decade has supported a string of major changes to how the state regulates its electric utilities.
“Over the last decade a lot of fundamental aspects of how rates were set were changed every couple of years,” Gilmore said.
But while Cleveland said many of those changes to the code were favorable to Dominion, allowing it to avoid rate cuts, they were less beneficial for Appalachian Power, as the 2020 rate review demonstrated.
“This is one of the foundational problems with Chapter 23, is that it prevented the commission from setting the rates on a going forward basis,” said Cleveland. “What APCo wanted to do was get away from this structure where rate setting on a going forward basis was contingent upon certain outcomes from the past. Rate setting going forward should be reflective of going forward costs.”
Dominion officials said situations like the one Appalachian Power found itself in during the 2020 rate case, when the company projected it wouldn’t earn enough in the future but couldn’t raise rates under state law, were not an intended consequence. They also pointed to consumer protections in the changes made over the past decade, including customer refunds and a provision allowing the company to reinvest excess earnings into projects. Critics have said reinvestments reduced refund amounts.
“With rates that have been consistently below the national average for more than a decade, we’ve provided customers nearly $1 billion in investments in renewable energy and grid modernization, refunds, and bill forgiveness during the COVID-19 pandemic,” said Dominion spokesperson Jeremy Slayton in a statement. “Customers will see additional savings as a result of this year’s bipartisan legislation, which will bring our rates even further below the national average.”
Appalachian Power said its focus during negotiations was on how the bill would impact the company and its customers.
“Our approach to rate cases will remain consistent under the new law, and we will continue to work cooperatively with the Commission and staff,” Hall wrote.