The Virginia legislature last week (Feb. 25) in the dying hours of the 2022 session approved a bill to change how the Old Dominion will regulate its giant, home-grown electric utility holding company, Dominion Energy. The bipartisan legislation is widely billed as, in the words of the Virginia Mercury, the statewide, online news service, “sweeping legislation to adjust Dominion Energy’s profit margin and reform the state’s system of electric utility regulation.”
But the history of the relationship between the state and Dominion including its predecessor (and still nominally the state utility VEPCO), suggests that the company generally comes out on top of any attempts to regulate its monopoly activities. Prior to the final approval of the Dominion-backed legislation, Albert Pollard of the Virginia Poverty Law Center, writing in the Richmond Times-Dispatch, said his group “understands the need for healthy and well-regulated utilities. But those utilities like Dominion should be forthcoming about how they got where they are. Dominion’s legislative effort this session is more of the same — bypassing the regulatory compact with legislative trickery instead of tough management decisions.”
Following the passage of the legislation, the Mercury reported, “Pollard took a more lukewarm approach, criticizing a provision that sets Dominion’s debt-to-equity ratio but saying he thought it was worth accepting with the restoration of [State Corporation Commission] oversight after two years.”
“This legislation is a win for consumers and regulatory oversight,” said Dominion spokesperson Aaron Ruby in a statement. “It will lower electricity bills for our customers, reduce the impact of rising fuel costs and strengthen SCC oversight.” The legislation passed the Democratic state Senate unanimously, with only one opposition vote in the Republican House.
The key to the Dominion legislation is restoring the role of the SCC into regulating the company’s Virginia rates and the overall operation of the company. In 1999, along with many other states, Virginia began a “deregulation” process designed to bring full wholesale and retail competition to electric service, according to a chronology by Direct Energy, an energy retailer. By 2009, the “General Assembly became uncomfortable with the level of competition and, feeling the pressure from utilities, began to reregulate electricity.”
In 2007, the legislature passed a “Re-Regulation Act,” which worked out to be entirely favorable to the utility. It essentially turned rate regulation over to the General Assembly, where decisions were made politically with little technical expertise, unlike the SCC practices. As a result, Dominion and much smaller Appalachian Power, a West Virginia subsidiary of Ohio giant utility holding company American Electric Power, serving a tiny portion of Virginia, earned considerably more in the state than they would have made under traditional utility regulation.
According to the Poverty Law Center’s Pollard, in the 15 years since 2007, “the state’s largest monopoly, Dominion, used its powerful legislative allies and legislative trickery to boost profits and avoid the fair process of regulation, earning $1.9 billion more than allowed under that boring old regulatory compact.”
The new legislation returns rate regulation to the SCC, but after a two-year gift to Dominion. The utility’s current profit margin (what it can earn in excess of costs) is 9.35%. The legislation will increase that figure to 9.7% for two years, when the SCC will again be able to set the figure based on its analysis of the utility costs, economic conditions, and other technical issues. According to Republican House Majority Leader Terry Kilgore, the two-year gift will let Dominion be in better position to borrow capital for new generation and provide stability before the SCC takes over.
While the Virginia legislation may improve utility regulation in the state, Richmond-based Dominion is considerably larger than its Virginia operations, with financial problems with investors that go beyond its rates in the home state. According to Wikipedia, Dominion “supplies electricity in parts of Virginia, North Carolina, and South Carolina and supplies natural gas to parts of Utah, Idaho and Wyoming, West Virginia, Ohio, Pennsylvania, North Carolina, South Carolina, and Georgia. Dominion also has generation facilities in Indiana, Illinois, Connecticut, and Rhode Island.”
The company has faced skepticism from Wall Street. The company’s stock has been falling rapidly in the last six months, from over $80/share to, most recently, just under $56/share, with a “bearish” rating short term, mid-term, and long term. A recent Morningstar analysis is “changing our economic moat rating to narrow from wide.”*
Pollard writes, “Dominion Energy, the holding company, has more debt than is ideal since it has used the cash cow of VEPCO, the regulated monopoly, to make mediocre to bad investments (everything from gas utility Questar to the doomed Atlantic Coast Pipeline. Also, to be fair, it has made good investments such as SCANNA in South Carolina).”
He concludes the “further legislative micromanagement of the SCC is not the solution to a problem that was, well, the by-product of past legislative micromanagement.”
On Feb. 8, Dominion announced fourth quarter 2022 earnings of $42 million ($0.07/share), compared to $1.3 billion in earnings ($1.63/share) for the 2021 fourth quarter. For the year, Dominion’s 2022 earnings totaled $994 million ($1.09/share), versus $3.3 billion ($3.98/share) in 2021.
* “Economic moat,” according to Investopedia, “popularized by Warren Buffett, refers to a business’s ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share. Just like a medieval castle, the moat serves to protect those inside the fortress and their riches from outsiders.”
–Kennedy Maize
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