DOMINION Energy Virginia is asking the State Corporation Commission to raise its guaranteed return on equity so that it can attract the $11 billion in capital the utility says its needs over the next three years for upgrades under the Grid Transformation and Security Act, which was passed by the General Assembly and signed into law by Gov. Ralph Northam in 2018.
The state law removed a 2015 rate freeze, but allowed state-regulated utilities to use “overearnings” (i.e. excess profits) to modernize the grid, increase energy efficiency, and invest in renewable energy projects instead of returning the money to their customers.
Investor-owned Dominion’s current return on equity (defined as net income divided by the average shareholder’s equity) is 9.2 percent, set in 2017. The utility wants it increased to 10.75 percent, which would amount to an extra $122.1 million for investors. In its March 29 filing, Dominion stated that “10.75 percent represents the return required to invest in a company with a risk profile comparable to the Company.”
But electric utilities such as Dominion are state-sanctioned monopolies that are shielded from competition. Investors on Wall Street who put their money in Dominion, which is considered one of the top 20 safest investments for retirees interested in high dividends, have much less to worry about than if they invested in other companies on today’s roller-coaster stock market.
So where is the added risk coming from to justify a 1.5 percent increase in your return on equity? The Free Lance–Star asked Dominion.
A utility spokesman replied that grid upgrades are capital intensive, and raising the money needed is more difficult when Dominion’s ROE is below the industry average. However, he also acknowledged that Dominion is “a very stable company that has a strong record of paying dividends and return on equity.”
And the burden of proof is on Dominion, the third largest utility in the U.S., to demonstrate that it needs a higher return on equity to attract sufficient capital, an SCC spokesman told the FLS.
If Dominion makes its case and the higher ROE is approved, customer rates would not automatically increase. Under the 2018 law that eliminated a rate freeze, base electric rates cannot be raised until 2024.
But a higher ROE would help set the stage for future rate hikes after that.
The SCC spokesman explained that when the commission next reviews the utility’s earnings in 2021, “the ROE set in this case will be the number by which to determine the company’s earnings position. Under Virginia law, if the company overearns, a portion of the overearnings may be refunded to customers. Or, in lieu of a refund, the company may invest those overearnings in certain qualifying projects as determined by legislation adopted during the 2018 General Assembly session.”
But “overearning” simply means that the company takes in more profit than is guaranteed by the SCC. If Dominion’s guaranteed return on equity is increased, that would mean more money for investors, but less money for refunds or grid investments that directly benefit the company’s 2.6 million captive customers—who incidentally just got stuck paying up to $5.7 billion to clean up decades’ worth of toxic coal ash.
It’s up to the SCC, which will hold a public hearing on Sept. 10 in Richmond on the utility’s application, to decide whether that’s fair.