Virginia SCC grants reconsideration in Dominion plant case to address ROE concerns

The Virginia State Corporation Commission (SCC) recently granted reconsideration of the state Attorney General’s petition, which asked the SCC to find that the enhanced rate of return on common equity (ROE) required in the case involving Virginia Electric Power’s d/b/a Dominion Virginia Power’s proposed Brunswick County Power Station applies only to the costs of the generation facility and not to any attendant transmission infrastructure costs.

The SCC awarded a 100 basis point increase to the company’s general ROE for the first 10 years of the service life of the generating facility, the attorney general said, adding that the company, whose parent company is Dominion Resources (NYSE:D), will apply this enhanced rate of return when calculating the revenue requirement for its rate adjustment clause (RAC), rider BW, which will recover the costs necessary to build the generation facility as well as associated transmission infrastructure costs. Therefore, the company will receive an enhanced ROE that will apply to the costs of the generation facility itself as well as to about $89.1m worth of transmission infrastructure costs.

The total cost of the Brunswick County Power Station is $1.3bn. The combined-cycle, natural gas-fired power station will serve growing customer demand and replace electricity from aging coal-fired power stations that are being retired for economic and environmental reasons.

The approval came despite the fact that parties to the case, including a hearing examiner with the SCC, said the utility had not done enough to seek outside power in place of this self-built project.

According to a study done for Dominion, the station will generate about $824m in economic benefits for the state during the development and construction period.

Dominion said it plans to start construction immediately with commercial service expected to begin in the summer of 2016.

This matter is continued, the SCC said in its Aug. 22 order.

As reported, Dominion Virginia Power on Aug. 2 received permission from the SCC to build the 1,358 MW, natural gas-fueled station near Lawrenceville in Brunswick County.

The SCC also approved a certificate of public convenience and necessity for transmission interconnection facilities needed to tie the station to the grid, and a rate adjustment clause, Rider BW, which will allow the company to recover project costs.

According to the petition of the Division of Consumer Counsel of the Office of the Attorney General, the company estimates that the transmission infrastructure component of the $1.3bn will be about $89.1m, excluding financing costs.

The SCC majority relied on a sentence to reach the conclusion that the law requires an enhanced ROE to be applied to transmission infrastructure: “A utility that constructs any such facility shall have the right to recover the costs of the facility, as accrued against income, through its rates, including projected construction work in progress, and any associated allowance for funds used during construction, planning, development and construction costs, life-cycle costs, and costs of infrastructure associated therewith, plus, as an incentive to undertake such projects, an enhanced rate of return on common equity calculated as specified below.”

A finding that “costs of infrastructure” is included in “costs of the facility” in the related statute is a necessary first step in order for the majority of the SCC to reach its conclusion. However, the attorney general added, it is logically and grammatically incorrect to determine that “costs of infrastructure” is a component of “costs of the facility.”

As SCC staff and the company agree, the word “therewith” in the statute relates to the term “facility,” that is, infrastructure associated “the facility.” Infrastructure may be associated with a facility but it would not make sense for the statute to refer to infrastructure that is associated with costs.

Therefore, the attorney general added, the phrase means that a utility may recover costs of transmission infrastructure that is associated with a generation facility.

Also, if transmission infrastructure were a component of a “facility,” and intended to be included in the meaning of “facility,” then the phrase “associated therewith” becomes unnecessary and redundant.

The provision cited by the majority only enumerates the types of costs that a utility is to have the right to recover through its rates. Such recoverable costs include planning, development and construction costs. After identifying those categories of costs, the statute provides that a utility may also recover an enhanced rate of return “as specified below,” the attorney general added.

The phrase “as specified below” makes clear that the statute is directing the reader to refer to subsequent language to determine how the enhanced return is to be calculated and applied. The attorney general also noted that the statute does not state that an enhanced return is to be applied to all of the categories of costs which may be recovered through rates.

The language regarding the application of the enhanced ROE refers only to the “facility,” and there is no indication that “the facility” – or “the entire facility” – is to extend beyond the generation facility to include separate transmission infrastructure.

While there was significant argument presented regarding the proper service life for the Brunswick generating plant, there was no discussion of the proper life for an associated transmission line.

The attorney general also said that since the company would already be recovering construction work in progress (CWIP), for instance, on associated infrastructure during the construction phase, the word “entire” cannot be used to bootstrap transmission infrastructure into the category of costs to which an enhanced return may be applied.

Furthermore, viewing the statutory framework as a whole, it should be clear that the General Assembly did not intend for electric transmission lines and related transmission infrastructure to be considered part of the generation “facility” and also subject to an enhanced return.

“[I]f everything being recovered in rates through the … RAC, including costs of transmission infrastructure associated with the generation facility, gets the ROE adder, then what purpose is served by the statute directing that only ‘the facility that is subject of the [RAC]’ gets it?” the attorney general said. “What else could get it? The only reasonable interpretation of this phrase is that, while certain costs – including costs of infrastructure associated with the generation facility – may be recovered generally through the rate adjustment clause, the enhanced rate of return is to be applied only to the generation facility itself.”

Among other things, the attorney general noted that the decision will establish an important precedent with significant cost implications for customers, especially in the event that the company builds an offshore wind facility or a nuclear plant with substantial infrastructure costs.

The company has indicated that it may pursue an offshore wind project of up to 2,000 MW, the attorney general said, noting that company officials have estimated the cost of offshore wind to be “three times higher than natural gas.”

In its order, the SCC also granted reconsideration to consider a joint motion by PJM Power Providers Group and the Electric Power Supply Association and a motion by the Doswell Limited Partnership. The joint motion asked the SCC to, among other things, clarify what suffices as evidence of a utility’s consideration of market alternatives.

About Corina Rivera-Linares 3112 Articles
Corina Rivera-Linares, chief editor for TransmissionHub, has covered the U.S. power industry for the past 15 years. Before joining TransmissionHub, Corina covered renewable energy and environmental issues, as well as transmission, generation, regulation, legislation and ISO/RTO matters at SNL Financial. She has also covered such topics as health, politics, and education for weekly newspapers and national magazines. She can be reached at clinares@endeavorb2b.com.