The Virginia State Corporation Commission (SCC), in a Nov. 29 final order, concluded that the fair rate of return on common equity (ROE) for Virginia Electric and Power (Dominion Energy Virginia) is 9.2%.
“The commission finds that this ROE is supported by the record, is fair and reasonable to the company …, permits the attraction of capital on reasonable terms, fairly compensates investors for the risks assumed, enables the company to maintain its financial integrity, and satisfies all applicable constitutional standards,” the SCC said.
As noted in the final order, Dominion Energy Virginia in late March filed with the SCC an application for the determination of the fair ROE to be applied to its rate adjustment clauses (RACs) for the next two years.
The company requested that the SCC approve an ROE of 10.5% for Dominion Energy Virginia’s approved RACs, to be applied prospectively, effective with the date of the SCC’s final order in this proceeding, the SCC said, adding that the company currently has nine RACs subject to the ROE to be determined in the proceeding.
The SCC noted that a company witness calculated Dominion Energy Virginia’s cost of equity to be between 10.25% and 10.75% and determined that, considering the economic requirements necessary to support continuous access to capital, an ROE of 10.5% represents the company’s cost of equity.
A company spokesperson did not immediately provide a response to TransmissionHub on the order on Nov. 30.
The SCC said in its order that the Office of the Attorney General’s Division of Consumer Counsel witness calculated the company’s market cost of equity to be between 7.6% and 8.75%, and determined that 8.75% represents Dominion Energy Virginia’s market cost of equity.
The SCC staff witness calculated the company’s market cost of equity to be between 8.25% and 9.25%, and determined that establishing the company’s cost of capital at 9.1% was appropriate.
The SCC also said that the Virginia Committee for Fair Utility Rates examined the testimony presented by those witnesses and recommended that the SCC adopt a market cost of equity that is no higher than the 9.1% recommended by the staff witness.
The SCC said that it finds that a market cost of equity within a range of 8.5% and 9.5% fairly represents the actual cost of equity in capital markets for companies comparable in risk to Dominion Energy Virginia seeking to attract equity capital.
Furthermore, under the circumstances of this case, for instance, the SCC said that it finds that using a cost of equity of 9.2% is fair and reasonable.
The SCC said that it concludes that the return is supported by the evidence in the record, results in a fair and reasonable ROE, and satisfies the constitutional standards as stated by the staff witness: “maintenance of financial integrity, the ability to attract capital on reasonable terms, and earnings commensurate with returns on investments of comparable risk.”
Conversely, the SCC said that it further finds that the company’s proposed cost of equity of 10.25% to 10.75% represents neither the actual cost of equity in the marketplace nor a reasonable ROE for the company.
The SCC said that it concludes that a market cost of equity of 9.2% is supported by reasonable proxy groups, growth rates, discounted cash flow (DCF) methods, and risk premium analyses. The SCC noted that it concludes that the evidence supports a market cost of equity at the midpoint of the range – that is, 9.0%.
“We find that approving an ROE above the midpoint of the range found reasonable (9.2%) is supported by the concept of gradualism in ROE determinations,” the SCC said.
The SCC also said that it finds that the company’s proposed market cost of equity of 10.5% is not supported by reasonable growth rates, DCF methods or risk premium analyses.
For example, the SCC said, the company continues to use only earnings per share as the measure of growth in its DCF model. As the SCC has previously stated, using only earnings per share as the measure of long-term growth results in unreasonably high growth rates that upwardly skew results, the SCC said.
In addition, the company’s capital asset pricing model (CAPM) analysis is also flawed, the SCC said. For example, the company’s highest ROE estimates result from the use of a 2019 projected 30-year Treasury bond yield of 4.2% and a 2021 projected 30-year Treasury bond yield of 4.4%, the SCC said.
The SCC said that it has rejected the use of such projected interest rates in prior cases, stating that inclusion of those projected rates inflates the results of the utility’s risk premium analysis.
In addition, the company exclusively used earnings per share as the measure of long-term growth to develop the market risk premium component of its CAPM analysis, which results in an overstatement of those cost of equity, the SCC said.
The SCC noted that it further rejects claims that certain business risks facing the company warrant a 10.5% ROE. For instance, while the company witness claims that risks associated with the company’s anticipated capital expenditures warrant a 10.5% ROE, of the approximately $8.5bn of additional planned capital expenditures the company anticipates making, the record indicates that the company plans to recover more than $5bn of that projected amount through RACs, which permit the timely and current recovery of all reasonable and prudent costs on a dollar-for-dollar basis, the SCC said.
Dominion Energy Virginia suggests that its ROE should not be any lower than 9.4%, the SCC said, adding that it first approved an ROE of 9.4% for the company in a February order issued in other SCC cases. The midpoint of the range found reasonable in those cases was 9.0%, the SCC said. However, the SCC did not direct an ROE of 9.0% but, rather, approved 9.4% based on the concept of gradualism in ROE cases, the SCC said. Furthermore, the SCC said that its decision in those proceedings was based on the record of evidence presented there, which reflects earlier financial data. For instance, in those proceedings, staff and the company relied upon financial data from late 2016; in contrast, in the instant case, the company updated its ROE results with financial data through July.
Moreover, the SCC said, the record presented in the instant proceeding shows that the company’s updated ROE results reflect a reduction in most of the values in its DCF, CAPM, and risk premium results.
The SCC noted that the participants differed on which utilities should be included in the statutory peer group in the proceeding. For instance, Dominion excluded Mississippi Power Company from the statutory peer group because “its Moody’s long term bond rating (Ba1) has dropped below the required level of at least Baa.”
Staff and Consumer Counsel, the SCC added, included Mississippi Power in their statutory peer group analyses because “Mississippi Power had a Moody’s long-term bond rating of Baa3 at the end of the test period.”
The SCC noted that Mississippi Power’s downgrade would not affect its inclusion in the statutory peer group because the downgrade occurred on March 1, which is after the end of certain review periods. The SCC said that it finds that, for purposes of this proceeding, Mississippi Power is to be considered part of the peer group.
The SCC said that the statutory floor majority that it selects had, on average, a return on average equity close to the ROE found fair and reasonable in the order, resulting in a statutory floor below the approved ROE.
“The commission concludes that the specific majority chosen herein is reasonable and does not violate any constitutional or statutory provision,” the SCC said.