Virginia Sets New ROE for Electric Rate Adjustment Clauses

In a biennial review of an electric utility’s rate adjustment clauses (RACs), the Virginia State Corporation Commission has ruled that a fair rate of return on common equity (ROE) to be applied to the RACs would be 9.2%. That marks a reduction from the company’s currently approved RAC return on equity of 9.4%.

The utility, Virginia Electric & Power Company d/b/a Dominion Virginia Power Company, had submitted an application in March in which it requested an RACrelated ROE of 10.5% for the upcoming two-year period. In denying the utility’s recommended ROE, the commission faulted a number of arguments Dominion had presented in support of its proposal. Among the claims with which the commission took issue were the company’s proxy group selections, growth rates, discounted cash flow (DCF) methods, and risk premium analyses. The commission similarly dismissed the utility’s assertions that it was facing certain business risks that warranted a 10.5% return on equity. On that point, the commission explained that although Dominion had cited the risks inherent in a planned capital spending campaign, which could include investments as high as $8.5 billion, such risks were greatly mitigated by the fact that the utility intends to recover more than $5 billion of the projected amount through its RAC mechanisms, which permit the timely and current recovery of all reasonable and prudently incurred costs on a dollar-for-dollar basis.

Elaborating on the RAC protocol, the commission commented that the state legislature, in a series of controversial actions, had crafted the RACs and directed the commission to institute the riders to incentivize the construction of generation facilities in the state. The lawmakers had reasoned that more timely recovery of associated costs would accelerate utility decisions to pursue such power plant investments.

According to the commission, the utility currently has a total of nine statutorily established RACs that are subject to the ROE limits. It said that the RACs are dedicated to the recovery of new generating facility costs and are applied to customer bills as a rider in addition to base rates and fuel cost recovery charges. As a result, the commission noted, RAC charges constitute a large portion of a customer’s monthly bill. The commission found that a market cost of equity within a range of 8.5% to 9.5% fairly represents the actual cost of equity in capital markets for companies comparable in risk to Dominion. Based on its analysis of reasonable proxy groups, growth rates, DCF methods, and risk premium model results, the commission concluded that Dominion should be authorized a RAC-related ROE slightly above the 9% midpoint of that range.

The commission thus adopted a 9.2% ROE as appropriate and more reflective of its policy of gradualism in ROE determinations. In expounding on the differences between its own ROE calculations and those of Dominion, the commission noted that the utility continues to use only earnings per share (EPS) as the measure of growth in its DCF model. But, the commission said, it has ruled in past proceedings that using EPS as the sole measure of long-term growth can yield unreasonably high growth rates that upwardly skew capital cost results. In addition, the commission referenced the risk premium component of the company’s capital asset pricing model analysis, which the commission said resulted in an overstatement of the cost of equity due to reliance on a projected 30-year Treasury bond yield of 4.2% for 2019 and of 4.4% for such bonds for 2021. By contrast, though, the commission used current bond yields, which produced a significantly lower ROE range. Re Virginia Electric & Power Co., Case No. PUR-2017-00038, Nov. 29, 2017 (Va.S.C.C.).