Overview and Proposals
Virginians pay some of the highest electricity bills in the country, according to the U.S. Energy Information Administration. (1) These bills are considered unaffordable for 75% of Virginia households. (2) The majority of Virginians are served by one of the Commonwealth’s two largest monopoly electric utilities, Dominion Energy and Appalachian Power Company. Fortunately, there are several mechanisms available to reform the current system into one that balances utilities’ interests and rate affordability. Electricity pricing reform, investment in energy efficiency, distributed energy resources, and reconsidering utility incentives are all mechanisms by which policymakers could address energy affordability.
Fair and reasonable electricity pricing
Every three years, the State Corporation Commission reviews the earnings reported by Dominion Energy and Appalachian Power. One purpose of these “triennial reviews” is to ensure that electric utilities are not abusing their monopoly position. Specifically, the Commission reviews utility base rates to ensure these monopolies only recover the cost of service plus an authorized rate of return. Unfortunately, utility-backed legislation passed in recent years has severely limited the Commission’s power to decrease rates when utilities overcharge customers above their authorized profit.
For example, during Dominion Energy’s 2021 rate case, state regulatory staff found that the utility had overcharged customers by $1.1 billion since 2017 and owed customers a rate cut of around $166 million as well as $830.9 million in refunds. (3) However, due to code utility-friendly code provisions, the agency could only issue a $50 million rate cut and parties to the case settled for $372 million in refunds. (4)
Preventing overcharges by investor-owned utility (IOU) monopolies would reduce costs to ratepayers and incentivize utilities to be more efficient. The following policy proposals would contribute to a more transparent regulatory process while empowering the SCC to prevent overcharges and ensure more affordable electricity bills:
The Commission should have the authority to determine the recovery period of large expenses, prioritizing affordability for ratepayers while still granting full cost recovery to electric utilities. The current law (56-585.1(A)(8)) allows IOUs to recover large expenses associated with coal combustion by-product management, severe weather events, and natural disasters in a single year, even if costs could be spread out and yield more affordable bills for customers. (5) Allowing utilities the discretion as to the recovery period for such costs is a recent modification that lacks any policy justification. In practice, it has the effect of altering the results of the triennial revenue review of base rates, artificially lowering utility earnings, and allowing IOUs to avoid rate cuts and customer refunds.
The Commission should be able to deny new Rate Adjustment Clauses (RACs) when a utility is likely overcharging in the base rates. RACs are extra charges that recover specific project costs through riders and outside the base rates. For example, the last SCC commission report showed that in 2021 the current base rate of Dominion Energy overcharged customers by $152.1 million above what the utility is authorized to recover. (6) Instead of adding new RACs, the Commission should be authorized to put new costs in the base rate. In this way, new projects would be paid for with the money the utility is already collecting in excess.
Virginia can significantly lower energy costs, reduce pollution, and spur job growth by implementing aggressive energy efficiency policies. Cost-effective efficiency upgrades can save the average Virginia household $729 a year on utility bills. (7) Businesses also benefit from energy efficiency, as the average commercial building wastes 30% of its energy. (8) Energy efficiency is also a powerful climate action tool. Tapping the full U.S. energy efficiency potential could cut national carbon emissions by 50% by 2050. (9) Lastly, energy efficiency generates the highest number of jobs in Virginia’s energy sector. In 2021, the efficiency industry employed over 73,000 jobs, compared to less than 28,000 from power generation and the fuel industry combined. (10) Clean Virginia shares these energy efficiency proposals with multiple advocates in the Virginia conservation community.
General policies that can expand the energy efficiency benefits in Virginia include:
Implementing more efficient building codes for new and renovated buildings.
Implementing a coordinated state-wide campaign to electrify fossil fuel-powered appliances. Electric appliances use considerably less energy and generate savings even with high electricity rates. Electrification can further reduce energy costs and pollution. (11)
Empowering local governments to advance energy efficiency. Localities need to be granted authority to (a) require building owners to “benchmark” their buildings’ energy intensity so potential tenants know energy costs in advance, incentivizing owners to make efficiency upgrades, and (b) adopt “stretch codes” with stronger efficiency and climate standards for buildings in their jurisdictions. Lastly, it is critical to protect localities from preemption legislation that revokes their existing authority to electrify new building construction and make the best, safest choice for their communities.
Ensuring stronger efficiency targets for investor-owned utility monopolies will nudge utilities to adopt broader efficiency measures and programs, avoiding costly new generation. (12)
Empowering a specific state agency, like the Department of Environmental Quality, to adopt the latest energy efficiency standards for multiple appliances would bring significant savings for both the commercial and residential sectors. If Virginia adopted all of the existing appliance standards the total electricity bill savings for the state could be $216 million every year; 9,021 million gallons of water would be saved, and the CO2 equivalent of more than 62,000 cars on the road would be avoided per year. (13)
Residential Energy Efficiency Programs from Investor-Owned Utilities
Energy efficiency programs should be at the center of any state affordability strategy. The Inflation Reduction Act (IRA) is a critical opportunity to harness energy efficiency investments that many families desperately need to reduce their energy bills. For example, the IRA would provide rebates of up to $14,000 per household including $8,000 for heat pumps, $1,750 for heat pump water heaters, and $840 for electric stoves. (14) Virginia Energy and all state agencies must play a critical role in coordinating these resources. However, there are some critical barriers at the utility level that the administration should work with stakeholders to solve in order to unleash the energy efficiency potential of Virginia homes.
Dominion Energy is the largest utility in the state serving 2.7 million customers, which is almost 70% of the electricity market. However, the utility lacks a solid coordinated energy efficiency program for residential customers. Although utilities should be a central player in the residential energy efficiency programs, up to date, Dominion has not ramped up, solidified, and coordinated its residential energy efficiency programs. As recently as 2020, Dominion Energy ranked 50th out of 52 utilities across the nation in energy efficiency performance, scoring the lowest rankings in program performance, program offerings, data accessibility, and evaluation measurement and verification. (15) Two aspects need to be improved to unlock the benefits of energy efficiency for Virginia households, the lack of customer awareness and the utility disincentives for energy efficiency
Lack of customer awareness:
The Grid Transformation Act of 2018 compelled Dominion to invest $870 million in energy efficiency of which the company has already spent $605 million in both residential and non-residential programs. (16) Despite this multimillion-dollar investment, a recent report developed by the consulting firm Cadmus showed that “only 19% of surveyed residential customers were “somewhat familiar” or “very familiar” with Dominion Energy programs, and even fewer (13%) reported participating in a program in the last three years (…) the general population program awareness is higher among customers in peer utility jurisdictions, ranging from 47% to 81%.” At the same time, the Cadmus report showed that residential customers, particularly income-qualified respondents, were strongly interested in program participation. (17)
The State Corporation Commission has also identified a lack of coordination in residential energy efficiency programs and confusion among would-be beneficiaries about eligibility and rules. For example, there are 6 programs with slightly different versions of the same residential services and home energy audits are not uniform across vendors. The Cadmus report identified as critical the consolidation and streamlining of Dominion’s 37 distinct energy efficiency programs. However, according to Dominion’s long-term plan, a complete consolidation of programs will not be possible until 2027. (18)
In its last energy efficiency filing, Dominion requested approval for a $2 million budget for an education and awareness campaign. It is crucial for the utility to coordinate with stakeholders and state agencies in order to conduct an effective campaign that will facilitate Virginia households' streamlined access to energy efficiency.
Lack of financial incentives for Energy Efficiency:
In its last energy efficiency long-term plan, Dominion showed that its current programs will not be sufficient to comply with the readily achievable savings targets established in the Virginia Clean Economy Act (VCEA). (19) This is disappointing given that the VCEA offered utilities 20 basis points of additional profit for each additional incremental 0.1 percent beyond the targets in the law. It is evident that the current incentives are not sufficient for utilities to ramp up their efficiency programs and exceed the targets. The paltry .1% of uncertain extra profits for efficiency can not compete with the current 9.35 guaranteed return on additional generation projects.
The main reason for the lackluster performance on energy efficiency is that the current regulatory structure does not align utility profit incentives with ambitious energy efficiency goals. The biggest source of profit for utilities comes from capital costs from expensive energy infrastructure projects. Reducing the need for new infrastructure projects via energy efficiency investments is not in the utilities' best interest. Unless there is a serious effort to align utilities’ profit incentive with efficiency, utilities will prioritize building infrastructure over ambitious efficiency programs.
An additional regulatory incentive for Virginia’s investor-owned regulators that hurts Virginians and energy efficiency efforts is that utility monopolies can profit in addition to their authorized rate of return. First, the utilities can keep profits that are 70 basis points above their authorized rate of return without any justification. For example, the current authorized profit level for Dominion is 9.35% but Dominion can keep up to (10.05%). This is referred to as the profit band. Second, the utilities can keep 30% of extra revenues above the 70 basis points band. These extra revenues can come from energy sales. Without scrutiny, utilities might be incentivized to sell as much electricity as possible to generate extra revenues and keep the bonus profits previously described.
Alternatives to solve energy efficiency disincentives include:
Create a new entity responsible for administering residential efficiency programs. This new entity will not have an inherent conflict of interest in developing and implementing energy efficiency programs, as its sole purpose would be to coordinate these programs statewide.
Slightly disincentivize new capital projects and favor efficiency measures. For example, by lowering the rate of return for new generation capacity and increasing the rate of return for programs that save energy.
The state should adopt specific enrollment, awareness, and savings targets for residential energy efficiency programs that the utility must achieve to collect profits.
Authorize utilities to keep the extra bonus profits (30% above the profit band) only if they show energy efficiency gains above the minimum requirements of the VCEA.
Distributed Energy Resources
Distributed energy resources (DER) like rooftop solar, community and shared solar, battery storage projects, and other methods of community-owned energy are excellent ways to reduce emissions, lower prices, improve reliability, and empower communities. Unfortunately, there are still many barriers to consumer-friendly distributed energy, including expensive fees for shared solar and interconnection hurdles largely put in place by Virginia’s utility monopolies. All stakeholders should closely coordinate efforts to make sure distributed resources can thrive and generate benefits for all.
DER projects have multiple benefits, including reducing the impacts on habitats, farms, forests, and waterways inherent in large-scale utility renewable projects. The DER model relies instead on the built environment and is closer to the demand the energy is intended to serve. In addition, DER involves residents in the climate solution and allows them to benefit from economic investment in the clean energy future. Virginia Energy should lead a study to measure the benefits and cost of distributed energy and how to harness its value for the grid and all rate-payers.
Utility Incentive Reform
The driving incentive for Virginia’s electric utility monopolies - per their fiduciary duty - is to maximize profits for shareholders and build out capacity rather than leverage energy efficiency. As noted prior, this incentive regularly is in conflict with the broader societal goals of environmental protection, affordability, and consumer protection. Virginia should consider mechanisms like performance-based regulation so that electric utilities are motivated and required to both decrease emissions and improve customer benefits through lower costs, efficiency, and reliability.
In order for a regulated monopoly to function in the best interest of the ratepayers and advance the commonwealth's energy and environmental goals, we recommend consideration of performance-based incentives to be designed in a participatory way and evaluated periodically.
A balanced system
Lawmakers, advocates, and regulators should work towards a Virginia in which power is distributed more equitably so that all Virginians benefit from an energy system that prioritizes people and the planet over corporate monopoly profit. Some critical aspects to consider for environmentally responsible energy include:
Recognizing the benefits of renewable energy sources near demand centers and within the built environment as a way to reduce transmission infrastructure, protect natural resource impacts, and build resiliency into the grid.
Granting Virginians the ability to generate their own energy and not only save money but even earn money.
Leveraging advanced technology to streamline and reduce the energy use of Virginia homes. Digital tools like sensors and smart meters would sync homes and businesses with the grid so that appliances could automatically operate when electricity is the cheapest. This will also benefit the utility's management of peak load.
Reevaluating utility incentives so that electric utilities are motivated and required to both decrease emissions and improve customer benefits through lower costs, efficiency, and reliability.
Environmental Justice and Good Governance
Environmental justice must be at the core of Virginia’s generational energy transition so that this transition shifts more power to Virginia households and small businesses while reducing carbon emissions and harmful pollutants. Carbon-emitting energy sources not only pollute the air, water, and land, but they also expose families and those on fixed incomes to volatile market prices. We must upgrade our energy system into one that lowers pollution and customer bills, establishes strong consumer power and protections and provides reliable and renewable energy year-round.
Three major players drive Virginia’s energy system: the electric utility monopolies, the customers, and the regulators. Unfortunately, the electric utilities’ current role in the system is disproportionately large leaving customers with virtually no voice, regulators with insufficient authority, and utilities a pass to regulate themselves. This imbalance of power has resulted in a system that encourages inefficient and expensive projects while leaving affordable clean energy solutions on the table. This is a bad deal for Virginians and is an unsustainable model for a fair and affordable transition to clean energy.
1) “2020 Average Monthly Bill-Commercial (Data from Forms EIA-861-Schedules 4A-D, EIA-861S and EIA-861U).” (2020). https://www.eia.gov/electricity/sales_revenue_price/pdf/table5_b.pdf.
2) “Electricity Burden and the Myth of Virginia’s Rate Utopia.” 2018. Virginia Poverty Law Center. August 15, 2018. https://vplc.org/electricity-burden-and-the-myth-of-virginias-rate-utopia/.
3) See Patrick Carr Direct Testimony 2021 Dominion Rate Case. Supplemental Appendix A, 8. https://scc.virginia.gov/docketsearch/DOCS/5y_v01!.PDF
4) SCC Approves Settlement in Financial Review of Dominion Energy Virginia Rates; Customers to Receive Refunds Totaling $330 Million and Rate Reduction of $50 Million. https://scc.virginia.gov/docketsearch/DOCS/5y_v01!.PDF
5) Patrick Carr Direct Testimony Supplemental Appendix A.
6) State Corporation Commission. Status Report: Implementation of the Virginia Electric Utility Regulation Act Pursuant to § 56-596 B of the Code of Virginia https://scc.virginia.gov/getattachment/ce6d77b0-052c-4961-b5cf-064bad4be9b6/2022-VEUR.pdf. 24
7) Wilson, Eric, Craig Christensen, Scott Horowitz, Joseph Robertson, and Jeff Maguire. 2017. “Energy Efficiency Potential in the U.S. Single-Family Housing Stock.” National Renewable Energy Laboratory. 62-63 https://www.nrel.gov/docs/fy18osti/68670.pdf.2. State Fact Sheets available: https://resstock.nrel.gov/factsheets/VA
8) “About the Commercial Buildings Integration Program.” n.d. Energy.gov. Accessed July 11, 2022. https://www.energy.gov/eere/buildings/about-commercial-buildings-integration-program#:~:text=buildings%20is%20enormous.
9) “Halfway There: Energy Efficiency Can Cut Energy Use and Greenhouse Gas.” 2019. Aceee.org. 2019. https://www.aceee.org/fact-sheet/halfway-there.
10) Coplon-Newfield, Gina. 2022. Review of United States Energy and Employment Report by State 2022. Edited by David Keyser and Hannah Schanzer. U.S. Department of Energy. June 2022.
11) “Lessons in Residential Electrification.” n.d. Community Climate Collaborative. Accessed July 11, 2022. https://theclimatecollaborative.org/lessons-in-residential-electrification.
12) “New Data, Same Results – Saving Energy Is Still Cheaper than Making En.” n.d. Www.aceee.org. https://www.aceee.org/blog/2017/12/new-data-same-results-saving-energy.
13) Appliance Standard Awareness Project. https://appliance-standards.org/sites/default/files/Virginia-2022.pdf
14) Inflation Reduction Act Summary https://bipartisanpolicy.org/blog/inflation-reduction-act-summary-energy-climate-provisions/
15) Grace Relf, Emma Cooper, Rachel Gold, Akanksha Goyal, and Corri Waters. “2020 Utility Energy Efficiency Scorecard”. February 2020. https://www.aceee.org/sites/default/files/pdfs/u2004%20rev_0.pdf
16) Virginia Electric and Power Company Application for Approval of its 2021 DSM update pursuant to § 56-585.1 A 5 of the Code of Virginia. SCC staff prefilled testimony of Justin Morgan https://scc.virginia.gov/docketsearch/DOCS/6y0101!.PDF. 18
17) Virginia Electric and Power Company Application for Approval of its 2021 DSM update pursuant to § 56-585.1 A 5 of the Code of Virginia. Cadmus Report. “Among surveyed residential customers, 84% would be somewhat interested or very interested in program participation, with income-qualified respondents expressing the strongest interest” Cadmus Report. 34-35
18) Virginia Electric and Power Company Application for Approval of its 2021 DSM update pursuant to § 56-585.1 A 5 of the Code of Virginia. Cadmus Report https://scc.virginia.gov/docketsearch/DOCS/67%40d01!.PDF. 10
19) Virginia Electric and Power Company Application for Approval of its 2021 DSM update pursuant to § 56-585.1 A 5 of the Code of Virginia. SCC Staff testimony of David J. Dalton https://scc.virginia.gov/docketsearch/DOCS/6xzy01!.PDF. 60