Complex Energy Bill Will Raise Costs to Customers

Posted on January 9, 2023 by Stephen D. Haner
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The headlines in the coming General Assembly may be captured by fights over abortion and taxes, but the deepest reach into your pockets will involve your energy bills. The state’s dominant electric utility appears to once again be seeking to amend Virginia’s regulatory and ratemaking process to its benefit.

A draft bill circulating among energy issue observers, not officially identified yet as Dominion Energy Virginia’s handiwork, would drastically change the rules on consumer choice, the process for determining utility profit margins, and the treatment of any excess profits beyond those allowed returns on equity. The changes are likely to increase the monopoly’s hold on the market and its profits.

A provision would also reverse a major element of the 2020 Virginia Clean Economy Act by eliminating the mandate to close all remaining fossil fuel plants by the 2040s.  Instead, the State Corporation Commission would have to approve proposed closures after reviewing their impact on system reliability. Much will probably be made of nearby Duke Energy’s unprecedented brownouts last month as its solar assets proved worthless during bitter winter nights.

Rumors have circulated for weeks that Dominion has a major bill in the works, with two people who met with them to discuss the effort confirming that to me. One tied the effort to the company’s recently announced top-to-bottom review of its operations to improve “shareholder value.”

There will be many other bills, but two deserve mention in this analysis.

The draft presumed to be Dominion’s effort makes no mention of the small modular nuclear reactor technology which Governor Glenn Youngkin (R) wants the state to pursue.  A separate bill on that topic is expected, one that so far has not leaked out. The Governor’s nuclear aspirations may be compatible with the utility’s plans to rewire the regulatory process and could be incorporated into one bill.

Also, a news conference has been called for Tuesday by four legislators, three Democrats and a Republican, to announce their so-called Affordable Energy Act. “This bipartisan bill seeks to address rising energy bills in Virginia and customer overcharges from electric utilities by restoring regulatory authority to the State Corporation Commission,” an advisory states.

Their bill reasserting traditional SCC autonomy over rates and profit margins is totally incompatible with the utility’s approach. That bill is simple, short and clear. The utility draft is long, complex and obscure. If a real debate is allowed to materialize the contrast could be useful, and legislators will face a real choice if both bills advance.

In his 2021 campaign and in his 2022 energy plan document, Youngkin has made controlling consumer cost, increasing choice and competition, and returning SCC authority his stated goals. Much of this Dominion draft moves in the other direction.

It does return both Dominion and Appalachian Power Company, serving Western Virginia, to two-year rate review schedules, something in the Governor’s energy plan. Dominion would have to file its next case later this year, reviewing the expenses and profits from 2021 and 2022.

It also calls for some of the rate adjustment clauses, now separate bill elements tied to specific purposes or power plants, to be rolled into the base rates. Youngkin also called for that.  But the SCC is still directed to consider each activity independently, without regard to costs and profits elsewhere in its operation, so it is a meaningless change.  The SCC’s hands remain tied in a way they are not under true “cost of service” regulation.

The bill maintains what is called the return on equity (ROE) collar. Dominion’s current authorized ROE is 9.35%, but it really is allowed another 50 basis points and can earn 9.85% before being deemed to have earned excess profits. Excess profits are then divided 70% to customers and 30% to the company.

This bill going forward raises that collar to 70 basis points and the authorized ROE would really be 10.05%, probably an important milestone for Wall Street analysts.  And, as noted, that is 10.05% plus 30% of any excess.

But the change that may provide the greatest benefit to the company, and cost to consumers, involves the language guaranteeing that the profit margin will be set equal to or higher than the authorized profit margins at “peer” utilities.  Unique in the industry when created in 2007, at least the peer comparison standard gave the SCC some leeway in choosing the members of the peer group. That discretion is taken away in this draft.

This is the most obscure element in the draft, but it is likely to produce a higher ROE over time. Dominion, worried as it is about its reputation with investors, isn’t going to propose a method that would produce a lower ROE ceiling. Which is also why it will reject the proposal from the four legislators which gives the decision back to the SCC.

Should the new peer comparison process produce an ROE floor above 10%, remember there is still that 70 basis point collar allowing the utility to make and keep even more, plus its claim on 30% of every dollar earned above that.

The return on equity is a percentage of the company’s capital invested in its assets, and they get it every year. The more stockholder funds it uses to build things, the more profit it can keep.  An additional 1% annual ROE on the $10-$14 billion Coastal Virginia Offshore Wind project, for example, will add up to more cost to consumers for that energy.  In its recent approval of the project the SCC stressed that it doubles the company’s rate base subject to ROE.

It will be interesting to see how all this is pitched as good for consumers, and who helps with the messaging.

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Here’s the Tax Cuts Youngkin Proposes: Will the General Assembly Say Yes?

Posted on December 22, 2022 by Stephen D. Haner
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The set of Virginia tax changes Governor Glenn Youngkin (R) has baked into his proposed 2023 budget amendments is far more extensive and involves substantially more tax relief than the descriptions he offered in his December 15 presentation.

“Baked into” is the correct phrase because his actual proposals can only be found in the budget document itself. None of them are introduced as bills yet, but the text can be found in a series of Code of Virginia amendments starting on page 713 of the printed budget bill under “Additional Enactments.” You will not find them in the on-line version most people see, or even the heading Additional Enactments. You have to call up the full PDF document.

The 50 pages of dense text also include apparent changes to Virginia’s marijuana laws and the rules dealing with skill games. It is 50 pages of “legislating in the budget” on steroids, continuing and building on a trend many legislative process purists decry. In fairness, Youngkin didn’t start this. Nor is he fixing it.

In his presentation, Youngkin focused on two major tax proposals. He wants to cut the corporation income tax by 16%, from a headline tax rate of 6% to 5%. He wants to cut the top income tax rate for individuals from 5.75% to 5.5%. Since that top rate kicks in at $17,000 of taxable income, quite a few middle income households will benefit from that. How much they benefit I discuss below. (Hint, not much.)

Youngkin pegged it at $1 billion in tax relief, but that is just for the remainder of this two year budget cycle, ending July of 2024. The foregone revenue rises to $2.9 billion in the next biennium cycle, and $3.1 billion in the following, Fiscal Year 2027 and 2028 cycle. Those numbers were included in Secretary of Finance Stephen Cummings presentation from the same day. It totals $7 billion over six years, back loaded. If combined with last year’s changes, Virginia businesses and individuals will enjoy significant tax cuts.

What is included in the new batch other than the two income tax rate changes?

For individuals, Youngkin wants to increase the standard deduction another $1,000 per individual or $2,000 on a joint return. That achieves the 2021 campaign promise of doubling the standard deduction Virginia has offered for the past several years, only partially met last year. For a married couple that saves another $115 in tax (but only $110 if the top rate drops).

For individuals collecting military retirement pay, the administration wants to expand the subtraction to cover all retirees of any age, not just those 55 and older, effective with tax year 2023. The subtraction amount is $20,000 next year, $30,000 in 2024 and $40,000 starting in 2025. This, of course, would be in addition to the $9,000 (or $18,000 for a couple) standard deduction.

Cummings’s proffered explanatory table “scores” this at $37 million of revenue lost (or taxes reduced). That is ignoring the out years when the full $40,000 subtraction kicks in immediately upon retirement from the military at any age. The foregone state revenue on $40,000 at the top tax rate is $2,300 ($2,200 at 5.5%). A full fiscal impact analysis should be produced at some point in the coming session.

Measured by revenue impact on the state treasury, reducing the top individual tax rate to 5.5% is the largest proposal, putting about a third of a billion dollars back in individual pockets each year. But that is divided among millions of taxpayers. For someone with $50,000 of taxable income, it saves $125. On income of $1 million it saves $2,500. That will be a hard sell.

And while comments were made last week about tax relief being tied to future revenue growth targets, which if missed leave the tax rules unchanged, it appears that only applies to the individual tax rate cut. Most of the other proposals have no contingencies attached in the budget language. Another Cummings slide confirms that.

On business taxes, Youngkin’s two major proposals balance nicely. There is his cut in the corporate tax rate to 5% for businesses organized as C corporations. But for sole proprietors and partnerships, business income ultimately taxed under individual tax rules and rates, he proposes to piggyback on a popular federal small business tax provision allowing them to subtract 20% of their business net income.

That qualified business income or QBI deduction was created in the 2017 Tax Cuts and Jobs Act. On federal returns it is applied after the calculation of adjusted gross income (AGI). Since federal AGI is the starting point for state taxes, there is no similar QBI deduction recognized in Virginia.

Youngkin proposes to allow it in Virginia, but at 10% rather than 20%. According to a legislator who has looked, no other state with an income tax has conformed with the federal QBI. Virginia could be the first and it could be very attractive for small businesses and attract start-ups. And remember, if the top rate is cut to 5.5% for individuals, that also lowers taxes on Schedule C and other forms of business income reported on personal returns.

Attracting more business investment is also the justification for reducing the corporate income tax to 5%, which Youngkin ultimately wants to make 4%. North Carolina has slashed its rates and shows stronger economic growth than Virginia.

In the wake of passage of the 2017 federal tax bill, some legislators proposed similar corporate tax rate cuts. That is what the feds had done, cut the corporate tax rate. The state bills hit a wall in 2019, however, with the senior legislators reporting that the business community itself was apathetic. Nobody was saluting that flag but the patrons and us at the Thomas Jefferson Institute for Public Policy. Our proposals on the standard deduction got more traction (and still do).

The bills also got no support from then-Governor Ralph Northam (D). Youngkin presumably will push the idea and line up major business endorsements and some economic analysis to bolster his argument. He also built his budget on the assumption this and all his other ideas pass, removing the usual whining about having to “cut” the budget to “pay” for lower taxes.

Virginia is enjoying a bonanza of revenue growth. The $3.6 billion in unallocated revenue legislators have to work with is based on very conservative estimates that assume a period of recession, which might not materialize. Even with the tax cuts Virginia will be sitting on huge and growing cash reserves.

Yet the battle on all these proposals (except maybe on the third rail of military retirement pay) will be fierce. Government always wants more.

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Youngkin delivers early Christmas gift

Posted on December 20, 2022 by Barbara Hollingsworth
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Virginians received an early Christmas present this year. For four years, the Thomas Jefferson Institute for Public Policy has been strongly urging state officials in Virginia to lighten what has become a steadily increasing tax burden on residents and businesses in the commonwealth by enacting tax cuts and tax reform.

On December 15, during his appearance before the joint Senate and House of Delegates’ Finance and Appropriations Committees, Governor Glenn Youngkin took bold steps to do just that. The governor announced his plan to “accelerate” the state government’s transformation based on what he said was “driving better outcomes for less money.”

In his budget amendments to the 2022-2024 biennial state budget delivered to the General Assembly’s “money committees,” Youngkin proposed cutting taxes on Virginians by a billion dollars – in addition to the $4 billion tax relief bill he signed earlier this year.

Youngkin told legislators that the state, which is running a large surplus, can afford the tax cuts despite his acknowledgement that a national recession is looming. “Our carefully planned budget balances spending priorities and tax cuts, with roughly $1 billion … conditioned on meeting our 2023 revenue forecast,” Youngkin told state lawmakers.

The governor wants to “finish the job of doubling the standard deduction” for state income tax filers, a long-time policy objective of the TJIPP. He also wants to reduce the individual income tax rate for the highest income bracket to 5.5 percent and eliminate state income taxes on military retirement pay. Youngkin said that these individual income tax reductions will save Virginians $700 million per year.

Under the governor’s plan, the corporate income tax rate for businesses would also be reduced from 6 percent to 5 percent, “the first step toward the ultimate goal of 4 percent at the end of our administration.” For small businesses, Youngkin is proposing a 10 percent Qualified Business Income Deduction. These measures, if approved by the General Assembly, would total $450 million in business tax relief annually.

The Jefferson Institute argued back in 2018 that doubling the standard deduction for individuals “is the best of the various choices for individual taxpayers with the current projected revenue. It is the step taken by the Congress, which was seeking to move people away from itemized deductions. It also aligns Virginia with most surrounding states that use the income tax but do so with higher standard deductions for individuals and couples.”

We also argued that “reducing the corporate tax rate is the best step for business taxpayers and will help make Virginia more competitive.” Youngkin told legislators the same thing, pointing out that neighboring states such as Tennessee and North Carolina are more tax-friendly to business than the commonwealth.

And, while not part of the Youngkin package, we’ve firmly argued that Virginia tax brackets, standard deductions, and exemptions should be indexed for inflation, so taxpayers are no longer punished for rising consumer costs – and government coffers no longer profit from it.

But with the state government running a record budget surplus of $3.6 billion, the state can afford to return some of that excess to taxpayers. Especially since the governor noted that his proposed budget amendments include contingencies that halt any tax cuts and $2.5 billion in new spending initiatives if revenue targets are not met. “In the event of a recession, Virginia will be able to avoid raising taxes or cutting needed public programs by maintaining revenue reserves greater than 15 percent of expected revenues,” the governor’s office explained in a briefing document.

Besides the clear benefits of tax cuts to the Virginia economy, tax relief is needed now more than ever as the worst inflation in 40 years continues to erode state residents’ standard of living. Tax cuts will at least help mitigate some of the brutal effects of inflation.

“For the first time in about a decade, you’ve got a budget that is on the side of working people,” said state Sen. Steve Newman, R- 23rd District, a member of the Senate Finance and Appropriations Committee, after hearing Youngkin’s presentation.

Of course, tax relief won’t become a reality unless the General Assembly actually approves the governor’s budget amendments. But legislators will have a hard time explaining to their constituents that they refused to lighten their tax burden while sitting on a record budget surplus.

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On Slow Path to Repeal, RGGI Tax Passes $500 Million

Posted on December 12, 2022 by Stephen D. Haner
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The tax on each ton of carbon dioxide emitted by Virginia electricity plants dropped to below $13 a ton in the most recent sale of CO2 allowances conducted by the Regional Greenhouse Gas Initiative (RGGI). That meant Virginia collected only $71 million in tax revenue for the fourth quarter, the lowest amount of the four auctions in 2022.

The auction was held December 7, the same day Virginia’s Air Pollution Control Board voted to take the next step in the slow process to withdraw Virginia from the interstate compact to cap, tax and shrink CO2 emissions from large power plants.  It is a state regulation that forces large electricity producers to buy emissions allowances in the quarterly auctions.

Soon after his election 13 months ago, Governor Glenn Youngkin (R) announced his intention to withdraw from RGGI.  By mid-2022 he had appointed four of the seven members to the regulatory board and started the process for repeal.  His appointees voted for repeal, and one holdover Governor Ralph Northam appointee voted against , with two Northam appointees abstaining, according to the Virginia Mercury.

The process is really moving toward an expected legal challenge.  Democrats began the process for Virginia to join RGGI as a purely regulatory effort but completed it after it was blessed in 2020 legislation signed by Northam.  Eventually one or more judges will probably be asked to decide if that bill simply allowed (the word in the law is “authorized”) or indeed required participation in RGGI.

There apparently are even conflicting signals about the statute from the two attorneys general for the period, and perhaps even conflicting opinions from the current one, as detailed in the report from Virginia Mercury.  An assistant to current Attorney General Jason Miyares (R) advised the board last week it could move forward with repeal.

Until the regulatory repeal process is complete next year, or until some court acts to interpret the statute, Virginia electricity producers will still have to buy and cash in emissions allowances (think of them as a tax stamp) and Virginia will continue to reap tax revenue.  The total over two years is up to almost $525 million, despite the downtick in allowance prices.  This will ultimately be paid by Virginia electric ratepayers or customers of Virginia businesses.

Another aspect of the 2022 legislation which is crystal clear is how that tax revenue is spent by the state. About half is supposed to be used for capital projects intended to mitigate flooding or stormwater problems or protect coastal regions from ocean storms.  The other half is dedicated to making energy efficiency improvements or repairs to housing used by low-income Virginians.

Both dedicated revenue streams of more than $100 million a year have created networks of beneficiaries motivated to maintain the tax.  Read the claims of environmental advocates uncritically, and you might conclude the RGGI tax by itself will lower average global temperatures, stop hurricanes, restore the polar ice caps and reduce everybody’s electric bills.  Several local governments weighed in seeking continuation of the grants (which could certainly be funded another way.)

The first step in the regulatory process was a notice of intended regulatory action (NOIRA) and after the Air Board issued that an initial 30 day comment period occurred, now closed.  Supporters of RGGI who oppose repeal dominated that, filing about 730 comments opposed to the 50 or comments in support of repeal.

The “comments” continued during the Air Board meeting.  Last week the opponents stood up and turned their backs (in uniform black shirts) on Acting Secretary of Natural Resources Travis Voyles as he made a presentation on the issue.  The board still did what it said it intended to do and approved the actual repeal language. The document is to be circulated for internal agency review, published, and then will face another public comment period, this one lasting 60 days.

One detailed comment in support of repeal came from Dominion Energy Virginia, which has long opposed participation in RGGI.  Its main argument is that with so many other states not part of the compact, RGGI’s main result is to just shift fossil fuel generation to other states, with Virginia power companies buying off the interstate grid.

Dominion can do that internally, because its largest coal fired plant is in West Virginia and needs no RGGI allowances at all.  So can the state’s second largest utility, Appalachian Power, serving about 500,000 Virginia customer accounts. It has only one small power plant needing allowance in Virginia.  Most of its generation is already in non-RGGI states.

The stated goal of RGGI is to slowly reduce reliance on fossil fuels, but the Virginia General Assembly has also imposed renewable generation mandates on Dominion and Appalachian.  Those cannot be evaded by simply buying off the grid, and those targets are more stringent than RGGI.  Dominion wrote:

Compliance with the (Renewable Portfolio Standard) entails costs from REC (renewable energy credit) purchases and development of eligible energy resources. And to reiterate, RGGI compliance entails costs from CO2 allowance purchases. Both the RPS program and RGGI participation thus result in costs borne by Virginia electric customers to achieve what is fundamentally the same objective – ongoing reductions in power sector CO2 emissions.

Dominion was also clear in its comments that state law allows it to recover the cost of RGGI allowances from ratepayers, and it will do so. Even if repeal goes smoothly and on schedule it may need to continue to collect from customers into future years to cover the full expense.

With the RPS mandates in place, the only function served by RGGI is financial.  It taxes electricity to fund programs popular with a portion of the populace, and to drive up the price of using fossil fuels in order to discourage their use.  The power to tax has long been the power to destroy.

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Feds Admit: Ocean Wind Projects Threaten Whales

Posted on December 5, 2022 by Stephen D. Haner
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Soon after a group of opponents to proposed East Coast offshore wind projects hired a law firm with environmental regulation expertise, the federal Bureau of Ocean Energy Management (BOEM) announced a new plan to protect North Atlantic Right Whales and put it out for public comment.

The opponents, with Thomas Jefferson Institute for Public Policy as part of the coalition, had been pointing to the impact of the project on the whales for months and this protection and mitigation plan admits the problem is significant.

One apparent result of that will be a major delay in publication of the draft environmental impact statement (EIS) on Dominion Energy Virginia’s Coastal Virginia Offshore Wind (CVOW) project off Virginia Beach. It was supposed to be available this past August, and once published is expected to be the focus of extended comments and perhaps litigation from opponents.

The ongoing debate at the Virginia State Corporation Commission over consumer price protections (a decision should come soon) is not the last hurdle to construction of the $10 billion project, with a much higher cost now under discussion. That EIS clock is not even running yet.

Other projects along the East Coast are a bit further along in that EIS process, but their location in the known migration corridor for the endangered right whales is a complication for all of them. The BOEM document includes a series of maps showing the density of the whale populations mapped against the proposed project areas.

BOEM is quite clear its primary goal is not protecting sea life but complying with President Joe Biden’s Executive Order 14008, which calls for the development of 30 gigawatts of offshore wind turbines by 2030. Dominion’s 176 turbine, 2.6 gigawatt project is less than 10 percent of that total. By one count the planned projects include 3,400 turbines, other transmission structures and almost 10,000 miles of submarine cable.

BOEM asserts in the document that the steps it proposes solve the problems those create for the whales, while at the same time calling for more observation and continuous improvement to the protection plan. The thousands of comments for or against that assertion received so far have not been released.

The right whale population (about 340 individuals) is so reduced and stressed that the federal standard is not one can be accidentally killed. The loss of even one will accelerate the path to extinction. That has already been established by the National Marine Fisheries Service in a 2021 Potential Biological Removal (PBR) ruling. That “zero take” PBR is also behind an ongoing regulatory effort to reduce the speed of commercial shipping in the corridor, also being resisted by that industry.

Protecting the whales is now becoming a problem for New England’s lobster fishermen, fighting federal regulations against certain fishing methods that risk entangling the giant mammals. A federal court recently ruled against the fishermen, and retailers are under pressure to eliminate the product. Whole Foods did.

Writes Virginia attorney Collister Johnson for the Committee for a Constructive Tomorrow, in a comment filed with BOEM:

When the PBR (which prohibits the human killing of a single whale) is combined with the fact that BOEM has no knowledge of the number, location, or travel path of any individual whale, the entire Strategy is doomed to failure.

No amount of “mitigation,” “minimization,” “reduction,” or “observation” can succeed in complying with a PBR where zero tolerance is the standard. Indeed, this issue has been adjudicated recently by the U.S. District Court for the District of Columbia. In Maine Lobstermen’s Assoc. v. NMFS, Judge Boasberg ruled that where the PBR is effectively zero, any ocean activity authorized by BOEM which includes the continuation of human caused (whale) mortality is ipso facto arbitrary and capricious….

In summary, BOEM cannot research, collaborate, minimize, mitigate, monitor, avoid, evaluate, or otherwise strategize its way out of a zero take marine environment for the (right whale). Therefore, the Strategy is a huge waste of time and resources and doomed to failure.

Under these circumstances, litigation appears to be inevitable.

For the Dominion project, litigation produces delay and delay will increase the ultimate cost to Dominion’s customers, already beginning to pay for the project on monthly bills.

A separate but similar federal review is underway because a company is seeking a permit for extensive underwater surveys off New York State, potentially useful for future wind plans, which could also result in the “incidental taking” of marine life. More public comments are being sought. The assumption is that some loss of wildlife is likely, so the permit is needed. This survey activity is far less invasive than building and maintaining thousands of structures which remain in place for decades.

Industrial development of the oceans on this scale is going to harm wildlife, with right whales most vulnerable species. Period. The response from the climate alarmists? Attack the messengers, of course, as in this Huffington Post article that dismisses Johnson and others as “climate deniers” and claims they are just tools of the fossil fuel industry. In fact, the money flow is stronger between the wind industry and the environmentalists willing to kill off the whales.

As a mental exercise, imagine the debate if 3,400 turbine structures, 500 to 800 feet tall, and ten thousand miles of crisscrossing high voltage cables were proposed for the length of the Appalachian Mountains from New York to North Carolina. Nobody could dispute those would be bird and bat blenders. Surrounding landowners by the tens of thousands would decry the changes to the view. Which is why the push is to put them offshore, instead.

Propose instead a series of ocean oil or gas drilling rigs and every concern raised about the offshore wind turbines would suddenly dominate the environmentalist websites. Their silence on the threat to whales and other environmental impacts on coastal waters is deafening.

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