by Jeff St. John
May 09, 2019

Over the past year or so, we’ve been tracking the unsteady progress of utility grid modernization proposals, and the steadier march of energy regulatory reforms, taking place on a state-by-state basis across the country. 

This week, we saw these two industry trends collide in Virginia, where top utility Dominion Energy, which has already seen several setbacks from state regulators in the past six months, is now facing a broad-based political coalition that wants to deregulate the state’s energy structure, and relegate Dominion to a “wires-only” transmission and distribution provider.

That’s the goal of the Virginia Energy Reform Coalition, an unusual combination of right- and left-leaning organizations led by former Republican state Attorney General Ken Cuccinelli.

The group launched this week with a nine-point policy program that would amount to converting Virginia’s vertically integrated utility regulatory framework into a Texas-like competitive market. 

Strange bedfellows

The plan contains several relatively noncontroversial proposals, such as low-income bill assistance and weatherization programs, increased consumer protections and uniform interconnection standards. These are of value to the environmental and consumer groups that are part of the coalition, such as the Virginia Poverty Law Center, Appalachian Voices, Clean Virginia and the Earth Stewardship Alliance. 

But it also includes plans to create a competitive retail electricity market, phase out capacity markets, and create an independent grid operator, with an end goal to “integrate grids, markets and operations” across the state. This set of free-market reforms has drawn the support of coalition members such as the libertarian Reason Foundation, free-market think tank R Street Institute, and the FreedomWorks Foundation. 

Cuccinelli, a conservative who lost the Virginia governor’s race in 2013 after being implicated in a Republican state party gift-giving scandal, framed the group’s goals as “shrinking the control of the government-imposed electricity monopoly” to enable “more citizens’ control, more choices, more innovation and lower prices.” 

There’s also a split between the coalition’s free-market members on the subject of climate change.

Some, such as the R Street Institute, have avowed the reality of climate change, with an energy mission statement calling for a “cleaner environment and a thriving economy through principles of market competition, limited government and well-founded science.” 

But the Reason Foundation and the Virginia Institute for Public Policy were condemned by U.S. Senate Democrats in 2016 for playing a role in denying the reality of human-caused global warming, and blocking political progress on combating it, on behalf of fossil fuel industry donors. 

A common foe: Dominion

What unites these otherwise unlikely partners is their antipathy to Dominion Energy’s outsize power as the state’s largest vertically integrated utility, and its outsize influence on Virginia’s legislature as the state’s biggest political donor. 

“The status quo is carefully designed to line the pockets of the government-protected utility monopolies that have been calling the shots,” Appalachian Voices Executive Director Tom Cormons said in Tuesday’s release. 

In 2015, Virginia lawmakers passed a law that froze rates for Dominion, a move that actually held rates higher than they would have otherwise been if the State Corporation Commission (SCC) had been allowed to review them and order refunds under the traditional rate-making process. The law was intended to help Dominion, which serves about 67 percent of Virginia's electric customers, manage the future costs of complying with the Obama administration's Clean Power Plan. 

Yet despite Donald Trump’s election and the demise of the Clean Power Plan, Dominion lobbied to protect the law against repeal until 2017. That year the SCC reported that Dominion would have been forced to refund ratepayers from $133 million to $175 million for 2015 and 2016 if its rate reviews had been in place. 

The controversy led to a broad legislative effort to rewrite Virginia’s energy regulations, culminating in last year’s Grid Transformation and Security Act.

Virginia’s Democratic Gov. Ralph Northam described the legislation as “ending the freeze on energy utility rates, returning money to customers, and investing in clean energy and a modern grid.” 

But while this bill did end the rate freeze, and mandated that Dominion spend $870 million on energy efficiency, it also declared large swaths of renewable energy, energy storage and transmission and distribution grid investment to be “in the public interest” — a move that further weakened the SCC’s authority over utility investment decisions. 

Pushback from regulators, renewables and consumer advocates

Dominion filed its first $6 billion grid modernization investment plan under the new law in June 2018, including $1.3 billion for smart meters, $776 million for intelligent grid devices and automated control systems, and $3 billion in “grid hardening,” over the next three years.  

But in January, the SCC rejected the entire plan except $154 million for physical security and cybersecurity spending, on the grounds that Dominion failed to prove its investments would be cost-effective. 

This denial came one month after the SCC ordered Dominion to redo its integrated resource plan (IRP) for 2019 to 2023, saying it overestimated future loads and the amount of new generation needed to serve it.

Critics say the IRP was designed to justify Dominion’s plan to build eight to 13 new natural-gas-fired power plants and supply them via a proposed pipeline project opposed by environmental groups. Dominion’s revised IRP, filed in March, cuts its projected gas-fired power plant needs roughly in half, but still calls for the pipeline to be built. 

Dominion’s critics say it has used its lobbying might to co-opt Virginia’s renewable energy policies. Last year’s Grid Transformation Act declared up to 5,000 megawatts of solar and wind to be “in the public interest,” opening the door for Dominion to propose utility-owned projects to meet the voluntary goal. Dominion opened its first 500-megawatt solicitation in October, and last month inked a 350-megawatt solar deal with Facebook, adding to two projects adding up to 240 megawatts already underway to serve the company’s data centers and facilities.   

But Dominion’s Virginia generation mix is still 33.8 percent nuclear, 33.6 percent natural gas, 26.5 percent coal and 5.6 percent renewables, with a state voluntary renewable portfolio standard that requires no more than 15 percent renewables by 2025. Meanwhile, clean energy advocates say that Virginia’s distributed and third-party solar potential has been held back by the state’s relatively weak net metering and community solar programs.

Taken collectively, these legislative actions have blocked opportunities for clean and distributed energy technologies to proliferate, the coalition's members argue.

“Virginia forgoes hundreds of thousands of advanced energy jobs due to unnecessary market barriers erected and enforced by Dominion Energy and its political allies,” Brennan Gilmore, executive director of liberal environmental group Clean Virginia, said in Tuesday’s release.

Which way for deregulation: Texas or California?

Dominion’s initial reaction to the coalition’s plan was to attack it as expensive and dangerous. “This coalition’s collection of grab bag policies was tried and failed and ultimately led to the bankruptcy of Enron,” Dominion spokesperson Rayhan Daudani told the Washington Post

Daudani is referring to what happened to California after its 1999 energy deregulation, which led to the rise of Enron’s market manipulation, the state’s energy crisis of 2000-2001, and the (first) bankruptcy of utility Pacific Gas & Electric. Virginia also deregulated its energy markets in 1999, and while it didn’t suffer California’s fate, it reverted to its current vertically integrated market structure in 2007. 

The answer to this critique, coalition members say, is Texas: The country’s biggest, most aggressive, and arguably most successful deregulated energy market.

Texas’ approach has its critics, with some questioning whether its energy-only markets can deliver the long-range investments needed for future capacity needs. But Texas’ deregulated system has also enabled the integration of vast amounts of wind energy, and the state’s deregulated market has helped make it a leader in corporate renewables procurements for wind, and an increasing amount of utility-scale solar, as well. 

Pat Wood III, formerly the head of the Public Utility Commission of Texas in the late 1990s and Federal Energy Regulatory Commission chairman during the Bush administration, consulted on the coalition’s plan, and spoke at Tuesday’s press conference to launch the effort, the Post reported. 

Dominion's Daudani told the Post that “[c]ustomers in deregulated states pay rates that are more than 40 percent higher on average,” but that statement seems to conflict with other sources of data on the topic.

For example, the American Public Power Association released a report in May 2018 (PDF), based on U.S. Energy Information Administration data from 1997 to 2017, that found that increases in retail electric prices across both categories of states were “about the same, though customers in regulated states saw a slightly higher percentage increase in rates.” 

It’s unclear how the different planks of the coalition’s platform will move forward. Some of their planks represent increases in already-committed investments from Dominion, such as low-income home weatherization and energy efficiency, or improvements in interconnection processes. 

But any efforts toward energy market deregulation are likely to face a long and challenging path, if the evidence from other states are any guide.