Dominion disputes state review, says it needs higher rate

Dominion Virginia Power has told the State Corporation Commission that it still needs customers to pay higher rates, even after the commission's staff concluded that the company earned $523.7 million more than necessary last year.

Virginia's largest power company filed its rebuttal Wednesday to the staff filing, which also recommended that Dominion cut its rates.

The staff examined Dominion's earnings as part of a process that began in March, when the company proposed increasing its base rates for the first time in 17 years.

In its rebuttal, Dominion officials said SCC staff used an unfairly low rate of return on equity to calculate the company's base rate. Base rates cover a company's operating costs plus a return on its common equity. A specific rate of return - the percentage of shareholders' investment in the company that it earns as profit - is built into the base rates.

The SCC staff proposed a rate of return of 10.2 percent. It found that Dominion earned about a 19 percent return last year.

State law directs the SCC to set Dominion's rates by looking at the earnings of other utility companies in the Southeast. Dominion argued that its rate of return should fall closer to 13 percent, based on the earnings of electricity companies in Florida, Georgia and Alabama.

Dominion's filing Wednesday included the written testimony of Thomas Farrell II, chairman and chief executive of Dominion Resources Inc., the utility's parent company, based in Richmond. If the company's rate of return on equity is set too low, he argued, it will make it difficult for Dominion to raise capital in the financial markets. It also will put Dominion at a disadvantage in competing for credit against similar companies with higher rates of return, particularly while the credit industry remains skittish in the current economy, he said.

The company will have to pay more to borrow money, he said, and it will have to pass those costs on to customers.

The 2007 state law that now governs regulation of electricity rates addressed this concern by allowing Dominion a more generous return on equity than the old method, Farrell said. Without it, Farrell said in his testimony, the company would be less willing to embark on system improvements it has proposed.

Under the law, if the company is found to have earned too much, the commission can order a refund to customers of up to 60 percent of the extra earnings or cut the company's rates going forward without giving refunds for overpayment.

In the SCC staff's filing, Kimberly Pate, manager of audits for the commission's Division of Public Utility Accounting, concluded that a refund would give back $295.8 million to customers next year but a rate reduction would save them more money over time. It also would decrease the likelihood that Dominion would continue to overearn in future years, she said.

Farrell's testimony did not directly address the excess earnings in 2008 that the SCC staff identified. However, he criticized the staff review for emphasizing a rate reduction over the refund option. Nor did Dominion's rebuttal address its agreement last month with the Virginia Attorney General's Office. In that deal, the company agreed to drop its request for a rate increase and to offer customers a refund. The Attorney General's Office had found that Dominion collected $397 million more than it should have last year.

The SCC's three judges will consider the multiple filings in Dominion's rate case and could decide in favor of the company. A public hearing in the rate case is scheduled for Jan. 20.

Dominion's proposed new base rate went into effect on customer bills on Sept. 1. The company is allowed to apply the change on an interim basis before getting final approval. It would have to refund customers if the SCC approves lower rates.

The new rate added $5.22 to the bills of residential customers using 1,000 kilowatt hours of electricity per month. Since July, the reduced cost of fuel to generate electricity has more than offset that increase on customer bills, leaving them about the same as they were at the beginning of this year.

Carolyn Shapiro, (757) 446-2270, carolyn.shapiro@pilotonline.com