Comments on HB 1526

Virginia Clean Economy Act

Thomas Hadwin

General

I have not participated in the development of HB 1526. Many well-intentioned people must have spent
countless hours putting it together. Some of them I know, and I respect their opinions. I spent hours reviewing
the substitute bill today. I have serious reservations about it.

You have been asked to call your delegates to ask them to support the bill. Before you do, take a look at what I
have to say, then make your own decision about what to do. This bill essentially locks in our energy policy
through 2050. It tweaks an outdated 20th century regulatory scheme and extends it until the middle of the 21st
century.

It intends to create a clean energy economy by promoting solar, wind, energy efficiency and storage. But the
implementation of the programs is primarily left to a single utility, although timelines and targets are imposed.
In this century, we now have technologies to produce electricity that are clean and cheap. This bill encourages
the “clean” but loses the “cheap.”

Instead of setting the stage for a vibrant economy centered upon clean energy technologies, this bill confirms
the many utility profit grabs embodied in the 2018 Grid Transformation and Security Act (GTSA). And it adds
some more, especially related to offshore wind.

Virginia flirted with opening up our energy system to market-based forces in the late 1990s. But our major
utility discovered that it was easier to manage the legislative and regulatory process to build their profits rather
than compete on an equal footing with other energy providers. That change in strategy has produced
considerable benefits to their shareholders. But it has harmed the interests of families and businesses in
Virginia.

Other states stayed the course of regulatory redesign. They now have rates lower than what they would have
been if they had not embarked on creating a modern energy system. They created an environment where
innovative new companies created jobs, cost savings and accelerated economic development. And their utilities
thrived by developing new business opportunities. It took some adjustment, but they are now prepared for the
future, no longer reliant on old ways of doing business.

Despite good intentions, HB 1526 attempts to promote more clean energy by a variety of complex mechanisms.
More wind and solar will be developed as a result, but perhaps not as fast and at much greater expense than if
we choose another path.

A Simpler Path
A concise bill could be drafted that said from now on, new generating facilities built by Phase I and Phase II
utilities could not be included in the rate base or in a Rate Adjustment Clause (RAC). If a utility wanted to build
them, they would have to earn their own way in the wholesale energy market. Nearly 40% of other states have
already chosen this path and their utilities are doing fine and customers are saving billions in energy costs.

With wind, solar and even conventional generation our utilities no longer provide an added value when they
build new generation and put it in the ratebase. With wind and solar, the ones that know how to do it best are
independent developers. The utilities just buy their projects and add a hefty profit at our expense.

A utility would still get paid for its wires and recover all of their costs of serving us, plus a fair return. Virginia
law requires it.

No new generation would go in the ratebase or a RAC. A utility would have no reason to exaggerate its growth
in demand to build a new plant. Or build something else that is unnecessary, because it would cost them money
not their ratepayers. But what about what has already been built?

All of the existing generation in the general ratebase or in various RACs could be tallied. We all benefitted from
the operation of the plants and we made a promise to pay for them in full when they were built regardless of
how much they contributed in output. The total value could be appropriately distributed among customer
classes. A cost per kilowatt-hour could be established for each rate schedule for what we might call a “Legacy
Cost.” This would gradually decline as the plants depreciated. Payments would be usage based, and could be
adjusted at a regular schedule to reflect the decline in the asset base, changes in usage, customers coming and
going, etc. But the important thing is that customer costs would be lowered considerably, and the utility would
still receive the fair return it was originally promised.

If a plant no longer had value as a generator, it would be retired or mothballed. Payroll costs, operating and
maintenance expense, fuel charges, etc. would halt. Customers would continue to pay off the plant until the end
of its financial life. We do that now, except the cost savings go to utility shareholders instead of back to the
ratepayers because of the lack of regular rate review.

Utilities would no longer be dependent on increasing income or building new facilities to remain prosperous.
There would be no reason to oppose power purchase agreements (PPAs) with low-cost providers because that
would be the best way to serve the customers.

There would be no need for net metering caps. The costs of improving the grid to make it ready for the two-way
flow of energy and information necessary to optimize the use of distributed energy resources such as solar and
storage would be balanced against the benefits of having those resources within the distribution system (such as
improving resiliency and reliability, or reducing distribution or transmission congestion costs).

A utility’s grid could be divided into zones where these costs or benefits are similar. The price (adjusted from
time to time by the utility, and reviewed by the regulator) would promote or discourage where solar and storage
was deployed. No complicated schedules or targets would be required. Nor would static schedules inhibit the
accelerated rollout of technologies that had a benefit. It would be a rule-based, price-based dynamic system that
was overseen by the utility and regulator but without the need for intensive or lengthy approvals for each small
to medium size project. Customers could add self-generation or storage, or it could be provided to them by a
third-party. Independent producers could sell to customers or to the utility, as could a non-regulated affiliate of
the utility that would compete on a level playing field without a ratepayer guaranteed profit skewing the market.

We need to develop a modern network-like grid of nested micro-grids that would keep first responders and
essential services online when the rest of the grid goes down. This would replace the outdated, electro-
mechanical, brittle grid that we have today. Many new solar and storage resources would be distributed within
the distribution grid instead of developing solar on the old hub and spoke design that increases vulnerability.
The utility would be well paid for this and could boost profits with performance-based rates.

Utilities would not need ratepayer subsidies to accomplish energy efficiency. Nor would they have a reason to
obstruct it or do a marginal job of it. They could do it at a profit like any other contractor, but not add it to the
ratebase.

Efficiency targets should be statewide, not funneled through utilities. They are not very good at it. Years of habit
have made them resistant to reducing their energy sales. We could then focus our efforts on increasing access to
certified contractors and inspectors that verify savings. Regional or statewide funds could be established to
make such projects more affordable and more easily financed. Appropriate energy efficiency projects cost
nothing. They just require an investment that is more than repaid by future savings. This is the cheapest way to
create more energy.

Legislation passed by the General Assembly whether sponsored by utilities or environmental groups, should not
decree that complicated energy projects are “in the public interest.” There is not enough time, or a good process
during the rushed legislative session to determine if this is actually true. It is time we returned that task to the
regulator of our state energy system. Only in-depth reviews using an evidentiary process can reveal the facts
about a major proposal. Our legislature should outline major policy initiatives but leave the details to the
experts. If that is not effective, then fund more investigations and hire better experts. Energy issues are too
important for the future of our state to charge forward without a well-reasoned policy.

Who would benefit from a plan such as I have outlined? Everybody would benefit. Customers would have many
more choices and lower energy costs. It would promote innovation, job creation, and build a vibrant economy
that would help businesses and families thrive.

What about the utilities? It might appear that this would be a setback for them. It definitely would be an
adjustment. Since the beginning of this century Virginia’s utilities have sponsored legislation that has increased
their profits at their customers’ expense. That works for a while, but no company can succeed when it sets the
interests of its owners against the interests of its customers. The utilities would receive a fair return for their past
investments and all of their costs. Energy efficiency and third-party providers could cut into their energy sales.
But their profits would not be dependent on sales. They are allowed to recover their costs plus a fair profit.
Rates might need to go up, but utility bills would go down. With the path we are on, rates are going up (with all
of the RACs) and bills will go up a lot more. The SCC has a handout showing how much this HB 1526 will
increase customer bills.

Utilities provide a public service. They were granted a monopoly in order to prevent the duplication of wires. It
took several decades before utilities figured out how much they could increase profits by putting generating
facilities under the umbrella of the monopoly. Having more energy was a good thing in the 20th century. The
sign of an advanced economy in the 21st century is producing more goods and services using less energy.

Having a utility build wind and solar facilities provides no added benefit, just added costs. HB 1526 magnifies
that by granting windfall profits to our investor-owned utility by giving them primary control over clean energy
development in Virginia.

I have outlined a simpler, less expensive way of achieving a reliable, more cost-effective supply of clean energy
in Virginia. If you think it deserves more investigation, let’s be careful about rushing into a program that locks
us in to an old regulatory scheme for the next 30 years.

If you want to read more about the shortcomings of HB 1526, read the topics below:

RGGI

The shortcoming of RGGI is that it deals only with carbon emissions. If the goal is to reduce climate effects,
total greenhouse gases (GHGs) should be considered. In those terms, a gas-fired plant contributes about the
same potency of GHGs as does a similar size coal plant. A climate policy based on carbon emissions favors gas-
fired plants when doing so doesn’t really deal with the problem. A companion methane leak reduction program
needs to be added.

3-Year Rate Review

Adding an extra year just prolongs the amount of time that a utility can use customers’ money for free, saving
millions in interest expenses or avoiding issuing more stock and paying dividends. A billion dollars of free
money from customers improves a utility’s debt-equity ratios without requiring them to sell assets to make
things look better for financial analysts. Most other states review rates every 1-2 years. New energy bills should
correct the abuses of the past.

Energy Efficiency

Virginia investor-owned utilities rank next to the bottom in comparisons of their energy efficiency efforts with
other major U.S. utilities. They do not want to reduce their energy sales. Efficiency projects have been
marginally effective and very expensive because the GTSA allows utilities to add efficiency program costs to
the ratebase. This is a customer subsidy which adds to utility profits with little customer benefit. This is bad
policy. This bill should remedy this.

HB 1526 ratifies the GTSA by saying the Ratepayer Impact Measure Test does not have to be met when
assessing energy efficiency programs.
Large commercial and industrial customers realized that the GTSA awards for energy efficiency were a sham
that would add to their energy costs. They were able to get an exemption from having the costs of the efficiency
programs added to their rates. HB 1526 should speak on behalf of the residential ratepayers and relieve them of
the cost burden too.

Peer Group

The peer group for setting rates of return should be reexamined. It is limited to Southern vertically integrated
utilities in states with friendly legislation and regulators. We should select a peer group of highly effective
utilities that we want our utilities to emulate. It does not serve the public to allow a comparison with other states
where utilities are successful at manipulating the process to favor shareholders. We should aspire to an
objective, even handed rate of return, not one tilted in favor of one party. It appears we will have a prolonged
period of an easy money policy that will sustain low interest rates in order to keep the economy wired together.
This should be taken into account in setting rates of return. The current rates were carried over from a period
with a much higher cost of capital. Borrowing costs, regulatory risks, and other factors have been reduced
without a similar reduction in rates of return.

New Projects

HB 1526 says a RAC for a coal plant can be awarded if the plant utilizes Virginia coal and is located in the
coalfield region of the state. Is this an appropriate provision in a clean energy bill?

This bill confirms the GTSA windfall profit handout for “one or more” pumped storage facilities developed in
the coalfield region of Virginia, as long as it uses renewable energy sources for “all or a portion of their power
source.” This is a huge extraction of money from ratepayers to fund an unnecessary and overly expensive
project that will provide a few millions of dollars in taxes to a SW Virginia County and billions of profits to
utility shareholders. Having a single solar panel at the site of the impoundment would meet the requirements of
HB 1526.

New generating projects would include consideration of the social cost of carbon and Environmental Justice
issues. This is a good addition.

HB 1526 confirms the huge payout for undergrounding power lines gifted by the GTSA. But some caps are set.
These projects are very expensive. They are considered hardening, not grid improvement or grid transformation
projects. The large expense creates a significant profit for shareholders, and reduces expenses for the utility
(which boosts profits without rate reviews), but provides minimal improvement in the reliability of the grid.
Some customers would experience shorter outages. But if a fault occurred in the underground facilities, the
outage would be considerably prolonged.
Utility Solar and Wind Projects

*** HB 1526 decrees that new solar or wind facilities constructed and owned and operated by a utility “are in
the public interest.” Such a provision in this bill will add billions to the cost of energy in Virginia. Up to 16,100
MW of utility-owned solar projects and up to 5000 MW of offshore wind facilities are given to utilities to
develop. The bill also confirms the “customer credit reinvestment offset” (free use of customers’ money) that
was granted in the GTSA. Again, rather than establish a new environment for clean energy development in
Virginia, this bill adopts the shareholder centric policies passed in previous energy bills written by utilities.

The SCC says allowing a utility to develop $8 billion in offshore wind facilities, as is proposed, would require
ratepayers to repay the utility $14 billion.

All other states along the Atlantic Coast are getting bids from experienced European offshore wind developers
that have partnered with American firms. These bids require the output of the offshore wind projects be sold at a
fixed price. The early projects are a bit higher, but projects in federal waters due about the same time as the
project proposed in Virginia are expected to be bid at 5-6 cents per kWh. This price is already being experienced
in new offshore wind facilities in Europe.

HB 1526 says the cost of a utility-owned offshore wind project will be “presumed to be reasonably and
prudently incurred” if the cost “does not exceed 1.6 times” the cost of a simple cycle combustion turbine (a
peaking unit). According to Lazard, this would be an average cost of 17.5 cents per kWh (15-20 cents).1

HB 1526 would allow a utility to build an offshore wind project in Virginia and consider the costs “prudent” if it
costs as much as 3 times more than what an experienced international wind developer would be willing to
charge for an independently developed offshore wind project in Virginia.

Ratepayers would continue to be exposed to storm damage, cost overruns, and other unexpected expenses with
the utility-owned project. The independent developer would assume that risk. There is a good reason all of the
other states are using fixed-price contracts with independent developers. Is there a reason that Virginia is not
doing the same? We would receive the same clean energy. It would produce the same new economic activity in
our port and elsewhere. Why should Virginia take what should be a low-cost resource and make it expensive?

Accelerated Development of Nuclear Refurbishment

HB 1526 incentivizes accelerated development of the proposed nuclear refurbishment projects. The first unit
does not require a 20-year extension until 2032. The fourth unit would need to be refurbished for 20 more years
of operation by 2040. This bill wants the utility to begin construction activities in 2021, or as soon as possible
thereafter, or lose the 2% additional rate of return granted to nuclear projects. Why?

1 Lazard’s Levelized Cost of Energy Analysis – Version 13.0, November 2019

This does not provide enough time to determine if effective energy efficiency projects could displace the need
for some or all of that capacity. The cost estimates will not be well enough developed to allow the SCC to
determine if extending the nuclear plant to an 80-year life span would produce affordable electricity. Anyone
familiar with nuclear projects knows that initial estimates are much less than final costs.

Based on current experience with nuclear plants, it is unlikely that after spending billions to refurbish these
units for just 20 more years of operation, that they would generate electricity at a competitive price. It is only
because the utility would be guaranteed to recover all of its costs, plus billions in profits, that it would be
considered a good investment. But it would place a heavy burden on ratepayers.

Nuclear units are not zero carbon facilities. There is a good deal of carbon emissions involved in the energy
required to mine uranium ore and fabricate nuclear fuel rods. Although no carbon is released when those rods
heat water to create steam and turn the turbines.

Renewable Portfolio Standards (RPS)

The RPS program described in HB 1526 includes projects that no other state would accept as “renewable.” That
is why the Renewable Energy Credits from the biomass projects in Virginia are so cheap. No other state will
accept them. Our utilities purchase the credits from plants that take industrial wood waste and mix it with coal
and oil so it will burn and call it a “renewable thermal energy source.” It is troubling that a clean energy
economy bill goes along with such a subterfuge.

Utility Solar

Allowing utilities to develop the bulk of solar capacity Virginia creates the same high costs that the offshore
wind project does. The bill allows the utilities to buy up solar projects built by independent developers then add
a considerable profit for the utility. This substantially increases the cost of energy over what the original
developer would have charged for a PPA. The utility added no value and reduced customer choice. Yet it used
legislative legerdemain to add to profits and increase energy costs for its customers.

The bill does allow about a third of the capacity to be controlled by the original developers. Other states open
up this market. Their utilities are not allowed to put solar projects in the ratebase. They can develop them, but it
must be on an equal footing with independent developers, without a ratepayer guaranteed profit.

Other states also encourage widespread development of distributed resources. Many attempt to have about a
50/50 balance between utility-scale facilities and distributed solar. HB 1526 requires just 6.8% to be distributed
and only .01% to be constructed on previously developed land. This is not an environmentally friendly
requirement, and not good energy planning either. The grid will be less reliable as a result.
Corporate Welfare

HB 1526 recognizes that the offshore wind and solar projects will add considerably to energy costs, especially
to low-income customers. A complex bureaucratic process was designed to deal with this (PIPP). The most
stringent requirement is the provision that forces customers to pay for the higher cost of utility-owned wind and
solar projects, even if the customers sign with other suppliers to seek refuge from the draconian schemes
imposed by this bill. This bill appears to strongly favor the utilities rather than a balanced approach to a modern
energy economy. There is a better way.