On July 1, 2016, a 2-1 majority of the SCC rejected a legal challenge to SB 1349, the so-called “electric rate freeze law,” which prevents the Commission from reducing the base rates of Dominion Virginia Power (“Dominion”) and Appalachian Power Company (“APCo”) until 2023 and 2021, respectively. A group of large industrial customers of APCo brought the challenge, alleging that the law violates the Virginia Constitution because it prevents the Commission from regulating the rates of Virginia’s largest investor-owned electric utilities for several years. Dominion and APCo are both monopolies, meaning that businesses and individuals in their service territories have no choice but to purchase power from the two utilities. As we have previously written, this issue is worth approximately $280 million per year for Dominion’s customers alone.
The legal challenge was based on Article IX of the Constitution of Virginia, which establishes the powers and duties of the SCC. Article IX, Section 2 provides that “Subject to such criteria and other requirements as may be prescribed by law, the Commission shall have the power and be charged with the duty of regulating the rates, charges, and services … of electric companies.” According to the industrial group, therefore, the Commission’s authority to regulate electric rates is subject only to “criteria” and “other requirements” that may established by the General Assembly. By taking the authority to regulate electric rates away from the SCC altogether, the group argued, the rate freeze law violates Article IX. The challengers also noted that SB 1349 freezes rates at an excessively high level, which will likely result in excess profits of hundreds of millions – or billions – of dollars for utility shareholders at the expense of Virginia citizens and businesses.
The SCC majority, however, wrote that “the question presented in this case is not whether SB 1349 represents good policy; it is whether SB 1349 violates the constitution.” The majority reasoned that the law does not run afoul of Article IX because SB 1349, by delaying rate reviews, merely establishes “requirements” or “criteria” regarding rate setting. Commissioner Dimitri dissented, writing that “rather than prescribing criteria and other requirements that the Commission must apply in setting base rates, [SB 1349] removes the Commission’s constitutional power and duty to regulate those rates.” IN support of his dissent, Commissioner Dimitri cited Professor A.E. Dick Howard, a chief drafter of the 1971 revisions to the Virginia Constitution, who has written that the General Assembly “may not itself fix the rates of a particular [utility] company.” Dimitri also wrote that “the majority embraces plenary power of the General Assembly in all rate regulation matters, by stretching ‘criteria’ to mean complete regulation of rates, including prohibition of Commission regulation of rates.”
Commissioner Dimitri noted that the Commission Staff had estimated that Dominion’s rates are currently designed to produce excess revenues of approximately $300 million per year and that “Dominion’s [excess profits] have the potential to reach well over a billion dollars, at customer expense,” during the rate freeze period.
Attorney General Mark Herring, who is charged by statute with representing the interests of ratepayers before the SCC, instead sided with Dominion and APCo. The Attorney General, while conceding that the General Assembly could not set electric rates, sought to parse the difference between “setting rates” and “freezing rates.” The Attorney General argued that SB 1349 is lawful because it “does not set the rate,” but merely “freezes” rates previously set by the Commission.
Commissioner Dimitri pointed out that the Attorney General had, in recent cases before the Commission, argued that Dominion’s and APCo’s rates are currently too high, and producing excess profits for utility shareholders. Dimitri also noted that the Attorney General’s decision to side with Dominion and APCo is contrary to a 2015 Attorney General legal opinion, in which Herring wrote that the General Assembly may not pass laws that “contravene the [Commission’s] fundamental power and duty to regulate the ‘rates, charges, and services … of railroad, telephone, gas, and electric companies.”
The challengers have until August 1, 2016, to decide whether to appeal the decision to the Virginia Supreme Court. If the Supreme Court strikes SB 1349, the decision could allow the SCC to reduce Dominion’s and APCo’s rates by hundreds of millions of dollars per year.