The Virginia State Corporation Commission (SCC) recently ruled on the application of Dominion Energy to construct its gigantic Offshore Wind Energy Project (OWP). The OWP consists of 176 wind turbines, each larger than the Washington Monument, to be erected 27 miles out in the open ocean off the shore of Virginia Beach, at an initial estimated cost of $10 billion.
This cost would be paid for by Dominion’s electricity customers. But unlike every other offshore wind project proposed in the US, Dominion would not hire a private operator to construct the project, who would then sell the generated electricity back to Dominion under the terms of a Power Purchase Agreement (PPA). Instead, Dominion proposed that it would undertake the construction itself, thereby earning a guaranteed rate of return on its capital investment, as is required by law for a regulated public utility.
The problem, however, with that model – the Self-Build Model (as opposed to the PPA model) is this: Who assumes the risks that surround a project such as this – risks which could cause not only construction costs to balloon out of control, but also cause massive increases in the electricity rates paid by consumers.
And the risks are many, and very large.
Start with permitting risks – mainly, the federal regulatory approvals required to construct the project in US waters. Permits must be obtained from the Bureau of Offshore Energy Management (BOEM), EPA, Department of the Interior, NOAA, to name a few, and the federal laws under which they regulate: NEPA, ESA, OCSLA, CWA, and CAE for example.
Litigation delay risk is also part of the equation. Environmentalists are diligent when it comes to litigation challenging federal agencies which are charged with protecting the environment against alleged environmental abuses caused by fossil fuel projects. For example, the Mountain Valley Pipeline project in Virginia has been delayed for years by environmental litigation. Why would one expect any less diligence by environmentalists concerned with environmental abuses created by the pouring of thousands of tons of concrete into the ocean, by service ships potentially striking endangered species, such as the Right Whale, and by the trenching of miles of ocean floor with cables connecting the towers with the mainland electricity grid?
Then there is construction and operational risk – supply chain problems, material delays, engineering snafus, subcontractor disputes, labor union issues, Jones Act problems. The list is almost endless.
All this project risk is what caused the SCC in the OWP proceeding to rightly pause, and query, “How is the consumer going to be protected against all, or even some of this obvious risk”?
The Commission’s answer to this question was to create a “performance guarantee” for the project. The consumer, the SCC ordered, would be held harmless from the failure of the project to operate at less than a 42% capacity factor over the life of the project, based on a three-year rolling average.
This ruling caused consternation in the halls of Dominion Energy. It immediately requested a re-hearing, and publicly threatened to abandon the project altogether unless the performance guarantee was removed.
Dominion argued that the imposition of the performance guaranty exceeded the Commission’s legal authority under the OWP’s enabling statute, the Virginia Clean Economy Act, because the VCEA only allows costs to be disallowed that are “unreasonable and imprudently incurred.” Dominion claimed that such an “open ended” obligation would require Dominion “to insure against events which are beyond its control, like acts of war, catastrophic weather events or changes in weather patterns.”
Dominion dismissed the SCC’s contention that the VCEA was “silent” on the Commission’s ability to insure against circumstances it cannot “control.” Dominion insisted that only costs that are “unreasonably or imprudently incurred” can be curtailed.
Ah, but there is the rub.
The VCEA did not force or compel Dominion to adopt the Self Build model. Dominion chose to do so in order to have it both ways – to earn a statutory return on invested capital and at the same time burden ratepayers with risks that cannot be controlled or mitigated.
It did not have to accept those “uncontrollable” risks in the first place. It could have chosen, like every other proposed US offshore wind project, to outsource most of these risks by hiring an operator who would construct the project and sell electricity to Dominion pursuant to a PPA. There are a host of qualified private operators who are capable of bidding on the OWP. For example, Orsted has been chosen as the operator for the Vineyard Wind project.
The VCEA is, in fact, silent as to which model of electricity production Dominion should choose to implement. Unless instructed otherwise by the Legislature, the SCC has inherent constitutional authority, indeed a duty, to formulate conditions which will protect consumers against the risks which Dominion has chosen, not been compelled, to absorb.
Dominion cannot have it both ways and pretend that the only way to fulfill the mandate of the VCEA is to choose a consumption model which exposes it to unquantifiable risk. In fact, the PPA model is the one which Dominion has chosen for virtually all of the solar projects authorized by the VCEA.
Assuming Dominion stays with its traditional 50/50 debt to equity ratio, that means Dominion will receive approximately $450 million per year from ratepayers, in addition to electricity revenues.
The SCC is to be congratulated for calling Dominion’s bluff: You want a rate of return on capital investment for the offshore project? Fine. But with it comes the obligation to absorb risk which you have chosen to face by means of your electricity production model.
If the VA Supreme Court should be called on to opine on the SCC’s authority to impose a performance guarantee, it should follow a well-established tenet of statutory construction that a statute should not be construed in a way which creates an irrational outcome, that is, unmitigated risk for electricity consumers. It should consider that the Legislature, in passing the VCEA, was not forcing Dominion to choose the Self Build model. There is no legislative language or history to that effect.
So, the SCC’s performance standard is not only allowable, it is required, to avoid an unconscionable outcome.