Reform the SCC

By: Evan M
Published On: 10/23/2007 6:10:11 PM

The State Corporation Commission (SCC) is the latest government entity to be raised as a scapegoat for problems that the current Assembly leadership brought upon themselves. This time, the SCC was excoriated for its oversight of the company that operates the Dulles Greenway. Today, the SCC hit back.
The chairman of Virginia's State Corporation Commission has rebuffed a request by a state House candidate to suspend toll increases approved for the Dulles Greenway. ... Morrison said the SCC only has jurisdiction over the local operator - Toll Road Investors Partnership II (TRIP II) - not over its investors.

"This is exactly the same way our regulation of all public service corporations is accomplished," he wrote. "For example, we regulate the rates and service of Virginia Electric and Power Company, but we cannot and do not analyze or consider the finances of its beneficial owner, Dominion Resources Inc., in fulfilling our regulatory responsibilities." - LoudounExtra


Under existing legislation, the SCC limits its oversight to the entity operating the public asset, and usually ignores the ownership behind that entity. Thus, the entity operating the Greenway, TRIPP II, can be operating at a loss, leading to the approval of higher tolls, even if the Australian parent company is itself profitable. The SCC has in fact done its duty in acting within the law and avoiding an expensive lawsuit against the state, which would have been a likely outcome if the toll increases had been denied.

The SCC only exercises as much authority as the Assembly grants it. For the past eight years, the Republicans have been in control of both houses of the Assembly, and have had numerous opportunities to give the SCC direction and authority to look more deeply into the companies that own the enities that provide Virginia public goods such as insurance, power and roads. The Republican Assembly, in their wisdom, has chosen to keep the SCC limited in its oversight powers, and not incidentally, the Republican Attorney General, Bob McDonnell is able to use his independent authority to investigate the Australian parent company.

In fact the Republican Assembly has previously sought to eviscerate the important oversight function that the SCC provides, and was only prevented from doing so by a veto from Governor Kaine earlier this year.

The Governor vetoed House Bill 1755, which would eliminate the requirement that the State Corporation Commission approve the acquisition or disposal of the assets or control of a telephone company.

"Such a change would represent a significant deviation from established practice and remove an important layer of oversight that the SCC has long exercised to protect Virginia customers," said Governor Kaine. "Access to telephone service continues to be vital for residents across the Commonwealth, and it is imperative that we act reasonably to ensure that this access is not diminished. - Governor Kaine Announces Action on General Assembly Legislation

The SCC should be given the flexibility and authority to broaden its oversight and investigation of the companies that deliver public goods and services to Virginians. Health insurance, electrical power and transportation are critical issues facing Virginia, and the state needs more, not less, information about the companies that drive so much of the action in these areas. This is not a call for more regulation, merely more transparancy and more information on which rational and effective public policy an be based. Transparency and disclosure only comes from active legal tools and entities dedicated to informing the public.

In order to reform the SCC, we need to change the Assembly. That means electing new leaders in the Assembly, by electing Democratic candidates to the Assembly.

(Crossposted from Leesburg Tomorrow.)

Comments



David Poisson (Evan M - 10/23/2007 7:05:41 PM)
David Poisson's comment on this issue is classic.
Poisson responded by saying that Chapman "is asking questions with the assumption that no one else has ever happened upon these questions" while legal teams and the state legislature undertook developing the public-private partnership in years-long reviews. - Living in LoCo
Just more evidence that Virginia Democrats are getting things done for Virginia, while Virginia Republicans are confused, confounded and condemned to fail.


The SCC problem (Gordie - 10/26/2007 10:59:15 AM)
is not so much the SCC's fault but the Repubican Parties attempt to destroy the SCC.

Much as Reagon had his agenda to destroy unions in the 1980's, some of the past legislative bills, seem to be pointing at destroying the SCC so the Republican Corporate buddies can raise rates when ever they want too.

Change in Richmond is the only answer.



Dreams, Regulatory Concepts and General Agreement (tx2vadem - 10/26/2007 1:18:46 PM)
First, if you think this is a Republican only issue, you are mistaken.  You only need to look at the voting record of Democrats on the Electric Utility Regulation Act (the nominal re-regulation of Dominion) passed in the last GA session and the Public Private Transportation Act of 1995.  Both of these acts limited or eliminated (in the PPTA's case) the SCC's regulatory authority.  And there were was hardly any objection from either party.  Both acts passed nearly unanimously.  Also, Democrats are in control of Fairfax, Arlington, and Alexandria and by extension the regional transportation authority.  Yet, they have done nothing to stop the HOT lane deals or even provide the public with a clear picture of the expected cash flows and return the Fluor-Transurban partnership will receive.  Those will be 80 and 60 year deals respectively and our elected officials are acting like this is not a big deal.  So, if you think a party change is going to make a difference, I would think again.

On your main point about transparency, there are regulations that govern financial reporting for public companies that issue traded securities.  Granting the SCC powers to look into that would create regulatory overlap between the SCC and SEC.  In the case of foreign companies, if they are issuers in the US, they are governed by the SEC.  If they don't, they are governed by the securities laws of their home country. 

Regardless of all that, the money that the parent company makes for other business activities it performs is irrelevant to the consideration of rates for the public service it provides.  Consider this, Dominion may have a very successful upstream oil production business that generates tons of cash for them, does this mean that they should not be able to earn a fair return on the electric utility service they provide to VA residents?  These activities are separate and the success of one should not be weighed down by the cost of the other.  The same is true for the parent of TRIP, if they are making lots of money operating projects in Australia, that has no bearing on the operating cost and associated return on their investment in the Dulles Greenway.  If you determine rates based on the total return of the parent entity, you will deter private investors from investing in public services.  You cannot deny them a market based return on these projects, because they can just take their money elsewhere.

The only caveat to my statements above is intercompany transactions.  Where the parent or its affiliates provide goods or services to the regulated entity, there needs to be absolute transparency there.  As far as I know the SCC has the authority to audit and disallow recovery from these transactions.

Otherwise, I generally agree with your points about the need to have a strong regulatory oversight function for monopoly service providers.  Alas, in the case of highway projects, the Dulles Greenway is the last of its kind.  With the PPTA, there is no reason for a private company to build transportation assets that would be regulated under the Qualifying Transportation Facilities Act of 1994.



Question (Gordie - 10/26/2007 2:27:21 PM)
What is your opinion of a fair rate of return?

Here in Nelson, AEP is the electric utility. They had a rate increase last year and are back asking for another increase this year. They have shown a profit and dividends any where from $6.50 to $2.50 for the last ten years. The 2006 CEO report to stockholders are bragging about how their return will increase over the next five years.

Investors will always buy utility stock as long as there is a return on investment, BUT do they need the same return the oil companies after gouging the consumer?



Returns (tx2vadem - 10/26/2007 4:47:59 PM)
My personal opinion is somewhat irrelevant in a broader discussion, and the question of fair return is a complex one.  It is complex in determining an expected rate of return as generally you would use the Capital Asset Pricing Model.  But as a quick reference, AEP's return on equity is 11.7% compared to an industry average of 14.8%, which ranks them in the 39th percentile among their peer group (this data courtesy of S&P Compustat which unfortunately I cannot directly reference as I pulled it via my brokerage account). 

Rate making works differently in that you generally look at a rate base and determine return off of that.  The rate base is utility plant at original cost less accumulated depreciation plus a working capital allowance.  This is multiplied by a weighted average cost of capital (WACC) to determine return.  That is input into the revenue requirement: operating expenses + depreciation + taxes + return.  And the revenue requirement determines rates.

You seem specifically concerned with AEP's rate of return (and I was just filling in return on equity (ROE), you could really be concerned with return on capital (ROC)).  AEP's rate of return, whether it be ROE, ROC, or Return on Assets, is not relevant in determining your rates.  Correct me if I am wrong, you are served by Appalachian Power Company (APCo), a subsidiary of AEP.  APCo would be the entity filing for the rate increase. In determining whether that rate increase was fair, the SCC would be looking at that particular entity and any intercompany transactions that APCo is engaged in.  I am not specifically familiar with how the Commission determines the cost of equity (cost of debt is simple as it is just interest rates).  On the complex side, they may compute a risk free rate of return and determine a risk adjustment to calculate a cost of equity.  Or they could compare amongst utilities they govern or ones approved by different regulatory commissions. 

The Commission generally holds public hearings on rate cases.  Where you might have a case is in challenging operating expenses or the need for capital improvements or even the cost of capital.  But you would have to bring something to light that the Commission staff has not already researched or challenged.  The return on equity that APCo currently gets as reported in their most recent financials is 8.9%.  That is below the industry wide average and below AEP's overall ROE.  That's not a lot.  You make a comparison to oil companies; so for reference, Exxon Mobil's return on equity is 35%.