Yet Another Use for Utility Tariff Bonds: Deferred Fuel Costs
Under the recently adopted amendments1 to the Virginia Electric Utility Regulation Act, on or before July 1, 2024, an electric utility may petition the Virginia State Corporation Commission (Commission) for a financing order for certain deferred fuel costs that would back related utility tariff bonds2.
Current law in Virginia (and as is generally the typical treatment in most states), permits recovery of fuel costs on a dollar-for-dollar basis as expenses without any additional return. Fuel costs (including purchased power) are estimated annually in advance for purposes of assigning a fuel factor in rates. If actual fuel costs (including purchased power) exceed that annual estimate, the excess is deferred and future rates are adjusted to collect such deferred costs.
Due to the Russian invasion of Ukraine, inflation and the COVID pandemic, electric utilities incurred significantly higher fuel costs and experienced significant fuel cost under-recovery. In the case of Dominion Energy Virginia (Dominion), its projected 2022 deferred fuel cost balance was more than $1 billion.
In Dominion’s related fuel factor proceeding for 2022-20233, Dominion noted that its costs for natural gas and coal in the July 2021-March 2022 period were 100% and 92% higher, respectively, than the prior corresponding period.
While the order in Dominion’s fuel factor proceeding for 2022-2023 allows it to recover these deferred fuel costs over a three-year period as proposed by Dominion4 to mitigate the rate “shock” to its customers that results from the deferred fuel cost recovery, it is expected that Dominion and other similarly situated electric utilities may seek to use this new recovery option since the opportunity to use lower cost financing and longer amortization will likely yield lower rate impacts for customers.
1 Under Senate Bill 1265 passed by the Virginia House and Senate on February 25, 2023 adding a new section 56-249.6:1 to the Code of Virginia.
2 Also known as rate reduction bonds, rate recovery bonds, stranded cost bonds, and utility rate charge bonds, utility tariff bonds have been used for storm costs (see our related Legal Update), coal plant retirement (see our related Legal Updates here and here), catastrophic wildfires (see our related Legal Update) and for COVID under-collections (see our related Legal Update) and have been proposed for coal ash remediation nuclear plant construction overruns (see our related Legal Update).
4 In contrast to the two-year period required under Virginia Code section 56-249-6.C.
