Editor’s note: This may not be a sexy story, but it’s a timely and important one by Steve Haner, an expert on all things energy related. Wind energy is coming to Virginia’s waters whether we like it or not and many details of the deal-making are being kept from the public. Four words of warning for Dominion ratepayers: Hang onto your wallets. kd

By Steve Haner

Dominion Energy Virginia’s proposal to sell a half-interest in its first offshore wind farm to a hedge fund is drawing no opposition at the State Corporation Commission, which will hold a hearing on the issue today.

The only analysis of the impact of the transaction has come from the SCC’s own staff, which filed comments on July 23. The Office of the Attorney General and an industrial energy consumer group have also joined the case as participants, but neither has filed any testimony, pro or con. No public comments have been filed, and the environmental activists who participate in many energy development cases are not involved.

The case file as it stands is here. The SCC staff conclusion is easily summed up with:

Staff also does not oppose a finding from the Commission that “adequate service to the public at just and reasonable rates will not be impaired or jeopardized” by the proposed transfer of the CVOW (Coastal Virginia Offshore Wind) Property.

The groundwork for all this was a 2023 bill approved without much debate and few dissents by the Virginia General Assembly. It is fair to assume that a similar financing scheme, with an outside investor taking on a substantial share of the capital costs, will be used if Dominion proceeds to develop the second phase of the offshore wind farm off Virginia Beach, or the third wind lease area it has now purchased off Kitty Hawk, North Carolina.

Reading the file provides a few more details than have been made public previously. The transaction will require the creation of various new corporate entities, mainly limited liability companies. Dominion will transfer the hard assets and licenses of the project to a new subsidiary, which it will own jointly with the outside investor. So far it has the generic designation of “ProjectCo.”

The outside investor, Stonepeak, will also form a new subsidiary which will own at 50% share in ProjectCo. It will be a non-controlling share with Dominion in full control.

ProjectCo will own the 176 individual turbines, the additional offshore assets needed to gather and manage the power created, and the onshore transmission assets that connect the project to the grid. It will own the permits. The estimate book value of those is $6.4 billion and the Stonepeak investors will pay an estimated $3.2 billion for their share. ProjectCo will then reimburse Dominion about $3.055 billion for transferring the assets.

ProjectCo will then basically also be a utility, but one that owns only the one generation asset. Dominion and Stonepeak will split the revenue flowing in from the rate adjustment clause that is paying for the project, split any subsidies and tax credits (which will be substantial) and divide the project’s return on equity over the coming decades. They will also share the cost of any overruns in the final phases of construction.

This will all be opaque to ratepayers, who will simply pay their monthly bill to Dominion. The company does want to move some of the maintenance and operating costs for the project out of its base rates and over to the project-specific rate adjustment clause. How much annual cost might that be? The discussion of all that is treated as confidential and is redacted from the public record.

What do we know about the internal financing on the Stonepeak side? Also all redacted. There is a clear promise that any subsidies or tax credits it claims that reduce the capital cost of the project will flow to the benefit of ratepayers, not its investors.

Dominion told the SCC staff that Stonepeak was chosen from among 11 competitors to become the non-controlling partner. It received outside advice from Goldman Sachs and Citigroup in evaluating them. Among the advantages Stonepeak offered was previous experience with wind projects, plenty of cash and a willingness to sign on through the commercial operation period.

For once, reading one of these files, the question arises whether this is fair to Dominion shareholders. A monopoly public service company such as Dominion enjoys many benefits not allowed to other corporations. Most of its financial risk is shifted to ratepayers. It has a legal right to recover all legitimate costs and earn a generous annual return on its equity. A 9% return on $6.4 billion is $576 million, and the cash will flow for decades as the project is amortized.

Before this deal, all of those benefits accrued to Dominion shareholders, and in the case of this project with its highly favorable subsidy and tax credit supports, they were real. Now a substantial portion of those benefits will transfer to a different set of investors.

It is not possible for general stockholders to invest in only one or another of Dominion’s power plants. They buy a share of the whole company, the bright shiny new assets and the old struggling assets, with all the multiple risks. Now some outside investors will get to buy a piece of the newest and most politically favored power plant. It may now be shareholders asking how trading away that cash flow and those state and federal preferences was in their best interests.

Republished with permission from Bacon’s Rebellion.