The Vermont Public Service Board in September approved a request from Vermont Gas Systems to withhold $4.4 million annually from ratepayers in Franklin and Chittenden Counties. The money would be used to subsidize a pipeline that would be extended from Burlington to Middlebury and possibly as far south as Rutland County.
The money, to be placed in an interest-bearing escrow account over 20 years, is to reduce rate increases if and when the pipeline comes on line. If the pipeline is not constructed, Vermont Gas may use the money to cover their costs in planning the pipeline, but they must refund the rest to today’s ratepayers—if they can find them.
Some experts question basis for expanding natural gas as a Vermont energy goal
by Carl Etnier
Vermont policymakers have been interested in expanding the use of natural gas to other parts of the state since at least the Kunin administration, according to former Public Service Commissioner Richard Sedano. The three current members of the Public Service Board disagree whether using ratepayer money to encourage a new pipeline is a good idea, but they agree on the value of natural gas. And the administration’s draft energy plan notes environmental benefits for natural gas and envisions cost savings when using gas to generate electricity, heat buildings and fuel heavy vehicles.
Claims of environmental superiority for natural gas are being questioned, however, especially as hydraulic fracturing, or fracking, is increasingly used to extract the gas from shale formations. The economic benefits of gas are also questioned. Some experts, while acknowledging the current low price of gas, say that several factors are likely to cause the price to rise significantly in the near future.
Natural gas is composed primarily of methane, the fossil fuel that produces the smallest amount of carbon dioxide for every unit of heat released when it is burned. Burning coal produces the most carbon dioxide, with oil somewhere in between.
However, methane itself is a potent greenhouse gas, over 20 times more powerful at warming the earth than carbon dioxide. And when gas companies extract gas from the earth, they don’t get all of it—some of it is released into the atmosphere.
The EPA released a study this year doubling its estimate of methane that leaks from loose pipe fittings and is vented from gas wells. With the new research, the EPA still concluded that gas is cleaner than coal, from a climate perspective, but the gap narrowed considerably.
Robert Howarth and two other Cornell scientists have calculated that gas can be even a worse climate changer than coal. The newly widespread method of fracking for shale gas releases 30-50 percent or more methane than conventional gas extraction, according to a letter published by Cornell scientists earlier this year in the journal “Climatic Change.” This makes shale gas up to twice as bad, from a climate perspective, as coal over a 20-year period. (Carbon dioxide persists longer in the atmosphere than methane, but even over a century, the researchers calculate that shale gas is no better than coal.)
If Vermont Gas Systems, which currently supplies natural gas to customers in Chittenden and Franklin Counties, succeeds in building a pipeline to Rutland and connecting to the U.S. gas pipeline system, then Vermont would be open to imports of gas from places where fracking is occurring, like New York and Pennsylvania. The chemicals used in fracking have also been blamed for groundwater contamination.
Richard Heinberg, a senior fellow at the Post Carbon Insitute, told policy makers and the public in the Statehouse on Oct. 13 that natural gas supplies are too limited to make significant pipeline investments worthwhile. The talk was attended by senior officials from the Agency for Natural Resources and Department of Public Service. Heinberg has co-authored a study of prospects for future natural gas production in North America.
Asked if a new pipeline is a good investment, Heinberg said, “No, I don’t think so.” He explained that conventional natural gas is in decline in both the U.S. and Canada. The unconventional shale gas has “created something of a bubble” in supplies and created today’s low prices.
“Over the long run,” Heinberg said, “what we’re going to see is conventional natural gas production declining even faster, because conventional gas discoveries in this country really fell off a cliff a decade or so ago… Unconventional gas is only going to be able to partly make up for that, even with heroic rates of drilling and high prices. So to invest more in gas infrastructure at this point, even though at the moment it looks economic to do so, is actually not a wise thing to do in a long-term perspective.”
Heinberg is supported by a series of articles earlier this year in The New York Times which revealed internal emails that showed industry and government insiders worrying about a bubble in unconventional gas.
Both the environmental effects and economics of gas are debated; industry spokespeople challenge the calculations of both Howarth and Heinberg. There’s little sign of either debate in Vermont energy policy circles, however, and the Department of Public Service’s current draft energy plan calls for increased use of natural gas to mid century.
Board member John Burke argued against the two board members in the majority, saying that it’s “unfair and improper” to ask existing ratepayers to pay for the expansion and that Gaz Metro, which owns Vermont Gas, has hundreds of millions of dollars that are available for investment.
Vermont Gas is a subsidiary of Montreal-based Gaz Metro, which also owns Green Mountain Power and is in the middle of a merger deal with Central Vermont Public Service. If the utility merger goes through, Gaz Metro will be the biggest player in Vermont’s electricity market, supplying power to 72 percent of Vermonters.
The formal testimony put before Public Service Board was uniformly favorable towards creating the “Expansion Fund,” as it is referred to. The Department of Public Service, whose job is to advocate for ratepayers, supported Vermont Gas’s request. No other parties were at the table in the hearings. All the public comment that the board received was favorable to expanding the service area of Vermont Gas; only one letter actually endorsed the expansion fund itself.
However, when Sen. Vince Illuzzi (R, Essex-Orleans) learned that the department had sided with Vermont Gas on the expansion fund, he says it helped push him to petition the board to remove the Public Service Department from a different case involving Gaz Metro: its proposed buyout of Central Vermont Public Service. Public Service Commissioner Elizabeth Miller is married to a managing partner in the law firm that represents Green Mountain Power, and GMP, too, is owned by Gaz Metro.
Other opponents of the expansion fund include the Vermont Fuel Dealers Association, which represents suppliers of competing home heating fuels like oil and propane, and the environmental group Vermonters for a Clean Environment. The Fuel Dealers Association says that the expansion fund uses the financing powers of a regulated monopoly utility to put their dealers at a disadvantage. Vermonters for a Clean Environment was founded in the 1990s to oppose a planned natural gas pipeline combined with gas turbine electrical generation. VCE Executive Director Annette Smith says the organization is neutral on the pipeline itself but objects to the expansion fund.
No design or other plans for the pipeline have been submitted to the state. According to Steve Wark, communications director for Vermont Gas, the pipeline is in preliminary engineering design. Their conceptual design cost estimate is $68 million, he says, with a five-year timeline for construction.
Vermont Gas told the board that they do not expect the markets in Middlebury and Vergennes, which are targeted by the pipeline proposal, are enough to pay for the expansion into Addison County by themselves. Their long-term goal, they reported, is to expand further south to Rutland and then interconnect with the U.S. pipeline system.
The ratepayers’ contributions to the expansion fund are a byproduct of a more flexible rate regulation that the board granted Vermont Gas in 2006. Under the “Alternative-Regulation Plan” (ARP), Vermont Gas may use a relatively simple process to adjust its rates up or down each quarter, based on fuel costs.
Richard Sedano, who was commissioner of public service in former Gov. Howard Dean’s administration, explained that volatile gas prices have posed a challenge to the standard rate-setting process, which takes over seven months to set a rate.
For the seven quarters up to early 2011, Vermont Gas had reduced its rates. In February, the price of gas had continued to go down, and the ARP would have reduced customers’ rates an additional 5 percent. Instead, Vermont Gas proposed putting aside the equivalent amount, $4.4 million annually, in an interest-bearing escrow account, to facilitate the pipeline expansion. If the pipeline to Addison County is completed, all Vermont Gas ratepayers will start to pay for it in their rates. The expansion fund is to be used to “smooth” the resulting rate increase, according to the board order. As a result, money from current ratepayers will be used to reduce costs for future customers served by the new pipeline.
If the pipeline is never built, Vermont Gas may use the expansion fund to pay for development costs. Vermont Gas has pledged to then repay any remaining portion of the fund to the same ratepayers who paid into it. While Vermont Gas is talking about a five-year pipeline project, the expansion fund is authorized for 20 years.
The board majority noted that the PSB has been trying through different mechanisms to encourage Vermont Gas to expand into Addison County, without success. The board instituted the quarterly rate review, and they authorized Vermont Gas to receive higher rates of return on its investment. These efforts, they note, “have not heretofore borne fruit,” and they describe the expansion fund as perhaps the best opportunity for succeeding “in any reasonable time frame.”
In his dissent, board member Burke agreed with the goal of expanding natural gas use into Addison and Rutland County, and he even agreed that some benefits would be statewide. However, he argued that the board is overstepping its authority by authorizing the expansion fund, and he encouraged the Legislature to find a way to subsidize expansion.
Burke contended that the ratepayer-financed expansion fund, by covering development costs of the pipeline if it is not built, has the same effect as venture capital. This gives Vermont Gas “a virtual (sic) cost-free source of investment capital, [but] offers no real tangible benefits to those ratepayers.” He pointed out that Gaz Metro had over $2 billion in gross revenues in 2009, with “operating cash flow (available for capital investments) of $425 million.”
In the event the pipeline is never built, Burke was skeptical of Vermont Gas’s ability to return the remaining portion of the money to the customers who paid into the fund. He noted other cases where utilities had not been able to find the customers to whom it owed money, so the money was used for other projects. Since the fund is authorized until 2031, Vermont Gas may find itself trying to track customers who moved or died up to 20 years before any potential refund.
While the board majority said a pipeline expansion would benefit existing customers through increased reliability and capacity in the system, Vermont Gas’ Wark did not cite any reliability problems in the existing system when asked. He wrote in an email, though, that bringing “transmission around Burlington would allow us to ‘backfeed’ or (sic) system and gives greater flexibility if there ever was an emergency.”
Wark also argued that today’s customers will benefit from an economically stronger state in the future. This “expansion,” he wrote “will reduce the state’s heating bill by $44M over 20 years (NPV), which means more money that goes back into the economy for other purchases.” NPV refers to “net present value,” a means of expressing expected future costs or benefits in today’s dollars.
Public comment to the board included letters of support for expanding gas service from five organizations, including Middlebury College and the Vermont Chamber of Commerce. The Agency of Commerce and Community Development also testified about the administration’s support of natural gas expansion as far as Rutland.
Only one public comment addressed the question actually before the board, which was whether to authorize the expansion fund using ratepayer money. Frank Cioffi, president of the business group Greater Burlington Industrial Corporation, wrote: “And even though Chittenden County businesses will be helping fund this expansion, they have been on the receiving end of that benefit at one time or another. The economic and environmental benefits of natural gas in Addison will help Vermont’s economy, and thereby help us all.”
When state Sen. Illuzzi heard about the decision, he asked the Legislative Council to summarize and analyze it. Illuzzi commented: “I’d expect that any system expansion would come at expense of system owner, with repayment as you provide service in future years… In this case, the ratepayers are funding the expansion, with ultimately the profits going to the business.” Illuzzi said has not had time to examine the decision in enough detail to decide whether he will call for new legislation.
Former Public Service Commissioner Sedano said he was not familiar with this particular board decision, but that it sounded to him like an example of a board addressing a dilemma. “People who are benefiting from these new services may not be paying the full costs… Generally, that would be seen as a bad thing. The counterbalance that I imagine the board saw in this is that there was no other way for the expansion to occur, and that the expansion would have general benefits for the state.” Sedano’s speculation corresponds closely to the board majority’s opinion.
Sedano continued: “This is where judicial ratemaking and their other important obligation, which is to make decisions for the general benefit of the state, can come into conflict. This is when appointed regulators earn their money, when they are confronted with a true dilemma—a conflict between two good things—and they have to figure it out.”
Sedano cautioned legislators about limiting appointed experts’ ability to be flexible in individual cases. “There’s always going to be tough cases… Sometimes legislators in response to these tough cases try to write specific legislation to limit the flexibility of the regulators, and usually that is not helpful. Usually, it doesn’t fully anticipate different ways that the facts can play out and often can result in the board making a decision that they actually know, based on the evidence, is an unwise decision, but because the statute is so specific, it can be ham-stringing.”