Lawmakers may consider new regulatory policy to shield utility customers from paying for public infrastructure cost overruns.
Senate Finance Committee members sent a letter to the Department of Public Service last month, questioning whether it is fair for customers to pay for a Vermont Gas pipeline through Addison County whose cost estimate increased by 40 percent this summer.
The Public Service Board approved the company’s 41-mile pipeline from Chittenden south to Middlebury last December, but Vermont Gas announced in July that the estimated cost of the project had increased to $121 million.
“If such costs are passed on to ratepayers, what prevents utilities from understating construction or infrastructure costs in the future when they are before the Board only to then increase ratepayer payments through post-approval disclosures?” the Sept. 9 letter states.
Public Service Commissioner Chris Recchia replied that Vermont Gas will not bill the cost of the project to ratepayers in the coming rate year, which starts on Nov. 1.
He said the department and the board will review any request by Vermont Gas to use ratepayer funds to pay for pipeline costs to ensure the costs are “prudently incurred.” He said when a regulated utility seeks to recover cost not approved in its initial permit, it “triggers a red flag and warrants heightened scrutiny.”
Senate Finance Committee Chair Tim Ashe, D/P-Chittenden, said the department’s response struck many of the right chords. However, he said there is a “structural problem” with how utility costs are billed to customers.
“I call it the ‘casino problem,’” he said in an email. “When it comes to who pays for legitimate business costs, for errors and mistakes, for penalties and fines, the answer is always the same — the ratepayer or customer. A penalty imposed on a utility is a penalty imposed on the ratepayer since they’ll be paying it. Cost overruns? The ratepayer. Like a casino, the utility always wins.”
Ashe said the Legislature needs to explore a fairer approach to cost overruns and other extraordinary utility costs.
“People with the luxury of being shareholders of large corporations can certainly absorb excess costs more so than Vermont households and small businesses,” he said.
Recchia said the Vermont Gas initially sought to place the cost of the pipeline into rates for the coming rate year. The company’s June 30 proposed rate adjustment filing drew fire from the consumer advocacy group AARP, which asked regulators to investigate the filing.
“Vermont Gas removed those costs at the urging of the Department due to our concerns regarding the timeliness of their inclusion,” Recchia said in his letter. He said utilities cannot use ratepayer funds to pay for a project until it is in service.
Vermont Gas has said the chief factor for the cost increase was due to competition for pipeline construction given the recent boom in the natural gas industry.
But the lawmakers questioned the capacity of the board and the department to effectively evaluate the cost of utility projects, stating labor and material expenses do “not suggest an unpredictable cost.”
Recchia said the department relied on Vermont Gas’ cost projections during the permit review. He said the department and the board have the ability to challenge cost assumptions.
Vermont Gas is under scrutiny for a delay in notifying regulators of the cost increase. The company has said it was waiting to receive its wetlands permits before sending a final cost estimate.
Regulators will decide whether to reevaluate the project this month in light of the cost increase. They will also decide next year whether the company violated state law for the belated cost estimation announcement. The department fined the company $35,000 for the delayed notification.
The company says even under the new cost estimate, the project’s benefits to ratepayers and the state economy outweigh the costs. The department has agreed, but will release an updated position on Thursday.
The Senate Finance Committee reviews issues related to utilities and other company’s regulated by the Public Service Board.
Committee member Sen. Ginny Lyons, D-Chittenden, who co-wrote the letter with Ashe, said she will wait until the regulatory process plays out before deciding whether new policy is needed, which she said would not be directed only toward Vermont Gas.
She said natural gas burns cleaner than oil, costs less for customers and also is an interim step toward renewables. But, she said, “there have certainly been huge issues created with landowners and I think that’s unfortunate.”
The Department of Public Service said it has hired an independent inspector to work with a state engineer to oversee pipeline construction. The contract is for two years and cannot exceed $225,000, according to a state engineer, and will be billed back to Vermont Gas.
The department will also hire an independent appraiser to assess the value of property purchased by Vermont Gas through eminent domain. The department said these costs will be billed back to Vermont Gas.
