Editor’s note: Melanie Peyser is an international justice system development consultant, who returned to Monkton earlier this year to help her mother address Gaz Metro/Vermont Gas Systems’ plan to construct a portion of the pipeline through her family’s property. She is a member of Just Power.
[I]n the middle of his recent testimony before the Vermont Public Service Board (PSB) about the 41 percent cost overrun on Phase I of Addison Natural Gas Project (ANGP), Don Gilbert, CEO of Vermont Gas Systems, owned by Gaz Metro of Canada, exclaimed that no price was too high for this “once-in-a-lifetime project.” Mr. Gilbert’s statement confirmed what astute observers already knew: Phase I of the pipeline project is, by definition, economically irrational. With the PSB deciding this week whether to reconsider the costs and benefits of the project, time is running out for Vermonters to digest the disastrous details of escalating costs and imaginary benefits of moving forward with the project.
Announced in July, VGS’ latest budget update brings the capital costs of Phase I to $121.6 million or $50-$60 million over the company’s original estimate back in 2011 when the idea of holding back a refund and rate reduction owed to ratepayers to pay for pipeline expansion was pitched to the board. The new price tag is also $35 million higher than VGS’ last submission to the PSB before receiving a certificate of public good at the end of 2013.
Vermont Gas doesn’t see a problem with the overrun, and points out that another Gaz Metro company, VELCO, had a similar expansion that nearly doubled in price, the Northwest Reliability Project. Apparently, two wrongs make a right, and, as usual, the Department of Public Service (DPS) hasn’t even blinked. However, over 400 people have sent postcards to Attorney General William Sorrell and the PSB asking that independent counsel be appointed to represent the public since the department evidently can’t do the job itself. No one has heard from Sorrell or the PSB even though the board has opened two dockets on the cost overrun, and no one outside Gaz Metro or Vermont Gas Systems can get access to the numbers underlying the costs and benefits claimed in the company’s filings and marketing. In the meantime, VGS is in the process of hiring the talented folks from the Northwest Reliability Project to improve cost estimation and controls.
In August, VGS accused landowners of getting in the way of gas service reaching 4,000 Addison County customers even though the company only promised to offer gas to 3,000 customers in Phase I and now estimates that fewer than 2,600 customers will actually switch to gas by the end of the decade.
Why would DPS, the attorney general, and the Public Service Board allow things to continue this way? Perhaps it’s hard to admit that someone should have checked facts before the entire state government mobilized behind this project. As it turns out, a bit of digging and simple arithmetic would have revealed the following:
• $121.6 million for infrastructure to serve fewer than 2,600 customers translates into $47,500 per customer hook up in Addison County. To cover that cost, Franklin and Chittenden county customers will pay up to 15.2 percent more than they do now, and that’s on top of the 5.4 percent rate reduction they never received in 2011 and will pay as a surcharge until 2031.
• The real cost to Vermonters to hook up just one Addison County customer will likely be at least $55,000. That’s because new customers pay upfront conversion costs, which, according to the Vermont Fuel Dealers Association, range from $8,000 to $14,000 for homes with older furnaces or boilers. Vermont Gas admits that conversion can cost thousands but says that customers can continue using existing systems by renting equipment for about $70 per month. Completely ignored to date are expenses incurred by landowners and taxpayer dollars spent on extra staff and consultants hired by the state to manage the project.
• Sixty percent of the promised Addison County fuel bill savings will go to just four large customers, who include Agrimark/Cabot and Middlebury College. An additional 15 percent will go to the next 72 largest commercial customers. The remaining 2,500 or so customers will split just 25 percent of the claimed savings. In contrast, when it comes to paying for the pipeline, big customers will see smaller rate hikes than residential customers, who will foot most of the bill. VGS and NG Advantage are already collaborating to bring condensed natural gas to Middlebury’s largest prospective Phase I customers beginning at the end of this year with claimed savings of 20-40 percent. Vermont Gas spokesperson Steve Wark was quoted in the Rutland Herald last month saying that the “gas island” would not be available to Middlebury residents because homes use too little heating oil to justify spending the money to switch to natural gas.
• If, at any time before 2031, the PSB rescinds approval for Phase I or denies future costs, VGS is supposed refund customers the 5.4 percent surcharge it has billed since 2011. To do that, the company will need forwarding addresses. No one knows what happens if a customer passes away or forgets to notify Vermont Gas of a move between now and 2031. Based on past experience, the gas utility will propose plowing leftover customer money into new infrastructure or efficiency programs. There is already a plan to charge higher rates now so that at least $49 million will be left in its customer-supported “System Reliability and Expansion Fund” — money it would use to pay for Phase III of the pipeline to Rutland.
• Mr. Gilbert says there’s no need to compare costs and benefits for current ratepayers in Franklin and Chittenden counties. That’s probably because the only verifiable benefit for current customers is improved reliability that could be achieved at a much lower cost by limiting the project to a bit of looping and dropping the rest of Phase I. There is also a chicken and egg story here. It’s unclear whether the increased reliability is needed because of the expansion or vice versa.
• VGS says Addison County will benefit from the same economic growth that Chittenden and Franklin counties have enjoyed from natural gas. There’s no evidence Franklin County has benefitted from over 50 years of gas service. Currently, Addison County has lower unemployment, higher median incomes and home values, and more registered businesses than Franklin County.
Is there a public good in raising rates for 50,000 customers in Chittenden and Franklin counties to as much as 15.2 percent above the value of gas service they actually receive so that 2,563 customers in Addison County can maybe save something on their heating bills but only after paying off huge conversion bills?
In the coming days, the board will consider whether to reopen the Phase I docket and reassess whether the benefits of Phase I of the pipeline still outweigh the costs. The following questions cry out to be asked:
• How could $55,000 per customer hookup possibly be the “lowest-cost” alternative to helping fewer than 2,600 Addison County businesses and homes get affordable heating? A combination of weatherization and cold climate heat pumps or wood pellet stoves would achieve similar savings for a fraction of that price. Even if small solar arrays were added to the mix, the total cost per household would likely still be under $40,000 – not counting federal and state incentives – and most customers would also be able to eliminate their electricity bills. If heat pumps are so ineffective or unaffordable, why is the PSB allowing GMP to rent them to customers as part of efficiency programs in Rutland and Montpelier?
• Is there a public good in raising rates for 50,000 customers in Chittenden and Franklin counties to as much as 15.2 percent above the value of gas service they actually receive so that 2,563 customers in Addison County can maybe save something on their heating bills but only after paying off huge conversion bills? Addison County customers will be charged that additional 15.2 percent as soon as gas starts flowing, reducing their savings to at most 25 percent over oil or propane.
• Shouldn’t the $23 million in claimed new annual tax revenues to towns be dropped from the equation as “benefit-neutral” since ratepayers in the north are funding the assets to be taxed?
• Does the PSB have the authority to approve a utility to charge St. Albans and Enosburg customers for a $100,000 incentive payment to the town of Shoreham that will fund conversion loans and economic development? Isn’t that taxation without representation? Wouldn’t it be more economically efficient for Shoreham to establish a 501(c)(3) and solicit donations from the VGS ratepayers directly so that donations would be voluntary, free of corporate revenue tax, and deductible?
• Will adding 0.7 percent biomass into Gaz Metro’s pipes in Quebec qualify its fossil fuel product sold in Vermont as “renewable natural gas” under federal law? Vermont Gas’ initiative to expand the use of renewable fuels by collecting bio-methane from Addison County farms doesn’t seem to have much of a future now that VGS’ own experts have questioned the feasibility of taking the concept to the scale envisioned in the certificate of public good.
• Even if the increased costs are worth the diminished benefits today, will the same be true next year? In September 2013, Oil & Gas Journal’s annual Pipeline Economics Special Report predicted that pipeline construction costs in the U.S. would spike by 32 percent for the period September 2013 to September 2014. In July 2014, VGS estimated its cost overrun to complete the project would be 41 percent. But VGS plans to build most of the project next year. Last month, the latest Pipeline Economics report predicted an additional 66 percent increase in construction costs between now and next September. At a recent PSB hearing, company representatives said they “don’t know” whether signed contracts are capped or could escalate. Is it prudent to assume that the construction costs for the project won’t move with the market yet again?
• Does the board plan to hold Vermont Gas, a public utility, accountable for costing errors? According to a University of Alaska study, the average cost estimation error for 155 pipelines completed in the Northeast between 1992 and 2008 was actually zero. At 41 percent, the firm’s estimation error exceeded the largest single mistake by another company in the region, and that’s before VGS had even started construction. Unlike VELCO in the Northwest Reliability Project, Vermont Gas management has offered only platitudes about better numbers. There is no evidence whatsoever that VGS has yet taken the time or resources to validate their projections.
• Is the Addison Natural Gas Pipeline the best investment for the public good of the state? The same $121.6 million that Gaz Metro’s VGS says would produce $195 million in savings and $23 million in taxes over 20 years could be invested in zero-risk U.S. Treasury bonds and produce $270 million ($52 million more than the pipeline). A $121.6 million investment in a more profitable gas company like Kinder Morgan Partners would likely produce $580 million over 20 years – enough to help every Vermont family begin the switch to affordable, renewable heating options.
A recent advertisement on the Addison Independent website underscores Mr. Gilbert’s magical thinking about the economics of the pipeline. Above VGS’ bold statement that natural gas is “smart for Vermont,” there is a drawing of a huge apple resting against a tiny school chalkboard. The apple is almost half as tall as the chalkboard and it’s too big to balance on the narrow rail next to the chalk and eraser.
This pipeline is like that apple – oversized, unrealistic, and absolutely ridiculous.
The Vermont Public Service Board should cut Vermont’s losses before outsized pipeline capacity and runaway costs impose an unrealistic economic burden on families for, at best, speculative economic benefit.
