[A] new report from an economist hired by AARP says Vermont Gas Systems ratepayers are stuck with high natural gas prices as a result of a regulatory program intended to drive down ratepayers’ costs.
The report says increasing base rates — a fixed fee on gas customers’ bills in addition to the metered cost of energy consumed — are hidden by diminishing wholesale gas prices.
While Vermont Gas customers’ bills have decreased, the report says, they’re still among the highest in New England.
The company is a regulated monopoly, meaning that in the absence of market competition, the Public Service Board sets what rate of return it may earn.
Vermont Gas currently operates under what’s called an alternative regulation plan, a complex rate-setting system that critics say serves utilities at the expense of ratepayers. This type of regulation was agreed upon by Vermont Gas and the Department of Public Service in 2006 and renegotiated in 2009. Hearings are underway at the Public Service Board to determine rates for the upcoming year.
The Vermont Gas alternative regulation plan actually results in higher rates for customers, in spite of its having been adopted to achieve lower rates, say AARP representatives and their report, which was produced by utility analyst and Louisiana State University economist David Dismukes.
“Our concern is that their alternative regulation plan was applied — and alternative regulation was created — because it would smooth over the rates, and in Vermont Gas’ case, because it would help recover costs” associated with capital expansion, said AARP’s Vermont associate state director of communications, David Reville.
“But it was also supposed to create administrative and operational efficiencies to benefit ratepayers,” Reville said. “One of the prime reasons for alternative regulation is ratepayer benefit. And (the report) shows it actually increases costs.”
Regardless of whatever the report claims, Vermont Gas ratepayers pay less today than they did in 2006 when the company first entered into an alternative regulation program with the state, said Vermont Gas CEO Don Rendall.
Customers are in fact paying 15 percent less today than in 2012, and that’s in spite of dramatic capital investments that have added thousands of new customers in Chittenden and Franklin counties, Rendall said.
Moreover, the company’s investments in energy efficiency assistance for customers save money that’s not reflected in the report’s rate analysis, he said.
“We help our customers reduce their energy bills by using less through energy efficiency programs, saving customers $15 million each year in the most valuable energy — the energy we don’t have to use at all,” Rendall said.
Department recommends keeping alternative regulation
The Department of Public Service has asked the PSB to retain only the gas pricing portion of the existing regulation plan for another year, so costs from the company’s $165 million pipeline extension to Addison County may be incorporated into the rate case next year.
Alternative regulation plans typically last three to six years, with the option of one-year renewals before utilities must appear before the Public Service Board and establish a new plan. Vermont Gas is applying for a one-year extension this year, and if that’s approved the company must submit to a full rate case hearing next year.
Alternative regulation includes mechanisms for rate adjustments during the term covered by a plan.
The Public Service Department intends to seek a continuation of alternative regulation for Vermont Gas in some form, said Commissioner Chris Recchia.
“Alternative regulation gives us the opportunity every single year to look at a company’s expenses and what they want to put into rates,” Recchia said. Under traditional rate setting plans, he said, “you don’t hear from (utilities) until they come back in and propose a rate case, which is of course when they’re losing money.
“We think (alternative regulation) is a huge benefit to ratepayers and should be continued, but we need a pause to fully integrate the Addison (County) gas project into rates before we enter into a new alternative regulation program in the future,” Recchia said.
No opportunity for cross-examination
Although AARP is a party to the Vermont Gas rate case in progress, the organization didn’t file any testimony by the deadline Monday.
Recchia said that’s unfortunate, because it prevents state officials from questioning the report’s author through the Public Service Board’s public hearings. His department will scrutinize the report and seriously consider its findings, Recchia said.
AARP submitted the report to the department only to aid in the state’s review of the alternative regulation process, Reville said, and the organization’s leadership thought Recchia and his colleagues would appreciate the information. The report wasn’t submitted as testimony because that would require the author to travel back and forth to Vermont, he said.
“We provided it to the department to help inform them to do their work as they provide recommendations to the board,” Reville said. “It should find its way to the board that way.”
“We should be able to give this to the department — who we should be working hand-in-hand with — and they should be able to make it part of their body of work,” he said. “We’re supposed to be on the same side. We aren’t always, unfortunately, but we should be.”
Reville said his organization and the Department of Public Service are both at least nominally working to serve the public good.
Unfair comparison?
But the report presents a comparison of New England utilities that might be misleading, Recchia said.
For instance, even supposing the Vermont Gas base rates exceed those of many of its peers in New England, that’s not necessarily evidence those rates are too high, because Vermont’s low population density means each customer requires more infrastructure to get the gas delivered, Recchia said.
The base rates reflect only revenue required to maintain and expand the company’s capital assets, plus a rate of return on that capital that the state sets annually after a thorough review of the company’s finances, Recchia said. That means Vermont Gas isn’t arbitrarily or independently raising its base rates as a means to increase profit, he said. Rather, increases in base rates simply reflect the company’s increasing capital investments, he said.
The $165 million Addison County pipeline expansion roughly doubles the value of Vermont Gas’ fixed assets. That size of investment isn’t common among utilities, and it’s certainly not a factor for the other New England utilities against whom the AARP report compares Vermont Gas, he said.
The report gives a less charitable interpretation of these capital expenditures, characterizing Vermont Gas as having failed to exercise financial discipline, and faulting the alternative regulation process as having abetted the expenses.
Recchia’s department has succeeded in reducing Vermont Gas rates by around $17 million below what the company sought in its annual rate cases since 2013, Recchia said.
Since his department began alternative regulation for Vermont Gas rates in 2006, however, customers have paid nearly $151 million more than the regional average, according to the AARP report.
Rendall said he and other Vermont Gas leaders aren’t unaware of what other New England utilities are doing and that he looks forward to arguing the company’s case before the Public Service Board.
“We certainly look at where we stand relative to other companies in the region, and we’re confident that when we and our regulators consider the way we manage our gas costs to keep them stable, the way we invest to bring service to new customers, and to new families and businesses, the way we focus relentlessly on a safe and reliable system, that we stack up very positively as a provider of service, and we’re proud of the service we provide, and of the value we provide to our customers,” he said.
Vermont Gas will submit to the PSB in late September a response to the Public Service Department’s recent filing in the rate case.
In that filing, the department asked that $35.5 million of the $165 million in total estimated pipeline costs be deemed unrecoverable from ratepayers, because the money had allegedly been imprudently spent. The department is asking that customers be let off the hook at least for now for an additional $17 million it says hasn’t been sufficiently documented yet.
The department has already reached an agreement with Vermont Gas limiting ratepayers’ exposure to pipeline costs at $134 million; its most recent request would reduce ratepayers’ investment in the pipeline to around $112 million.
