To Protect Vt. Gas From 'Significant Financial Hardship’, Regulators Relax Rate Controls

Aug 31, 2016

Recordkeeping at Vermont Gas Systems is so sloppy that Vermont’s consumer advocate made exceptions to consumer protection rules in order to prevent “significant financial hardship” for Vermont Gas, according to expert testimony filed with regulators.

The testimony is from Bill Schultz, an accountant who specializes in utility budgeting. Schultz has been working on utility cases in Vermont since the early 1990s as a contractor for the Department of Public Service. His testimony on Vermont Gas was made on behalf of the department.

One of the department's roles is to look out for the interests of the general public in regulatory proceedings.

The regulatory ratemaking process is designed make sure monopoly utilities aren’t collecting money from customers to cover inappropriate costs, or costs for which the company doesn’t have solid documentation.

Vermont Gas has put forward a proposal for future rates that would make customers cover $134 million of costs from the pipeline. This is the first time the company has asked regulators for permission to recover money spent on the pipeline from customers.

According to Schultz, who vetted the proposal, Vermont Gas did not properly document its spending.

"I have reviewed invoices to cost reports for some 40-plus years and to my recollection have not encountered so much difficulty in tracing in supporting documentation," Schultz wrote in testimony filed with the Vermont Public Service Board.

Chris Recchia, the commissioner of the Department of Public Service, stood by the consultant's report.

"We need to be able to see what was spent, and on what, and what the value of that was," says Recchia. "In order to do that, there needs to be really good documentation on first, the company's decision to do this project ... but probably more to the point, you need contracts for the vendors who are doing the work, actual work orders for what they're supposed to do and when they're supposed to do it, and how much it's going to cost to do that. And then invoices documenting those costs."

To determine how much customers should pay, Schultz examines the spending that the company wants customers to pay for and asks two questions: Are the costs and benefits of this spending “known and measurable”? Did the spending achieve something that is “used and useful” for customers?

The goal of the regulation is to ensure that utilities, which tend to have a natural monopoly on their customers, aren’t charging customers far more than it costs to serve them.

Checking these two boxes – “known and measurable” and “used and useful” – is the only way utilities in Vermont can get recover costs from customers when they spend money on infrastructure. A project is known and measureable if the company can prove it is in service – or can provide evidence that it will be soon – did a cost-benefit analysis to show that the investment was financially sound, then properly documented the spending. Documenting spending means quite literally keeping receipts.

In its effort to make customers pay for its pipeline to Addison County and a number of other projects, Vermont Gas fell far short of those “known and measurable" standards, according to the state's consultant. The documentation was so bad, Schultz wrote, that he decided to make exceptions to this standard.

After explaining his understanding of the rules, Schultz wrote that his interpretation “would lead to the conclusion that most if not all of the capital projects proposed to be included in rates should be disallowed as not meeting the known and measurable standard.”

Bill Schultz, an expert consultant for the Vermont Department of Public Service, said in regulatory testimony that Vermont Gas failed to properly document millions of dollars in spending. The company is trying to recover much of that money from customers through rates. (Highlighting is the reporter's own.)
Credit Bill Schultz / Public Service Board filing

Schultz and the Department of Public Service didn’t remove the project costs in the department’s proposal for Vermont Gas rates. Schultz’s testimony explained why.

“I have not proposed such an across-the-board disallowance because to do so would likely result in significant financial hardship,” Schultz wrote.

Even though Vermont Gas failed to properly document millions of dollars in spending, the Department of Public Service essentially changed its interpretation of the existing rules in order to allow the company to bill customers for that spending.

“My analysis here [in my testimony] is based on the known and measurable standard based on prior [Public Service] Board rulings,” Schultz wrote. “However, I have had to make certain exceptions given the extensive absence of supporting cost documentation.”

Public Service Commissioner Chris Recchia said his department's oversight is forcing Vermont Gas to properly document its spending.
Credit Angela Evancie / VPR File

Chris Recchia, the commissioner of the Department of Public Service, said the department did remove $20 million from Vermont Gas' proposed rates due to lacking documentation from the company. He said part of the reason the department didn't strictly follow the "known and measurable" standard was that the Addison County pipeline project is so big in comparison to Vermont Gas as a company.

"This is doubling their rate base," Recchia said, referring to the total value of Vermont Gas' infrastructure. "This project is huge, and that's part of the issue of trying to make this project work and some of the challenges that they've faced, but you know a $165 million project basically doubles their footprint and doubles their cost. If you disallowed 100 percent of that ... that does weaken the utility to a point where if you want them to upgrade a gate station or add service to a community, they're going to be real hard-pressed to do that. And we do want there to be a functioning, capable and reliable utility here."

Even though Vermont Gas failed to properly document millions of dollars in spending, the Department of Public Service essentially changed its interpretation of the existing rules in order to allow the company to bill customers for that spending.

In other words, Recchia said that if the company has to take too much of a financial penalty, it won't be in a financial position to serve its customers well.

Vermont Gas takes issue with Schultz’s characterization of the process and his claims that the utility lacked documentation for its spending. Company officials refused interview requests for this story, but spokeswoman Beth Parent provided an emailed statement.

“Our rate filing reflects our commitment to protect customers from increased costs associated with the project and that is why we agreed to the $134 million cost cap,” she wrote. “Additionally, we have recommended a rate decrease for customers. With due respect to Mr. Shultz, we do not agree with his position regarding information. We provided the department with thousands of pages of documents regarding our project and our business for this rate filing. Our team is working through their assertions and will respond appropriately in the coming weeks.”

Schultz’s testimony paints a picture of a company that failed to properly plan the major pipeline expansion currently underway in Addison County, systemic failures in documenting costs and resistance to close regulatory scrutiny.

When Schultz asked for documents related to the company’s payroll expenses, he wrote, “[t]he Company objected … and responded that the request to provide invoices for actual costs and payroll reports for payroll costs seeks information that is voluminous and unduly burdensome to produce.”

The company offered to provide documentation for amounts over $5,000 at its headquarters in South Burlington, but wouldn’t send the documents to the state’s analyst.

Schultz said that Vermont Gas has the burden to prove that costs should be passed on to customers. “[A]nd to attempt to shift that burden after failing to provide the required information in two previous opportunities is viewed as being disingenuous,” he wrote.

"We provided the department with thousands of pages of documents regarding our project and our business for this rate filing. Our team is working through their assertions and will respond appropriately in the coming weeks." - Beth Parent, Vermont Gas

Schultz said he had to ask Vermont Gas four times for copies of all of the contracts related to construction on the Addison County pipeline.

The first request “asked for all contracts and 21 were provided,” Schultz wrote. “As confirmation a follow up was asked to confirm that the contracts provided were all of the contracts. The response to the follow-up … produced 44 more contracts. That is a serious failure on the Company’s part when it is asking for ratepayers to pay $134 million for the [pipeline] Project.”

Schultz wrote that if he didn’t already have major concerns about the company’s records, he could have recommended that company profits – not customers – cover the costs of the contracts that weren’t provided up front.

“This is not only contrary to rate case precedent and Vermont ratemaking,” Schultz wrote, “it is an indication that the Company’s management has applied poor decision making in the undertaking of the [pipeline] Project.”

Recchia said the company's withholding of documents is a problem.

"It is not pleasant when we have to ask more than once," he said. "We should not have to ask more than once for something, and as you can see from that testimony in some cases we had to ask multiple times, and that's just not okay."

"We should not have to ask more than once for something, and as you can see from that testimony in some cases we had to ask multiple times, and that's just not okay." - Chris Recchia, Department of Public Service

Vermont Gas also wasn’t able to provide Schultz with a single cost-benefit analysis, according to his testimony. The company didn’t provide a cost-benefit analysis for the pipeline, and it didn’t provide any such analyses for 46 smaller projects that Vermont Gas wants customers to pay for.

“None of the projects under review had a cost-benefit analysis and/or a financial analysis that was provided, despite being specifically requested,” Schultz wrote.

Cost-benefit analyses are important to regulators because they serve as evidence that a given project is cost-effective and will result in a good value for the customers that are being asked to pay for it.

Ultimately, Schultz worked with the Department of Public Service to come up with an alternative proposal for Vermont Gas’ rates. Noting issues with documentation, and $35.5 million in spending that wasn’t considered “prudent,” the department’s proposal includes $112 million of pipeline costs being built into Vermont Gas’ rates. Recchia said the department's proposal removed $20 million from Vermont Gas' request due to lacking documentation.

Recchia says that even though an argument could be made for removing more costs from Vermont Gas rates, his department made its concerns clear and provided a reasonable proposal to hold the company accountable without putting it in a tough financial spot.

"We know [these projects] exist. We know the work was done. We know the money was spent," he said. "It's not documented well how it was spent, and that's why we're disallowing the ones that are egregiously not supported. It doesn't mean we're doing the work for the utility. The utility has to go back and do that documentation if they want to recover that $20 million that we have said is not yet known and measurable."

He said the department has still sent a message with its changes to Vermont Gas' rate proposal.

"We are causing them significant pain in this process," he said. "We're making them do it right."