Green Mountain Power will collect millions of dollars from customers over the next year as reimbursement for costs that the company didn’t properly document for regulators, records show.
State officials have warned GMP for years about its failure to document expenses, but are not consistently enforcing the rules that were explicitly designed to prevent such costs from being passed on to customers.
A VPR investigation shows that Green Mountain Power has perennially failed to prove to regulators that GMP officials did their due diligence before and during projects. As a result, it’s hard for regulators and the public to know if GMP’s investments benefit customers, even though regulations say customers should only have to pay for investments that provide them with a real value.
Green Mountain Power is regulated using “Alternative Regulation,” a model that allows for more frequent regulatory reviews of utility spending than traditional regulation does. Critics of the system say it lacks transparency, and allows GMP to collect money it wouldn’t be entitled to under the state’s normal regulatory regime.
Since at least 2011, documents show, Green Mountain Power has regularly failed to provide regulators with key documents that would prove how much the new infrastructure will cost. Despite these failures, regulators have routinely allowed poorly documented projects to be added to the company’s rate base, which means customers are covering those costs without the assurance that those things are actually providing any value.
Vermont’s regulatory system is designed to prevent this. The system was set up to allow utilities to make customers pay for infrastructure investments like utility poles, bucket trucks or a new computer system for the company. But because GMP has a monopoly on its customers and doesn’t have to compete with other companies for business, regulators are supposed to make sure the company is only charging customers for investments that help deliver safe and reliable service to those customers.
Customers pay for these investments over time, not all at once right after the utility spends the money to build them. Those payments are calculated by adding up the value all of the infrastructure Green Mountain Power owns, from power lines to substations to trucks (this total is known as “rate base”), then charging the company’s customers a percentage of that amount to cover the costs of maintaining its infrastructure. That percentage customers pay is made up of a rate set by regulators and the company's debt payments and depreciation, and it makes up about $100 million of the roughly $600 million customers pay in rates every year. For GMP bills starting in November, customers are paying 7.29 percent of rate base.
In order to be sure customers only have to pay for infrastructure that benefits them, regulators closely monitor Green Mountain Power’s spending on new projects. Before the company is allowed to charge customers for a given investment, regulators must determine that the investment meets a legal standard called the “known and measureable” standard.
To do this, the company has to prove that the investment is likely to be serving customers in the first year they are being asked to pay for it, and that customers aren't being asked to pay too much. If a utility can prove that, then the project is considered “known and measurable.”
If a utility spends money on a project but regulators rule that it wasn’t “known and measureable,” the utility can’t make customers pay for it, according to Vermont regulations. But if regulators rule that a given piece of infrastructure is “known and measurable,” the value of that infrastructure is added to the company’s “rate base” – that’s the total value of the infrastructure that serves customers, and it’s also the amount that customers pay a percentage of in rates every year.
That is why Green Mountain Power’s documentation of its costs is so important: If the company can’t show documents to regulators that prove the company has done due diligence about the finances of an investment, Vermont’s regulatory rules say customers should not have to pay for that investment. When a project is added to rate base, customers end up paying for that decision for years.
Bill Schultz, a consultant working for the state, conducts the Department of Public Service’s annual review of Green Mountain Power’s requested rates. It’s his job, along with the department’s staff, to make sure the company isn’t adding costs to rates that customers shouldn’t have to pay. Every year, Schultz writes a report named the “Larkin Report,” after the consulting firm he works for, Larkin & Associates.
In the August 2011 Larkin Report about Green Mountain Power’s proposed rates for the following year, Schultz wrote that he “is of the opinion that Alternative Regulation may be creating complacency regarding documentary support that typically does not exist under traditional regulation.”
That year Green Mountain Power was asking regulators to allow the company to make its customers start paying for the Kingdom Community Wind project, a 21-turbine wind development on Lowell Mountain in the Northeast Kingdom. Schultz’s report said the company struggled to present the documents he needed to ensure it was fair for customers to pay for the project.
Of the $112,178,000 that Green Mountain Power wanted to add to its rate base for the Kingdom Community Wind project, Schultz found that at least $18,208,002 —16 percent — was not properly documented.
For example, the company entirely failed to document some spending on a wind turbine.
“The major cost component, Turbine A was made of a contract price and a $1,000,000 contingency for various added costs,” Schultz’s report says. “No documentation was provided to support the $1,000,000.”
For the most part, the 2011 Larkin Report doesn’t clearly state whether those poorly documented costs were added to GMP’s rate base or not, but it is clear that those costs didn’t meet the known and measurable standard when the company asked to have them included in rates in 2011.
Kristin Carlson, a spokeswoman for Green Mountain Power, said the company ultimately documented all costs related to the project.
"Kingdom Community Wind is an important energy project for Vermont," she said. "GMP is proud that it was completed ahead of schedule and within the proposed budget. We have provided documentation for all costs associated with the project. The 2011 Larkin Report does not reflect the finished project, which went into commission in 2012. Kingdom Community Wind has the overwhelming support of the community in two town votes, has helped lower costs for GMP customers, and infused economic support for the Northeast Kingdom, including jobs during construction, tax payments and financial support to the surrounding communities through Good Neighbor Payments."
At least some of the costs of Kingdom Community Wind were allowed into customer rates without proper documentation, the 2011 Larkin Report shows. For example, $2.6 million for a switching station was added to rate base, despite problems mentioned in the Larkin Report.
“The [cost] estimate indicates that this is an estimate from VEC [Vermont Electric Coop],” the report said. “No documentation was supplied to support this cost. We are not reflecting an adjustment but one could arguably be made since there is no documentation to support it, just a line on a piece of paper that says VEC estimates the cost to be $2,600,000.”
The problems with documentation came up again in Schultz’s reports in 2012 and 2013.
Specifically, Green Mountain Power either completely failed to come up with the documents it needed, or it failed to include them in its initial annual filing on June 1. As a result, Schultz and the Department of Public Service had to ask for the documents later. That “updating” of supporting documentation is generally not allowed under traditional utility regulation in Vermont, and Schultz urged regulators to put an end to it by forcing the company to meet a deadline.
“Absent direction from the [Vermont Public Service] Board, establishing a time frame for providing the additional [documentary] support, Larkin believes that the problem will continue to persist,” Schultz’s 2013 report said.
In 2014, the Department of Public Service came up with a new set of rules to prevent Green Mountain Power from charging customers for costs that weren’t properly documented. In the years since, the department has continued allowing costs with weak documentation into rates, despite the new rule.
The Department of Public Service and Green Mountain Power renegotiated GMP’s latest “Alternative Regulation Plan” in 2014. That plan governs how the company’s rates are set, and the department used the renegotiation of the plan to implement Schultz’s recommendation: A deadline that Green Mountain Power had to meet if company officials wanted to include a given project in the company’s rates.
In 2014, the Department of Public Service worked with Green Mountain Power to come to an agreement on exactly what documentation is required before the company can charge customers for a new investment.
The deal was added to GMP’s Alternative Regulation plan as “Attachment 7.”
“That resulted in – through Alt Reg – a negotiation on that Attachment 7 to say, ‘Look, we’re done kind of debating what the terms are, we’re going to clearly lay them out and you need to do them,’” says Chris Recchia, the commissioner of the Department of Public Service.
The goal of the agreement was to make it so that Green Mountain Power not only submitted solid documentation to meet the “known and measureable” standard, but also to make sure the company submitted that documentation on its own by June 1, before regulators reviewed the company’s budget, without the Department of Public Service having to ask for it.
In a regulatory system that generates reams of densely written filings about arcane policy arguments, the agreement stands out for its simplicity.
“Any Supporting Cost Documentation that is not provided in the relevant folder at the time of the June 1 [annual] filing will be excluded from consideration and the associated project will be excluded from rates,” the agreement states. It then goes on to define exactly what the department expects of “Supporting Cost Documentation.”
There is no caveat, no built-in consideration for regulators’ discretion. The agreement says that if the company doesn’t provide the documentation for a given investment, customers do not have to pay for that investment, period.
Recchia said the deal was important to ensure Green Mountain Power isn’t charging customers too much.
“We want good value for ratepayers,” Recchia says, “and that requires good documentation to know not only when something is ‘known and measureable’ … but also that the costs were beneficial to ratepayers,” Recchia said.
Despite the agreement’s mandate, Green Mountain Power has failed to properly document new costs in both of the annual filings since Attachment 7 went into effect. The Department of Public Service and the Public Service Board, in turn, have been inconsistent about holding the company accountable, continuing to allow the company to make customers pay for poorly documented projects.
In Green Mountain Power’s first regulatory review after the company agreed to Attachment 7, Schultz made clear that in some ways the company’s documentation of costs had improved.
“The Company focused heavily on complying with Attachment 7 … by communicating with the Department [of Public Service] and Larkin regarding the detail to be presented as support for the projected additions,” Schultz’s August 2015 report said.
The report also says that Green Mountain Power did a better job of gathering documents like invoices and contracts that show how much the company paid for certain projects.
The utility didn’t meet the known and measurable standard on all of its spending, though. The Larkin Report points out that GMP’s up-front analysis of projects wasn’t good enough.
In his review of $139,184,479 in spending on new investments, Schultz wrote that the company was falling short on the financial analyses GMP was supposed to conduct before spending on a new project.
Green Mountain Power’s vice president for power supply and general counsel, Charlotte Ancel, said the company did its due diligence.
“We do a cost justification for every project that we plan on doing,” she said.
Schultz said what Green Mountain Power provided didn't meet regulatory requirements.
“Under strict application of Attachment 7 … a large number of the projects could have been excluded from the request,” Schultz wrote.
Instead, Schultz gave GMP a pass.
“[B]ecause this is the first testing under Attachment 7, and in light of the Company’s improvement in providing underlying supporting cost documentation, some allowances were made,” the report says.
In essence, Schultz and the regulators who subsequently approved GMP’s rates made customers pay because even though the utility failed to meet the standards clearly stated in Attachment 7, the latest filing showed improvement. GMP’s requests were essentially being graded on a curve.
The same thing happened this year as Schultz evaluated the company’s request to add more than 200 projects worth a total of $86,499,359 to its rate base.
“The vast majority of the projects generated a concern,” the Aug. 15, 2016, report said. “Larkin deemed the financial analysis on the documents provided was insufficient.”
The report says that “[u]nder strict application of Attachment 7 … a large number of projects could have been excluded from the request.”
But again, for the second year in a row after Attachment 7 made the requirements clear, regulators made customers pay for the poorly documented projects.
“Despite the company’s failure to comply, Larkin focused more on the supporting cost detail [such as invoices and contracts] and the justification provided with the work orders,” Schultz wrote in the August 2016 report.
In other words, instead of penalizing the company for failing to meet one of the four requirements laid out under Attachment 7 – that each project needs to have a financial analysis in order to be “known and measurable” – regulators apparently ignored the requirement and made customers pay for the projects anyway.
Among the costs that made it into rates was the company’s $13.826 million software budget, which consisted of 52 projects.
Schultz’s report said that “[t]he document where the explanations were provided is supposed to be a financial analysis and after reviewing all 52 projects Larkin is of the opinion no financial analysis [sic] were provided.”
Charlotte Ancel, Green Mountain Power’s vice president of power supply and general counsel, says the company did cost-benefit studies for the projects but Schultz disagreed with the way the company undertook its analysis.
“The financial analyses, they are subjective in terms of how they’re presented,” Ancel says. “The report does indicate that for every project sufficient cost justifications were provided. To the extent that we may view differently how financial analyses – the specific metrics by which financial analyses are done – we’re open to input from our regulators, from the department’s independent consultant, and we keep continuing to work those in, but there were cost justifications for all those projects.”
Attachment 7 was designed specifically to eliminate disputes about which documents the company needs to provide by setting clear expectations for GMP, but Ancel said there’s still some disagreement.
“Again, form versus substance,” she says. “The department’s independent consultant did have some suggestions about how we might present that in a formalistic way that was different than we were thinking about it.”
Ancel also noted the company’s year-to-year improvement in meeting the “known and measurable” standard, which was reflected in Schultz’s report.
“Every year, we look at those observations [in the Larkin Report], we take them seriously, we look at and take feedback from all of our regulators and stakeholders in our review and we incorporate them into the filing next year. That’s another example of Alternative Regulation working for customers,” she says.
The Larkin Reports over the past five years do show improvements, but they also show that the company has fallen short every year in documenting projects properly, and that every year, some of those poorly documented costs are billed to GMP customers.
Recchia, the commissioner of the Department of Public Service, says allowing Green Mountain Power to charge customers for projects that didn’t have proper cost-benefit analyses was the right call.
“Here’s why it’s not just a hard line in the sand: Because we have seen vast improvement in the last year and a half on the documentation, but it’s not anywhere near as good as it needs to be,” Recchia says.
He says recent years have been more difficult because of a switch from paper files to electronic files for the annual review.
“We’re also transitioning to electronic from paper,” he said. “We don’t want Green Mountain Power spending time making paper files of things solely to document the costs; we want to be able to use their electronic versions of these things.”
Recchia says there are also some costs for which full documentation might not make sense, for example if a malfunction in a switchyard causes a power outage. Recchia said in such cases it makes sense for GMP to fix the problem right away “so that you’re not saying ‘Wait. Let me do a cost-benefit analysis to see whether I should replace the switch.’”
Still, he admits the system is imperfect.
“It’s not where we want it to be, but we want to be realistic about this and look,” he says. “You know, we can often see that the work was done, the project was completed and is in service. That tells us something about the value of it and whether it was effectively put into service. So then the question is, 'What level of cost should be recovered?'”
The Department of Public Service and Bill Schultz, the department’s consultant, regularly challenge Green Mountain Power on some of its costs, and those challenges do yield results for customers. When the department refuses to allow GMP to add an investment to rates, customers don't have to pay for it.
This year, for example, the department got GMP's $23 million purchase of hydroelectric dams and $11.4 million for new manure digesters – used to generate electricity – removed from the company's rate request because of concerns about the "known and measurable" standard. According to Jon Copans, the deputy commissioner of the Department of Public Service, those two changes removed $3 million from this year's rates.
But not all of the utility’s poorly documented projects get taken out of rates. Schultz and the Department of Public Service chose not to challenge the company on some costs, and instead allow investments into rates even when the company didn’t meet its obligations under Attachment 7.
Recchia says his department doesn’t always take the hardline approach outlined in Attachment 7 – which would disallow costs without proper documentation from being added to customer bills – because he wants to be sure Green Mountain Power makes the right investments in its infrastructure.
“Yeah, we could strictly say, ‘You know what? June 1, that documentation wasn’t there, so we’re just disallowing it,'” he says.
That is exactly what Attachment 7 calls for.
“But more often we will let the company through discovery,” Recchia says. “We will ask questions about it. If they have documentation, we will look at that. But there is supposed to be a no updating rule because this process has to stop somewhere and they know that the documentation is needed when they file. So we want them to be complete, but it’s not perfect yet. I will admit that we are trying to provide the right incentive to move this in a good direction to get this in better shape, for not only this utility but others. But it’s still some art to it, and we want to be cognizant of the fact that we do want the utility to invest appropriately in its infrastructure and maintenance of that infrastructure and enhancement of that infrastructure, and don’t want to unduly penalize them.”
In an effort to avoid unduly penalizing Green Mountain Power for making investments, even poorly documented investments, Recchia’s department has put aside the requirements explicitly laid out in Attachment 7 for the past two years and allowed the company pass those costs onto customers.
In both 2015 and 2016, regulators at the Public Service Board approved GMP’s rates without requiring changes or removing costs that didn’t meet Attachment 7.
Because Schultz’s reports aren’t detailed about the exact number of projects that lacked documentation, or the costs associated with those projects, it’s difficult to calculate exactly how much the poorly documented projects cost customers every year. Because customers pay a percentage of GMP’s overall rate base each year, they end up paying for every project regulators allow – no matter how poorly documented – for years.
Correction 5:24 p.m. Oct. 17, 2016 An earlier version of this story contained an inaccurate description of the "known and measurable" standard and inaccurately stated the percentage Green Mountain Power customers pay for rate base. The company's "return on equity," set by regulators, is 9.02 percent. The percentage customers are paying for rate base is 7.29 percent. The story has been corrected.