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In re Investigation into Petition of Vermont Gas Systems, Inc.

Supreme Court of Vermont

April 20, 2018

In re Investigation into Petition of Vermont Gas Systems, Inc. (AARP, Appellant)

          On Appeal from Public Utility Commission James Volz, Chair

          James A. Dumont of Law Office of James A. Dumont, P.C., Bristol, for Appellant.

          Stephanie B. Hoffman and Geoffrey Commons, Department of Public Service, Montpelier, for Appellee Vermont Public Service Department.

          Craig S. Nolan and Owen J. McClain of Sheehey Furlong & Behm P.C., Burlington, for Appellee Vermont Gas Systems, Inc.

          PRESENT: Skoglund, Robinson, Eaton and Carroll, JJ., and Teachout, Supr. J., Specially Assigned

          CARROLL, J.

         ¶ 1. In this ratemaking proceeding, AARP[1] appeals an order of the Vermont Public Utility Commission[2] that incorporates a memorandum of understanding (MOU) reached by the Department of Public Service and Vermont Gas Systems, Inc. (VGS). Among other things, the incorporated MOU sets VGS's firm non-gas rates for the tax year beginning October 1, 2016; allows VGS to use a specified amount from a fund previously authorized by the Commission to mitigate the rate effects of any system expansion; and establishes both the penalty for VGS's imprudent costs associated with the Addison Natural Gas Project (ANGP) and its return on equity. We reverse and remand the matter for the Commission to make further findings regarding VGS's ANGP-related imprudent costs and, if necessary, to reconsider the penalty imposed for those costs under the incorporated MOU.

         I. Procedural History

         ¶ 2. To put the issues raised in this appeal in context, we discuss briefly at the outset previous Commission orders and then examine those orders in greater detail as needed in addressing each issue. From 2006 to 2016, VGS operated under an "alternative regulation" plan (ARP). See 30 V.S.A. § 218d(a) (authorizing Commission to approve alternative forms of regulation for electric and gas companies as long as Commission makes specified findings). Pursuant to the ARP, VGS's rates were automatically adjusted every quarter based on changes in gas costs.

         ¶ 3. In 2011, VGS proposed amending its ARP by establishing the System Expansion and Reliability Fund (SERF) as a means of facilitating the expansion of its service into Addison County, and perhaps beyond, while maintaining a smooth rate trajectory. At the time of the proposal, VGS would have been required under the ARP's automatic rate adjustments to reduce customer rates for the spring 2011 quarter by approximately $4.4 million, which would have been the ninth rate reduction in the previous ten quarters. Instead of reducing rates for existing customers pursuant to the provisions of the ARP, VGS proposed depositing that amount annually into SERF to smooth out rate increases resulting from future expansion of services. Under the proposal, VGS's rates would remain the same rather than be reduced by an automatic adjustment.

         ¶ 4. VGS and the Department reached an MOU on the proposal, which was accepted by the Commission in a September 2011 order. The Commission concluded that SERF would provide a creative mechanism to facilitate the expansion of natural gas service in Vermont, which had long been a goal of Vermont energy policy. In effect, as the Commission explained, the SERF would allow VGS to collect from ratepayers money for later use to offset future rate increases that might arise from the projected system expansion.

         ¶ 5. The Commission emphasized that, in authorizing SERF, it was not deciding at that time how or even whether the fund might be used. As safeguards for establishing SERF, the Commission, among other things: (1) prohibited VGS from making any distributions from the fund until such time as the Commission authorized them, (2) required VGS to make quarterly reports on both the fund and the company's expansion plans, and (3) required VGS to track all customer payments so that funds could be returned to customers in the event the proposed expansion of the system did not occur.

         ¶ 6. The Commission recognized the concerns about having current ratepayers pay higher rates for potential future benefits, but concluded that the potential benefits-expanded service, an incentive for increased economic development, and reduced greenhouse gas emissions-outweighed these concerns. The Commission further recognized its dissenting member's concerns about the establishment of SERF and the potential for subsidization of future customers by existing ones, but it concluded that the concerns about the fund were misplaced in light of the conditions imposed on VGS, including that money in the fund be returned to customers should expansion not occur. Any use of SERF funds would have to be specifically authorized by the Board in future proceedings. The question of whether unjust cross-subsidization existed would be considered as part of a review of any expansion project once it was filed.

         ¶ 7. In December 2013, the Commission issued a CPG for VGS to build a forty-one- mile, twelve-inch-diameter natural gas pipeline to Addison County. See 30 V.S.A. § 248 (setting forth procedures and criteria for obtaining CPG to construct or purchase electric or gas facilities). In its order, the Commission explicitly rejected the argument that the ANGP would result in an impermissible cross-subsidy of new customers in Addison County by existing customers in Chittenden and Franklin counties. The Commission acknowledged that, in the short term, existing customers would effectively be subsidizing new customers and that in this case the point at which the annual revenues from the project were expected to exceed the annual carrying costs was further in the future than that previously accepted by the Commission. Nonetheless, the Commission concluded that there was no impermissible cross-subsidization because existing customers would derive not only some short-term benefits but also substantial long-term benefits from a project expected to provide service for several decades.

         ¶ 8. Following the December 2013 order, VGS's estimated costs increased first from $86 million to $121 million and then later to $153 million.[3] In two separate proceedings pursuant to Vermont Rule of Civil Procedure 60(b), [4] in which AARP participated as an intervenor, the Commission declined to reopen the record to reconsider its December 23 order in light of the increased estimated costs for the ANGP. In the first of those orders, issued in October 2014, the Commission concluded that the estimated cost increase was not of such a material and controlling nature to change its previous determination that the ANGP would promote the public good under the criteria set forth in § 248. The Commission addressed AARP's argument that the new estimated cost of the ANGP would result in an impermissible cross-subsidy. The Commission acknowledged that the cost increase would extend the period during which existing customers would pay higher rates than if the ANGP were not constructed, but it concluded that the new estimated project costs would still not result in an impermissible cross-subsidy over the expected life of the project.

         ¶ 9. The Commission also declined to reopen the CPG proceeding in its second Rule 60(b) order issued in January 2016. In so ruling, the Commission once again rejected AARP's argument that the new estimated costs resulted in an impermissible cross-subsidy. The Commission cited as a significant factor in its decision an MOU in which VGS agreed not to seek rate recovery costs in excess of $134 million, even if actual costs exceeded that figure. The Commission reiterated its finding that, over the life of the ANGP, new customers would provide sufficient contributions to fixed costs such that the cross-subsidy resulting from the project would be acceptable. Neither AARP nor any party appealed either of the Commission's Rule 60(b) orders.

         ¶ 10. The instant proceeding before the Commission commenced on February 17, 2016, when VGS filed for an overall rate decrease of 3.3% effective October 1, 2016. The proposal included a request for a 2% increase in non-gas costs, which would be offset by a larger decrease in gas costs. The proposed rate reflected inclusion of costs associated with the ANGP and the use of $13.9 million in SERF funds. The Commission opened an investigation into the proposed rate change and granted permissive intervention to AARP, as well as the Conservation Law Foundation. Between June and December 2016, the Commission held a public hearing over several days, the parties submitted voluminous prefiled testimony and supporting exhibits, and the Commission held technical hearings at which the prefiled testimony and exhibits were admitted into evidence.

         ¶ 11. On February 2, 2017, VGS and the Department filed the MOU that the Commission ultimately incorporated into its order. AARP filed an objection to the MOU and requested an evidentiary hearing on the matter. On March 13, 2017, after AARP and VGS engaged in discovery, the Commission held a continued technical hearing for the limited purpose of ...

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