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Vermont Gas details cost hike reasons in PSB report

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Posted on January 19, 2015 |
By Zach Despart



MONTPELIER — In a flurry of filings before the Public Service Board Thursday afternoon, Vermont Gas Systems detailed the cost drivers for the most recent budget increase for Phase I of its Addison Rutland Natural Gas Project.

Company executives argued that the pipeline from Colchester to Middlebury and Vergennes still will bring significant economic benefits to the state, and asked regulators to allow the project to continue.

“The board should conclude that the (December) cost estimate does not change the board’s findings from its prior orders in this proceeding that the project will promote the general good of the state,” wrote Vice President of Regulatory Affairs Eileen Simollardes.

Incoming CEO Don Rendall on Dec. 19 announced a $32 million budget increase for the project, which came just five months after Vermont Gas announced a $35 million increase. The current project estimate of $154 million is 78 percent higher than the $87 million figure regulators approved in December 2013.

Opponents of the project on Jan. 12 asked the Public Service Board to open an investigation of the December increase, which they allege is evidence that Vermont Gas has bungled the management of the project from the start. Regulators did investigate the July cost increase, but concluded that the project should move forward.

The Public Service Board on Jan. 16 said it will ask the Supreme Court to remand the case, so it can launch a second investigation.

The Department of Public Service pledged to review Vermont Gas’ Jan. 15 filings to determine whether the project is still in the public good, and whether to recommend any sanctions against the company.

COSTS DETAILED

Among the testimony filed by Vermont Gas this past Thursday was a spreadsheet detailing how costs jumped in each of the project’s eight areas. Those areas include construction (up by $9.1 million), project management ($4.2 million), engineering and design ($854,000), permitting ($2.1 million), environmental ($56,000), procurement ($1.6 million), land acquisition ($4.4 million) and company overhead ($4.8 million).

Compared to estimates used when the project was approved in December 2013, the contrast in costs is more stark. In several categories, estimates have more than doubled, including land acquisition (197 percent), construction (102 percent) and Vermont Gas overhead (129 percent.)

The company has spent $48.8 million to date, and has laid about five miles of the 41-mile pipeline.

The new budget was prepared by Philadelphia project management firm PricewaterhouseCoopers, which Vermont Gas hired as lead project manager after removing Clough Harbor Associates, after determining that firm was providing inaccurate estimates.

Vermont Gas filed testimony in which PricewaterhouseCoopers Principal Ralph Roam explained the use of a methodology developed by the Association for the Advancement of Cost Engineering.

Vermont Gas pledged to use this method after announcing the July cost hike. Opponents have criticized the company for not using the AACE method, which Roam touted as an industry standard used by “numerous companies and government agencies throughout the world,” from the start of the project.

Using the AACE method, PricewaterhouseCoopers determined the project, based on its maturity, to have an accuracy range from 20 percent under budget to 30 percent over budget, a category that recommends a 15 to 30 percent contingency cost estimate.

The $154 million figure Roam’s firm determined includes contingency costs totaling 11 percent, up from a baseline figure of $138.4 million.

Roam testified that the results of the calculation gave his firm a “high level of confidence that the defined project scope could be completed for $154 million.” However, Roam noted that cost estimates would change if there are “significant scope changes” or delays in the construction schedule.

Vermont Gas estimates the project will be complete by March 2016, pushed back from a late 2015 finish date the company estimated last fall.

ECONOMIC BENEFIT

Despite the significant cost increases over last six months, Simollardes testified that the project will provide “robust economic benefits to Vermont.” According to figures calculated by the South Burlington company, Phase I of the pipeline will, over the next 20 years, bring $272 million in economic benefits to the state.

That estimation breaks down to $48.4 million in construction benefits, $4 million in state taxes, $192.2 million in Addison County energy savings and the equivalent greenhouse gas reductions of $27.1 million.

The company also made calculations that take into consideration the falling price of fuel oil, which lessens the competitive price advantage of natural gas. But even with cheaper fuel oil, the company estimated that Addison County residents and businesses would save $174 million in energy costs over the next two decades.

“The project still has solid economic benefits even with a decreased competitive position relative to fuel oil,” Simollardes testified.

Vermont Gas also pushed back the estimated time at which the revenue generated from the pipeline would exceed costs — in other words, when the project would break even.

In September, based on the $122 million cost estimate from July, Vermont Gas officials told regulators that it would take between 31 and 32 years for the project to recover its costs. The new estimates push that date back three years, between years 34 and 35.

The company also said the December cost increast of $32 million "has a rate impact of 3.2 percent over 10 years," compared to the $122 million budget, using a formula by which rates increase 1 percent for every $10 million in additional costs.

Rendall said in a statement Jan. 15 that the company remains committed to keeping rates affordable.

Vermont Gas plans to recoup most of the costs of the project through increased rates on customers. The authority to set rates lies solely with the Public Service Board.

LAND ACQUISITION

Increased estimates for securing land easements along the pipeline route suggest Vermont Gas may be girding for a legal battle to secure the remaining parcels.

Company spokeswoman Beth Parent told the Independent on Jan. 7 that the company has secured easements for 184 of 221, or about 84 percent, of parcels along the route.

Roam’s testimony shed light on why the company increased its estimates for the right of way category.

“The estimated right of way costs were updated to reflect the anticipated costs to acquire the balance of parcels outstanding, as well as the extended duration anticipated to acquire those parcels,” Roam said.

According to the Jan. 15 budget, the company has spent $5.4 million securing easements for 84 percent of needed parcels. With a new right of way budget of $12.2 million, the company estimates it will spend $6.7 million on the remaining 16 percent of parcels.

Vermont Gas has said it will, if necessary, pursue eminent domain to secure land rights if it cannot come to terms with landowners.

Parent said last week that the company has not yet set a deadline by which it must pursue eminent domain. Given recent eminent domain cases in front of the Public Service Board, the process can take anywhere from a few weeks to many months.

“The company will exhaust other approaches before it proceeds with any eminent domain, and we can’t yet predict what that timeline looks like, partly because it depends on the success of the negotiations and mediations we are already working on with willing, interested landowners.”

The Public Service Board will in the coming weeks decide whether or not to investigate the cost increases further. Opponents argued that the board should revoke the project’s approval, while the company hopes to resume construction, on schedule, when the ground thaws this spring.

Editor's note: This story was updated Jan. 22 to give additional attribution to the company's estimate of a rate hike caused by the budget increase.

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