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Vermont Gas admits it kept regulators in the dark on pipeline cost increase

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Posted on March 14, 2015 |
By Zach Despart



MONTPELIER — Vermont Gas Systems officials last year knew the company’s proposed natural gas pipeline through Addison County would cost much more than anticipated, but waited more than five months to tell regulators — even after the Department of Public Service requested that it do so.

This information came to light in recent testimony by Vermont Gas executives in a Public Service Board proceeding to determine whether the company violated board procedure by not providing timely cost updates for Phase I of the Addison Rutland Natural Gas Project.

This past July, Vermont Gas announced that Phase I of the 41-mile pipeline from Colchester to Middlebury would cost $32 million, or 40 percent, more than the Public Service Board (PSB) had originally OK’d. The board, which regulates Vermont utilities, in August launched an investigation into the cost increase; that investigation is ongoing. Testimony in that case from Vermont Gas officials and state regulators sheds light on what the company knew about the pipeline’s cost, and when it disclosed that information to regulators.

According to testimony this past December by company Vice President Eileen Simollardes, Vermont Gas knew on Jan. 17, 2014, that Phase I would likely cost 40 percent more than previous estimates. Vermont Gas informed the Public Service Board on July 2. Between those dates, the PSB issued its final approval for the project and the company began construction.

Vermont Gas told the Burlington Free Press in August that it knew of the cost increase last March, but Simmolardes’ testimony indicates officials knew of the cost hikes two months prior to that date.

Public Service Board rules require utilities to inform regulators if project costs increase by 20 percent, but they do not specify how prompt that disclosure must be.

Simollardes testified that while the company knew in January 2014 of a likely cost increase of 40 percent, it did not have enough information to detail the cost drivers to regulators, and thus decided not to share its findings with the PSB. Simollardes conceded this was a mistake, and that the company should have instead sent a preliminary budget and then a detailed report when it was ready.

“In hindsight, a better course of action by Vermont Gas would have been to report that the company had reason to believe a 20 percent increase in the budget would occur,” she said.

Vermont Gas informed the Department of Public Service of the project’s surging price tag long before it told the PSB. Testifying before the PSB last month, Department Commissioner Chris Recchia said Vermont Gas officials told him as early as February 2014 of the anticipated cost hike for the project, but ignored his advice to pass that information along to the PSB.

“Department staff repeatedly urged Vermont Gas to notify the board and Docket No. 7970 parties of the revised cost estimates,” Recchia said.

He added that his staff asked Vermont Gas to do so in March, April, May and June of 2014.

In her testimony, Simollardes acknowledged that in “informal conversations,” Department of Public Service officials said Vermont Gas should disclose the cost increases to the PSB. She said the company wanted to see if permits it still needed to start construction would contain conditions that would further change the budget before informing the PSB.

“The company’s thinking at the time was that until these permits were final, VGS could not know with certainty all the project-related changes … that could impact project costs,” she testified.

Recchia was also critical of Vermont Gas’ apparent failure to anticipate the cost increases before 2014. When the PSB approved the project in December 2013, the price tag was $87 million. Now, after another cost increase announced in December, it stands at $154 million.

“Regardless of whether Vermont Gas ‘knew’ of the revised cost estimate in January or March 2014, I am troubled that Vermont Gas did not see this coming even sooner,” Recchia said.

As the only natural gas company in the state, Recchia said Vermont Gas analysts should have been paying better attention to economic forces within the natural gas industry in the United States.

“Vermont Gas, more than anyone, should be monitoring such industry trends, especially when it is engaged in a significant expansion project,” he testified.

Recchia added that Vermont Gas bears the burden of informing the public about any changing costs or other economic factors, as “that information bears heavily on whether a project … remains in the public interest.”

TRANSPARENCY QUESTIONED

According to company testimony Jan. 30, Vermont Gas also knew of smaller cost hikes between when it filed an $86.6 million budget with the PSB in February 2013 and when the board approved the project in December of that year. Those cost updates are as follows: $97.4 million in August 2013, $97.8 million in September 2013 and $100.2 million in November 2013.

While the $100.2 million figure is only 15.7 percent higher than the $86.6 million budget filed with the PSB, and thus does not meet the 20 percent threshold which requires the company to disclose the increase, opponents of the pipeline say the failure of the Vermont Gas to keep regulators informed represents a lack of transparency.

Screenshot from the company's Jan. 30 testimony

Greg Marchildon of the AARP’s Vermont branch, which has taken an interest in the case as an advocate for consumers, said Vermont Gas’ failure to do so shook the public’s confidence in the company.

“If you’re talking about such a large-scale project, that has a significant impact on ratepayers, landowners and a whole range of people, it probably would have been smart for Vermont Gas to report that to the board,” Marchildon said.

Marchildon saved his harshest criticism for the Department of Public Service. He characterized as “reprehensible” the department’s decision to not tell the PSB about the cost increases when Vermont Gas failed to do so.

“The Department of Public Service is supposed to be the regulator and (the Department is) supposed to represent consumers,” Marchildon said. “That had a real responsibility to communicate what they knew, and it was several months before that happened.”

Recchia told the Independent Wednesday that the reason the Department of Public Service didn’t inform the PSB of the cost increase when Vermont Gas failed to was because it didn’t have enough details about the estimated cost hike.

“We didn’t have the details at that point as to why the costs were increasing,” he said. “They were the only ones that had that information.

“I will say I learned some lessons from this process, and I will do it differently next time,” Recchia continued.

Recchia added that Vermont Gas did inform him and the PSB this past December as soon as it calculated a new, $35 million increase, which he said was evidence that the company has listened to regulators’ requests.

Bristol attorney James Dumont, who represents several project opponents who are parties to the case, said that even though the cost increases in 2013 didn’t meet the 20 percent threshold, utilities are still required to keep regulators informed about changing costs while projects are in the approval process.

“They have a duty to provide prompt and full disclosure before final judgment,” Dumont said. “They knew there was a cost increase and didn’t tell the board or the parties.”

Sandra Levine, who represents the Conservation Law Foundation in the case, said it was incumbent upon Vermont Gas to provide regulators with updated cost estimates, especially since many parties to the proceeding have questioned the company’s figures since the beginning of the project.

“They have an obligation to let other parties and the board know about increased costs,” she told the Independent on Wednesday. “It either points to a lack of transparency or mismanagement of a large project like this.”

RULES BROKEN?

Ultimately, the Public Service Board in this docket is tasked with determining whether Vermont Gas violated board rules, and imposing an appropriate punishment.

In testimony before the PSB last month, Recchia said he believed that the company’s decision to inform the board of the cost increase in July was not timely.

“This is too long by any measure, and this is why the Department has urged the Board to impose a significant financial penalty on Vermont Gas,” Recchia.

That penalty is a $35,000 fine the department is recommending the PSB to impose. The company has said it doesn’t object to the fine, the sum of which equates to $1 for every $1,000 of the July cost hike. Simollardes noted that Vermont Gas has “sufficient resources” to pay the fine.

Vermont Gas defended officials’ decision not to provide an updated budget to the PSB until July 2014. Simollardes testified that even if the company did violate board rules:

“I do not believe that the timing of the reporting of the cost increase harmed or might have harmed the public health, safety, or welfare; the environment; the reliability of utility service or the other interests of utility customers,” she told the PSB.

Simollardes went on to say that the company informed the PSB when it could provide an “accurate and certain estimate.” She said the company could have reached out to the PSB earlier, but did not admit to wrongdoing.

“The company acknowledges it could have provided earlier notice to the board and parties of its expectations for a cost increase,” Simollardes said.

Vermont Gas spokeswoman Beth Parent told the Independent Wednesday afternoon that because the proceeding is currently before the PSB, the company would not comment beyond its filed testimony at this time.

FINE AS DETERRENT?

After the July 2014 cost increase announcement, Vermont Gas agreed to provide regulators with an updated budget every quarter. Recchia said the proposed fine would discourage Vermont Gas from keeping regulators in the dark in the future.

“I believe that imposing a penalty on Vermont Gas will have a strong deterrent effect on both Vermont Gas and other regulated utilities,” Recchia said.

But even though Vermont Gas has, since last summer, filed quarterly budgets as it promised, the company has not been able to steer its way out of controversy. Its October budget filing reported the same $122 million price tag as July. But 70 days later, the company announced a new, $32 million cost increase.

The Public Service Board has opened an investigation into that increase as well, which will take place throughout this spring.

Reporter Zach Despart can be reached at [email protected]

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