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Pipeline cost hikes raise questions about Vermont Gas’ ability to project expenses

ADDISON COUNTY — The Dec. 19 announcement by Vermont Gas Systems of a second multi-million-dollar price hike for Phase I of its Addison Rutland Natural Gas Project pipeline disappointed regulators and the governor and raised key questions about the company’s ability to both manage the project and rein in costs.
Opponents of the project say the $32 million increase, which brings the total estimated project cost to $154 million and is 78 percent higher than the figure approved by the Public Service Board in December 2013, shows that Vermont Gas cannot be trusted to provide accurate information to regulators nor administer such a large project.
“There’s no reason to trust (the numbers). None whatsoever,” said Bristol attorney James Dumont, who represents several opponents of the pipeline and warned the PSB this fall that Vermont Gas could announce future cost increases.
The Department of Public Service said it will take a harder look at the cost hike this time around, while project opponents have criticized regulators for failing to hold Vermont Gas responsible for what they perceive as repeated failures to operate transparently.
The South Burlington company maintains the project still makes economic sense and is in the best interests of Vermont, but has not yet detailed why it failed to stick to an updated budget it revised just six months earlier.
Vermont Gas spokeswoman Beth Parent declined on Wednesday to detail the cost drivers for the $32 million December cost increase, saying the company will disclose that information to regulators in a few weeks.
HISTORY OF PROJECT COST
While the investigation into the most recent cost increase, including possible sanctions on Vermont Gas, has yet to play out, what is clear is that the cost of the Phase I pipeline has grown significantly since it was first proposed.
When Vermont Gas first announced the project in 2011, it told the Independent that Phase I, that extends an existing pipeline from Colchester to Vergennes and Middlebury, would cost between $60 million and $70 million.
In its December 2012 petition for a Certificate of Public Good, the company upped its total cost estimate to $83.8 million. By the time the PSB approved the project in December 2013, the cost estimate had risen to $86.6 million.
Vermont Gas broke ground on Phase I in June 2014, and since then has announced two cost hikes of more than $30 million each.
The first came on July 2, when the company announced a 40 percent, $35 million hike. On Dec. 19, incoming President and CEO Don Rendall announced the total cost estimate had ballooned an additional $32 million, to $154 million. Rendall told the Independent that same day he could not rule out another significant cost hike in the future.
LAST BUDGET INCREASE
Rendall’s statement and the project’s history of revised budgets raise questions about Vermont Gas’ ability to present an accurate estimate to regulators.
During the Public Service Board’s investigation this fall of the July cost increase, opponents of the project argued the July numbers were not reliable and that the hike was likely a harbinger of future cost increases.
The board ultimately decided to allow the project to continue without imposing any additional conditions, and dismissed opponents’ arguments that Vermont Gas’ budget formulations were unsound.
On behalf of resident Kristin Lyons, Dumont argued Oct. 2 that that regulators shouldn’t trust the July estimate because it was prepared with the help of a firm, Clough Harbor & Associates, that Vermont Gas later removed from overall project management.
“The recently revealed $35 million cost increase may be the forerunner of a series of cost increases, because that figure was developed by a project management team that Vermont Gas itself has dismissed because of it lacks the skills and experience necessary to manage and predict the costs of the project,” Dumont wrote.
Parent, the VGS spokeswoman, disputed Dumont’s claim, and said that a Vermont Gas team, rather than CHA, prepared the July budget.
Dumont asked the PSB to order Vermont Gas to provide a cost estimate prepared by a different firm before deciding whether to alter its approval of the project.
“$35 million may be the tip of the iceberg in new costs,” he wrote.
Other parties in the case, such as the AARP and Conservation Law Foundation, raised concerns about the reliability of the company’s estimate, and urged the board to reopen the approval process and investigate further.
But, in its Oct. 10 order in which it allowed the project to proceed, the board wrote: “We find there is a reasonable basis to conclude that the revised cost projections are reliable.”
Seventy days later, Vermont Gas told the board that it now expects the project to cost $154 million, $33 million more than the figure it assured regulators was reliable and 78 percent more than the sum the PSB initially approved in 2013.
TIMELINE QUESTIONED
Another key component to regulators’ upcoming investigation into the December cost hike is the timeline of events: When did Vermont Gas know it needed to revise the budget, and when did officials notify regulators, as required by PSB rules?
As late as Oct. 7, when Vermont Gas filed its third-quarter budget with the state, the company stood by its $122 million estimate. Parent said at that time, the company had not finished a new cost calculation method used by the Association for the Advancement of Cost Engineering, nor had any reason to believe a second cost hike was imminent. 
“The supporting information supplied in October was not informed by the new AACE-consistent methodology, which was just getting under way at the time,” she said.
Department of Public Service Commissioner Chris Recchia told the Independent that Vermont Gas first told him of its second cost hike a few days before the Dec. 19 announcement.
He said between Oct. 7 and Dec. 16, Vermont Gas gave no indication that it would need to again increase the cost estimate significantly. Asked what specific date the company realized it would need to again update the Phase I budget, Parent said it notified regulators “shortly before” the Dec. 19 announcement.
Recchia said that because the company has not yet provided a full explanation of the cost hike, it is too soon to evaluate whether Vermont Gas told regulators about it in a timely manner.
“I don’t know all the details of what they knew and when they knew it, but we will evaluate that,” Recchia said.
The commissioner did say the December announcement did seem to signal a positive change in behavior for the company, which did not submit an updated budget for more than a year before the July cost hike, a misstep for which the state fined the company $35,000.
While disappointed, Recchia said he believes Vermont Gas acted responsibly by notifying regulators about the December hike, even before officials could disclose all of the details behind it.
“This is a balance between not wanting to punish the bad news and supporting the fact that they actually told us,” he said.
NEW ACCOUNTING?
Project opponents also question the accounting methods used by Vermont Gas to calculate each of their cost estimates.
When it announced the July cost hike, Vermont Gas said it would adopt industry-standard accounting practices to produce accurate cost estimates.
In testimony Sept. 22, then-CEO Donald Gilbert said the company was “taking a hard look at (the project’s) estimated cost for Phase I and Phase II using industry recognized standards such as those established by the (AACE).”
Gilbert said that company had relieved Clough Harbor of some of its responsibilities and brought in another firm to make estimates.
Public Service Commissioner Recchia told the Independent Tuesday that regulators have not yet received a satisfactory answer as to why the company did not use the best accounting model from the start of the project.
Parent said while making cost calculations using potential contractors and internal staff, the company “certainly learned in the process that the AACE methodology would yield better results and was also an industry standard.
“That is why we shifted to the AACE approach in the July testimony,” she said.
It remains unclear why Vermont Gas stood by its July estimate of $122 million when it was not calculated using the AACE method, nor why the company gave no indication to regulators before Dec. 16 that the July estimate significantly underestimated project costs.
Parent seemed to suggest that regulators should not have taken the July budget as a reliable figure, saying that it was presented “with the caveat that the next budget would be put through a process consistent with industry standards.”
CRITICISM OF REGULATORS
Opponents of the project said they were dismayed that the Department of Public Service, which is charged with protecting the interests of ratepayers, did not take a harder line against the company during the PSB’s investigation of the July price increase.
Dumont said he expected Department of Public Service lawyers to ask tough questions of Vermont Gas executives Don Gilbert and Eileen Simollardes when they filed testimony in September. But the department largely sided with Vermont Gas in its filings.
“The department’s stance the last time around was, to put it charitably, surprising,” Dumont said.
In a brief during those proceedings in October, the department counsel Louise Porter urged the PSB not to alter its approval of the project nor impose additional conditions arguing that the project would still be a boon to Vermont’s economy.
“The project remains in the general good of the state as the significant benefits associated with the project continue to outweigh the costs even in light of the revised cost estimates,” Porter wrote.
Maren Vasatka, who lives along the pipeline route in Monkton, expressed her belief that the department, by not advocating for a more in-depth investigation, did not adequately protect the rights of the ratepayers it serves.
“The Department of Public Service needs to step up to the plate,” Vasatka said. “They have to answer some hard questions instead of looking the other way, which is all they have done.”
Melanie Peyser, whose mother’s land in Monkton the pipeline will traverse, said she believes that during its investigation of the July cost hike, the PSB did not fairly evaluate the merits of the project, but rather sought evidence to support its original conclusion — that the project was in the public good.
“They picked the pieces of evidence they felt were convenient,” Peyser said. “In my view the Public Service Board was acting more as Vermont Gas lawyers than a neutral arbiter.”
Peyser added that she was disheartened that the Department of Public Service did not press Vermont Gas officials harder for why they failed to provide accurate budget numbers.
DEPARTMENT RESPONDS
During the July cost increase investigation, the Department of Public Service remained steadfast in its support of the project. But Recchia said that won’t necessarily be true this time around. He vowed to take a more aggressive stance against Vermont Gas and the merits of the project.
“Now we’re closer and to the point where you need to take a hard look at both the costs and the benefits again on the basis of the current situation, and determine whether the project is still in the benefit of Vermonters,” Recchia said.
Though opponents’ warnings of a future cost increase turned out to be accurate, Recchia said he did not regret siding with Vermont Gas this fall.
“I think that at the time, based on the information available, that was the best judgment we could make,” he said. “We’re in a different place now, and we’ll make a different judgment now.”
NEXT STEPS
Parties to the Phase I case have until Monday to file motions in response to the December price hike announcement.
Since the case is currently on appeal in front of the state Supreme Court, it is likely that one of the project’s opponents will ask the PSB to seek remand for the case, a process by which a higher court sends a case back down to a lower court.
If the Supreme Court grants a remand, like it did after the July increase, the PSB will again have the opportunity to investigate whether to alter, or revoke, the project’s approval.
Dumont said he hopes that the Board will reopen the project’s December 2013 Certificate of Public Good.
“The Board and the Department owe it to ratepayers to take a deep breath here to say the project may have made sense, but maybe it doesn’t anymore,” Dumont said. “Just because Vermont Gas has sunk millions of dollars into the project, doesn’t mean we have spend the rest of the money.”
While he cautioned that it is premature to speculate on possible sanctions against Vermont Gas by the PSB, Recchia promised to advocate on behalf of state ratepayers.
“All options are on the table here,” he said. “Anything we think is appropriate to protect the interests of Vermonters we will advance.”
Recchia also did not rule out the possibility of significantly altering the project, should regulators reach the conclusion that it no longer provides an economic benefit for Vermont.
“If costs exceed the benefits, that will be a turning point.”
Reporter Zach Despart can be reached at zachd@addisonindependent.com.

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