STATE OF VERMONT
PUBLIC UTILITY COMMISSION
Case No. 18-0409-TF
Investigation into the tariff filing of Vermont
Gas Systems, Inc. proposing a change in rates
and use of the System Expansion and
Reliability Fund

Hearings at
Montpelier, Vermont
August 29, 2018

Order entered: 10/25/2018
PRESENT:

Anthony Z. Roisman, Chair
Margaret Cheney, Commissioner
Sarah Hofmann, Commissioner

APPEARANCES:

Daniel C. Burke, Esq.
Vermont Department of Public Service
Owen McClain, Esq.
Sheehey Furlong & Behm P.C.
for Vermont Gas Systems, Inc.
Peter G. Raymond
Sheehey Furlong & Behm P.C.
for Vermont Gas Systems, Inc

ORDER APPROVING BASE RATE INCREASE,
USE OF THE SYSTEM EXPANSION AND RELIABILITY FUND (“SERF”), AND
DISCONTINUATION OF SERF COLLECTIONS
I.

INTRODUCTION

In today’s Order, the Vermont Public Utility Commission (“Commission”) determines
that a 3.9% increase in the firm non-gas rates for Vermont Gas Systems, Inc. (“Vermont Gas” or
the “Company”), effective with bills rendered November 1, 2018, should be authorized, that
$1.92 million of the System Expansion and Reliability Fund (“SERF”) should be utilized to

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mitigate the impact of the Addison Natural Gas Project (“Addison Project”) on rates, and that
future SERF collections should be terminated. 1
The Company initially requested a 4% increase in non-gas costs and the use of $8.1
million of the SERF in February 2018. On August 23, 2018, Vermont Gas filed a memorandum
of understanding with the Vermont Department of Public Service (“Department”) (“August 23
MOU”) resolving all litigated issues in this case. In the August 23 MOU, the parties agreed to a
3.9% increase to non-gas rates and utilization of $1.92 million of the SERF. On August 29,
2018, the Commission conducted a full-day evidentiary hearing in this proceeding. After our
review of the record in this case and for the reasons described below, the Commission adopts the
resolution set forth in the August 23 MOU and concludes that, based on the evidence presented,
the August 23 MOU results in just and reasonable rates and in a SERF withdrawal that
appropriately smooths the rate impacts of the Addison Project.
II.

PROCEDURAL HISTORY

On February 15, 2018, Vermont Gas filed a petition requesting a 4% increase in firm
non-gas rates to be effective November 1, 2018. Vermont Gas also requested that the
Commission suspend the effectiveness of the proposed tariffs pursuant to Section 226(a) with
implementation occurring on November 1, 2018, after the conclusion of the Section 227(a)
seven-month review period. Vermont Gas also requested use of $8.1 million of the SERF to
reduce the cost of service and to smooth and mitigate rate impacts related to the Addison Project.
On February 26, 2018, the Commission suspended the effectiveness of the proposed
tariffs and opened this investigation into the proposed rate change.
On March 7, 2018, the Commission held a prehearing conference.
On March 14, 2018, the Commission issued a procedural order to set forth the case
schedule, which established April 20, 2018, as the deadline for motions to intervene.
No motions to intervene were filed.

1
The Commission approved the establishment of the SERF in 2011. Docket 7712, Order of 9/28/11. Under the
Commission’s order, in lieu of decreasing rates by approximately 5% to reflect lower natural gas costs, Vermont
Gas was permitted to keep rates unchanged and place the difference between the rates and the reduced gas costs into
the SERF. The contents of the SERF were then used to smooth rate impacts resulting from the expansion of VGS’s
system in Addison County.

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On April 11, 2018, the Commission convened a public hearing at South Burlington High
School. Notice of the public hearing was published in five area newspapers. One member of the
public attended the public hearing.
On July 12, 2018, in a separate proceeding, Vermont Gas requested approval of a oneyear extension of its alternative regulation plan through September 30, 2019.
On August 14, 2018, the Commission approved the one-year extension of the Company’s
alternative regulation plan, which includes the purchase gas adjustment provision for recovery of
gas-related costs (Case No. 18-2033-PET).
Between March 8, 2018, and July 20, 2018, the Department served three rounds of
discovery on Vermont Gas. The Department submitted prefiled testimony and surrebuttal
testimony on May 30, 2018, and August 7, 2018, respectively. Vermont Gas served two rounds
of discovery on the Department. On July 11, 2018, Vermont Gas filed rebuttal testimony.
On August 23, 2018, Vermont Gas and the Department (the “Parties”) filed the MOU
resolving the issues between the Parties, incorporated as Attachment 1 to this Order, and a
motion for approval of the MOU.
On August 24, 2018, the Parties filed testimony in support of the MOU.
On August 29, 2018, the Commission held an evidentiary hearing in this case. At the
hearing, the testimony and exhibits listed in Joint Exhibit-1 were admitted into the evidentiary
record.
On September 25, 2018, Vermont Gas filed a draft proposal for decision. The
Department filed a post-hearing memorandum in which it indicated that it did not join the
Company’s proposal for decision, but did not object to the factual findings or conclusions
proposed in the proposal for decision.
III.

PUBLIC HEARING AND COMMENTS

On April 11, 2018, the Commission convened a public hearing at South Burlington High
School. One member of the public attended and spoke at the public hearing. The Commission
also received one written public comment during the pendency of this proceeding. Concerns
included the amount of the proposed rate increase relative to the rate of inflation and the
inclusion of the Addison Project costs in the Company’s distribution charge.

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IV.
A.

FINDINGS

General

1. This case addresses the non-gas rate components of the Company’s cost of service.
These components are the daily access and distribution charges and are collectively identified as
the “Base Rate.” The natural gas charge component of the Company’s rates is modified on a
quarterly basis pursuant to the purchase gas adjustment approved in Docket Nos. 8698 and 8777
as part of the Company’s alternative regulation plan and as extended through September 2019 in
Case No. 18-2033-PET. 2 Lauren Hammer, VGS (“Hammer”), pf. at 4–5; exh. Pet. LH–2.
2. The August 23 MOU provides for an adjusted cost of service that includes $1.92
million in SERF withdrawals and results in a 3.9% increase to the Base Rate. Exh. Joint-2
(MOU) at ¶ 18, Joint-3 (MOU Exhibit 1) at 1.
3. The Department initially recommended a 2.3% increase in the firm non-gas rates.
Brian Winn, Department (“Winn”), pf. at 3.
4. The historic test year is the 12-month period ending December 31, 2018, and the rate
year is the 12-month period from October 1, 2018, through September 30, 2019. Hammer pf.
at 3, 5.
5. In the memorandum of understanding between the Department and Vermont Gas in
Docket 8710, which was adopted by the Commission in an order dated April 14, 2017, the
Company’s authorized rate of return on equity was set at 8.5% for three years. The cost of
service incorporates a return on equity of 8.5%. Winn pf. at 18.

Discussion
In this case, Vermont Gas and the Department initially presented opposing testimony
related to the following components of the Company’s proposed cost of service: (1) the amount
of growth-related investment costs included in the Company’s rate base; (2) the appropriate
levels of payroll and benefit expenses; (3) the appropriate amount for certain operating expenses
in the cost of service; and (4) the amount of SERF withdrawal and collection. The Parties
2

The terms “Docket” and “Case” both refer to proceedings before the Commission. Proceedings that
commenced prior to 2017 were called “Dockets” and proceedings commenced from 2017 onward were called
“Cases.”

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maintain that each of these issues is addressed in a just and reasonable manner in accordance
with the terms and conditions of the August 23 MOU in this proceeding. We have considered
the Parties’ proposed resolution of the issues in this case and we find that the cost of service set
forth in accordance with the August 23 MOU will result in just and reasonable rates for the
Company’s ratepayers. We describe each issue, and the additional issue of untariffed services, in
detail below.
B.

Growth-related Investment

6. Vermont Gas continues to expand its service territory in Addison County, including
in the communities of St. George, Middlebury, Vergennes, New Haven, Bristol, and Monkton.
The Company’s initial cost of service included the costs associated with extension of the
distribution network in Addison County, as well as investments in distribution mains, meters,
and services for growth within the Company’s existing service territory, also known as infootprint growth. Hammer pf. at 12.
7. The Department recommended that growth-related investments that had progressed
substantially would be included in the cost of service. In-footprint growth and certain other
investments identified by the Department would be excluded from the cost of service. Winn pf.
at 10-11.
8. The Middlebury, Vergennes, and New Haven distribution systems are at or near
completion, but the timing for completing distribution systems in Bristol, Monkton, and St.
George is uncertain. John St. Hilaire, VGS (“St. Hilaire”), reb. pf. at 3-4; Winn pf. at 12.
9. The August 23 MOU provides that certain growth-related investments as well as
projected growth-related revenues associated with Vergennes, Middlebury, and New Haven will
be included in the cost of service. Investments associated with in-footprint growth, as well as
growth-related investments in St. George, Bristol, and Monkton will be excluded from the cost
of service. Exh. Joint-2 (MOU) at ¶ 19.

Discussion
Based on the evidence presented, the resolution agreed to by the Parties in the August 23
MOU regarding the treatment of growth-related investments and revenue is appropriate in this

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case and will result in just and reasonable rates. The Parties initially presented differing opinions
on the appropriate treatment of growth-related investments and ultimately agreed in the
September 23 MOU to include only those growth-related investments that had progressed
substantially and are at or near completion. The Parties’ agreement results in a reasonable
compromise that includes growth-related investments likely to generate revenues in the rate year
and excludes growth-related investments where completion and revenue generation during the
rate year are uncertain. We expect that Vermont Gas will continue to describe its proposed
treatment of all growth-related investments and revenue in future tariff filings so the
Commission may evaluate appropriate treatment of these items in the cost of service.
C.

Payroll and Benefit Expenses

10. Employee benefits, including items such as payroll taxes, health insurance, and
retirement contributions, are expressed as a percent of payroll. Eileen Simollardes, VGS
(“Simmolardes”), reb. pf. at 16.
11. In this rate proceeding, Vermont Gas excluded from its cost of service its long-term
incentive compensation plan, resulting in a sharing of incentive compensation costs between
customers and the Company. Rebecca Towne, VGS (“Towne”), reb. pf. at 9.
12. One component of the Company’s overall payroll expense includes expenses
attributable to the Vermont Gas short-term incentive compensation plan for its employees.
Towne reb. pf. at 4.
13. The August 23 MOU reduces the cost of service by $368,493 to reflect half of the
short-term incentive compensation plan amount. The Parties agree that costs associated with the
short-term incentive compensation plan will be recovered at a 50% level “unless the Company
can demonstrate that a greater percentage of [the short-term incentive compensation plan] should
be recovered based on a change in circumstances.” Exh. Joint-2 (MOU) at ¶ 23.
14. Vermont Gas included 50% of the cost of its supplemental executive retirement plan
in the initial cost of service. Hammer pf. at 11.
15. The August 23 MOU reduces the cost of service by $20,000 to reflect lower
estimated supplemental executive retirement plan costs in the rate year. Exh. Joint-2 (MOU) at ¶
25.

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Discussion
The August 23 MOU reasonably resolves the issues related to payroll and benefit
expenses, including the costs associated with the Company’s long-term and short-term incentive
compensation plans and supplemental executive retirement plan. The evidence provided in this
case demonstrates that the resolution reached in the August 23 MOU would achieve a level of
payroll and benefit expenses that will result in just and reasonable rates. The Parties initially
disputed whether the beneficiaries of the goals of the short-term incentive plan were VGS
customers or shareholders and, correspondingly, who should bear the cost of the plan. The
Parties agreed in the September 23 MOU to include 50% of the costs of the short-term incentive
plan in the cost of service. The Parties’ agreement shares the costs of the short-term incentive
plan equally between VGS customers and shareholders. Accordingly, we conclude that the
provisions in the MOU related to payroll and benefits expenses and the resulting cost of service
will result in just and reasonable rates.
D.

Recurring Annual Expenses

16. Many of the differences between the cost of service initially proposed by Vermont
Gas and the Department’s recommendation are a result of whether certain recurring operating
expense categories in the cost of service should be based on a three-year or five-year average.
Ashley Wainer, VGS (“Wainer”), reb. pf. at 6-7; Helmuth Schultz, Department (“Schultz”), reb.
pf. at 26-36.
17. The Department recommended reductions to the cost of service that included
removing certain expenses and using a five-year average instead of a three-year average. Schulz
reb. pf. at 26-36.
18. The Parties’ dispute over averages concerned the following five categories of
recurring expenses: (A) outside services; (B) computers; (C) transmission costs; (D) distribution
costs; and (E) maintenance of plant and vehicles. Wainer reb. pf. at 2.
19. The August 23 MOU provides that the cost of service shall reflect the Department’s
adjustments to expenses for outside services – legal, insurance claims, and board of directors as

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shown in the Department’s rebuttal testimony. Exh. PSD-L&A-10, Schedule 2; exh. Joint-2
(MOU) at ¶ 22; Simollardes supp. pf. at 3-4.
20. The Parties agree to a modified version of the five-year average recommended by the
Department for “outside services–other,” reducing the expense by $78,308. Simollardes pf. at 4;
exh. Joint-2 (MOU) at ¶ 24.
21. The Parties agree to use a three-year average for transmission and distribution costs to
account for ongoing costs associated with the expansion of the Company’s transmission system.
Wainer reb. at 9.
22. The Parties agree to use a three-year average for computer costs to account for
ongoing software maintenance costs associated with the Company’s implementation of new
computer systems. The three-year average adjusts the test year to remove costs associated with
the implementation of the Company’s upgraded financial accounting system. Wainer reb. at 8-9;
Hammer pf. at 3, 8-9.
23. The August 23 MOU provides that test-year expenses will be used for plant and
vehicle maintenance. The test-year expenses are consistent with costs in FY2014 and FY2015
and account for the increased costs associated with the additional plant and travel required to
maintain the Company’s expanded network. Schultz pf. at 37; exh. PSD-L&A-10, Schedule 20;
Wainer reb. pf. at 11.
24. The August 23 MOU provides for a reduction to total operating expenses of
approximately $338,000 from the amount originally requested by Vermont Gas, resulting in a
total operating expense reduction of approximately $700,000. Simollardes supp. pf. at 3-4; exh.
Joint-2 (MOU) at ¶ 21; exh. Joint-3 at 1.
25. Vermont Gas also agrees to defer any effort to seek recovery of expenses associated
with the Commission’s pending investigations in Case Numbers 17-4630-INV and 17-3550INV. 3 Exh. Joint-2 (MOU) at ¶ 28; Simollardes supp. pf. at 5.

3

Case Numbers 17-4630-INV and 17-3550-INV are investigations into alleged violations of Commission orders
and conditions in VGS’s certificate of public good during the construction of the Addison Natural Gas Pipeline.

 Case No. 18-0409-TF

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Discussion
The August 23 MOU reasonably resolves the Parties’ disagreements by utilizing the
Department’s recommended five-year average and adjustments to the outside services, insurance
claims, and board of directors categories; a three-year average for transmission, distribution, and
computer costs; and the test-year amount for plant and vehicle maintenance. The selection of a
five-year average, three-year average, or test-year amount for a category was based on
differences in the particularities of the historical costs for the expense categories as noted in the
findings above. We conclude that the evidence provided in this case demonstrates that the
various approaches used in the August 23 MOU to determine the costs for the rate year will
achieve a level of recurring annual expenses that will result in just and reasonable rates.
The August 23 MOU also requires Vermont Gas to defer seeking recovery of expenses
associated with the pending investigations in Cases 17-4630-INV and 17-3550-INV. Because
the final resolution of those investigations may result in factual and legal findings that affect
whether Vermont Gas may seek recovery of its expenses, we agree that the expenses associated
with those investigations should not be addressed in this proceeding.
E.

SERF

26. The SERF was established by the Commission in Docket No. 7712 to mitigate the
rate impact of the Company’s system expansion into Addison County. Winn pf. at 21.
27. The difference between the SERF withdrawals of $8.1 million initially proposed by
Vermont Gas and $1 million initially proposed by the Department was due to the differences in
the Parties’ proposed cost of service and differing assumptions about the continued collection of
SERF funds. Simollardes reb. pf. at 19-20; Winn pf. at 22.
28. The parties agree on the overall approach of using SERF withdrawals to smooth the
rate impact of costs associated with the Addison Project. Simollardes reb. pf. at 20.
29. Ultimately, in the August 23 MOU, the Department and Vermont Gas agreed to
certain cost of service adjustments. After accounting for these adjustments, a SERF withdrawal
of $1.92 million would be required to implement a 3.9% change in firm non-gas rates. Exh.
Joint-2 (MOU) at ¶ 18.

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30. The August 23 MOU provides that Vermont Gas will discontinue SERF collections
effective with the implementation of these rates. Exh. Joint-2 (MOU) at ¶ 26.

Discussion
Based on the evidence presented, we conclude that it is just and reasonable to authorize
Vermont Gas to use $1.92 million of the SERF funds to mitigate the impact of the Addison
Project on rates during the rate year. Furthermore, the use of SERF monies as described in this
proceeding will appropriately smooth the rate impacts of the Addison Project consistent with our
Order in Docket No. 7712.
In Docket 8710, the Department and Vermont Gas agreed that future SERF withdrawals
should be calculated so that the full SERF balance is returned to customers by the end of 2021
and that “SERF collections shall be terminated thereafter.” 4 Initially, Vermont Gas and the
Department disagreed on whether the Company should continue to collect SERF contributions
from its customers during the rate year. Vermont Gas argued that SERF collections should
continue, while the Department urged the Commission to end SERF collections. However, in
the August 23 MOU, the Parties agreed that SERF collections will end earlier than was
contemplated in Docket 8710 because the existing SERF balance is sufficient to fund the SERF
withdrawals needed to smooth potential rate impacts due to the expansion through the end of
2021. Based on the evidence presented, we conclude that it is appropriate for Vermont Gas to
end SERF collections from its customers when the new rates are implemented.
F.

Untariffed Services

31.

Vermont Gas offers products and services that are not included in its tariff

schedules. These untariffed services include rental of water heaters, conversion burners, space
heaters, equipment installation, appliance repair, maintenance services, and service plans. Winn
pf. at 19.
32.

Vermont Gas accounts for the costs and revenues associated with these services

on its books as “above-the-line” expenses and income. Winn pf. at 20.

4

Order of 4/14/17 at 12.

 Case No. 18-0409-TF

33.

Page 11

Offering these services under tariffs would provide customers with transparent

pricing and terms of service. Winn pf. at 20.

Discussion
The Department initially raised the issue of the Company’s untariffed services in its
prefiled testimony. Vermont Gas did not directly respond to this issue in its rebuttal testimony.
At the evidentiary hearing, Vermont Gas stated that it is “continuing to work on the treatment of
so-called untariffed services” and indicated that it would be prepared to file a report with the
Commission on the status of untariffed services. 5 In its post-hearing memorandum, the
Department recommended that Vermont Gas include the following information in any report that
the Commission requires Vermont Gas to file on its untariffed services:
(a) List of all untariffed services offered or expected to be offered;
(b) Commencement date for each existing service;
(c) Basic financial information for each service over a specified timeframe including
revenues, expenses, and number of customers receiving the service;
(d) Analysis describing whether it is appropriate for tariffs to be developed for each service;
and
(e) Proposed process and schedule for filing tariffs for each service that Vermont Gas
determines should be subject to a tariff.
The Department states that a six-month deadline is reasonable and that it is “prepared to
collaborate with Vermont Gas in advance of any such filing to reduce areas of potential
dispute.” 6
The Department states that the “MOU does not and is not intended to resolve appropriate
rate-making treatment of the untariffed services.” 7 While the Parties chose not to resolve the
issue of untariffed services in the August 23 MOU, the Commission may decide to address this
issue in a separate proceeding. Accordingly, we require Vermont Gas to file the information
recommended by the Department as a report case type in ePUC, the Commission’s electronic

5

Tr. 8/29/18 at 19 (Simollardes).
Department’s post-hearing memorandum at 2-3.
7
Department’s post-hearing memorandum at 2.
6

 Case No. 18-0409-TF

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filing system, within six months of the issuance of today’s Order. We encourage the Department
to review the Company’s report in advance and to file any specific recommendations in the
report case in ePUC.
V.

CONCLUSION

Based on the evidence presented in this proceeding, and for the reasons discussed in this
Order, we conclude that the cost of service proposed by the parties in the August 23 MOU
achieves just and reasonable rates and is approved. Based on the agreed-upon cost of service for
non-gas costs, and a SERF withdrawal of $1,920,000 as well as the termination of further SERF
collections, the resulting change in non-gas rates to firm customers is 3.9%. The Company’s
natural gas charges will continue to be established under the alternative regulation plan, as
recently extended through September 2019 in Case No. 18-2033-PET.

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Page 13

VI.

ORDER

IT IS HEREBY ORDERED, ADJUDGED, AND DECREED by the Public Utility Commission
(“Commission”) of the State of Vermont that:
1. The memorandum of understanding between Vermont Gas Systems, Inc.
(“Vermont Gas” or “Company”) and the Vermont Department of Public Service that was filed
with the Commission on August 23, 2018, is accepted and incorporated herein as Attachment 1
to this Order.
2. The Company is entitled to rates that produce retail revenues under the non-gas
portion of its tariffs in the amount of $50,278,942, or 3.9% above existing non-gas rates.
3. Vermont Gas will terminate the System Expansion and Reliability Fund
collections effective with the implementation of these rates beginning on November 1, 2018.
4. During the rate year, Vermont Gas is authorized to withdraw $1.92 million from
the System Expansion and Reliability Fund.
5. Within 3 days of issuance of this Order, Vermont Gas shall file compliance tariffs
reflecting the substance of this Order.
6. Within 6 months of issuance of this Order, the Company shall file a report as a
new case in ePUC, the Commission’s electronic filing system, on untariffed services that
includes at minimum the information described above.

 Case

No. l8-0409-TF

Dated at Montpelier, Vermont, this

Page 14

25th day of October, 2018

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Z. Roisman

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Or¡rcp oF THE Cr-pnr
Filed

October 25, 2018

Attest:
Clerk of the Commission
Notice to Readers: This decision is subject to revision oftechnical errors. R.eaders are requested to notify
the Clerk oJ'the Coinmission (by e-mail, telephone, or in writing) of any apparent errors, in order that any necessary
c or r e c t i o ns m ay b e m a d e. (E - m a i I a d dr e s s : p*UÇ,.ç.leLk@¿çLULa n!,gpy)
Appeal of this decision to the Supreme Court of Vermont must befiled with the Clerk of the Commission
within 30 days. Appeal will not stay the effect of this Order, absent further order by this Commission or appropriate
øction by the Supreme Courl of Vermont. Motions for reconsideration or stqy, if any, must be filed with the Clerk of
the Commissionwithin 28 days of the date of this decision and Order.

 PUC Case No. 18-0409-TF - SERVICE LIST
Parties:
Daniel C. Burke, Esq.
Vermont Department of Public Service
112 State Street
Third Floor
Montpelier, VT 05620-2601
dan.burke@vermont.gov

(for Vermont Department of Public Service)

Owen McClain, Esq.
Sheehey Furlong & Behm P.C.
30 Main Street
P.O. Box 66
Burlington, VT 05402
omcclain@sheeheyvt.com

(for Vermont Gas Systems, Inc.)

Peter G. Raymond
Sheehey Furlong & Behm P.C.
30 Main St. 6th Floor
PO Box 66
Burlington, VT 05402
praymond@sheeheyvt.com

(for Vermont Gas Systems, Inc.)