In re Investigation into Petiton of Vermont Gas Systems, Inc. (AARP, Appellant), 187 A.3d 1138

Background

Vermont Gas Systems (VGS) operated under an alternative regulation plan (ARP) and in 2011 established a System Expansion and Reliability Fund (SERF) to smooth rates for future expansion; Commission approved SERF with safeguards and required Commission authorization for any withdrawals.
The Commission granted a Certificate of Public Good (CPG) in 2013 for a 41-mile, 12-inch pipeline (ANGP) to serve Addison County; projected ANGP costs rose significantly (to well over the original estimate).
VGS later agreed (via an MOU with the Department of Public Service) to cap recoverable ANGP costs at $134 million (an effective ~$31 million disallowance) and to a reduced return on equity (ROE) of 8.5% for three years; the Commission incorporated that MOU into its 2017 ratemaking order and authorized a $5.5 million SERF withdrawal for FY2017.
The Department’s expert recommended discrete disallowances (~$25M) plus a $10M global disallowance (total ~$35M) for imprudent early-project management; VGS contested those figures and AARP intervened, arguing for larger disallowances and for other relief.
The Commission found VGS had engaged in some imprudent management early in the project but concluded the record did not support disallowing more than the effective $31M cap; it accepted the MOU, left non-gas rates unchanged, allowed the SERF withdrawal, and imposed the 8.5% ROE cap for three years.

Issues

Issue	Plaintiff's Argument (AARP)	Defendant's Argument (VGS / Commission / Dept.)	Held
Sufficiency of findings on imprudent ANGP costs	Commission failed to make specific findings quantifying imprudent costs, preventing meaningful review	Record contained expert testimony and parties’ agreement; Commission’s conclusion that imprudent costs did not exceed $31M was adequate	Reversed and remanded: Commission must make further findings identifying amount/nature of imprudent costs so appellate review is possible
Adequacy of ROE reduction as penalty	8.5% ROE cap for three years is unexplained and may be insufficient to offset imprudent costs allowed into rate base	ROE cap, together with $31M effective disallowance, reasonably addresses imprudence; ROE not challenged as excessive	Remanded contingent: if additional findings show ROE cap was used to offset undisclosed imprudent costs, Commission must explain/calibrate how ROE reduction compensates for those costs
Used-and-useful challenge to 12-inch vs. 10-inch pipeline	Additional cost of 12-inch line (vs. 10-inch) should be disallowed as not used and useful given no current plans for further expansion	CPG authorized 12-inch pipeline; no party in this ratemaking case presented evidence quantifying extra costs; long useful life supports inclusion	Affirmed: Commission’s finding that no party presented evidence on proper pipeline size is not clearly erroneous; costs retained in rate base for this period
Legality of SERF withdrawal / cross-subsidization	Allowing SERF withdrawal to smooth rates unlawfully subsidizes new customers by existing ones without explicit statutory authorization	SERF was approved under ARP with statutory notice/hearing criteria; some cross-subsidization is permissible and SERF withdrawals are subject to Commission oversight	Affirmed: Commission acted within discretion to allow $5.5M SERF withdrawal for FY2017 to smooth rates; not an unlawful subsidy here

Key Cases Cited

Citizens Utilities Co. v. Pub. Util. Comm’n, 171 Vt. 447, 769 A.2d 19 (Vt. 2000) (deferential review of Commission decisions and ratemaking expertise)
In re Tariff Filing of Cent. Vt. Pub. Serv. Corp., 167 Vt. 626, 711 A.2d 1158 (Vt. 1998) (courts defer to Commission on ratemaking; role limited)
In re Cent. Vt. Pub. Serv. Corp., 141 Vt. 284, 449 A.2d 904 (Vt. 1982) (recognizing Commission expertise in ratemaking decisions)
In re Cont’l Tel. Co. of Vt., 150 Vt. 76, 549 A.2d 639 (Vt. 1988) (adequacy of administrative findings where board evaluated expert testimony)
In re Consol. Rate Appeals of Green Mt. Power Corp., 142 Vt. 373, 455 A.2d 823 (Vt. 1983) (deference to Commission rate-setting choices directed at regulatory objectives)
New England Tel. & Tel. Co. v. Pub. Serv. Bd., 115 Vt. 494, 66 A.2d 135 (Vt. 1949) (used-and-useful / property held for future use test)
Latourneau v. Citizens Util. Co., 125 Vt. 38, 209 A.2d 307 (Vt. 1965) (useful-life and timing considerations for utility plant inclusion)