Maryland Says No to Proposed Gas Extension Plan

Although not discounting the possible consumer benefits that could result, the Maryland Public Service Commission has denied a natural gas local distribution company (LDC) authority to proceed with a three-part program aimed at providing greater access to natural gas service in those regions of the state that are currently unserved or underserved. The commission acknowledged that the state has an interest in bringing natural gas service to additional Maryland communities, and it lauded the LDC, Washington Gas Light Company (WGL), for its work in developing new service offerings that could accomplish that goal. Nevertheless, the commission said, it could not approve the LDC's plan as presented, even in pilot form, because it was not convinced that the programs could be implemented in a manner that produces just and reasonable rates. At the same time, though, the commission stressed that its rejection of the proposal was without prejudice, and it invited the LDC to return with a modified plan that addresses the commission's reservations.

In submitting its proposal, the company averred that it was comprised of three independent service initiatives, which included the following: (1) a contribution payment plan (CPP) that would offer residential and small business customers financing options in support of extensions of natural gas facilities to their premises; (2) a targeted conversion plan (TCP) that would reduce the minimum customer commitment necessary for converting groups of customers to natural gas; and (3) a gas access program (GAP) that would help facilitate projects targeted at extending "backbone" infrastructure into unserved areas that have already been designated for development by local governmental agencies.

Providing more background on its plan, WGL stated that the CPP component would allow a new residential customer to utilize an on-bill adder of $40 per month, for up to 20 years, through which to finance the associated line extension. According to the LDC, because the installment payment plan would be in lieu of large up-front contributions that are now required, line extensions would become far more affordable for consumers. The company asserted that customers would be permitted to pay off the remaining balance at any time. It also informed the commission that a similar CPP option would be available to commercial customers, but at a fixed monthly charge of $100.

As explained by the company, the TCP element would enable the LDC to home in on certain targeted areas where residents could be encouraged to sign up for natural gas service as a group, rather than just individually. That way, WGL said, it could revise its economic test for determining whether an extension is feasible visà- vis the revenues expected to come therefrom over the life cycle of the new facilities. The company stated that while the TCP could be effectuated once 20% of a target area's premises commit to taking natural gas service, its cost analyses would actually assume a 60% penetration rate.

The final piece of the three-part proposal, the GAP, was described by the company as a means of facilitating work in the near term on those system segments that will be necessary for serving anticipated customer growth in the long term. The company argued that by commencing such foundational projects now, with a certain portion of associated investments deferred each year, the LDC would stand ready to serve once an area has been developed and customers are ready for connection. The company reminded the commission that the GAP component would pertain exclusively to areas that are already in the planning stage and have been approved for development by local government officials.

Its best efforts to highlight the benefits of the programs notwithstanding, WGL's proposal was met with near unanimous opposition. Commission staff, the Office of People's Counsel, and other intervenors were united in denouncing the plans on a number of grounds.

For one, they contended that the three offerings would unfairly force existing customers to subsidize new customers. Such underwriting was emblematic of an unreasonable shift in risk, they said. That is, they claimed, the LDC's current ratepayers would be left holding the bag if future customer growth does not materialize as expected or new customers fail to adhere to CPP payment schedules.

The challengers expounded that the programs appeared to be structured so as to ease WGL's path toward various system expansions, regardless of whether they are likely to be truly economic and yield an affirmative revenue-to-cost ratio. Moreover, they expressed concern that the programs could distort inter-fuel competition. In that regard, opponents observed that the programs could enable customers to take service from WGL at a lower cost than from an alternative supplier, but the LDC would retain a distinct market advantage because the alternative providers would not have the same cost recovery tools available to them. Thus, they protested, WGL's programs could have an anticompetitive impact on other players in the industry.

In addition, one intervenor ques tioned whether WGL was trying to make a "backdoor" attempt to resurrect stalled legislation that had been directed at natural gas service expansions. That party noted that both Senate Bill 778 and House Bill 1324 had died during the 2016 session of the Maryland General Assembly. According to the intervenor, however, WGL's proffered plans contained terms virtually identical to some of those that had been included in the two bills.

In considering the various party positions, the commission concurred that the CPP, TCP, and GAP measures, at least as presently constituted, could put current ratepayers at too great a risk, because they would have to make up for any defaults by new program participants. The commission was particularly skeptical about the CPP component, in that the flat monthly adder had been calculated without any thought to an individual new customer's credit risk. The commission criticized WGL for failing to take into account the need for a strategy to hedge against the possibility of CPP defaults.

The commission stated that the other two programs had unacceptable risk-shifting features of their own. But it added that if the company amended its plans to more properly and evenly share the proportionate risks, the LDC would stand a better chance of winning approval of the plans.

While declining to authorize the three programs at the present time, the commission said it did see merit in extending natural gas service to more consumers. Among the attributes it recognized were the environmental benefits that occur when gas replaces electricity, inasmuch as there is increased efficiency when gas is used directly to produce heat instead of as a fuel for generating electricity.

Building on that point, the commission noted that use of gas for direct heating purposes can lower energy costs overall and clearly offers greater convenience. Given those benefits, the commission said it would welcome future proposals promoting natural gas service extensions, so long as such plans reflect a more equitable sharing of associated risks. Re Washington Gas Light Co., Case No. 9433, Order No. 88324, Aug. 1, 2017 (Md.P.S.C.).