DR 97-130 EnergyNorth Natural Gas, Inc. Petition for Recovery of Expenses Related to Environmental Investigation and Remediation Associated with a Manufactured Gas Plant Formerly Located at Gas Street in Concord, New Hampshire Order Approving Settlement Agreement O R D E R N O. 22,943 May 19, 1998 APPEARANCES: McLane, Graf, Raulerson and Middleton by Steven V. Camerino, Esq., for EnergyNorth Natural Gas, Inc.; Office of Consumer Advocate by Kenneth E. Traum for residential ratepayers; and Michelle A. Caraway and Stephen P. Frink for the Staff of the New Hampshire Public Utilities Commission. I. PROCEDURAL HISTORY On June 23, 1997, EnergyNorth Natural Gas, Inc. (ENGI) filed with the New Hampshire Public Utilities Commission (Commission) a Petition for Recovery of Expenses Related to Environmental Investigation and Remediation Associated with a Manufactured Gas Plant Formerly Located at Gas Street in Concord, New Hampshire. The Commission previously allowed recovery of costs associated with cleanup of the Manufactured Gas Plant (the MGP) at the Gas Street property in Dockets DE 93-168 and DR 94-306. The June 23, 1997 petition requested recovery of certain expenses totaling $1,230,282 incurred in investigating and remediating the environmental contamination of a pond near Route 93, Exit 13 in Concord, New Hampshire that resulted from the operations of the MGP and costs of $683,731 incurred in seeking to recover a portion of those expenses from potentially responsible parties and insurance carriers. ENGI sought to recover those expenses totaling $1,914,013 over a five year period, through a surcharge, with the unamortized portion of such costs accruing carrying charges. On July 22, 1997, the Commission issued an Order of Notice which set a Prehearing Conference for August 29, 1997. No Motions to Intervene were filed. The Office of the Consumer Advocate (OCA) is a statutorily recognized intervenor. According to ENGI, the manufactured gas operations at the Gas Street MGP created by-products that ultimately ended up in the pond area next to the Merrimack River at Route 93, Exit 13. These by-products are now classified as hazardous materials by state and federal law. The New Hampshire Department of Environmental Services required ENGI to clean up the pond area, in conjunction with the New Hampshire Department of Transportation's plans for improving the Route 93, Exit 13 interchange. On September 19, 1997, ENGI filed the Supplemental Direct Testimony of Albert J. Hanlon. Mr. Hanlon's testimony addressed issues directly related to the operation of the Gas Street MGP and the disposal of the residuals produced there. In particular, he discussed the history of the manufactured gas industry including the development of the industry, methods of manufacturing gas, residuals produced during the manufacturing process and the disposal practices used by plant operators. On September 23, 1997, the Commission issued Order No. 22,733 which clarified the scope of the proceeding and set the procedural schedule. In accordance with the procedural schedule, ENGI, OCA and Staff engaged in formal discovery and technical sessions. On December 12, 1997, Staff indicated that hearings scheduled for the week of December 15, 1997 could not take place due to discovery delays. The Commission concluded that a postponement was reasonable and directed the parties to propose a revised schedule. On February 13, 1998, ENGI submitted the Prefiled Supplemental Testimony of Michelle L. Chicoine. The purpose of the testimony was to update the status of ENGI's efforts to recover a portion of its remediation costs from the former plant operator, United Gas Improvement Company, now UGI Utilities, Inc. (UGI), and to update the costs that ENGI sought to recover through rates. On March 4, 1998, ENGI requested that the Commission establish a new procedural schedule for the remainder of the proceeding. On March 11, 1998, the Commission approved the revised procedural schedule. ENGI, OCA and Staff conducted discovery on the supplemental testimony. On March 27, 1998, a settlement conference was held at which ENGI, OCA and Staff reached an agreement in principle. On April 2, 1998, Staff requested a postponement of Staff's and OCA's testimonies in order to pursue finalizing the agreement. On April 7, 1998, the Commission granted Staff's request for postponement. On April 17, 1998, Staff filed the original Settlement Agreement (Settlement) signed by ENGI, OCA and Staff. A hearing on the merits was held on April 20, 1998 at which testimony supporting the Settlement was presented by ENGI's witness Michelle L. Chicoine. II. SETTLEMENT AGREEMENT ENGI, OCA and Staff agree that ENGI's petition, as revised through supplemental testimonies, should be approved subject to the Settlement Agreement which contains the following provisions: 1. Prudence of MGP Operations. ENGI and Staff recommend that, based on the information submitted by ENGI, the Commission should find that the waste products from the Concord MGP were disposed of by ENGI's predecessors in a prudent manner and in accordance with the practices of the time, and that the contamination of the Concord MGP property, the pond located near Route 93, Exit 13 and the surrounding area (Site) is consistent with such operations. The OCA takes no position with regard to the foregoing. 2. Prudence of Costs. ENGI, OCA and Staff recommend that, based on the information submitted by ENGI, the Commission should find that: (1) the costs incurred by ENGI in investigating and remediating contamination associated with the Concord MGP operations that have been submitted for review in this case were prudent; (2) the costs associated with the litigation against the alleged former operator of the Concord MGP were prudently incurred by ENGI; and (3) the settlement resolving the litigation with the alleged former operator was prudent. 3. Rate Recovery Mechanism. ENGI, OCA and Staff agree that the costs related to environmental cleanup and the litigation with the alleged former operator of the Concord MGP, as updated by ENGI for the period through March 31, 1998, should be recovered through rates as follows: a. The amounts authorized to be recovered in this docket shall be booked as a deferred asset, which shall not be included in rate base, and shall be recovered through a surcharge in rates to be collected over a seven year period. Amortization of the deferred asset shall begin when the asset is included in rates. The unamortized balance of the asset shall not be included in rate base and shall not accrue carrying costs. The rate increase shall be applied to all sales and transportation customer classes taking firm service on an equal per therm basis. b. Any amounts already received from the alleged former operator of the Concord MGP, net of the costs of obtaining such payments (including the costs submitted for review in this case) shall be applied to reduce any unamortized balance authorized to be recovered through rates in this case. Such amount shall be applied by reducing the amortization period rather than reducing the per therm amount of the environmental charge. c. The cost recovery mechanism set forth in this Settlement Agreement shall apply to all costs incurred with regard to environmental remediation and investigation related to the Site (including costs related to claims against third parties) that are incurred in the future, subject to a determination of prudence of the actual costs incurred as set forth in Section 4 below. d. ENGI shall withdraw certain ongoing monitoring costs totaling $3,108 from this case. The parties agree that such costs are prudent and necessary to comply with directives of the New Hampshire Department of Environmental Services but should be included in base rates as an ongoing operating expense as part of ENGI's next rate case rather than recovered through the deferred asset being recommended in this case. Such costs shall be included in base rates to the extent they are actually incurred (whether higher or lower than $3,108) in the test year for the relevant rate case subject to customary practices regarding pro forma adjustments and other adjustments typically made in rate cases. 4. Cost Review Mechanism and Step Adjustment. ENGI, OCA and Staff agree that costs recoverable in accordance with Section 3 above shall be recovered as follows: a. With regard to the costs that were submitted for review in this proceeding, ENGI shall implement a per therm surcharge ("Environmental Charge") of $0.0025 effective with bills- rendered for the first May 1998 billing cycle. The Environmental Charge shall be updated annually simultaneously with implementation of the winter cost of gas adjustment and shall remain in effect until ENGI has collected $520,030 (which amount is net of the ongoing costs that have been removed from the case in accordance with Section 3(d) above). b. Future costs related to environmental investigation and remediation arising from the Site and costs related to claims against third parties for such investigation and remediation shall be submitted to the Commission annually for review with the Company's winter cost of gas adjustment filing. Upon a determination that such costs were prudently incurred, the costs shall be recovered through rates over a seven year period in the same manner as the costs that are the subject of this proceeding. In any such review or proceeding, the issue of the prudence of the operation of the Concord MGP and the disposal of hazardous waste during the period that the Concord MGP was operated and removed from operation shall be not subject to review. (It is the parties intention that the issue of prudence of the disposal of hazardous waste from the Site that may occur in the future shall be open to a prudence review in association with any request by ENGI for rate recovery of the costs arising from such disposal.) Future recoveries by ENGI from third parties for costs incurred at the Site shall be netted against the costs actually incurred by ENGI. Such amounts shall be applied by reducing the amortization period rather than reducing the per therm amount of the environmental charge that is authorized to recover such costs. 5. Rule 1203.05(a) Waiver. ENGI, OCA and Staff agree to request that the Commission waive Puc 1203.05(a) so that the Environmental Charge may be implemented on a bills-rendered basis in accordance with Section 4(a) above. III. COMMISSION ANALYSIS After careful review of the Settlement Agreement and the testimony and exhibits offered at the April 22, 1998 hearing, we find that the Settlement Agreement is reasonable and in the public good. We agree with ENGI and Staff that the waste products from the Concord MGP were disposed of by ENGI's predecessors in what was considered at that time to be a prudent manner and in accordance with the practices of the time. Additionally, we find that the contamination that was found in the pond area located near Route 93, Exit 13 is the result of waste products disposal from the Concord MGP. ENGI responded to state mandates that required remediation of the pond area and we find that the costs spent by ENGI to remediate the contamination were prudently incurred. Furthermore, we are pleased with the terms of the settlement that ENGI was able to obtain with UGI. The UGI settlement significantly reduced the remediation costs ENGI originally sought to recover from its ratepayers; thereby providing a real benefit to ENGI's customers. Therefore, we find that the settlement between ENGI and UGI is prudent and in the public good. Consistent with our decision in prior dockets regarding the Concord MGP, we find that some sharing of the burden of the remediation costs between ratepayers and shareholders is appropriate. The recovery mechanism in the Settlement which prohibits carrying costs or rate base treatment of the deferred asset ensures that remediation costs shall be borne by both ratepayers and shareholders. It is also consistent with our decision in Order No. 21,710 (June 26, 1995) which states: Consistent with the recovery mechanism approved in DR 93-168, any recovery, such as settlement with UGI, net of costs, will reduce the total amount to be recovered through rates. But rather than simply lowering the amount to be collected over the remaining amortization period, we will require ENGI to credit the recovery to the end of the amortization period, thereby shortening the time of ratepayer recovery. This should serve as an additional incentive to ENGI to obtain any potential recovery quickly, as the amount recovered will reduce the carrying costs being absorbed by shareholders. ENGI's witness Ms. Chicoine testified that over a seven year period, shareholders will absorb approximately 20% of the remediation costs by not allowing carrying costs on the unamortized balance of the deferred asset. Additionally, Ms. Chicoine stated that shareholders have borne the carrying costs associated with the environmental and recovery effort expenses incurred since the completion of Docket DR 94-306 in June 1995. Prior to the UGI settlement, ENGI's shareholders were absorbing approximately $14,000 a month in carrying costs. We continue to expect ENGI to aggressively pursue avenues for third party recoveries. Additionally, we believe that our decision in Order No. 21,710 to apply third party recoveries to reduce the amortization period serves as a strong incentive for ENGI to reduce the costs borne by its ratepayers. Consistent with our conclusions in Order No. 21,710, we will require ENGI to report each year, as part of its winter cost of gas adjustment proceeding, the status of the cleanup recovery efforts with third parties. If there are adjustments necessary to the Environmental Charge, ENGI and any other party or Staff should make recommendations as part of that proceeding. Specifically, we would expect ENGI to revise its Environmental Charge to reflect updated weather normalized therm sales and the net balance of the deferred asset that remains outstanding. Finally, the Settlement Agreement proposed that rates go into effect May 1, 1998. Given that May 1, 1998 has passed, the Environmental Charge shall go into effect on June 1, 1998. We waive the application of N.H. Admin. Rules, Puc 1203.05(a), which requires generally that rate changes be implemented on a service-rendered basis, and will allow ENGI to implement its Environmental Charge on a bills-rendered basis. This waiver, pursuant to Puc 201.05, produces a result consistent with the principles embodied in Puc 1203.05(b), which sets forth exceptions for allowing rate changes on a bills-rendered basis, and is in the public interest because it eliminates customer confusion and reduces administrative costs. Based upon the foregoing, it is hereby ORDERED, that the Settlement Agreement is APPROVED; and it is FURTHER ORDERED, that ENGI's Environmental Charge of $0.0025 per therm shall be effective with bills-rendered for the first June 1998 billing cycle; and it is FURTHER ORDERED, that ENGI shall file compliance tariff pages within ten days of the date of this order. By order of the Public Utilities Commission of New Hampshire this nineteenth day of May, 1998. Douglas L. Patch Bruce B. Ellsworth Susan S. Geiger Chairman Commissioner Commissioner Attested by: Claire D. DiCicco Assistant Secretary