Report Regarding Implementation of 33 V.S.A. 2607(g) Prepared by the Vermont Public Service Board Pursuant to 33 V.S.A. 2607(g)(3)

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1 Report Regarding Implementation of 33 V.S.A. 2607(g) Prepared by the Vermont Public Service Board Pursuant to 33 V.S.A. 2607(g)(3) January 15, 2013

2 In accordance with 33 V.S.A. 2607(g)(3), the Vermont Public Service Board ("Board") is providing the House Committees on Commerce and Economic Development and on Human Services, Senate Committees on Health and Welfare and on Economic Development, Housing and General Affairs a report on the Board's implementation of subsection 2607(g), including its consideration of the matters described in subdivision 2607(g)(2) and the results of that consideration. By Order dated January 15, 2013, the Board has implemented subsection 2607(g)(1) by requiring Vermont Gas Systems, Inc. ("Vermont Gas") to provide a discount program to eligible customers. Consistent with the requirements of subsection 2607(g)(1), the discount program will be available, no later than July 1, 2013, to customers with incomes no greater than 185 percent of the federal poverty level or who meet the Department for Children and Families' ("DCF") means test of eligibility for LIHEAP 1 crisis fuel assistance. Eligible customers will receive a 20 percent discount on the entirety of each month's gas bill. Eligibility for the discount will be verified by the DCF. In its January 15, 2013, Order the Board considered the matters described in subsection 2607(g)(2), which states: In implementing the discount program, the Board shall consider: (A) Low income discount programs, rates, and cost structures of other Vermont regulated utilities. (B) Low income discount programs, rates, and cost structures for gas customers in other states. (C) Options for allocating the costs of the discount program that avoid or reduce the cost impact of the program on ineligible ratepayers, including consideration of each of the following: (i) Use of any revenues collected from ratepayers that are in excess of the revenue requirement most recently determined by the board. 1. LIHEAP stands for Low Income Home Energy Assistance Program. 2

3 Section 2607(g)(2)(A) (ii) Use of revenues collected from ratepayers to fund system expansions that have not been placed in service. With respect to low-income discount programs of other Vermont regulated utilities, the Board concluded that, while direct comparisons between the electric and natural gas regulated utilities industries can be difficult due to certain fundamental differences, the Vermont Gas discount program is consistent with the discount program developed for electric customers. Section 2607(g)(2)(B) With respect to low-income discount programs in other states, the Board concluded that a wide variety of discount programs have been implemented in New England, and there is no "one-size-fits-all" solution. Instead, the Board concluded that the Vermont Gas discount program contains certain appropriate elements that have been adopted in other New England states, and that overall the program is within the range of regional natural gas discount programs. Section 2607(g)(2)(C) With respect to options for allocating the costs of the discount program that would avoid or reduce the cost of the program on ineligible ratepayers, the Board considered both (i) the use of revenues collected from ratepayers that are in excess of the revenue requirement of Vermont Gas, as most recently determined by the Board, and (ii) the use of revenues collected from ratepayers to fund system expansions that have not been placed in service. In both instances, the Board concluded that the use of such revenues to avoid or reduce the costs of the program on ineligible ratepayers was inappropriate, for the following reasons. Pursuant to the Alternative Regulation Plan ("ARP") most recently approved by the Board, 2 Vermont Gas is likely to collect excess revenues only in colder- than-normal weather, and pursuant to the weather-normalization mechanism of the ARP, 2. See Docket No. 7803, Petition of Vermont Gas Systems, Inc., for approval of a Successor Alternative Regulation Plan, Order of 8/21/12. 3

4 any such revenues are already being returned to customers. Additionally, pursuant to the Earnings Sharing Mechanism of the ARM, a portion of any over-earnings will also be returned to customers. The revenues collected from ratepayers to fund system expansions that have not been placed in service were deemed an inappropriate source of funding for the discount program because these funds were approved specifically for the purpose of system expansion, 3 and were to be returned to ratepayers if not used for that purpose. This decision was widely communicated to customers. Accordingly, the Board concluded that the most appropriate way of allocating the costs of the discount program that would avoid or reduce the cost of the program on ineligible ratepayers was to adopt caps on rate impacts, overall and by customer class, as proposed by Vermont Gas, supported by the Department of Public Service, and not opposed by any party. 3. Docket No. 7712, Request of Vermont Gas Systems, Inc., to establish a System Expansion and Reliability Fund with funds provided by reductions in the quarterly Purchase Gas Adjustment rate under the Alternative Regulation Plan, Order of 9/28/11, at

5 STATE OF VERMONT PUBLIC SERVICE BOARD Docket No Investigation into Low Income Customer Discount Program for Natural Gas Suppliers Subject to Regulation Under 30 V.S.A. 203 ) ) ) Hearing at Montpelier, Vermont December 4, 2012 Order entered: 1/15/2013 PRESENT: Thomas Knauer, Hearing Officer APPEARANCES: Louise Porter, Esq. for Vermont Department of Public Service John H. Marshall, Esq. Kane Smart, Esq. Downs Rachlin & Martin PLLC for Vermont Gas Systems, Inc. Leonard H. Singer, Esq. Adam T. Conway, Esq. Couch White, LLP for International Business Machines Corporation David A. Cain, Esq. Janet Doyle Timothy Baechle Eric Berliner Candice Callahan Nathan Fiske Daniel Tukey for International Business Machines Corporation James Dumont, Esq. James A. Dumont, Esq., P.C. for AARP

6 Docket No Page 2 I. INTRODUCTION On August 8, 2012, the Vermont Public Service Board ("Board") opened this investigation pursuant to 33 V.S.A. 2607(g) to establish a discount program for low-income customers of natural gas suppliers subject to regulation under 30 V.S.A In this Proposal for Decision, I recommend that the Board approve the Low Income Assistance Program ("LIAP") proposed by Vermont Gas Systems, Inc. ("VGS") in this proceeding. If approved, the proposed LIAP will be made available no later than with bills rendered on and after July 1, 2013, to VGS residential customers with incomes at or below 185 percent of the federal poverty level, will provide eligible customers with a 20% discount on their natural gas bills, and will be administered by the Vermont Department for Children and Families ("DCF"). II. PROCEDURAL HISTORY On May 18, 2012, the Vermont Legislature amended 33 V.S.A to include Section 2607(g), which mandates that the Board require natural gas suppliers subject to regulation under 30 V.S.A 203 to provide a discount program to customers with incomes no greater than 200 percent of the federal poverty level or who meet the DCF's means test of eligibility for LIHEAP crisis fuel assistance. 1 On August 8, 2012, the Board issued an Order opening this investigation to fulfill the mandate of 33 V.S.A. 2607(g), and appointing me to serve as the Hearing Officer in this proceeding. On August 13, 2012, a Notice of Appearance was filed by Kane H. Smart, Esq., and John H. Marshall, Esq., of Downs Rachlin & Martin PLLC, on behalf of VGS. On August 14, 2012, a Notice of Appearance was filed by Louise C. Porter, Esq., on behalf of the Vermont Department of Public Service ("Department"). On August 20, 2012, a Notice of Appearance was filed by James A. Dumont, Esq., on behalf of AARP, as well as a Motion to Intervene. 1. The term "LIHEAP" stands for "Low Income Home Energy Assistance Program".

7 Docket No Page 3 On August 21, 2012, I held a prehearing conference, pursuant to 30 V.S.A. 10(c) and Board Rule 2.212, in order to establish a process and schedule for this investigation. In attendance were representatives from VGS, the Department, International Business Machines Corporation ("IBM"), DCF, Vermont Fuel Dealers Association, Champlain Valley Office of Economic Opportunity ("CVOEO"), and AARP. On September 11, 2012, Adam T. Conway, Esq., Leonard H. Singer, Esq., and David A. Cain, Esq., of Couch White, LLP, filed Notices of Appearance on behalf of IBM. IBM also filed a Motion for Admission of Counsel, Adam T. Conway, Esq., and Leonard H. Singer, Esq., pro hac vice. On September 13, 2012, I granted AARP's Motion to Intervene in this proceeding. On September 13, 2012, I issued a Prehearing Conference Memorandum that established a schedule for the proceeding. On September 20, 2012, IBM filed a Motion to Intervene. On September 21, 2012, VGS filed the proposed LIAP and supporting evidence. On October 2, 2012, a public hearing was held at the South Burlington High School. One member of the public was in attendance, who had no comments on the proposed LIAP. On October 11, 2012, I conducted a workshop to discuss VGS's proposed LIAP. In attendance were representatives of VGS, the Department, IBM, CVOEO, and AARP. On October 18, 2012, the Department filed comments on the proposed LIAP. On October 18, 2012, VGS filed a memorandum of law, concerning the implementation of 33 V.S.A. 2607(g). On October 19, 2012, IBM filed comments on the proposed LIAP. On October 19, 2012, I granted IBM's motions to intervene and for admission of counsel pro hac vice. October 24, 2012, VGS filed a letter with the Board responding to questions raised during the workshop and to comments submitted by the Department and IBM. On October 29, 2012, I convened a status conference to discuss pending issues and establish a schedule for the remainder of the proceeding.

8 Docket No Page 4 On November 7, 2012, I issued a Procedural Order amending the schedule in this proceeding. On November 9, 2012, VGS filed additional information regarding the LIAP in response to questions raised at the status conference. On November 20, 2012, the Department filed a letter responding to VGS's November 9 letter and advising that neither the Department nor IBM had any objection to the LIAP. On December 4, 2012, I convened a technical hearing. On December 11, 2012, IBM filed an Initial Brief and Proposed Findings of Fact. Also on this date VGS and the Department filed a Joint Proposal for Decision. On December 13, 2012, VGS filed additional information regarding the LIAP in response to questions raised at the technical hearing. III. FINDINGS Based on the prefiled testimony and exhibits and evidence presented at the technical hearing, I hereby report the following findings of fact to the Board pursuant to 30 V.S.A. 8(c): 1. VGS is a "company" within the meaning of 30 V.S.A VGS transmits and distributes natural gas within the meaning of 30 V.S.A. 203(2) and, as such, it is subject to the Board's jurisdiction. Docket No. 7109, Order of 9/21/06 at VGS's proposed LIAP will provide a rate discount to its residential customers with incomes at or below 185 percent of the federal poverty level ("FPL"). Simollardes pf. at The proposed LIAP provides to eligible residential customers a 20 percent discount from the current Rate R tariff on the three components of VGS's residential rate: the Daily Access charge, the Natural Gas charge, and the Distribution charge. The 20 percent discount will apply to all gas usage during each billing period. Eligible customers will receive the LIAP discount on a bills-rendered basis beginning with the next bill rendered following verification of eligibility. Simollardes pf. at 3; exh. VGS-l.

9 Docket No Page 5 Eligibility for and Enrollment in the LIAP 4. To be eligible for the LIAP, a customer must have an income no greater than 185 percent of FPL or less as determined by the DCF. A customer may apply to enroll in the LIAP at any time. No customer will be eligible until the DCF provides to VGS written notification of eligibility. Simollardes pf. at 3-4; exh. VGS-l. 5. Once enrolled, a customer's eligibility must be re-verified by the DCF annually, as is customary under LIHEAP, a federal social services program. Exh. VGS-l; tr. 12/4/12 at 83 (Moffi). 6. Unless the DCF re-verifies eligibility, a customer's enrollment in the LIAP will terminate the month following the anniversary date of the last certification by the DCF or any time the customer changes addresses. VGS will work with the DCF to develop appropriate procedures to minimize the potential for disruption in a customer's participation in the LIAP, but VGS is not responsible for ensuring eligibility is re-verified. Simollardes pf. at 3-4; tr. 12/4/12 at 11 (Simollardes); exh. VGS-l. 7. A customer will remain enrolled in the LIAP until: (1) the DCF notifies VGS that the customer is no longer eligible for the LIAP; (2) the customer opts out of the LIAP; (3) the customer changes addresses for gas service and eligibility is not re-verified at the new address; (4) the customer ceases taking gas service; (5) fraudulent participation is determined; or (6) thirteen months after the last DCF eligibility verification. Exh. VGS-l. Funding of the LIAP 8. The LIAP will be funded by a non-by-passable Assistance Program Fee ("AP Fee") that will be assessed per meter, per month and that will be shown as a separate line item on all VGS customer bills. Simollardes pf. at 4; exh. VGS Although there are arguments to exclude certain customer classes from the AP Fee, it is appropriate for all customer classes to pay the AP Fee because it helps provide a stable base for funding and a consistent level of participating contributors, thereby avoiding the need to make frequent adjustments to the LIAP. Tr. 12/4/12 at 61 (Pariseau); tr. 12/4/12 at 74 (Nagle).

10 Docket No Page VGS proposes to limit the AP Fee to an amount that will result in no more than a 1.2 percent rate impact across all classes. The average rate impact by rate class will be no greater than the following: Rate R 1.30% Rate G1 1.05% Rate G2 1.05% Rate G3 0.90% Rate G4 0.90% Interruptible Rate IS and ISO 0.30% Simollardes pf. at 4; exh. VGS-l. 11. The AP Fee and overall rate impact were determined by evaluating billing determinants associated with customers who had received any form of heating assistance in 2011 (the "Current Participants"). The fiscal year 2011 heating assistance billing determinants are a reasonable proxy for estimating low-income customer usage because temperatures were colder than normal in fiscal year 2011; however, Current Participants represent only a subset of customers eligible for the LIAP. Simollardes pf. at The billing determinants for Current Participants were applied to the rates that will be in effect as of November 1, 2012, to estimate the total annual natural gas bill for all Current Participants combined, with the assumption that the rates as of November 1, 2012, were in effect for twelve months. To provide a 20 percent discount to all Current Participants and cover administrative fees for the LIAP, VGS calculated a need to collect $650,680 in AP Fees. Simollardes pf. at VGS estimates that approximately 18.6 percent of households in Franklin and Chittenden County are at or below 185 percent FPL. Assuming that 18.6 percent of VGS's 40,430 residential customers are eligible for the LIAP, VGS estimates approximately 7,520 of its current residential customers could be eligible for the LIAP. Simollardes pf. at VGS has established in the proposed LIAP an AP Fee that corresponds with a 50 percent increase in the level of Current Participants, which amounts to 4,293 customers. At this level of

11 Docket No Page 7 participation, the AP Fee results in an overall rate impact of 1.02 percent at current natural gas rates. Simollardes pf. at AP Fees for each class were established using revenues by rate class and were informed by the Board's Order in Docket No. 7535, where a discount program was established for lowincome electric utility customers. 2 The rate impact on interruptible customers will be limited to 0.25 percent of projected interruptible revenues, in order for VGS to stay competitive with other fuel providers. Simollardes pf. at To address the wide variations in interruptible customer usage, the fee level for interruptible customers is further delineated between customers using less than 200,000 Mcf and those using more. This is a reasonably clear delineation, as all interruptible customers readily fall into one of the two usage-level categories; no customer is close to the threshold level. The rate impact to both groups is 0.25 percent. Exh. VGS-3; tr. 12/4/12 at 44 (Simollardes). 17. The rate impact on small commercial rate classes and large commercial rate classes is limited to 80 percent and 70 percent, respectively, of the residential AP Fee. The residential AP Fee will fund the balance of the LIAP and administrative fees. Simollardes pf. at The establishment of limits on the AP Fee rate impacts to the large and small commercial rate classes relative to the residential classes reduces the cost impact of the program on ineligible ratepayers. Exh. Board The initial AP Fee by rate class is shown below: Rate R Rate Gl Rate G2 Rate G3 Rate G4 Interruptible Rate IS and ISO Annual sales < 199,999 Mcf $1.39/meter/month $1.85/meter/month $2.38/meter/month $12.91/meter/month $17.99/meter/month $11.25/meter/month 2. See Docket No. 7535, In re: Investigation into (1) petition of AARP, for the establishment of reduced rates for low-income consumers of Green Mountain Power Corporation and Central Vermont Public Service Corporation; and (2) as expanded to possibly include general applicability to all Vermont retail electric utilities, Order of 7/22/11 (hereinafter "Docket 7535 Order").

12 Docket No Page 8 Annual sales > 199,999 Mcf $179/meter/month Based on rates to be in effect as of November 1, 2012, these initial AP Fees result in the following rate impacts: Rate R 1.25% Rate Gl 1.00% Rate G2 1.00% Rate G3 0.87% Rate G4 0.87% Interruptible Rate IS and ISO Annual sales < 199,999 Mcf 0.25% Annual sales > 199,999 Mcf 0.25% Simollardes pf. at 9-10; exh. VGS-1; exh. VGS The AP Fee has been established at a level to cover a 20 percent discount at current rates for a 50 percent increase over the number of customers currently receiving LIHEAP assistance. Exh. VGS The actual number of LIAP participants is unknown, as are future rates and the amount of gas that these LIAP customers will use. These uncertainties, together with changes in weather conditions, will lead to fluctuations in the level of AP Fees collected. Exh. VGS-1; exh. Board- 1; tr. 12/4/12 at (Simollardes). 22. It is possible that the AP Fee will over- or under-collect the revenues necessary to fund the LIAP. VGS will recalculate the AP Fee each year as part of its base-rate filing under its Alternative Regulation Plan to reflect then-current levels of participation and usage, and thencurrent rates as well as to address the sufficiency of the LIAP reserve balance. Simollardes pf. at 4; tr. 12/4/12 at 11 (Simollardes); exh. VGS-l. 23. At the time of the annual AP Fee adjustment, balances in the LIAP fund in excess of $500,000 will be used to reduce the applicable AP Fee. If the balance in the LIAP fund is less than $300,000 at the time of the annual AP Fee adjustment, the AP Fee will be set to bring the LIAP fund to $500,000 by the end of the next annual AP Fee adjustment while continuing to

13 Docket No Page 9 provide revenues to offset the projected loss of revenues to VGS associated with the LIAP discount to participating customers during the 12-month AP Fee adjustment period. Exh. VGS-l. 24. Should the maximum potential AP Fee be insufficient to cover anticipated LIAP participation, VGS shall file with the Board proposed modifications to LIAP eligibility requirements or discount levels. The intent is to keep the rate impact below 1.2 percent. Should the over-collection balance in the LIAP be so large that the resulting AP Fee would be negative, VGS will credit customers' bills by the amount above what is necessary to fund the LIAP and maintain a $500,000 balance. The amount will be determined based on each customer class's proportional contribution to the LIAP. Exh. VGS-l; tr. 12/4/12 at (Simollardes ). 25. VGS will conduct a review of the performance of the LIAP at the end of its initial 3-year term. This review will include evaluation of the appropriate size for the reserve balance, with the intention to "right size" the reserve. Exh. VGS-4; exh. Board At current natural gas rates, the maximum overall rate impact proposed under the LIAP (1.2 percent) would cover participation at 75 percent above the level of Current Participants, which amounts to 5,009 customers or a participation rate of 67 percent. Simollardes pf. at 7, A 10 percent colder- or warmer-than-normal winter would result in a change in total customer bills by approximately $150,000 (based on Current Participants and rates to be in effect as of November 1, 2012). The impact on the LIAP would be approximately $30,000. Exh. VGS-4. Administration of the LIAP 28. The DCF will act as the Program Administrator of the LIAP. The DCF will process and review enrollment applications and determine and verify customer eligibility in LIAP. The DCF will inform VGS of a customer's enrollment or removal from the LIAP. Exh. VGS-l. 29. VGS will negotiate an Administrative Services Agreement ("ASA") with the DCF that will provide greater detail, including such things as: (1) roles and responsibilities between and among VGS, the DCF, and the customers; (2) initial eligibility and verification procedures; (3) annual re-verification procedures; (4) eligibility termination provisions; (5) reporting requirements; and (6) customer communications. Simollardes pf. at 4-5; exh. VGS-l.

14 Docket No Page VGS will file the ASA with the Board and Department once it is executed. Simollardes pf. at A portion of the revenues collected from the AP Fee will be used to fund an administrative fee to be paid to the DCF. No more than 10 percent of the revenues generated by the AP Fee will be paid to the DCF for the administration of the LIAP. Simollardes pf. at 5; exh. VGS-l. 32. Initial development and implementation of the LIAP will involve costs such as programming expenses associated with modifying the customer billing system, customer communication expenses, 3rd party consulting expenses, or legal expenses, among others. VGS proposes to apply up to $100,000 of the AP Fee revenues to cover the initial costs associated with developing and implementing the LIAP. VGS will not use this money to cover VGS' internal staff time. To the extent these costs are incurred before the LIAP is implemented and the AP Fee is collected, VGS will record these items as a regulatory asset, and VGS will track and report these external costs. Simollardes pf. at 5; exh. VGS-l; tr. 12/4/12 at 38 (Simollardes). Implementation Schedule 33. Prior to implementing the LIAP, certain steps must be taken. VGS is required under Board practice to provide between 30 and 60 days' notice for rate changes. No notice has yet been provided for the AP Fee. VGS must test its billing system with the final LIAP to ensure that it is functional. Further, VGS and the DCF must agree on the terms of the ASA, and VGS must conduct outreach to affected customers. Tr. 12/4/12 at (Simollardes); tr. 12/4/12 at 84 (Moffi). 34. VGS does not propose to undertake customer outreach until the ASA is in place. If the ASA is in place before April 1, 2013, VGS can notify its customers of the pending AP Fee before it appears on the June bill. Simollardes pf. at The DCF does not have the capacity to undertake administration of the LIAP at this point in time due to limited resources and the lack of an approved LIAP. Tr. 12/4/12 at 85 (Moffi).

15 Docket No Page The preferred date for implementation of the LIAP is July 1, Tr. 12/4/12 at (Pariseau); tr. 12/4/12 at 85 (Moffi). 37. VGS proposes that the LIAP be formally reviewed, with public input, after three years. This review will include revisiting the reasonableness of the parameters for the reserve fund. To facilitate this review, VGS proposes to track rate impact, cash flow and monthly balances of the reserve fund, the level of participation in the LIAP, the amount of shut-offs for non-payment, and the number of notices worked. VGS will also track aging comparisons between LIAP participants and non-participants. Tr. 12/4/12 at 41, (Simollardes ). Statutory Considerations pursuant to 33 V.S.A. 2607(g) 33 V.S.A. 2607(g)(1) 38. The LIAP will be available to customers with incomes no greater than 185 percent of the FPL, which is by definition, a customer with income no greater than 200 percent of the FPL, as required by 33 V.S.A. 2607(g). Eligibility for the LIAP is consistent with means testing for LIHEAP, which is also based on 185 percent of the FPL. As further required by 33 V.S.A. 2607(g)(1), the DCF will provide for the means testing and eligibility verification as set forth in the ASA with VGS. Simollardes pf. at V.S.A. 2607(g)(2)(A) 39. The LIAP is comparable to low-income discount programs, rates and cost structures of other Vermont regulated utilities. Simollardes pf. at 12; see generally Docket 7535 Order. 40. Eligibility for the LIAP is more generous than the low-income rate referred to as "Lifeline" offered to low-income customers for assistance with basic telephone service. Although it is difficult to compare the level of discount because of the differences between gas and telephone services, the Lifeline program provides an approximate average monthly discount of $13 while the average monthly discount through the proposed LIAP is equal to $17.22 per month. Simollardes pf. at The LIAP compares favorably to the low-income rate that will be offered by Green Mountain Power Corporation ("GMP") pursuant to Docket More individuals are eligible

16 Docket No Page 12 for the LIAP insofar as the eligibility criterion for the LIAP is 185 percent of the FPL, rather than 150 percent of the FPL as in the case of GMP's low-income rate. Moreover, the LIAP applies to all usage, not just a specified block as is GMP's low-income rate. Both programs require contributions from all customers. The combination of LIHEAP funds received by VGS's customers and the LIAP program results in a 42 percent discount for low-income customers, which is more than the 25 percent discount provided by GMP. Simollardes pf. at 12-14; tr. 12/4/12 at (Simollardes). 42. The proposed LIAP does not include an arrearage forgiveness program, unlike the electric discount program. Simollardes pf. at VGS's uncollectible expense or bad debt write-off is well below the industry average 0.36 percent of total gas revenues, compared to 1.9 percent. Bad debt write-off in the New England states is 2.24 percent. Tr. 12/4/12 at 19-20, 26 (Simollardes ). 44. An arrearage forgiveness component is not as critical a feature of the LIAP, as compared to Electric Assistance Program, because monthly bills for natural gas are comparatively lower than for electric service, customer complaints to the consumer advocate regarding unreasonable repayment plans are low, and VGS has been successful in reaching agreement with customers before arrearage amounts reach a critical point. Exh. Board-2; tr. 12/4/12 at (Simollardes); tr. 12/4/12 at (Pariseau). 45. Implementing an arrearage forgiveness program would either increase the cost of the LIAP or decrease the discount available to participating customers. Tr. 12/4/12 at 29 (Simollardes). 46. Unlike the block rate provided in the Electric Discount Program, a flat rate discount is a preferable aspect of the LIAP because VGS's residential customer class has a very seasonal load profile. Seventy percent of residential customer usage occurs between November and March. Average usage per month during that time is roughly three times the average monthly usage during the rest of the year. In order to make a meaningful block in the winter, it would likely result in usage in excess of a total bill in the summer. Further, a discount on a block of gas usage does not have a significant effect on energy conservation because customers are using natural gas for basic necessities like heat and hot water. Simollardes pf. at 14.

17 Docket No Page V.S.A. 2607(g)(2)(B) 47. The LIAP is comparable to the discounts being offered by gas companies in other New England states. The low-income discount rates offered by New England gas companies range from 0 percent in Connecticut to 30 percent in Maine. New Hampshire provides a 60 percent discount, but it only applies to the distribution portion of the bill, which equates to about a 15 percent discount on the overall gas bill. Since natural gas rates have declined, the resulting overall discount is likely larger. Simollardes pf. at 15; exh. VGS The low-income programs provided by gas companies in other states do not have a uniform framework. Some have only arrearage forgiveness; some have only low-income discounts; some have both. Some exclude interruptible customers from the discount program fees; some do not. Tr. 12/4/12 at 27, 35 (Simollardes); exh. VGS-2; tr. 12/4/12 at 72 (Pariseau). 33 V.S.A. 2607(g)(2)(C)(i) 49. It is not appropriate to reduce the cost of the LIAP on ineligible ratepayers by allocating to the LIAP surpluses from the VGS revenue requirement most recently determined by the Board. Excess revenues are likely only in a colder-than-normal winter. Under the weathernormalization feature in the recently approved Successor Alternative Regulation Plan ("SARP"), revenues in a colder-than-normal winter are already being returned to customers. Further, the SARP features an earnings-sharing mechanism that returns to customers 75 percent of any earnings in excess of 25 basis points over the authorized return. Simollardes pf. at 18; tr. 12/4/12 at (Simollardes); tr. 12/4/12 at (Betit). 50. Limiting the AP Fee rate impacts on the large and small commercial rate classes relative to the residential classes (70 percent and 80 percent, respectively, of the residential AP Fee) reduces the cost impact of the program on ineligible ratepayers. Exh. Board-l.

18 Docket No Page V.S.A. 2607(g)(2)(C)(ii) 51. The system expansion and reliability fund (SERF) was approved for the specific purpose of enabling the expansion of natural gas to un-served areas of Vermont. Simollardes pf. at 18-19; Docket 7712, Order of 9/28/11 at 2. IV. DISCUSSION On May 18, 2012, the Vermont General Assembly amended 33 V.S.A to require the establishment and implementation of an assistance program for the low-income customers of natural gas suppliers. As amended, 33 V.S.A now includes the following language: (g)(l) The public service board shall require natural gas suppliers subject to regulation under 30 V.S.A 203 to provide a discount program to customers with incomes no greater than 200 percent of the federal poverty level or who meet the department for children and families' means test of eligibility for LIHEAP crisis fuel assistance. Eligibility for the discount shall be verified by the department for children and families. (2) In implementing the discount program, the board shall consider: (A) Low income discount programs, rates, and cost structures of other Vermont regulated utilities. (B) Low income discount programs, rates, and cost structures for gas customers in other states. (C) Options for allocating the costs of the discount program that avoid or reduce the cost impact of the program on ineligible ratepayers, including consideration of each of the following: (i) Use of any revenues collected from ratepayers that are in excess of the revenue requirement most recently determined by the board. (ii) Use of revenues collected from ratepayers to fund system expansions that have not been placed in service. (3) On or before January 15, 2013, the board shall: (A) Implement this subsection by order to each natural gas company subject to its jurisdiction; and (B) Report to the house committees on commerce and economic development and on human services, and to the senate committees on health and welfare and on economic development, housing and general affairs on its implementation of this subsection, including its consideration of the matters described in subdivision (2) of this subsection and the results of that consideration.

19 Docket No Page 15 VGS is currently the only natural gas supplier subject to regulation under 30 V.S.A 203. Pursuant to VGS's proposed plan, the LIAP will be provided to customers with incomes at or below 185 percent of the federal poverty level or who meet the DCF's means test of eligibility for LIHEAP crisis fuel assistance. The DCF will verify eligibility for the LIAP. This proposal is consistent with the requirements of 33 V.S.A. 2607(g)(1). While VGS could have proposed a discount program that would have been available to customers with incomes at or below 200 percent of the federal poverty level, the company has proposed to limit incomes to 185 percent of the federal poverty level. This income level is consistent with the means testing for LIHEAP. Increasing the income level to 200 percent of the federal poverty level would add a layer of complexity to the administration of the program by DCF, and would have the result of either increasing the program's costs, or decreasing the amount of the discount. No party objected to providing the discount program to customers with incomes at or below 185 percent of the federal poverty level. I recommend that the Board find this income level to be consistent with the standards set forth in 33 V.S.A. 2607(g)(1). I have further considered VGS's proposed discount program in light of the requirements of 33 V.S.A. 2607(g)(2). 33 V.S.A. 2607(g)(2)(A) VGS has modeled its discount program, in part, on the discount program developed for electric customers, and approved for implementation by the Board in Docket No pursuant to 30 V.S.A. 218(e). There are two notable differences between VGS's proposed discount program and the reduced rate program developed for electric customers. The first difference is that, while the electric discount program applies only to a specified block of usage, the gas discount program, as proposed, would apply to all usage. VGS maintains that this is appropriate in the gas context because typical residential gas usage is very seasonal in nature, and because residential gas customers are using gas for basic necessities, such as heating and hot water. The second difference is that the electric discount program includes a provision to forgive customer arrearages, while VGS's proposal does not. If VGS were to include arrearage forgiveness as part of its discount program, it would result in either a greater cost to fund the program, or would

20 Docket No Page 16 decrease the amount of the discount the company could offer. VGS and the Department each assert that VGS does not have an arrearage problem with its customers, due to the company's willingness to negotiate repayment plans with its customers. Accordingly, having considered and weighed the similarities and differences between the proposed LIAP and the low-income rate program approved in Docket No. 7535, I recommend on balance that the Board conclude that the proposed LIAP compares favorably to low-income discount programs, rates, and cost structures of other Vermont regulated utilities. 33 V.S.A. 2607(g)(2)(B) VGS has demonstrated that there is no one consistent natural gas discount program model in New England, and that, in fact, these programs differ significantly in the region. Certain programs apply a discount to a customer's entire bill, others apply a discount to only a portion of a bill. Some programs include an arrearage forgiveness mechanism, others do not. As demonstrated above, the magnitude of discounts in New England ranges from 0 to 30 percent. Accordingly, I recommend that the Board conclude that the proposed LIAP to be at least comparable to low-income discount programs, rates, and cost structures for gas customers in other states. 33 V.S.A. 2607(g)(2)(C)(i) VGS has not proposed to use any revenues collected from ratepayers that are in excess of the revenue requirement most recently determined by the Board to avoid or reduce the cost impact of the discount program on ineligible ratepayers. Pursuant to the Alternative Regulation Plan ("ARP") for VGS recently approved by the Board, excess revenues are only likely in colderthan-normal weather, and these excess revenues are already being returned to customers due to ARP's weather-normalization feature. In addition, under the earnings sharing mechanism of ARP, there is a deadband of 25 basis points above the company's authorized rate of return, within which the company retains all over-earnings. Between 25 and 200 basis points above the authorized rate of return, 75 percent of over-earnings are returned to customers, and 25 percent are retained by the company. Above 200 basis points all over-earnings are returned to customers.

21 Docket No Page 17 For the foregoing reasons, I recommend that the Board conclude that using any revenues collected from ratepayers that are in excess of the revenue requirement is not an appropriate manner to avoid or reduce the cost impact of the LIAP on ineligible ratepayers. 33 V.S.A. 2607(g)(2)(C)(ii) VGS also has not proposed to use revenues collected from ratepayers to fund system expansions that have not been placed in service to avoid or reduce the cost impact of the program on ineligible ratepayers. VGS and the Department maintain that such funds should be retained for the specific purpose of enabling the expansion of natural gas to un-served areas of Vermont. Specifically, the Department and VGS agree that, given natural gas's current price advantage over other heating fuels, expansion to unserved areas of Vermont could provide the opportunity to low-income customers to achieve savings through fuel switching, and could also expand the pool of potential customers that would be eligible for the LIAP. Without expressing an opinion as to the merits of these points, I do note that in Docket No. 7712, the Board indicated that the creation of the expansion fund was provisional in nature pending regulatory review of a prospective system expansion proposal by VGS, and that therefore it remained yet to be determined whether any disbursements from the fund would be approved to off-set the cost of any such prospective system expansion or whether these funds must be returned to ratepayers in the event that the prospective expansion were not approved or constructed. 3 Accordingly, in light of these considerations, I recommend that the Board conclude that using revenues collected from ratepayers to potentially fund system expansions that have not been placed in service is not an appropriate manner to avoid or reduce the cost impact of the LIAP on ineligible ratepayers. 3. Docket No. 7712, Request of Vermont Gas Systems, Inc. to establish a System Expansion and Reliability Fund with funds provided by reductions in the quarterly Purchase Gas Adjustment rate under the Alternative Regulation Plan, Order of 9/28/11 at 3.

22 Docket No Page 18 V. CONCLUSION For the reasons discussed above, I find the proposed LIAP satisfies the requirements of 33 V.S.A. 2607(g). Accordingly, I recommend that the Board approve the LIAP for implementation no later than July 1, 2013, subject to the following conditions: 1. Prior to July 1, 2013, VGS shall develop and implement the LIAP on terms that are consistent with the evidence in this proceeding. 2. VGS shall file with the Board and the Department a final, executed version of the Administrative Services Agreement with DCF no later than April 1, VGS shall file a status report regarding its development and implementation of the LIAP no later than April 1, The status report shall, at a minimum, identify the progress made in developing and implementing the LIAP, any challenges that VGS foresees to meeting the July 1, 2013, implementation date, and steps that VGS will take to address any such challenges. 4. At the end of the first three years of the implementation of the LIAP, and every three years thereafter, VGS shall conduct a review of the implementation of the LIAP. VGS shall invite the parties to this proceeding and DCF to participate in this review. 5. VGS shall provide the following data for the Board to review at each three-year review of the LIAP: (1) rate impact; (2) cash flow and monthly balances of the reserve fund; (3) the level of participation in the LIAP; (4) the amount of shut-offs for non-payment; (5) the number of notices worked 4; and (6) aging comparisons between LIAP participants and nonparticipants. This Proposal for Decision has been served on all parties to this proceeding in accordance with 3 V.S.A For the purposes of this Proposal for Decision and proposed Order, the term "notices worked" means instances where a notice of service disconnection has been mailed to a customer as a result of a delinquency of payment, and additional follow-up action has occurred to achieve a final resolution.

23 Docket No Page 19 Comments on Proposal for Decision On January 7, 2012, VGS and the Department each filed a letter stating that they have no comments on the Proposal for Decision. No other party filed comments on the Proposal for Decision. Modifications to Proposal for Decision After circulating this Proposal for Decision to the parties for comment, I discovered that the term "notices worked" first appears, without further explanation, in Paragraph 5 of the Conclusion, as well as in Paragraph 6 of the proposed Order. Accordingly, I have added Footnote 4 to Paragraph 5 of the Conclusion, which includes a working definition for this term. Because this addition is not adverse to any of the parties, I have not circulated a revised version of the Proposal for Decision to the parties for further comment. th Dated at Montpelier, Vermont, this 9 day of January, s/thomas Knauer Thomas Knauer Hearing Officer

24 Docket No Page 20 VI. BOARD DISCUSSION We have reviewed the Hearing Officer's Proposal for Decision as well as the letters filed by VGS and the Department. We adopt the findings, conclusions, and recommendations of the Hearing Officer in the modified Proposal for Decision, subject to the additional consideration described below. We begin by noting that the Hearing Officer's Proposal for Decision did not include the customary summary of the positions of the parties to this proceeding. Therefore, we take the opportunity to provide such a summary now. AARP did not file testimony, a proposal for decision, or any comments. IBM generally opposes cross-subsidies among various classes of ratepayers and the imposition of additional costs on interruptible customers that are unrelated to the cost of serving those customers. Nonetheless, IBM does not oppose VGS's proposed LIAP because the LIAP fees are carefully designed to avoid undue impacts on interruptible customers. IBM also supports the use of a meter fee as a funding mechanism and supports VGS's proposal to itemize the meter fee on each customer's gas bill. Finally, IBM does not oppose a reserve balance for the LIAP as long as the reserve balance is monitored and adjusted as necessary in accordance with the LIAP review procedures proposed by VGS. VGS and the Department jointly filed a Proposal for Decision in which these parties contend: (1) that the VGS LIAP satisfies the requirements of Section 2607(g)(1); (2) that the LIAP was developed in consideration of the statutory factors in Section 2607(g)(2)(B); and (3) that it would not be appropriate to reduce the cost of the LIAP on ineligible ratepayers as enumerated in Section 2607(g)(2)(C). We are concerned that the LIAP does not include a provision for arrearage forgiveness, as was developed for the electric discount program in Docket No We understand that this topic was discussed at length at the technical hearing, and that no party expressly supported inclusion of an arrearage forgiveness provision in this discount program. We note that pursuant to our Phase II Order dated September 6, 2012, in Docket No. 7535, we will convene a workshop after the end of the first year of the implementation of the low-income rate program by Green Mountain Power Corporation ("GMP") to review the progress of GMP in implementing its low-

25 Docket No Page 21 income electric rates and other plan terms approved in that Order. Depending in part on the outcome of that review, we may revisit in due course whether an arrearage forgiveness component would be appropriate as part of VGS's discount program. VII. ORDER IT IS HEREBY ORDERED, ADJUDGED AND DECREED by the Public Service Board ("Board") of the State of Vermont that: 1. The findings, conclusions, and recommendations of the Hearing Officer are adopted. 2. Prior to July 1, 2013, Vermont Gas Systems, Inc. ("VGS"), shall develop and implement the Low Income Assistance Program ("LIAP") on terms consistent with the evidence in this proceeding and the conditions in this Order. 3. VGS shall file with the Board and the Vermont Department of Public Service a final, executed version of the Administrative Services Agreement with the Department for Children and Families ("DCF") no later than April 1, VGS shall file a status report regarding its development and implementation of the LIAP no later than April 1, The status report shall, at a minimum, identify the progress made in developing and implementing the LIAP, any challenges that VGS foresees to meeting the July 1, 2013, implementation date, and steps that VGS will take to address any such challenges. 5. At the end of the first three years of the implementation of the LIAP, and every three years thereafter, VGS shall conduct a review of the implementation of the LIAP. VGS shall invite the parties to this proceeding and DCF to participate in this review. 6. VGS shall provide the following data for the Board to review at each three-year review of the LIAP: (1) rate impact; (2) cash flow and monthly balances of the reserve fund; (3) the level of participation in the LIAP; (4) the amount of shut-offs for non-payment; (5) the number of notices worked; and (6) aging comparisons between LIAP participants and non-participants.

26 Docket No Page 22 th Dated at Montpelier, Vermont, this 15 day of January, s/james Volz ) ) PUBLIC SERVICE ) s/david C. Coen ) BOARD ) ) OF VERMONT s/john D. Burke ) OFFICE OF THE CLERK FILED: January 15, 2013 ATTEST: s/susan M. Hudson Clerk of the Board NOTICE TO READERS: This decision is subject to revision of technical errors. Readers are requested to notify the Clerk of the Board (by , telephone, or in writing) of any apparent errors, in order that any necessary corrections may be made. ( address: psb.clerk@state.vt.us) Appeal of this decision to the Supreme Court of Vermont must be filed with the Clerk of the Board within thirty days. Appeal will not stay the effect of this Order, absent further order by this Board or appropriate action by the Supreme Court of Vermont. Motions for reconsideration or stay, if any, must be filed with the Clerk of the Board within ten days of the date of this decision and Order.