Utility’s request draws scrutiny

Southwest Gas Corp. says it’s good for business.

Consumer advocates say it’s a little sneaky.

Either way, it’s a growing trend in the utility world, and industry observers say it has both benefits and pitfalls.

In question is Southwest Gas’ request to add a surcharge outside of regular rates to pay for pipeline replacement. If the Public Utilities Commission of Nevada approves the request, the surcharge would dwarf the money it asked for in a general rate case filed in the spring.

The company wants to spend as much as $40 million a year to accelerate replacement of pipelines between 2013 and 2020. By comparison, its general rate case asks for $24.9 million a year until the next case, which could come in three to five years.

There’s a difference in how each affects your bill: The general rate case would boost monthly gas bills from $45.30 to $49.05. The surcharge would appear separately on your bill. It would start at 14.4 cents a month, or $1.73 a year, in 2013 and go up to $2.31 a month, or $27.67 a year, in 2020.

Southwest Gas officials say a surcharge will keep it healthy so it can lure capital for improvements.

“We think it’s a better and more fairly balanced proposal for all stakeholders,” spokeswoman Sonya Headen said. “It allows the company to have the financial ability to keep up with infrastructure moving forward. It helps us become a healthy utility, and it helps us attract investors when we need to produce capital to replace our pipeline and keep the integrity of the system safe.”

To understand why the proposal raised eyebrows, consider how utilities usually finance infrastructure. Typically, they get capital from investors to build new plants or distribution. They then file for a rate increase to cover the costs of those investments. The Public Utilities Commission of Nevada spends several months reviewing expenses to determine whether a utility spent money wisely. The commission has disallowed utility investments it considers ill-advised.

By contrast, a surcharge is collected from ratepayers up front, before infrastructure is built. Unlike in a general rate case, that guarantees recovery of costs, said Barry Gold, government relations director of the AARP, in a July 26 consumer session covering the rate requests. That leaves utilities with less incentive to control costs, and it shifts the financing burden from investors to ratepayers, Gold said.

Surcharge reviews are also faster – as little as two months, state consumer advocate Eric Witkoski said. Witkoski’s agency, the Bureau of Consumer Protection, filed a motion asserting there’s no legal authority for the surcharge and review Southwest Gas requested.

“This is a procedure that is really not workable or provided for under current law,” Witkoski said.

Also, Southwest Gas’ own filing says there aren’t any safety or reliability issues behind the request to speed up installation of new pipes, Gold noted.

Witkoski said his agency is doing its own analysis, and so far, it doesn’t “see a need to accelerate replacement and increase cost on ratepayers.”

But Headen said some of the company’s pipelines are 40 years old. Though there aren’t safety issues, speeding up pipeline replacement by six years from its initial 2026 completion date “only enhances the integrity of the system.”

The utility’s proposal also has mechanisms to protect the consumer, Headen said. Once replacement is complete, Southwest Gas has to show what it spent and ensure costs were “fair and justified, and make sure we can back that up 100 percent,” she said. The Public Utilities Commission would review costs each year, and Southwest Gas would refund over-collections to consumers.

Robert Schain, president of Regulatory Research Associates in New York, said surcharges are becoming more popular with utilities adding infrastructure. General rate cases can be expensive and take up time of public utilities commission staff and a utility’s rate department. A general rate case may not be worth the hassle or cost if a new investment is the only issue to address, he said.

Also, including new investments in rates periodically through a surcharge cuts deferred capital charges, which keeps rates lower, Schain said.

Finally, the better cash position a surcharge brings a utility could improve the company’s credit position, which would mean lower borrowing costs and lower rates, though Witkoski noted Southwest Gas already has A- and BBB ratings with credit-rating agencies and has no problem raising capital.

A potential pitfall for consumers is that ratepayers paying for improvements now may not be the same ones who benefit from the upgrades, Schain said.

Headen agreed Southwest Gas’ surcharge request is part of a bigger trend.

“Utilties are requesting capital costs up front. We feel it’s a balanced approach that benefits everyone,” she said.

The Public Utilities Commission has scheduled a Sept. 10 hearing into Southwest Gas’ filings.

Contact Jennifer Robison at jrobison@reviewjournal.com or 702-380-4512. Follow @J_Robison1 on Twitter.