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Coronavirus, climate policy hang over National Grid's NY gas rate case

The coronavirus pandemic and New York climate policy could influence the outcome of National Grid USA's petition for higher downstate gas rates — a proceeding that developed throughout 2019 alongside a contentious dispute with the state utility regulator.

New York City and other stakeholders in the nearly year-long rate case have recently asked the New York Public Service Commission, or PSC, to consider COVID-19's impact on ratepayers and recently passed climate law in its final decision. The PSC will already be working from a recommendation from the New York Department of Public Service, or DPS, that is unfavorable to National Grid's two downstate utilities, offering both a lower recommended return and lower recommended revenue requirements compared to what the company requested.

COVID-19 concerns

New York City argued that National Grid's rate increase request was excessive to begin with but even more problematic in light of the U.S. coronavirus outbreak, which has hit the city particularly hard and prompted record U.S. unemployment claims.

The National Grid subsidiaries "are seeking extremely large rate increases that, if granted, will impose very significant burdens on all KEDNY and KEDLI customers," Couch White LLP attorneys wrote in an April 7 filing on behalf of the city. "Given the incredible financial burden of the pandemic, the impact of these bill increases on ratepayers will be magnified."

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The DPS warned commissioners that its inputs do not reflect the pandemic-induced market volatility that has crushed stock prices and contributed to an oil price collapse. The department advised the state commission to incorporate into its final decision another two months of market data through May 15, including National Grid's share price and utility bond yields, which could affect its finances.

"Many investors expect the recent market volatility to persist given the challenges in getting the COVID-19 pandemic under control, the difficulty in resolving the oil price war raging between Saudi Arabia and Russia, and market reaction to the emergency measures put in place by the Federal Reserve and the U.S. lawmakers," the DPS said.

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Still, the DPS declined to reopen the record and consider new evidence in light of the pandemic submitted by the Public Utility Law Project and supported by AARP New York. The utility law group argued the COVID-19 outbreak and its economic impact rendered previous projections inaccurate.

The DPS said the evidence the group is seeking would be speculative since the full future impacts of COVID-19 cannot be known, and the PSC can choose to address effects on all state utilities in a holistic way. National Grid said it can later update its filing based on material changes and argued that the pandemic does not negate the need to continue investing in the gas distribution system.

Climate policy

New York City and other stakeholders also asked the commission to consider recently passed city and state climate laws, including the Climate Leadership and Community Protection Act. The act, signed into law less than three months after the rate case started, mandates the state take steps to reduce greenhouse gas emissions 40% from 1990 levels by 2030 and 85% by 2050.

Noting that the commission's order in this rate case will be "one of its first major actions to address utility rates" since the act came into effect, the Environmental Defense Fund suggested in a filing that the PSC use the interim period to require utilities to develop information about their greenhouse gas emissions so the state can assess their compliance in future rate filings once the act's regulatory framework is complete.

However, the DPS advised rejecting that recommendation, noting that the New York State Department of Environmental Conservation is developing a statewide emissions inventory. Requiring the utilities to develop their own inventories could waste ratepayer money on duplicative efforts, the DPS said.

National Grid has already begun studying its long-term supply plans, issuing a report in February mandated in a $36 million settlement with the PSC and DPS over the company's 2019 moratorium on new gas hookups. The moratorium, a response to New York's refusal to permit a new gas pipeline, sparked a months-long battle during which Gov. Andrew Cuomo threatened to strip National Grid of its license.

What is at stake

The DPS recommended that the PSC authorize an 8.2% return on equity for Brooklyn Union Gas Co., also known as KEDNY, and KeySpan Gas East Corp., or KEDLI, for the rate year ending March 31, 2021. That is below the National Grid subsidiaries' current 9% ROE and its requested ROE of 9.65%.

DPS staff acknowledged the 8.2% ROE is below the national average, but said it was reasonable based on the low interest rate environment, investors' expectations for allowed returns in New York and the goal of balancing ratepayer and shareholder interests.

The staff also recommended revenue requirements for KEDNY and KEDLI that are roughly $149.2 million and $77.3 million below their requests, respectively. KEDNY's annual requirement would increase by $30.6 million, or 3.08% in total revenues, well below its 11.05% requested increase. KEDLI would see its requirement fall by $39.7 million, or 1.43% in total revenues, versus its request for a 5.06% increase.

"Through this extensive analysis staff has determined that the companies' rate requests are excessive," the DPS said in an April 7 filing. "The companies [sic] requests cannot be said to be just and reasonable and are not necessary to enable the companies to provide safe, adequate, and reliable service."