Utah energy group says rate hike will help bring natural gas to rural towns

(Leah Hogsten | The Salt Lake Tribune) Eureka Mayor Nick Castleton said the town, population of 690, will be the first rural city to get natural gas service under a new law that allows Dominion Energy to increase rates on all its Utah customers to cover the cost of extending gas lines to rural communities that currently rely on propane.

For years, leaders in the historic Utah mining town of Eureka have sought natural gas service, hoping it would stabilize residents’ energy costs, while attracting businesses, spurring growth and possibly helping to resurrect mining operations.

Thanks to a new state-backed program that spreads the high capital costs for such projects to existing customers across Utah, Dominion Energy may soon be serving the town of 360 homes to the delight of Mayor Nick Castleton, who believes it “will change the future for the city.”

“It will take a lot more money than we have,” Castleton said. “For Eureka to get any industry development, we need natural gas. These companies can’t afford propane.”

The program is intended to benefit Utah’s out-of-the-way rural pockets, but the propane industry is challenging the premise, arguing that the costs far outweigh the benefits. It says the undertaking amounts to an unfair subsidy that penalizes small businesses that deliver propane by truck to residential tanks around the state.

Getting gas to Eureka will require running a buried pipe, 6 inches in diameter, 9 miles from the Juab County town of 700 residents to an interconnection tapping the Kern River interstate transmission line near Goshen, in Utah County, as well as installing another nine miles of distribution lines around the town at a total tab of about $20 million.

“Bringing natural gas to a community can be expensive. It’s a burden many communities cannot overcome,” said Brad Simons, an account manager with Dominion who has pitched the program to lawmakers.

Under two recent pieces of legislation facilitating the extension of natural gas service to rural communities, Dominion would recoup most of the cost through rate hikes on existing customers. Under 2018′s HB422, Eureka’s share would be covered by a surcharge on residents’ monthly bills. Adopted last session without a single nay vote, HB129 expanded the program to include service lines in addition to extending main lines to unserved towns.

But Dominion, Utah’s main natural gas provider, must first obtain approval from the Public Service Commission, which has opened a docket on the matter.

Expanding service “will result in significant benefits to Eureka residents with only a negligible impact on the company’s other customers. Eureka’s residents will enjoy lower, predictable, regulated rates for energy instead of relying on unpredictable energy prices that currently vary significantly based on market forces,” the company wrote in its application. “Further, residents of Eureka will have the benefit of a more reliable energy source that is not dependent upon the availability of propane, wood, coal and fuel oil.”

The project would also reduce emissions because Eureka residents would no longer rely on burning coal or wood for heat.

Unfair subsidy?

The propane industry sees the idea much differently, of course, arguing it gives an unfair advantage to a major corporation. Its benefits are being exaggerated, while its true costs are being buried, the Rocky Mountain Propane Association wrote in an April 2 filing with the PSC.

Springville-based Freeway Propane, which has 84 customers in Eureka, has invested heavily to serve that community, including the acquisition of a 200,000-gallon storage tank and seven trucks and hiring 15 employees, according to the trade group. The firm’s investment could be made worthless if Eureka gets subsidized gas service.

"This is not only a subsidization of the costs of expanding infrastructure into a sparsely populated area, it is a subsidization of [Dominion's] shareholders," the group's lawyers wrote.

Other Utah towns without natural gas service that could be candidates for the program include Dugway, Garden City, Genola, Elberta, Goshen, Green River, Kanab, Rockville, Springdale and Virgin. Dominion has determined Eureka is best situated to receive service, so the historic town has risen to the the top of the list.

"We look for the best bang for the buck as we weigh the interests of concerned parties,” Simons said.

Dominion selected a more costly pipeline alignment so that it could also potentially serve Goshen and Elberta, which have both approached the company about extending service to their communities, according Dominion’s PSC filings.

The Eureka project is expected to raise the typical Dominion customer’s annual gas bill by by $1.80, or 0.28%.

Proponents such as Castleton say that’s a small price to help lure development to rural communities that have not participated in Utah’s economic boom.

“Eureka has also been considered as a candidate for economic development projects or as a location for business or manufacturing operations, but our lack of access to natural gas as an energy source has routinely kept the city near the bottom of the list of possible locations for such projects,” he wrote to the PSC. “Access to natural gas in our community will enable Eureka to compete for those economic development opportunities in the future.”

Conversion costs

A typical Dominion customer pays $643 annually for gas. According to Castleton, who burns wood to heat his home, Eureka residents pay $500 to $700 a month for propane during winter, when the price spikes with increased demand.

“In the survey responses gathered by Dominion Energy from Eureka customers, cost savings was the largest reason that customers are interested in having access to natural gas,” he wrote, noting 92% of homes and businesses said they would be interested in such service.

The propane industry contends Castleton and Dominion are not accounting for all the project’s costs and associated expenses associated with transitioning homes from propane to natural gas. These costs include hooking into a natural gas system; retiring old propane systems; and converting appliances. Disposing of a tank properly can cost up to $2,100.

The Utah Division of Public Utilities has yet to be convinced that the project is in the public interest, citing numerous deficiencies in the information provided by the utility. For starters, the division insists Eureka residents be fully informed of the costs and risks they face by switching to natural gas.

The division could support the project if “there is sufficient evidence to support the extension and costs are justified and reasonable,” Eric Orton, the division’s technical consultant, wrote to the PSC. “HB422 does not negate the burden of proof of just and prudent rates based on substantial evidence. This is the first time this statute has been used, and it should be done with full information and rational assumptions.”

The utility’s financial model assumed all 360 of Eureka’s homes would sign up for natural gas, but Orton doubts there would be 100% participation. A more reliable figure, he argued, would be 190 homes.

“It is not unreasonable to assume that the potential cost for a resident to convert to natural gas may be a deal-breaker to many in Eureka,” Orton wrote. “The estimated costs of adding these appliances may substantially offset any commodity savings of switching to natural gas or at least would extend the payback time.”

Is it worth spending $20 million so Eureka’s 700 residents and its businesses can have access to natural gas? The answer to this big question, now pending before Utah utility regulators, depends on many factors, but it has already been determined who would pay: Everyone in Utah who uses natural gas.