VNG Accused of Tilting Bid Process to Affiliate

Virginia Natural Gas Service Territory (marked in brown)  Source:  Segment of SCC map. Click to expand.

A State Corporation Commission hearing examiner has recommended that a proposed agreement between Virginia Natural Gas and an affiliated asset manager be rejected and put out to bid once more, with their shared parent entity Southern Company Gas not making the decision this time.

The proposed agreement, a continuation of a relationship dating back to 2000, is opposed by three unsuccessful bidders for the contract and a group of large industrial customers of VNG.  One of the other bidders, Tenaska Marketing Ventures reportedly outbid the Southern Company affiliate by 50 percent but was rejected.

VNG is up against a hard deadline, with the current contract with affiliate Sequent Energy Management due to expire next month.  Hearing examiner Michael D. Thomas told the full Commission it might consider granting this new contract for a short period, perhaps a year, before a new request for proposals goes out.

The case provides a glimpse into struggle to impose competition on regulated monopolies with an incentive to vertically integrate. Virginia Natural Gas is a local distribution company required to meet the demand for gas from 300,000 customers in its territory.  To do that, it has contracts for guaranteed capacity and storage with the various pipelines upstream in the gas supply chain.  Except during the periods of highest demand, it has excess capacity, and managing the use of that is done by somebody else under an asset management and agency agreement.

The profits from that process flow back to the local gas company’s customers through the part of their bill dealing with the commodity cost of the natural gas.  A better return on those unused assets means lower ultimate costs for VNG’s customers.  Just how much money is involved is, as is common in SCC cases, is confidential and redacted from the documents.

In his response to the hearing examiner’s report, Louis Monacell representing the industrial customers complained:

“…the record shows clearly that the repeated affiliate agreements over 18 years have undercompensated VNG’s customers for the affiliate’s use of VNG’s upstream assets that the customers paid for. The price bid by Tenaska Marketing Ventures (“TMV”) of (CONFIDENTIAL) for the guaranteed annual minimum payment to customers is five times the payment of (CONFIDENTIAL) in the current affiliate agreement. Moreover, TMV’s payment over two years of its offered asset management agreement would pay customers (CONFIDENTIAL).”

Not blacked out, and crucial, is that Tenaska Marketing bid five times what Sequent was paying in the old contract, and 50 percent more than Sequent is paying in this contract.  Tenaska and other say that is just the start of the additional value they could offer to VNG’s customers if given a chance.  Simply requiring the bid at all was a win for consumers.

Agreements between a public utility and affiliates, presumed to be tainted by conflict of interest, need SCC approval.  The original 2000 agreement between VNG and Sequent was approved for renewal in 2005, 2009, 2011 and 2015.  An SCC staff audit a short while back raised no red flags.  But in 2018 the SCC ordered that the next contract needed to include a “robust” competitive bid process.

Tenaska Marketing and the other two case participants, Enspire Energy LLC and Direct Energy Business Marketing, complained about several elements of the bidding process as slanted toward Sequent, from provisions of the initial non-disclosure agreement all the way to the final review of bidder’s creditworthiness.  Tenaska’s bid was rejected on that grounds, the company judged to be insufficiently sound financially.

Monacell is wearing two hats in the case, speaking for the industrial users and for Enspire Energy LLC, but he says their interests are aligned and the bid should have been awarded to Tenaska Marketing, which is not his client. (Disclaimer:  My former employer and client Newport News Shipbuilding has been a member of that industrial user group and I assume still is.)

VNG’s legal team is portraying this as a delaying action by losing bidders, who are putting VNG in jeopardy by trying to block this new contract,

“….a hurry-up game of “pile on” by the market participants, with the principal suggestion that VNG’s RFP was not conducted in a fair, objective and transparent manner. The RFP was certainly conducted in good faith and in all material respects in a reasonable and appropriate manner, with a guiding principle to protect the interests of VNG’s customers and to provide the greatest reasonable value to them from the assets which they fund.  Unfortunately, the unsubstantiated hue and cry to the contrary by the market participants was accepted by the Hearing Examiner.”

That from a commentary on the examiner’s report by Joseph K. Reid III of McGuire Woods, who often represents Dominion Energy Virginia, as well.  Just how aggressively the SCC oversees affiliate contracts will also matter to that company when it seeks to recover costs of gas transportation from the Atlantic Coast Pipeline.

Enspire Energy has also asked the Commission to order VNG’s asset manager, whoever it is, to offer some of that upstream excess capacity to others from time to time, complaining that Sequent’s policy has been to do so only with a package deal of both capacity and gas.  Large users on VNG’s distribution network can make their own gas purchases, but those seeking to sell inside VNG’s “gate” need the ability to get the gas delivered.

Mary K. Hensley of Enspire wrote in her filed testimony that even a few such transactions without forced bundling of capacity and gas would send signals about the value VNG should be receiving:

“The opaqueness of this market is harmful to market participants who are looking to serve transportation customers behind VNG’s gate, as they are not provided an opportunity through the pipeline electronic bulletin board (“EBB”) to bid fairly on available unneeded capacity assets. Moreover, it also harms VNG’s customers, as there is no true way to test whether Sequent, or another asset manager, is returning a fair market value to VNG’s customers on VNG’s unneeded assets when making bundled sales.”

If some of the real energy experts who show up in the comments string want to fill in some details or correct my understanding, that will be welcome.

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10 responses to “VNG Accused of Tilting Bid Process to Affiliate

  1. Don’t take this the wrong way – but this in weeds so deep, it makes my head spin.

    But I THANK YOU for opening up a window into something I bet not one in 1000 people are aware of much less have any understanding of at all.

    You’ve opened that window – but what we see is a confusing mess!

    Perhaps you could emulate Bacon’s practice of a Bottom Line to help us neophytes better interpret !!!

    I see parallels with Dominion and electricity but I also see parallels with health care where the premise is if consumers had “transparency” they could make buying decisions that would then, in turn, affect the “market” and affect prices.

    But it’s obvious in your excellent commentary just how clueless most of us are in this regard – even after you’ve pulled that curtain back!

    I got the very same bad feeling after reading a WSJ article entitled: ” Trump Administration Weighs Publicizing Secret Rates Hospitals and Doctors Negotiate With Insurers”

    “Requirement to release secret prices of health care would put more decision-making power in hands of patients, possibly lowering copays or deductibles.”

    I’m not sure even if I understood all of it – if I actually had any ability to do anything any different to get a better price.

  2. Bottom line: competition good, insider dealing suspect. The case was called to my attention by one of the participants, and if I had to plow through some of the documents I was going to try to convert into a story. I’m educating myself, mainly, taking you along for a ride. I think it would be more interesting to the public if the money amounts were not redacted. Obviously the industrial users smell money.

  3. So it appears that natural gas at the consumer level is not outrageously expensive… it’s cheaper to use to heat than heat pumps…

    so one might ask – if natural gas could be even cheaper except there is corporate skullduggery going on?

    We use propane – and anyone that does can tell you that the only way to “shop” is to call each company and ask for the current – on that day – rates and some will not provide it until they think you’d switch to them!

    I actually checked with the SCC and was advised that they don’t regulate propane – it’s truly a “market” fuel!

  4. Well, at least the General Assembly isn’t trying to tell the SCC how to do its business…. that we know of.

  5. Good article. Self dealing by monopolies goes back at least to the Roosevelt Administration … Teddy Roosevelt. However, even the Robber Barons of the TrustBusting Era were more subtle than VNG! 5 times the price and the answer was “no”. That kind of behavior ought to be considered price fixing and should result in jail time not just rebidding. Unfortunately, beyond just Virginia, the Trump Administration has taken a very “monopolist-friendly” position with respect to anti-trust enforcement at the Department of Justice. The facts, in this area, do indeed speak louder than tweets.

  6. The law in Virginia is clear: “Agreements between a public utility and affiliates, presumed to be tainted by conflict of interest, need SCC approval.” I don’t follow local gas distribution matters closely but that much, as a matter of longstanding Virginia regulatory policy embodied in the law, is clear enough.

    It’s good to see the SCC grappling with this. There are similar affiliate relationships on Dominion’s electric side, involving (for example) contracts concerning the construction and management and ratebasing of new gas-fired and solar electric generation, that should have been weighed against the long term projected costs of the purchasing the same power from the regional wholesale marketplace. The SCC has been in the habit of deferring such questions until the costs from these new generators actually show up in Virginia Electric’s rates; but the horse is out of the barn at that point. The projected costs of deals with affiliates should be examined up front when the affiliate relationships and all those affiliate contracts first come up for review.

  7. @Acbar/Steve/DJ

    are these “relationships” only of importance because of their linkage to electric or other regulated rates or are these on their own – “illegal” business relationships? Are businesses not allowed to enter into agreements with others in the same business?

    • I’m no expert but I assume most publicly-traded companies, those under SEC supervision, face some rules requiring arms-length transactions and transparency when a potential conflict of interest exists. And if they do an RFP that seems favorable to an affiliate, unhappy bidders have recourse to the courts. Utilities are regulated public service companies, but I don’t this situation is unique to them. I think this one is interesting because the allegation is the ratepayers – i.e. the entire Hampton Roads region – are being shortchanged.

  8. This issue arose with the ACP and Dominion Energy Virginia (DEV) and the SCC ducked it. Before contracts are entered into between a utility and its affiliates, the SCC is supposed to review it. Even though all of the parties to the ACP/DEV agreement were not properly identified, the SCC decided to not review the transaction when challenged by the Sierra Club. Upon appeal to the Virginia Supreme Court, the court also bailed with a convoluted ruling that basically said that the pipeline contract did not need to be reviewed because the parties had a relationship before the pipeline was proposed ???

    This left either the pipeline or the customers exposed to great financial risk when the Fuel Factor proceeding will address the pass through of costs, if the pipeline is built.

    Waiting until after a project is built to decide whether its cost is prudent is bad energy planning. It is complicated by the fact that the federal regulator is supposed to address the issues of need and public benefit (but does not) before a state has a chance to decide issues under its jurisdiction.

    The same thing will happen to VNG’s customers. The gas utility itself will make no money from the ACP, but its affiliates might and its parent company certainly will.

    Let’s set aside the issue of whether other options, such as energy efficiency or renewables, are better sources of energy in the region. If the issue is simply what is the lowest cost way to provide affordable supplies of gas to the region, the ACP just doesn’t make sense.

    Based on current rates (that will increase by at least 50% based on new estimates for the cost of the pipeline), the cost of transporting gas to southeast Virginia using the ACP will add at least 60% to the current price of gas.

    The price of gas at various production zones that are available to Virginia is now about the same. Differences in the delivered price of gas will depend primarily on the price of pipeline transportation. VNG itself, not its affiliate, has signed the contract with the ACP. This 20-year contract will cost over $2 billion no matter how much of the reserved capacity is actually used. Gas is purchased separately.

    The good folks in the Hampton Roads region are expecting the ACP to bring them a significant supply of gas that will attract new business to the area. No business will be eager to locate in southeast Virginia just for the privilege of paying 60% more for gas than they would pay somewhere else.

    The ACP is currently halted. It will not begin construction again until at least the fall of this year, and then maybe for only a portion of the route. There is time to see if other options would serve VNG’s customers better. Unfortunately, the easy way to do this, the Affiliates Act review, has been passed up.

    The existing pipelines serving Virginia have already increased in capacity by more than the amount provided by the ACP and the MVP. A connector to Columbia Gas or Transco could be built at a fraction of the cost of the ACP to serve Hampton Roads. Dominion Energy Virginia doesn’t need more gas. All of their gas-fired plants are well served by less expensive long-term contracts. No more large gas-fired plants are planned to be built. The new plants in NC are delayed 5-10 years and might not be needed at all.

    Where are the chambers of commerce, economic developers, and General Assembly members who have advocated for the ACP? Are they not interested in protecting the economy of the region? Do they want to stick their neighbors with billions in higher energy costs just to keep the contributions flowing?

    There are better, less expensive solutions available if the regulators do their job and the GA stays out of it. How about returning t0 the concept of a fair return in exchange for a fair price?

  9. Pingback: Energy Bacon Bits: VNG Case, LED, APCo's Grid - Bacon's Rebellion

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