When a Rate Freeze Is a Rate Hike in Disguise

When National Grid, the natural gas utility that serves New York City and Long Island, proposed a one-year rate freeze last month, Governor Kathy Hochul celebrated it as a victory for affordability.

“I’m pleased to announce National Grid and the Department of Public Service found a way to hold the line on rate hikes for nearly 2 million gas customers,” she wrote on social media.

“New Yorkers don’t deserve gratuitous rate hikes. We’re fighting at every turn to stop them.”

But if “holding the line” for a year means accepting higher rates the following year, is it really a win for customers?

Jamie Van Nostrand, a former utility lawyer and regulator who served as the chair of the Massachusetts Department of Public Utilities through last fall, dug into the details of National Grid’s proposal and was alarmed by what he saw. In Van Nostrand’s view, it’s actually a delayed rate hike dressed up as a rate freeze, designed to avoid the scrutiny that comes with an official request.

To be fair, National Grid did not use the words rate freeze in its filing with the Public Service Commission, instead referring to the plan as a “rate stabilization proposal.” The Catch-22 is that during this year of stabilized rates, the company wants to continue — and actually increase — its capital spending, then bill customers for the work the following year with interest and a return on equity.

Infrastructure spending is the only part of the natural gas business that utilities earn a profit on, so they have an incentive to overdo it. Normally, regulators review such capital expenditures in year-long proceedings called rate cases to ensure the added costs to ratepayers is worth it. But here, National Grid is asking regulators for prompt approval “without material modification.”

I reached out to National Grid for comment on Van Nostrand’s critique. In response, a representative referred me back to the company’s press release.

Van Nostrand is now the policy director at the Future of Heat Initiative, a nonprofit working to improve utility regulation on the path to decarbonized heating. The group is concerned about utilities investing billions into natural gas delivery at the same time many states, including New York, are pushing to switch to electric heat pumps, which risks sticking the remaining gas customers with higher bills. Rate cases are essentially the only venue to challenge this spending, hence Van Nostrand’s ire.

I spoke to him about the hidden details in National Grid’s proposal and what a “good” rate freeze might look like. Our conversation has been lightly edited for length and clarity.

When did National Grid last have a rate increase and what’s the context for this rate stabilization proposal?

In 2024, the New York Public Service Commission approved a three-year rate plan which runs through the end of March in 2027. So what National Grid would have done is file a rate case in May of this year in order to have a new rate take effect in April of 2027. Essentially, what they say they’re doing is trying to extend that three-year rate plan for a fourth year. They’re saying, “We want to avoid having to file a full rate case” — which they audaciously and presumptuously say is going to result in rate increases for customers that are greater than the rate of inflation.

And what is in the proposal?

What jumps out at me are two things. One is, when they did this three-year rate plan, 2024 to 2026, they had certain expenses that they said were one-time, non-recurring expenses — a three-year amortization of $250 million. That three-year amortization expires on March 31. That would result in a $250 million rate decrease for customers. But by avoiding the rate filing, the rates are going to continue to reflect the amortization of costs that they are no longer authorized to recover.

They’re basically saying, “Rather than giving it back to customers, we’re going to keep collecting it and find other things to spend the money on.” So by avoiding the rate filing, they’re avoiding having to give the money back to customers and acting like they’re doing us a favor.

But didn’t you just say that the alternative to this rate freeze proposal is a big rate increase?

Yes, but they would have to prove their costs. These are closely scrutinized rate filings. The other piece I was going to mention is there’s $1.7 billion of additional capital spending. They’re saying, “We’re going to keep spending money,” actually spending more money in the next year than they are currently spending. They’re going to increase the level of spending on infrastructure investments without having to go through the process of proving, why are these expenditures necessary? Are you overspending? Is there a cheaper alternative?

Regulators need to closely scrutinize natural gas company infrastructure spending. They want to spend billions of dollars replacing pipes because that’s where they make money. They put it in their rate base and they earn a return on it.

Does the proposal at least allude to what they’re planning to spend the $1.7 billion on?

Oh yeah, it’s more pipe replacement. It’s a continuation of what they’ve been spending, it’s just more. And the point is, when they approved their rate plan, the parties to the rate case got to look at what they were spending in 2024, 2025, 2026, and they signed off on it. And here they’re saying, “Here’s our spending for 2027. It just builds on what we’ve already been spending, it’s just there’s more of it.” But there’s not the same review, other than I guess that there’s going to be a comment proceeding where parties can file comments on this proposal. But they don’t have to put out evidence and sworn testimony and be subjected to cross examination and discovery. It’s like, “Here’s what we’re gonna do. Take it or leave it.”

Is the idea that the $1.7 billion will be recovered through a future rate increase?

They’re just going to defer those costs and have ratepayers pay it beginning April 2028 with interest at 9%. It goes right into their rate base, and they’re going to earn a return on that. That means they’re going to collect $150 million more from customers to cover the return on that $1.7 billion they’re spending.

This is not uncommon when utilities propose rate freezes. Utilities go, “Our costs aren’t actually going down, our costs are continuing to go up, so we’re just going to keep spending money like we otherwise would have. But rather than raise rates contemporaneously, we’re going to put them in this little account and wait until the end of the rate freeze, and then we’re going to raise rates and add on the interest because the customers didn’t pay these costs when we incurred them.” Utilities love the concept of a rate freeze. I’ve never seen anybody quite so audacious as this proposal, where they’re not just doing that, they’re doing a whole bunch of other stuff to make this far sweeter for shareholders.

What else are they doing?

They’re not just extending their rate plan, they’re extending it selectively. For example, there’s a penalty mechanism that if you don’t address a certain number of miles of leak-prone pipe, you’re going to be subject to a penalty. And they are adjusting that target because they’re not meeting it. The same thing with the backlog of leaks. They’re not reducing the backlog of leaks, so they’re raising that target.

That’s a benefit to shareholders because shareholders end up bearing the consequences — you can’t recover the penalty in rates. So you’ve got a couple of mechanisms that are intended to benefit customers by having the system more safe by reducing miles of leak-prone pipe and by reducing a backlog of leaks, and they’re basically walking away from their commitments, making them easier for them to attain and thereby avoiding penalties. It’s resetting the balance between customers and shareholders, and it’s all in the shareholders’ favor. They’re throwing more risk onto the customers.

Do you think that a rate freeze could be structured in a way that is good for ratepayers?

Well, just strictly a rate freeze might not have been that bad a deal. If they really stepped up and said, “We’re going to live by the rates that were set, we’re just going to extend them for another year, and we’re going to suck it up and make it work, and our shareholders are going to bear some of that pain because by God, it’s all about customer affordability.” They’re so far away from doing that.

[At Future of Heat,] we’re all about the infrastructure spending, right? In New York, 75% of your gas bill is the delivery charge, 25% is the commodity. What we’re trying to do is work with the commissions, ask the tough questions. Let’s look at this pipe replacement program. Do you need to replace the pipe? Can you rely on a repair rather than replace it, and really make them prove their case? And they’re saying, “We’re going to spend $1.7 billion, and no, you don’t get a chance to review it because we’re not doing a rate case. We’re just telling you how much we’re going to spend.”