Peggy Pisini could have been the ideal natural gas customer.
After Pisini and her husband, Jim, paid oil bills of up to $700 every month or two last winter to heat their home in Cumberland Foreside, Pisini was excited to learn that Summit Natural Gas of Maine would soon bring the efficient fuel source to her doorstep.
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The family signed a contract with Summit in April, and began hunting for a contractor to install a new gas-fired furnace.
But delays in Summit’s construction timetable, coupled with the sudden collapse of a home heating contractor that Summit promoted and Pisini nearly employed – Dave Ireland Builders – have shaken her confidence in the utility’s plans. Last month, Pisini canceled her contract with Summit. She said she will wait at least a year before converting to gas, giving her more time to learn about a heating system that will cost her upward of $10,000 to install.
“I’m just so happy I didn’t jump on board,” she said. “I don’t want to be rushed.”
No one can say today how many other potential customers are reacting like the Pisini family. But the prospect that large numbers of families and businesses could come to the same conclusion is threatening the most aggressive natural gas distribution project in Maine history.
Summit’s 2012 arrival in Maine promised to be a game changer, not just for the state’s energy market but for the overall economy. But a variety of construction and labor problems that have delayed hookups – as well as an unexpected plunge in heating oil prices – have thwarted the company’s efforts and created a cloud of negative publicity that now hangs over its development plan.
Summit promised to spend $350 million within five years to connect 15,000 homes and businesses in the Kennebec Valley with natural gas, which was half the price of heating oil. Summit’s commitment represented the largest single investment in Maine at the time, according to the administration of Gov. Paul LePage, which has made expanding gas pipelines a top priority.
This year, Summit began work on a $73 million network in three affluent Portland suburbs, with a goal of serving 80 percent of the homes in Falmouth, Cumberland and Yarmouth.
Summit has made impressive progress. Despite some delays, it has buried 130 miles of pipe in the Kennebec Valley between Pittston and Madison. Contractors are hard at work connecting homes, schools, hospitals and factories. Last month, they reached the Sappi Fine Paper mill in Skowhegan, displacing 100,000 barrels of heavy oil.
But Summit is facing obstacles now that call into question its ability to meet very ambitious goals.
• Summit is behind schedule in hooking up customers.
Residents in the Portland suburbs, for instance, have letters from Summit that guaranteed them service by Nov. 1, although to date they have no gas. In an email response to the Maine Sunday Telegram, Summit declined to say how many hookups have been completed or in which towns. It said the number changes daily and will be included in an annual report early next year. Summit did say it has installed mainline pipe in front of 7,200 homes and businesses in Maine.
• Summit’s trouble finding qualified contractors to convert customers became a crisis last month.
In September, Summit got special permission from state utility regulators to set up a subsidiary to help convert homeowners from oil to natural gas. Potential customers were having trouble lining up contractors who are familiar with gas and able to make timely, reasonably priced conversions.
Summit’s trouble with contractors was compounded late last month when a prime partner, Dave Ireland Builders LLC, went out of business after taking deposits from customers. Following days of negative publicity, Summit announced that it would reimburse people who lost their money and that its new conversion company would honor job quotes made by Ireland. But it’s too soon to say how the incident has eroded public confidence in the company and its ability to perform.
• Summit is experiencing a change in leadership.
Mike Minkos, the company’s president, is retiring Jan. 1 but will remain with Summit as a consultant. Minkos is a veteran of the gas industry and served as president of Portland Natural Gas Transmission System in the late 1990s, when the interstate pipeline network was being built across Maine.
He will be succeeded by Mike Tanchuk, the former head of Ormet Corp., an Ohio-based aluminum producer that filed for bankruptcy last year because of low metal prices and high power costs.
• Summit’s business plan is threatened by plummeting oil prices. To achieve high saturation numbers, Summit has been banking on high oil prices to give people the financial incentive to convert to cheaper natural gas. Suddenly, that calculus is defunct.
“We definitely want them to be a game changer, but there are significant obstacles,” said Patrick Woodcock, the governor’s energy director.
Summit may straighten out its internal problems, but the collapse of worldwide oil prices, which seem likely to remain low at least through the winter, hits at the heart of the company’s business model.
“There are a lot of companies in the world struggling with a new paradigm for oil,” Woodcock said. “The model of oil-to-gas conversions at a high penetration rate is severely challenged, with the oil prices we see now.”
In an email response to questions from the Telegram, Mike Duguay, Summit’s director of business development in Maine, said the company has invested $280 million so far in the state, is committed to its build-out plan and has signed 4,000 service line contracts with home and business owners. He said the company and its investors have the financial capacity to weather delays.
“We’re proud to help Mainers connect to natural gas by continuing our work to complete the largest natural gas distribution project in Maine’s history,” Duguay said.
AN AMBITIOUS PLAN
Natural gas warms more than 60 percent of American homes, but only 6 percent or so in Maine. The established gas utility in Maine, now called Unitil, and two more-recent start-ups, Maine Natural Gas and Bangor Gas, had until recently been growing at a cautious and deliberate pace, picking the most cost-effective routes anchored by large customers.
Summit shook up the market, introducing a level of competition never before seen in Maine. And the timing was perfect, just as oil – Maine’s dominant heating fuel for decades – was on an upward price trend.
Winter oil prices hovered around $3.65 a gallon in 2012, and the seasonal average hit $3.71 last year, a record. That created lots of public interest in Summit’s ambitious plan to hook up thousands of homes and businesses. In a marketing campaign this year, Summit estimated homeowners could save up to 50 percent on their bills, compared to oil.
Summit’s big ambitions were clear early in 2013, when it bid to provide natural gas service to Falmouth, Cumberland and Yarmouth. At the time, Summit was competing against Maine Natural Gas, a subsidiary of Iberdrola, the Spanish energy company that owns Central Maine Power Co. In its 16-year history, Maine Natural Gas had gained only 3,600 customers.
Summit offered a sweeping plan that the communities found too good to pass up.
In its bid, Summit outlined how it expects to serve at least 80 percent of the homes and businesses in the three towns within five years. Specifically, it pledged to invest nearly $73 million to reach 6,000 customers over that period. The build-out plan envisioned 12 percent penetration in 2014, and 38 percent in the second year.
Although Summit declined to reveal numbers, that penetration rate seems unlikely to happen in the next few weeks. Bill Shane, Cumberland’s town manager, said last week that Summit told him nearly 400 connections have been made in his town. Shane was instrumental in bringing Summit to town and is among the homeowners who’s now on gas, switching from oil and propane. But based on Summit’s late start in breaking ground and decisions to postpone service to some neighborhoods, he’s doubtful that the company can meet its five-year, 80 percent goal.
“I don’t think they will achieve the 80 percent saturation rate,” Shane said. “It’s too early to tell, but I’m hoping for between 50 and 80 percent.”
MAKING A SPLASH IN SMALL MARKETS
Summit based its saturation numbers on a business model that it honed elsewhere: Make a large splash in small markets.
Its parent company, Summit Utilities Inc. of Littleton, Colorado, is owned by JP Morgan Infrastructure Investment Fund. It was founded in 1996 and has gas subsidiaries in Colorado and Missouri with a total of 40,000 customers. It has been able to reach 90 percent of customers in some far-flung suburbs within three years, the company boasts. Recently, the Denver Business Journal highlighted Summit Utilities as one of the area’s fastest-growing companies, with revenues increasing from $4.6 million in 2011 to $48.4 million last year.
As a point of pride during its bid to the Maine suburbs, Summit referenced the challenging conditions it had encountered in the Rocky Mountains, boring through granite at high elevations to reach scattered customers during a short construction season. Those skills were a perfect match for Maine’s geography, climate and demographics.
To achieve high penetration in neighborhoods far from the gas mains, Summit proposed a rate structure designed to have all customers pay a share of the increased construction costs. The rate structure also includes the cost of cash rebates up to $1,500 for most customers, to help customers convert to gas. This approach was approved as part of a 10-year rate plan by the Maine Public Utilities Commission.
In its bid, Summit noted that other gas utilities charge customers to extend lines far from homes or businesses. Those charges can run into the thousands of dollars and are a barrier to extending gas lines in Maine, the company said.
“Our model is unique, but it is the basis for our high penetration rates,” Summit said in its bid filing. “Other utilities may have lower rates, but their rates do not permit expansion. A low rate is of no value to customers who cannot obtain gas service.”
To gain PUC approval, Summit also assumed financial risk that’s especially noteworthy now. For the first five years after connecting 1,000 customers, the company and its investors bear the full consequences if Summit earnings fall below expectations. After that, the company and ratepayers split the difference in any shortfall below a set level. On the upside, if Summit’s earnings range between 5 and 20 percent, it keeps all the money; above 20 percent it splits the difference with ratepayers.
OIL’S DROP CHANGES THE MATH
The PUC approved the rate plan based in part on the calculation that customers would still be better off, when compared to the price of fuel oil. Summit, too, made key assumptions on how many customers in the three towns would want to switch to gas, based on heating oil at $3.75 a gallon.
Crude oil prices are very volatile. But even six months ago, it would have been hard to imagine how the combination of growing domestic production and falling worldwide demand would send oil prices into a tailspin.
Six months ago, Summit was sending out marketing material that compared a gallon of heating oil at $3.50 with the natural gas equivalent at $2.71. Last week, the state energy office’s weekly survey pegged the average statewide price of oil at $2.99 a gallon, the lowest since 2008. In some areas, oil was as low as $2.60 a gallon. That means that on a heat-unit basis, fuel oil and natural gas are nearly the same price.
No one knows how long this condition will last. But the continuing fall of oil prices at the start of winter may be taking the urgency out of switching to gas for many oil customers.
Summit’s aspiring penetration rates in Maine also face a hurdle not seen in Colorado and Missouri. In those states, Summit was converting customers from propane. In most cases, customers need only minor modifications to their heating equipment to switch from propane to natural gas.
In Maine, most conversions involve oil. Newer oil boilers can be retrofitted with gas burners for under $3,000, but many customers need a new boiler, which can run between $5,000 and $10,000. With oil prices so low, there’s less financial incentive now to make that investment.
In Summit’s email response, Duguay said the advantages of natural gas go well beyond price, noting the benefits of a cleaner-burning fuel free from delivery worries and cost volatility.
“Our customers have told us they appreciate the convenience and predictability of these benefits, which are not found with alternative fuel sources,” he said.
Addressing the issue of public confidence, Duguay said the company’s decision to reimburse customers hurt in the Ireland incident is an example of Summit’s commitment.
Only time will tell whether that’s enough.
“The big challenge when you come into a market without natural gas is skepticism,” said Tim Schneider, the state’s public advocate. “People know their oil dealer, but who are these guys?”
Schneider noted that consumers today are weighing natural gas against other alternatives to oil, including heat pumps and wood pellets.
“When oil prices drop, it makes Summit’s service less attractive,” he said. “And if things happen that cause you to lose faith in the company, those are additional barriers. I think it’s really challenging for them.”
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