For many years, the topic of regulation of gas distribution utilities has been far from the limelight and has not received the kind of attention that electric utility regulation attracts. But there are an increasing number of reasons to take a fresh look at gas utility regulation. Most importantly, climate goals call for phasing out greenhouse gas emissions associated with gas production and consumption, which include carbon emissions and methane leaks.
Climate goals aren’t the only reason for concern. Many utilities face looming expenses to maintain and replace aging distribution systems, and the way this is handled will have significant implications for consumers. In addition, new evidence documents the harmful health impacts of indoor air pollution associated with gas appliances.
In a recent paper, Under Pressure: Gas Utility Regulation for a Time of Transition, we analyzed a number of regulatory tools and concepts to help refresh gas utility regulation. In this post, I’ll take a brief look at one of those: the idea of non-pipeline alternatives (NPAs). Several states have already started to discuss NPA frameworks, and all states will have something to gain by taking up this topic.
Recently, my colleague Megan Anderson discussed how regulators and gas utilities can and should improve planning. Regulators play a crucial role in making sure that utilities create meaningful scenarios and conduct comprehensive assessments of options. Considering NPAs can improve longer-term planning and can also help optimize short-term investment decisions that are not captured in planning scenarios.
The NPA concept is related to the “non-wires alternatives” idea that became a hot topic in the power sector from about a decade ago. The main idea is straightforward: instead of expanding or upgrading traditional networks — electricity grids or gas pipeline systems — utilities can and should consider investing in alternatives. For gas utilities, alternatives include energy efficiency, electrification, and other measures on the customer’s premises, which are often lower cost. For example, consider a new housing development that creates potential demand for gas for home heating and cooking. It is often less expensive — especially when considering both direct costs and also the social costs of fossil-fuel emissions — to support electrification measures for the new homes instead of expanding the capacity of the natural gas distribution network.
To make NPAs work, the key is to create a regulatory framework that requires the utility to consider NPAs in a routine, transparent, and evenhanded way when creating planning scenarios and when making incremental decisions about new investments. An NPA framework should provide a level playing field for all options. It should also consider the total societal costs of different options, including costs associated with greenhouse gas emissions and health impacts. The framework should be detailed enough that the utility can use it to guide routine decision-making.
When designing a framework for NPAs, here are some important considerations:
- The framework should detail a methodology for cost-benefit analysis, including which costs and benefits to include. Each demand-side measure should receive credit for the benefits that accrue over entire life of the measure. Ideally, this should include avoided emissions costs and avoided health costs. Avoided emission costs should encompass not just the carbon emissions associated with burning gas, but also methane emissions from venting, flaring, and leaks throughout the gas system.
- The framework should include details regarding solicitation of alternatives. As in the power sector, competitive solicitation by gas utilities can encourage competition and reveal information about the costs of various alternatives. An NPA framework might set a requirement based on the size of the investment in question; larger projects could be required to undergo competitive solicitation, while smaller projects could be assessed based on estimated costs.
There are a number of states considering NPA frameworks. In 2020, the New York Public Service Commission kicked off a proceeding on gas planning procedures, including a call for establishment of NPA frameworks. In February 2021, the New York commission staff issued a proposal for such a framework, including many of key points discussed above. Colorado’s new package of climate legislation specifically allows the Colorado Public Utilities to require utilities to evaluate NPAs. California’s ongoing gas utility proceeding includes a “long-term gas system planning” track that includes discussion of NPAs. Meanwhile, Oregon and other states have been piloting NPA efforts.
The next year is likely to see further growth of the NPA discussions. States with firm decarbonization goals are likely continue to move ahead with NPA framework development. But states without firm decarbonization goals can also benefit from an NPA framework to help to search out and exploit cost-saving opportunities on a routine basis. In short, it’s time to take a fresh look at gas utility regulation, and NPAs should be near the top of the list.