Prudent Gas System Planning Can Minimize Risk
According to the American Gas Association, from 2018 to 2020, natural gas utilities added an average of 753,619 customers and 20,724 miles of pipeline each year. This equates to adding more than one customer per minute and more than 2.4 miles of pipe per hour over that timeframe.
At the same time, however, consumers are showing increased interest in alternatives to gas, such as electric heat pumps. New state and local building codes are limiting emissions from new appliances or otherwise restricting or discouraging gas equipment installations, and states are putting in place decarbonization policies that require limitations on future emissions from gas distribution utilities. These trends collectively hint at a future of a declining customer base for gas utilities, and that in turn is driving customer, advocate and policymaker concerns about stranded assets. The risk is that those customers least able to afford alternatives to gas would be forced to shoulder more of the cost to run the gas system.
From the perspective of public regulatory commissions, investments being made by gas utilities today are expected to serve customer energy needs reliably and equitably throughout the useful life of those investments. However, in many cases, current regulatory processes and tools used to evaluate gas utility investment decisions are not designed to adequately reflect these countervailing uncertainties and risks.
The planning and regulatory processes for gas are not directly coordinated with electric system planning processes, and as a result they are unable to quantify a range of potential long-term risks and benefits for customers. Specifically, regulators are lacking insights that can be gained from transparent tools that can model major uncertainties in long-term planning assumptions. These uncertainties include the degree and speed of decline in customer demand, as well as the cost and availability of alternative gas resources that are less emissions-intense than fossil gas.
Many important questions facing our energy systems can be explored within updated gas utility planning, with decision support tools and consideration of complementary regulatory tools (such as revised line extension policies and accelerated depreciation) to mitigate increasing costs to customers.
What States Are Doing
At least 10 states have recently engaged in a regulatory proceeding exploring some aspect of the gas utility system transition: California, Colorado, Connecticut, Hawaii, Massachusetts, Minnesota, New York, Nevada, Oregon and Washington. Bills addressing some aspect of gas planning or line extensions have been introduced in Nevada, Vermont, Rhode Island, Maryland, Oregon and Massachusetts. Although the specific driver behind each state’s proceedings varies, the underlying consistent theme is one of exploration of uncertainties and minimization of risks to customers.
For example, Washington passed legislation in 2021 requiring that the Washington Utilities and Transportation Commission open an investigation to evaluate pathways for electric and gas utilities to achieve their share of greenhouse gas emissions reductions. An independent third party is to conduct the study, to which stakeholders will supply data and other input. Since two of the three investor-owned gas utilities operating in the state are gas only, this process could yield best practices for coordinating the sharing of customer and planning data between gas and electric utilities. The legislature also funded the study to be managed through the public utility commission (PUC), so no additional ratepayer funds need to be collected by utilities to enable the study. Although not complete yet, the study development process is well underway.
Another example of gas planning evolution comes from Colorado, where legislators passed S.B. 21-2646, a bill that requires gas utilities to file Clean Heat Plans pursuant to PUC regulations. These plans much achieve a 4% reduction in greenhouse gas emissions from 2015 levels by 2025 and a 22% reduction by 2030, using a mix of supply-side resources, including energy efficiency, beneficial electrification, recovered methane and green hydrogen. The PUC issued a decision in December 2022, and the first utility plans will be filed in 2023.
Other gas-planning developments have focused on line extensions. Another 2021 Washington bill, H.B. 1084, precludes cross-subsidization of line extensions for residential and commercial customers. It requires new customers to cover the full cost of the new line extension rather than allowing the cost (or part of the cost) of new service to be allocated among all gas customers. This reallocation of costs has the effect of more appropriately reflecting system cost to new users. Note it does not apply to new customers on an existing gas line but only to new line extensions for a new development or service area.
An Accelerating Trend
Washington and Colorado are not alone, as states, utility commissions and utilities grapple with new scenarios that don’t fit into old processes. According to a McKinsey article, “gas utilities could face a range of scenarios, including high rates of electrification with significantly declining gas consumption, or more moderated electrification with transitions to biogas, carbon capture, or hydrogen. As gas utilities consider different decarbonization pathways, they will need to plan for different business trajectories amid the uncertainty.” Consequently, business-as-usual planning is no longer serving the gas sector well. States and commissions across the country are recognizing the need to review and update their planning approaches.
Leadership from policymakers, particularly at the legislative level, can provide needed guidance and authority to utility commissions, helping to dismantle the silos of gas and electricity planning and allowing for fuel-neutral planning in the public interest.