Mon, Jun 17 2024 17 June, 2024

U.S. gas utility spending could lead to “unsustainable rate increases” for customers

A new report finds that U.S. gas utilities could spend up to $1.4 trillion on gas infrastructure through 2050. It warns that regulators need to manage the transition away from gas to avoid the continued build-up of stranded asset risk.

Elevated train tracks between buildings at The Loop, Chicago, Illinois, (Photo: Adobe Stock/Rosana)

Business-as-usual spending by U.S. gas utilities on infrastructure, including plans to grow their networks even as the shift to electrification gathers momentum, could result in “unsustainable rate increases” for millions of people in the coming decades, according to a new report.

The electric grid in the U.S. is making substantial progress towards transitioning to renewable energy. But the gas system — gas burned in buildings for heating, hot water, and for cooking, for example — is a bit further behind. Still, electric heat pumps are now outselling gas furnaces in the U.S., a promising sign that electrification of the building sector is accelerating.

But many gas utilities across the country are attempting to stall that transition. Some are proposing plans to grow their gas pipeline networks, arguing that gas demand will grow. Others are proposing lower-carbon solutions for gas networks, such as “renewable natural gas” and hydrogen, solutions that are technically complex and extremely expensive.

In the meantime, the vast spider web of gas pipelines and distribution networks spread across the country is ageing, leaking methane, and becoming costlier to maintain.

“The stuff that was put in after the second World War, and through the 1980s, and in the big growth boom for the gas industry, is now pretty old,” Dorie Seavey, a senior research scientist at Groundwork Data, an energy transition consultancy, told Gas Outlook. “Even if you forget decarbonisation and policy pushes towards an energy transition, the gas system, because of its embedded costs, is just going to keep getting more and more expensive.”

The efforts by the utility industry to replace ageing pipes, while also attempting to add new customers, risks leading to massive overspending on gas infrastructure at a time when the country is also attempting to shift away from fossil fuels.

Seavey is the author of two recent reports that look at the future of gas. One published by HEET, a Boston-based climate NGO, details the mounting costs to the gas utility system. Over the past decade, gas utilities have tripled capital spending on gas infrastructure, which has climbed to $21 billion annually. If that trend continues, gas utility customers will be hit with $1.4 trillion in additional costs by 2050, according to the HEET report. Because those costs will be passed onto customers, that will lead to “unsustainable rate increases” for millions of people. 

A second report, published by Building Decarbonization Coalition and Groundwork Data, looks specifically at the risks to gas customers in Illinois from utilities continuing elevated levels of spending on a gas system that will need to be wound down.

“Illinois’ Big Four gas utilities are accumulating stranded asset risk at an escalating rate,” the report found. The state needs a “managed transition away from methane gas” not only to cut climate pollution, but also to avoid saddling gas customers with an enormous financial toll. However, the problem is that Illinois, like many other states, is allowing the energy transition to unfold in an “unmanaged” way, which is the “mostly costly path,” the report concluded.

One of the challenges is that business-as-usual spending on the gas system is obscured from the public.

“This spending is supported by a regulatory framework that more often than not is turning a blind eye to the future,” Seavey said. “It’s set up to replace expensive pipeline infrastructure in a wholesale manner and without consideration of alternatives, and whether or not it’s cost effective.” For instance, gas utilities can pass on the costs of entirely replacing pipelines to customers, with the approval of regulators. That gives them a lot of incentive to undertake costly replacements rather than considering alternatives.

“These costs are largely hidden in the regulatory framework,” Seavey said.

The future of gas

At the same time, there are signs that state utility regulators are starting to scrutinise the growth plans of gas utilities. For decades, utilities could go to the state regulator — typically called a public utility commission, or PUC — and request approval for increases in rates for customers to cover the costs of investments in new infrastructure. While there was usually some back-and-forth over whether or not those rate requests were reasonable, in general, the utility commissions would approve them.

But just in the last few years, regulators are starting to ask tougher questions. The proliferation of climate policy at the state and federal level, along with the technological progress achieved by electric alternatives, has significantly darkened the long-term outlook for gas. Because gas pipelines and distribution lines are expected to last decades, it is no longer clear that new pipes installed today will pencil out, given the relatively high likelihood that electrification efforts eat into market share for gas as time goes on.

Against the backdrop of this brewing stranded asset risk, utility regulators are beginning to pushback on the growth plans of gas utilities.

Utility commissions in 12 states have now opened up “future of gas” inquiries, official regulatory procedures that include a variety of stakeholders — consumer advocacy groups, policymakers, and the gas utilities themselves — to get a better handle on the prospects for gas utilities and what that means for regional planning.

One of those states is Oregon, where the state public utilities commission (PUC) has started to second guess the business-as-usual plans from gas utilities. Earlier this year the PUC did “not acknowledge” the long-term plans of three gas utilities, stating that the utilities — Cascade Natural Gas, NW Natural, and Avista — were “unreasonably optimistic” about the future of gas demand. The “not acknowledge” phrase is a technical response by the PUC that is akin to a rejection. That means that the next time one of those gas utilities files a request to pass on to their customers the costs of new gas infrastructure, there is a higher likelihood that the PUC will reject it. 

“The context that we are moving in is rapidly changing. The policy context, the technology and even the cultural context – these changes are happening so rapidly,” Carra Sahler, a staff attorney and the director of the Green Energy Institute at Lewis and Clark Law School in Portland, Oregon, told Gas Outlook.

She pointed to the example of Cascade Natural Gas’ contract with a long-distance gas pipeline called GTN Xpress. A few years ago, Cascade received approval from the PUC to purchase more capacity on that pipeline on the assumption that gas demand would grow in central Oregon. But a few years on from that decision, the outlook for gas in Oregon has changed dramatically.

“The context has changed now. We have a new building code in Washington. We have the Climate Commitment Act in Washington. We have the Climate Protection Program here [in Oregon],” Sahler said, referring to a variety of policies that have been enacted in the last three years that accelerate building electrification in the Pacific Northwest and are expected to curtail gas use. The state governments of Oregon, Washington, and California, are now arguing that the additional gas planned on GTN Xpress is no longer needed.

And the utility commissions in Oregon and Washington are now asking gas utilities to analyse what early retirement of that pipeline might mean for them. It’s a warning sign for the gas industry — only a few years after the state regulator approved a utility’s contract for gas, it is now asking that utility to think about the implications of that asset being retired early.

The Oregon PUC is also weighing another important development. Gas utilities have traditionally been allowed to build into their rates the costs of hooking up new customers, a policy called “line extension allowances.” Typically in the range of a few thousand dollars per new building, critics call it a subsidy to the gas utility, effectively incentivising them to keep growing. At a time of climate crisis, it’s a subsidy that no longer looks prudent.

Some states are beginning to ax those line extension allowances. In 2022, California’s PUC ordered the end of line extension allowances, a decision that took effect last year.

Oregon’s PUC decided in 2022 to begin phasing down its line extension allowance. A case pending before the Oregon PUC could alter it further.

It’s not clear what will happen, but Sahler said that the fight over the line extension allowance encapsulates the entire predicament with the future of gas utilities, and regulators may need to start making some tough decisions.

The Oregon PUC “will be deciding whether it makes sense for the company to continue growing. And by implication, that will mean they can’t grow anymore,” Sahler said, referring to a scenario in which the PUC opts to slash the line extension allowance. They’ll be deciding that “it’s not in the ratepayers’ best interest to grow anymore.”

At the end of the day, “we can’t afford to decarbonise two systems,” Sahler said. “Everyone needs electricity. Not everyone needs gas.”

It’s a conversation that is still in its early stages, but it is beginning to happen around the country.

Seavey said that a cultural change at utility commissions is needed. She said regulators are “the gatekeepers of the energy transition,” and too often are cautious, do not offer transparency, and have structures in place that keeps utility work siloed off from broader questions about climate and energy policy.

“For the most part, state regulatory practices for gas utilities are outdated and misaligned with state climate policy and greenhouse gas reduction goals,” she said. “And so, we need regulatory reform that prioritises long term gas planning and intelligently downsizes the gas system, in a managed phased way.”