Will Gas Utilities Remain Viable Given Aging Infrastructure and Dropping Loads?
by Bob Shively, Enerdynamics President and Lead Facilitator
In our March 2024 blog post titled While Much Focus Is on Electricity, Natural Gas Utilities Are Also in Transition, we explored the transitional challenges faced by natural local distribution companies (LDCs). Aging infrastructure requires growing investment to ensure safety and reliability. Yet the residential and commercial loads that systems depend on to cover investment costs are likely to decline as electrification grows. While overall natural gas consumption has increased in recent years, growth has been due to industrial and electric power consumers often served by interstate or intrastate pipelines rather than LDCs.
The result is that while pipelines see a boom, the LDCs are caught in a bind of declining sales and increasing costs. For example, Baltimore Gas and Electric (BG&E) is spending $1.2 million per day on capital gas infrastructure according to the Maryland Office of People’s Council. A three-year rate plan for BG&E with increasing rates each year was approved by the Maryland Public Service Commission in December 2023. The plan will increase the average residential customer distribution rates by $10.43 per month in 2024 with additional smaller increases in 2025 and 2026.
Above: The gas utility “death spiral” – as rates get higher more and more consumers shift to electric
Clearly, energy investment in safety and reliability is necessary given that some gas distribution infrastructure dates back to the 1950s. But, how can gas utilities remain financially viable as improvements in competing technologies such as electric heat pumps and convection stoves combine with federal, state, and local policies that encourage electrification? A recent study prepared by Strategen for Advanced Energy United titled “Regulatory Approaches for a Cost-Effective Gas Transition: Ratemaking, Incentives, and Other Tools” identified various tools and strategies for addressing the issue.
Near-term tools include:
- Performance metrics
- Long-term planning
- Consideration of non-pipeline alternatives
- Revenue decoupling
- Multi-year rate plans without a guarantee of capital recovery beyond approved levels
- Energy efficiency program revisions
- Targeted approaches to alternate fuels
Potential non-pipeline alternatives include targeting demand response, energy efficiency, or electrification to mitigate the need for pipeline upgrades. To avoid utility bias toward capital spending, regulators may consider shared savings mechanisms or capex/opex equalization where utilities may earn a return on certain operating expenditures.
In the longer term, regulators and utilities may use tools that include:
- Avoiding expansion of gas utilities where electric alternatives exist
- Repurposing or decommissioning targeted segments of the gas distribution system through targeted electrification
- Securitization, which allows utilities to finance through bonds with lower interest than the utility’s cost of capital
- Accelerated depreciation
- Targeted programs to assist low-income customers
- Intersectoral cost recovery where certain gas system costs may be recovered through electric rates (for example, programs where gas furnaces remain in place as backups for electric heat pumps on cold days with electric customers sharing the cost of infrastructure to support the backup furnaces)
While evaluating strategies, regulators must also carefully consider the design of gas rates and charges. For example, increasing fixed charges or imposing disconnect fees may not foster desired policy goals.
Clearly, the future for gas utilities may involve significant turmoil. Utilities and their regulators must work together to find innovative ways to soften the upcoming difficulties.
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