How states are trying to fit gas utilities into a low-carbon future

California and Colorado are the latest states to boost oversight of how gas utilities spend their customers’ money. The goal: avoiding stranded assets.”

Two men in white hard hats and bright reflective vests stand near a large metal pipeline that is being lowered into a trench
Workers install a section of natural-gas pipeline near a subdivision in Berthoud, Colorado. (Craig F. Walker/The Denver Post/Getty Images)
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A zero-carbon future is largely incompatible with an ever-expanding network of fossil-gas infrastructure. What sense does it make to let utilities keep building pipelines that must stop carrying fossil fuels in less than 30 years to meet decarbonization mandates? 

But states with ambitious climate goals also need to keep gas utilities financially healthy enough so they can maintain their remaining infrastructure in safe running order. States are also responsible for protecting low-income customers, who can’t easily switch from gas to electric heating and cooking, from being stuck paying exorbitant prices for a dwindling resource delivered by an increasingly underused delivery network. 

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These competing imperatives mean that states are stuck trying to pull off a tricky policy balancing act, as seen most recently in California and Colorado. Last week, public utility commissions in both states adopted measures aimed at reducing the risk of stranded assets” — gas pipelines that may not be able to earn back the cost of building them in future decades. They’re also trying to gain a better understanding of what can be done to supplant new gas lines with cleaner and more cost-effective alternatives, and ultimately to address the broad conundrum of what to do with gas utilities. 

Taking stock of stranded gas assets 

The value of gas assets at risk of being stranded as the world moves to cut the use of fossil fuels amounts to hundreds of billions of dollars, according to various estimates. This includes the large-scale pipelines that carry gas from where it’s pulled out of the earth and the power plants that burn it to generate electricity. It also encompasses the distribution networks of pipes that deliver gas directly to customers’ homes and buildings. 

States with decarbonization goals are taking action to limit these stranded-asset risks. This year, Oregon and Washington state cut back subsidies for gas-system expansion, and Connecticut regulators ended a program that subsidized homes switching from heating oil to gas, saying it was no longer cost-effective or compatible with the state’s climate goals. 

Cities and counties are also acting to ban gas from newly constructed homes and businesses in California, Massachusetts, New York, Oregon, Washington state, Washington, D.C., and most recently, Maryland’s Montgomery County. (But this trend has provoked a backlash in a number of other states, where legislatures have passed laws preventing cities and counties from banning gas.) 

All in all, the risks for gas utilities are rising as it becomes clear that keeping global warming below catastrophic levels will require a steep reduction in burning gas, 2021 report from consultancy Brattle Group warns.

Regulated utilities recover the cost of capital investments from customers over the course of decades, yet business as usual needs to be upended on a much shorter timescale. Utilities will likely continue investing in their existing system for safety and reliability but need to recover those costs from a shrinking customer base,” the report states. That could drive up costs on those remaining customers, pushing still more of them to make the switch to electricity for heating, cooking and other needs — which would be good from a climate perspective, but, again, would put the burden on low-income customers who lack the means to electrify their homes. 

This cycle could leave U.S. utilities with $150 billion to $180 billion of under-recovered” gas-distribution assets over the coming decade, the report warns. This presents a potential time bomb for utilities, customers, investors and state regulators — and a rationale for regulators to take action to contain those risks, as California and Colorado did last week. 

California’s latest move to transition away from gas 

In California, which is targeting a zero-carbon economy by 2045, the California Public Utilities Commission ordered gas utilities in the state to seek case-by-case approvals for every project that would cost more than $75 million, as well as to lay out 10-year forecasts of plans for building any projects that would cost more than $50 million. The decision also requires environmental review of any projects within 1,000 feet of homes, schools or hospitals — a response to community backlash against the risk of large gas projects exposing people to unhealthy or dangerous emissions of methane, the chief component of fossil gas. 

California is arguably the furthest ahead of all states in curtailing the future of fossil gas. In September, the CPUC became the first regulator in the country to end the practice of allowing gas utilities to charge their entire customer base for the cost of extending gas lines to new buildings and neighborhoods, eliminating what Commissioner Clifford Rechtschaffen called a perverse incentive” to continue bringing gas to buildings that must switch to electricity to meet the state’s carbon goals. 

Also in September, the California Air Resources Board voted to ban the sale of new gas-fueled furnaces and water heaters in the state after 2030, creating the first zero-emissions building heating standard from a U.S. air regulator. And last year the California Energy Commission approved new building codes that will make all-electric buildings the default choice for most new construction in the state. 

Viewed in the context of those policies, last week’s decision from the CPUC is more of an incremental step, said Matt Vespa, senior attorney for environmental legal nonprofit Earthjustice. Rather than banning new gas infrastructure, the decision is aimed at bringing more transparency and scrutiny to whether proposed new investments are truly cost-effective and environmentally sound, he said. 

Today, all gas utility investments are lumped together into massive general rate case” proposals, Vespa explained. Those are huge proceedings, and individual investments get maybe a couple of paragraphs at most,” he said. Regulators have little opportunity to question whether each individual investment is in fact a cost-effective use of utility customer funds, or whether any one project may cause environmental harms. 

California has required similar individual reviews of large-scale electric-grid infrastructure projects for decades, Rechtschaffen noted in last week’s meeting. The new gas-utility framework advances our transition away from natural gas by allowing for close review and scrutiny of significant gas investment projects, increasing transparency in utility gas planning and providing opportunities for meaningful engagement by impacted communities,” he said. 

Colorado looks to alternatives to gas 

In Colorado, where state law calls for a 90 percent reduction in greenhouse gas emissions by 2050, the Colorado Public Utilities Commission took similar steps to California, requiring gas utilities to break out large and costly projects for individual review and submit long-term gas-infrastructure plans for more careful scrutiny. The commission also ordered utilities to review how they assign the costs of gas-line extensions, with an eye toward lowering the costs that are paid by customers at large — although it did not outright ban utilities from charging all customers for extensions to new buildings, as California did earlier this year. 

The Colorado commission also laid out how it intends to implement a set of policies passed by the state legislature last year that encourage gas distribution utilities — including Xcel Energy, the state’s biggest investor-owned utility — to reduce energy waste and to cut their carbon and methane emissions by 4 percent by 2025 and by 22 percent by 2030, with deeper cuts to come in future years. 

One notable provision of the new regulations is setting a social cost” of both the carbon emissions associated with gas use and the methane that leaks from gas utility infrastructure, said Mike Henchen, a principal on the Carbon-Free Buildings team at nonprofit RMI. (Canary Media is an independent affiliate of RMI.) Methane is a far more potent global-warming gas than carbon dioxide, and preventing its leakage could yield more immediate effects in slowing down climate change. 

This step of counting the social costs of both types of emissions is a first for a state utility regulator, and it could shift the balance for energy-efficiency investments that cut gas usage,” Henchen said. Those investments could aim to replace gas with a less greenhouse-gas-intensive alternative like biomethane or hydrogen. But they could also look to switch customers to using electricity instead of gas, he said. 

Seeking non-pipeline alternatives”

One way for gas utilities to manage the transition to clean energy would be to embrace non-pipeline alternatives,” Henchen said — ways to provide customers with energy services that don’t involve piping gas through pipelines. Utilities could identify less expensive and less climate-polluting options, such as supporting newly built neighborhoods with highly efficient all-electric heating and appliances or designing thermal energy networks” that tap underground ambient temperatures to improve the efficiency of heat pumps. Then, regulators would allow gas utilities to recover some of the costs of investing in those alternatives. 

New York has been a hotbed of experimentation with non-pipeline alternatives, given the region’s short supply of gas due to pipeline extensions being blocked by regulators. Utility Con Edison won partial approval for a proposed non-pipeline solution in 2019, with regulators allowing it to recover costs of energy-efficiency and electrification investments but denying its plan to use biomethane and trucked-in liquefied and compressed gas. ConEd and other New York utilities are proposing more such non-pipeline projects. 

Utilities that provide both gas and electricity have a clearer path to helping customers switch from one fuel to the other. Gas-only utilities have fewer options. Southern California Gas, which serves nearly 22 million customers, is proposing a range of investments in green” hydrogen produced with carbon-free electricity, even though it’s unclear how feasible it will be to carry hydrogen in fossil-gas pipelines. 

Henchen noted that last week’s decisions in California and Colorado could be useful in giving regulators and the public more information about the costs and benefits of the infrastructure being planned by gas utilities in both states. 

One of the outcomes is to improve everyone’s understanding of the gas system and the gas planning process,” he said. Once everyone is smarter about that, they’ll have more confidence in the climate solutions for this sector.” 

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Jeff St. John is director of news and special projects at Canary Media.