Regulated utilities are like giant ships. Massive, solid, plodding. Both are accustomed to setting a course and staying on it, confident that their inertia alone will be enough to carry them through most storms. Sometimes that steadiness is a feature, but when it comes to rapid but permanent trends, that quality can quickly become a problem for ratepayers. 

Much attention has been paid over the years to how electric utilities have been navigating choppy waters as the clean and distributed energy transformation takes shape, but gas utilities have only just recently entered the storm. Just glance at the projected bill and rate impact analyses and one can easily see a problem:

• In Michigan, Consumers Energy gas bills are expected to rise between 29% and 75% by 2030.
• In Maryland, gas rates are projected to double or triple by 2035 and reach levels 10 times higher by 2050.
• By 2040, CenterPoint customers in Minnesota will likely be paying a gas utility delivery charge — the fixed portion of customer bills that must be paid regardless of how much fuel is used — over six times that of 2010.
• In Illinois, fixed gas charges are expected to rise 45% by 2030 and 94% by 2035.
• In New York, a 2% annual decline in customers and consumption would increase delivery costs seven-fold by 2050.
• In Colorado, Xcel Energy projected to increase their base rate revenue by 32% by 2030, before considering electrification.

Underlying these numbers are several simultaneous and unprecedented headwinds for the gas industry. The natural gas pipelines in many parts of the country are aging and leaky, and the cost of the gas they transport is volatile and subject to extreme price spikes due largely to a recent globalization of gas markets and increase in demand for electric generation. The pot of money that ratepayers are able to pay — and that state lawmakers, governors, and public utility commissioners are willing to let them pay via monthly utility bills — can only stretch so far.

Meanwhile, households and businesses are moving away from the direct use of gas, either for cost, comfort, climate, health, or safety reasons. This trend is changing our infrastructure needs, but existing infrastructure does not easily adjust to new market conditions. To make matters worse, our existing system of regulating monopoly utilities encourages, and is fundamentally premised upon, continuous capital investments and growth, regardless of real-world conditions. We are wholly unaccustomed and unprepared to regulate an energy system in decline.

The risks of staying the course include overinvestment in long-lived infrastructure, underutilization of existing and new pipelines, stranded assets, and the infamous utility death spiral. Although the extent of the risks to customers over the long run is uncertain, we can say one thing for certain — gas utility investments in their delivery system is far outpacing customer demand growth and has been for some time. This has led to, and will continue to lead to, higher rates for customers before we even consider future impacts of the clean energy transition.

Those charged with regulating the utilities — and those charged with protecting ratepayers — need to begin considering these risks head-on in their decision-making. But like an ocean vessel, small adjustments today can land us in a very different place tomorrow.

Utilities are unlikely to make significant changes on their own initiative, especially when their financial incentives are not adjusted to match the changing times. As such, state regulators need to begin assembling their toolbox to manage the impact of the energy transition — on both gas customers and the electric grid — before crises in affordability and reliability are upon us.

The toolbox will likely include some programs, mechanisms and strategies that regulators are deeply familiar with, like energy efficiency and conservation programs and performance metrics and incentives. Others tools, like long-term planning, non-pipe alternative analyses, and securitization, already exist for electric utilities but may be newly applied to gas utilities. Other concepts may be brand new, like intersectoral cost recovery, coordinated gas and electric planning, and advanced rate design. Some of these strategies can be implemented today, while others will take years to develop and hone alongside interested stakeholders with many divergent perspectives.

Advanced Energy United published a new whitepaper laying out potential regulatory tools and strategies for the near-, intermediate- and long-term, from which state regulators can choose the methods most applicable and appropriate for their state’s specific goals, challenges and timelines. Recognizing that each state will need to map unique paths forward through this moment of transition according to their own values, goals and timelines, the paper intends to spark a conversation about the need to turn the ship and offers some suggestions about how to begin.

The answer to this looming challenge is not to ignore the dangerous waters ahead. Rather, it is to acknowledge that the world is changing, and ask how we can reconfigure our utilities and utility regulations to minimize risks today and set us up for greater success tomorrow.

Read the full article here.