Regulating a Gas System in Transition: The Need for New Approaches to New Challenges

Posted by Sarah Steinberg on Jun 11, 2024 1:00:00 PM

A Guide to Reforming Gas Utility Regulation

For the past 20 years, states across the country have been working to re-orient our electric utilities around 21st-century goals, including greenhouse gas reductions, distributed resource integration, peak load management, resilience from emerging weather threats, energy burden alleviation, and more. These efforts have led to a plethora of new policies, programs, and processes that span from demand response and time varying rates to non-wires alternatives, performance incentive mechanisms to distribution system planning and hosting capacity analysis. Many of these reforms seek to mitigate the inherent bias in the electric utility world towards capital expenditures and large utility-owned resources, to varying degrees of success.

Gas distribution utility regulation, on the other hand, has been relatively stagnant over that same time period. The business of delivering gas into homes and businesses itself has – until recently – flown under the radar, with few major shocks to the system drawing the attention or ire of stakeholders, Public Utility Commissions, and policymakers. But recent extreme price and gas bill spikes, research on the health consequences of burning gas, and generous federal incentives from the Inflation Reduction Act, have sparked a conversation about whether gas is the best way to heat air and water in our buildings. Regardless of what any individual might believe, consumers seem to be deciding this question for themselves: electric heat pump technologies have become the dominant way to heat air and water for those purchasing new HVAC equipment. 

As a result of this sea change, it has become increasingly clear that the current regulatory regime, which incents constant and unending pipeline system growth, is no longer serving us. Instead, it is creating new risks for gas ratepayers, gas utilities, and the public at large by allowing billions of new ratepayer dollars to be spent on infrastructure with numbered days ahead. Furthermore, it holds no answers for us as to how to manage a stagnant or shrinking system in a way that maintains affordability, safety, and reliability for those who still depend upon it. The time is ripe for a re-examination of this model, for some out-of-the-box thinking and hard conversations, and for some thoughtful implementation of new tools and strategies.  

That’s why we collaborated with Strategen Consulting to come up with a guide to help policymakers, regulators, and stakeholders understand the available options to reform gas utility regulation: Regulatory Approaches for a Cost-Effective Gas Transition: Ratemaking, Incentives, and Other Tools. Though we make several recommendations for where to begin, the paper is not meant to be prescriptive; rather, it is meant to help states chart their own unique paths forward through this moment of transition according to their own values, goals, and timelines.

Defining Characteristics The whitepaper first describes the phases of this transition by its characteristics, not a set number of years. It then lays out potential regulatory tools and strategies for each phase, and describes how each might support a managed, affordable transition. Finally, the paper considers how evolving gas and electric rate design might play a role and offers both words of caution and potential process improvements to better serve our needs.  

Table 1 - Gas Ratemaking

The gas and electric industries sit at an inflection point, both in need of billions of dollars of new investment to keep pace with our country’s demands, replace aging infrastructure, and adapt to new technologies and resources. One of these systems – the electric system – is set to play the central role in our clean, affordable, and reliable energy and transportation future. Investing in it is like betting that the earth will continue turning on its axis. The other – the gas system – is at increasingly obvious risk of first becoming underutilized, and then later becoming stranded and technologies and policies trend towards the healthy and climate-friendly.  

The answer is not to double down on fossil fuel pipelines built to last half a century or longer. Rather, it is to acknowledge that the world is changing, and ask how we can reconfigure our utilities, regulations, incentive structures, and risks, to provide for today’s demands with our long-term future in mind. We hope this white paper helps invigorate those important conversations.

Download the White Paper  

Topics: Building Electrification, Building Decarbonization



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