TOPIC #4
Natural Gas Sector Developments
Regulatory and policy shifts create new demands on the local gas distribution sector.
Future of Gas Proceedings Continue
As many jurisdictions progress toward ambitious greenhouse gas reduction goals, some have initiated future of gas proceedings as commission investigations (either self-directed or incited by state legislation) or as utility commissions consider gas rate cases.
Those proceedings are largely a debate over whether and how to reinvest in or expand existing gas systems and what should be the future role of natural gas in a given jurisdiction. An additional focus for these proceedings is the role of electrification, especially in building applications.
Illinois is the latest jurisdiction to initiate a future of gas proceeding. The catalyst was consolidated rate proceedings of North Shore Gas and Peoples Gas, each of which serves the Chicagoland area.
- The Illinois Commerce Commission (ICC) reduced the utilities’ rate increase requests by 34% and 25%, respectively.
- However, the ICC noted that proposed gas distribution company capital investment needed to be considered in the context of Illinois’ Climate and Equitable Jobs Act, which codifies a goal of economy-wide, 100% clean energy by 2050.
- In a November 2023 order, the ICC directed commission staff to develop a plan for a future of gas proceeding in response to decarbonization proposals and issues raised by parties in the rate case dockets.
The ICC noted that a rate case is not the appropriate forum for consideration of the future of gas and related decarbonization issues. A broad set of stakeholders, including electric utilities that may be impacted, is required to fully consider the topic.
Formal proceedings were initiated on March 7, 2024, with ICC staff conducting workshops from April through August. (see Figure 4.2).
Figure 4.1: Jurisdictions with Future of Gas Proceedings (Active or Anticipated) (as of Dec. 8, 2023)
Notes: Numbers shown in selected states are 2022 residential customers (in millions) (rounded to nearest 100,000). Total U.S. = 72.5M.
Sources: Building Decarbonization Coalition; EIA
Figure 4.2: Illinois Commerce Commission Outline of Issues to Be Addressed at a Future of Gas Proceeding
Source: ICC Orders 23-0068 and 23-0069 (Consolidated) (Nov. 16, 2023)
KEY TAKEAWAYS
Jurisdictions with decarbonization or net-zero targets continue to scrutinize traditional regulatory models for natural gas distribution utilities.
Proceedings range from “future of gas” investigations to clean heat portfolios.
Utility commissions seek to balance decarbonization with affordability, particularly for low- and middle-income customers.
The key question for utilities and regulators: What are available and desirable options for decarbonization approaches and technologies that will be considered in the near and long term?
Jurisdictions with decarbonization or net-zero targets continue to scrutinize traditional regulatory models for natural gas distribution utilities.
Proceedings range from “future of gas” investigations to clean heat portfolios.
Utility commissions seek to balance decarbonization with affordability, particularly for low- and middle-income customers.
The key question for utilities and regulators: What are available and desirable options for decarbonization approaches and technologies that will be considered in the near and long term?
Clean Heat Heats Up
In consideration of the role of natural gas as an end-use energy resource, several jurisdictions have considered or are implementing a clean heat standard (CHS). A few examples include the following:
- In Vermont, legislation enacted in May 2023 directed that the utility commission design a potential CHS and to file its recommendations with the Vermont General Assembly by January 15, 2025.
- In November 2023, Massachusetts’ Department of Environmental Protection released a draft CHS program framework with an anticipated rollout by 2026. A CHS had been under consideration since Fall 2021.
- In Colorado, state legislation SB 21-264 required gas distribution utilities to file a “Clean Heat Plan” with the PUC by January 2024, demonstrating a 4% and 22% reduction (in GHG emissions) by 2025 and 2030, respectively, from a 2015 baseline (see Figure 4.3).
Figure 4.3: Overview of Colorado Clean Heat Requirements
Sources: Colorado Public Utilities Commission; ScottMadden analysis
A CHS is a performance standard, akin to a renewable portfolio standard, requiring heat providers—notably gas utilities and heating oil and propane providers and possibly electricity suppliers—to deliver a gradually increasing percentage of zero or low-emissions heating services to customers.
- These increasing annual requirements are typically pegged to greenhouse gas goals.
- Potential clean heat choices are jurisdiction specific but can include weatherization, electric heat pumps, and low-emissions heating solutions (biodiesel, RNG, district energy, solar thermal, or advanced wood heat).
- Obligated parties can deliver cleaner fuels, help convert heat systems, or purchase credits from others.
Other states are investigating building decarbonization proposals, including CHS.
- Maryland, for example, is instituting a zero-emissions heating equipment standard (ZEHES) as well as a CHS as part of the state’s Climate Pollution Reduction Plan rolled out in December 2023. ZEHES would not require early replacement of equipment but will mandate conversion to zero-emissions technologies at the end of useful life of installed equipment.
- Maryland’s Department of the Environment will initiate a rulemaking to propose a draft regulation by the end of 2024 and adopt a final regulation by the end of 2025.
Massachusetts Issues Final Order in Its Future of Gas Proceeding
Massachusetts initiated its future of gas proceeding (D.P.U. 20-80) in 2020, after its Department of Public Utilities (DPU) opened an investigation of the role of gas in achieving the state’s goal of economy-wide net-zero greenhouse gas emissions by 2050.
The proceeding focused on eight potential decarbonization “pathways” and regulatory design recommendations for the DPU to consider in its policies and structures governing local gas distribution companies operating in Massachusetts.
In early December 2023, the DPU issued its final order in that docket. In that order, it stated “beyond gas” regulatory principles. While the traditional notions of the regulatory compact continue to apply, the DPU stated that Massachusetts’ net-zero objective required that “a different lens will be applied to gas infrastructure investments going forward.” In particular:
- Examining more closely whether gas infrastructure investments are “in the public interest”
- Moving beyond “business as usual” in gas system planning, whether involving proposed expansion of service or safety investments
- Examining non-pipeline alternatives (broadly defined) as a condition of recovering gas pipeline and main investments
The D.P.U. 20-80 order made specific findings on natural gas regulatory design going forward in key areas such as heating technologies, renewable natural gas, pilots and innovation, embedded gas infrastructure and cost recovery, customer affordability, and transition planning. A summary of those findings and conclusions are shown in the table at Figure 4.4.
The order leaves as many questions as answers, many of which will have to be considered as Massachusetts’ local gas distribution companies (LDCs) prepare their climate compliance plans, which are due on or before April 1, 2025. For example:
- How do LDCs navigate needed repairs for reliability, safety, and leak protection under a “beyond gas” construct?
- How do LDCs and regulators balance affordability and adequate cost recovery for mandated transition activity such as non-pipes alternatives and early migration of customers from the gas system as well as impacts on remaining customers (including income-qualified customers)?
- How will non-combination LDCs coordinate planning with electric utilities?
- How will LDCs preserve options amidst uncertain cost, technology, and policy developments?
Proposed New York State Budget Suggests Building Decarbonization
In February 2023, the New York State Senate introduced the NY Home Energy Affordable Transition Act (HEAT Act). That act sought to, among other things:
- Remove a residential customer’s legal entitlement to utility gas services.
- Remove the 100-foot rule, by which, for new gas customers, utilities pay for connection if those customers reside within 100 feet of an existing gas main.
- Regulate for the continued provision of gas service to existing residential customers unless such service is discontinued under a PUC-approved program that ensures customers have access to safe, reliable, and “clean” substitutes to gas prior to cessation of service.
- Cap energy bills for customers at 6% of their household income.
This legislation was passed by the State Senate but did not pass committee in the State Assembly.
New York Governor Kathy Hochul released her fiscal year 2025 budget in early January 2024. In that budget, Gov. Hochul reprises some key provisions of the HEAT Act in new proposed legislation: the Affordable Gas Transition Act (AGTA).
Figure 4.5: New York Gas Local Distribution Companies and Territories
Source: S&P Capital IQ Pro
Tapping the Brakes on Proposed Natural Gas Bans
In 2019, the city of Berkeley, California, enacted an ordinance prohibiting natural gas infrastructure in newly constructed buildings. The ordinance spurred dozens of other cities to do the same. As of January 2024, 147 municipalities have established zero-emissions building ordinances for new construction.
Gas industry, appliance, and large user organizations (e.g., restaurants) challenged the Berkeley ban. After a district court dismissed their action, a three-judge panel of the federal Ninth Circuit Court of Appeals agreed to hear the case.
In April 2023, the court found that the federal government preempted Berkeley’s ability to effectively ban gas appliances. Congress enacted the Energy Policy and Conservation Act, under which the Department of Energy establishes appliance efficiency standards and expressly preempts state and local regulations concerning “energy use” of gas appliances.
One analysis by law firm Akin Gump summarized the court’s rationale: “The city’s ban on natural gas hookups for new construction constituted a regulation of the ‘energy use’ of the covered products. By hiding ‘energy use’ regulations in building codes, the city effectively was doing indirectly what Congress prohibited them from doing directly.”
An appeal for an en banc (i.e., all judges) hearing was declined on January 2, 2024. The ruling is applicable only in states in the Ninth Circuit footprint. Some municipalities have suspended enforcement of similar ordinances while the case evolves and appeals continue.
Some analysts note that states and municipalities may seek other alternatives to limit natural gas uses, noting that the court was careful to clarify that states can continue to regulate natural gas distribution under the federal Natural Gas Act.
Figure 4.6: Gas Bans and Ban Prohibitions (as of June 26, 2023)
Source: S&P Capital IQ Pro
IMPLICATIONS
Gas utilities in jurisdictions with aggressive decarbonization goals should engage policymakers and regulators as they consider potential pathways to a lower-emissions future. Being proactive with options and education, as well as influencing policy prescriptions, can smooth any transition sought by regulators and stakeholders.
Customer uptake and acceptance is also a significant factor. Government mandates and restrictions can cause serious customer pushback, so a gradual approach in jurisdictions that have demonstrated customer interest is key to programs effectiveness.
For decarbonization solutions such as clean heat, utilities should draw lessons from vehicle electrification efforts. In those cases, balance, patience, and well-executed transition activities are critical for success.
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