Driven by the U.S. shale boom and low natural gas prices, the issue for local utility gas providers of extending their distribution pipeline systems is drawing re-examination by regulators and industry researchers.

The American Gas Association and others in the industry have talked about indications around the country that fuel-switching was taking off in the face of continuing low gas prices (see NGI, Jan. 7).

As a national regulatory researcher pointed out in a new report, the New York Public Service Commission recently initiated a statewide proceeding to examine policies associated with the expansion of natural gas service systems throughout the state.

“Other state utility commissions may want to do the same,” said Ken Costello, principal researcher at the National Regulatory Research Institute in Silver Spring, MD, in a report that outlines a model policy for states, along with recommending to state regulators what to avoid and include in pipeline extension policies.

“The demand for distribution line extensions has proliferated in recent years across various parts of the country,” Costello said. “[State regulators] should consider seriously reviewing their gas utilities’ line extension policies in light of this development. They may find them to be incompatible with current regulatory objectives and conditions in the natural gas sector.”

As with most utility regulatory issues, the focus is on who pays, whether one group of customers subsidizes other groups, and the usual cost-benefit considerations, according to the 57-page report, “Line Extensions for Natural Gas: Regulatory Considerations.”

“As far as the author knows, no comprehensive study of gas line extension policies exists,” Costello said. The report makes the assumption that increased switching to natural gas for economic and environmental reasons is a “public benefit,” an assumption he recognized as somewhat untested.

“The shale gas revolution has dramatically changed the outlook for natural gas in the United States,” said Costello, noting that national projections call for lower gas prices and increasingly abundant supplies. “Current and expected gas prices now make it economically sensible for more energy consumers to switch from oil or propane to natural gas.”

State pipeline extension policies obviously have a direct impact on the extent to which switching eventually takes place. Costello said the interest in the issue is growing as reflected in the fact that as part of last summer’s meetings of the National Association of Regulatory Utility Commissioners getting gas to “unserved and under-served” parts of the nation was one of the issues discussed.

Along with setting objectives, options and incentives as part of state policies for expanding gas utility systems, Costello’s model policy generally stresses balance and fairness for existing and new customers once it is established that a specific utility can be made whole or kept financially viable in investing in expanded infrastructure.

Costello recommends that state regulators begin by reviewing each utility’s policies on line extensions, and he predicts that “many may not match the current market environment.” Ultimately, he said, fuel switching needs to be effective in reducing energy costs to new consumers. His recommendations for state regulators include encouraging gas utilities they oversee to actively “market, facilitate and financially assist” customers in switching to gas.

“Policymakers might want to consider governmental financial support for line extensions that promote economic development and other public benefits,” he said, although he acknowledged that the assumption of public benefits from fuel-switching, for now, could be “more theoretical in nature.” For example, proponents of direct governmental involvement so far have provided little, if any, “empirical support to justify taxpayer funding.”

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