The debate over U.S. infrastructure hit home for the utility sector Wednesday in Los Angeles where a meeting of the nation’s state regulators dissected various aspects of a national challenge that runs through energy, water and telecommunications utilities just as readily as through city/county governments and state capitals. Part of the construction push will be in the gas pipeline sector, including added capacity from the Rockies and other regions, speakers said.

Industry and government officials at the final day of the summer meeting of the National Association of Regulatory Utility Commissioners, however, heard about a mixture of problems and solutions. The natural gas industry, particularly interstate transmission pipelines, appears to be making headway on updating and expanding infrastructure; electricity and water have steeper challenges. Telecommunications is more lightly regulated, market-driven and technologically forced to redo its infrastructure every few years.

Nevertheless, all of the sectors face increased financing challenges as their customers face the inevitability of higher retail rates to pay for what amounts to trillions of dollars of investment during the next 20 years, a variety of panelists told NARUC attendees.

Panelists recommended more education, candor and outreach among regulators, between regulators and utilities, and throughout the utility consumer population.

Noting that historically state regulators may have inadvertently set rates too low to deal with the magnitude of the current infrastructure investment needed, Scott Hempling, executive director of the National Regulatory Research Institute (NRRI), said the infrastructure challenges raise questions about “regulatory responsibility,” and state commissioners need to ensure that their actions now don’t leave a future generation in the same predicament 30 years from now.

Hempling said in dealing with the large infrastructure investments regulators need to make sure they have in place “the right accountability measures and performance reviews” to ensure that the money is spent well with a thoroughly reviewed plan. As part of that planning regulatory commissions need to assure that they have adequate professional staff to make sure large infrastructure projects involve money being spent prudently, he said.

“I want to harp on the point of regulatory resources,” Hempling said. “If we are going to rely on regulators to judge the performance of utilities, then the expertise within the commissions has to be the equal of the people making utility decisions. And the smart investor-owned utilities should welcome this.”

Politics increasingly is playing a big role in the regulatory arena, according to Nick Akins, president of American Electric Power (AEP), which operates utilities in 12 states. The cost to consumers of various public policy mandates, such as renewable portfolio standards, needs to be recognized and understood by consumers and politicians, Akins said.

“I think we need to be more mindful of the true end-user costs,” said Akins, noting that on Tuesday in the midst of the heat dome over much of the United States, only a small amount of the wind capacity in PJM markets was operating, so AEP had “every unit we had operating, even the [coal-fired] ones contemplated to be shut down. Those are the kinds of issues we have to get to.”

Akins said the utility infrastructure challenges now are different than when the power industry went through a “massive building program” in the 1970s and 1980s. “Back then, most of us had ‘double-A’ or better credit ratings, now most of those ratings are ‘triple-B’ and there is very limited capability to take on additional debt.

“We have to realize that we have to minimize the cost of debt to future customers and at the same time address the infrastructure needs that occur. I think the equation has changed dramatically, and it is one in which all the parties are going to have to come together and agree on transformational plans that make sense. In the absence of a national energy policy, it is up to the states to get the job done.”

In the gas transmission pipeline sector the picture is much more upbeat, according to Allan Bradley, CEO of Salt Lake City-based Questar Pipeline and the current chairman of the Interstate Natural Gas Association of America, touting the $8 billion/year infrastructure program that has been underway for a number of years.

“In the midstream natural gas industry these days the issues are less about rates and regulation and more about competition,” said Bradley, noting that the Federal Energy Regulatory Commission has set policies in the past 10 years that promote “workable competition” for the industry. “We tend to think more like the telecommunications industry, even though we do have filed rates.

“When you have a transparent gas market and you can look at a price in the Rockies set at Opal, compared to a citygate price in Chicago, you look at the basis differential, and if there is an opportunity to build a pipeline and narrow the basis it is a win-win for both producers and marketers.”

In the past five or six years with the growth of shale gas, Bradley said the industry has seen the financing for pipeline infrastructure being driven by producers who were willing to enter long-term contracts where they saw an opportunity to avoid the historic basis swings.

“For years, these swings were driven by a lack of pipeline capacity, and as we have seen dramatic growth in unconventional gas plays, producers and customers got tired of the volatility, and one way to solve that is to build more pipeline capacity,” he said. “We’ve seen numerous pipeline expansions out of the Rockies and we’re not done yet.

“As the pipeline capacity exceeds production, the basis differences really collapse back to variable costs. All of this has a lot to do with the gas volatility being a lot less right now. So cost-recovery will be driven by producers signing long-term contracts.”

Bradley said he thinks there are risks centered in the pipeline construction, but the returns have been adequate so far. In three of the past five years with long-term contracts in place, the gas pipeline sector has exceeded its annual $8 billion infrastructure cost three of those years. “That’s the total for both transmission and gathering-processing infrastructure,” he said.

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