By David S. Lapp
The writer is the Maryland People’s Counsel.
The big spike in gas utility bills that Maryland residential customers should expect this winter is just the tip of the iceberg. Without major policy changes, customers will see huge increases in their gas bills in the years and decades to come. These looming increases are not because of the cost of gas itself, the source of this winter’s bill hikes, but because of the gas utilities’ massive spending on their local distribution systems — the pipes, concrete, computers, and other infrastructure that utilities use to deliver gas.
A report my office is releasing this week shows that the utilities are on track to spend tens of billions of dollars replacing their entire local distribution systems and expanding pipeline capacity, with the state’s largest gas utility this year spending at a rate of more than $1.2 million per day. Using conservative assumptions, the report, Maryland Gas Utility Spending: Projections and Analysis, shows that by year 2100, utilities will have spent $34.5 billion on the gas distribution system, at a projected cost to Maryland customers of $125 billion.
The largest category of these investments is through the legislatively created Strategic Infrastructure Development and Enhancement (STRIDE) program, under which the state’s three largest gas utilities are replacing — with accelerated cost recovery from their customers — the entire distribution system each had in place in 2014. Capital spending through STRIDE, however, is less than half of the gas utilities’ capital spending.
Baltimore Gas & Electric’s (BGE) third-largest spending category is on system expansion to serve new customers and increase pipeline capacity. In 2022 alone, BGE is spending $78 million for new business and expansion; Washington Gas Light (WGL) is spending about $53 million on new business and expansion for its Maryland service territory. The Maryland Public Service Commission, which is charged with protecting the public interest, reviews and approves all such spending and sets associated customer rates.
This capital spending serves the financial interests of Exelon, the out-of-state (and, in the case of WGL parent AltaGas, out-of-country) holding companies that own Maryland utilities, and their shareholders. Capital spending adds to the utility’s “rate base” — the regulatory term for the amount by which the company’s “rate of return” is multiplied to calculate company earnings. For investors, high levels of capital investment are fundamental to profits. Just see Exelon’s September investor report, which highlights capital spending and ever-growing rate base, as evidence of its success.
Gas utility capital spending is paid back by gas utility customers over the long term along with a return for utility shareholders, much like the way homeowners pay for the principal plus interest on their mortgage. Once the capital is spent, it goes into rate base and earns a return — paid by customers — usually for about 40 years, but sometimes for as long as 70 years. Once the utility makes the capital expenditure, customers can be on the hook to pay for it for decades to come.
The benefits of capital spending to investors have a big, opposite effect on residential customers’ rates and bills, as our report shows. To assess the impact on residential customers, we took the capital investment data and projected what would happen to the typical residential customer’s bills if the utilities continue business as usual. To project customer bills, we calculated a gas “commodity” rate, the rate charged for the gas itself, using historical data that is less than half current commodity rates.
Even with the relatively low gas price, we found that the utilities’ current spending path will lead to substantial increases in the typical residential gas customer’s 2035 winter bill, relative to average winter bills over 2020-2022:
- For BGE customers, a 56% bill increase, up from $192/month to $299/month.
- For WGL customers, a 40% bill increase, up from $160/month to $224/month.
- For Columbia Gas of Maryland (CMD) customers, a 45% bill increase, up from $186/month to $270/month.
At September 2022 gas commodity prices, the typical residential customer’s winter bill in 2035 will be much higher: $390/month in 2035 for BGE; $326/month for WGL; and $353/month for CMD.
Our report projects these large increases in customer bills despite the fact that it conservatively assumes customers will continue to use the same amount of fossil gas. They almost certainly will not, which leads to the crux of the problem: State law both incentivizes utilities to spend billions replacing local gas distribution systems — for which customers must pay, plus a shareholder return, for periods approaching half a century or more — and recognizes that customers likely must desert those same gas systems for electricity if climate goals are to be met.
Recent data show that electric heating has been gradually replacing gas since 2020. Customers are leaving the gas system now, and to meet state climate goals and take advantage of new federal rebates and incentives, more and more customers will switch to electric heating and air conditioning systems and other appliances. Indeed, the Climate Solutions Now Act provides the state’s intention to electrify buildings that currently depend on fossil gas, consistent with a study prepared for the state last year showing that electrification is the most cost-effective path for residential customers to meet State climate goals.
Customer migration to electricity means fewer gas customers and fewer gas sales. With electrification, utilities’ spending will be recovered among fewer customers and sales, so rates for remaining gas customers are likely to increase more than projected in our report. Eventually, the investments are likely to become uneconomic, with too few remaining customers to support the massive costs, leaving the question of who pays. In that case, policymakers should anticipate that gas utilities will ask some combination of customers and taxpayers for a bail out.
The possible use of the gas distribution system for lower-carbon non-fossil gases such as biomethane and hydrogen is often cited as the rationale for the continued investments, but these are not currently viable alternatives. They are much more expensive than fossil gas and are not available in the quantities needed to replace fossil gas. Electric heat pumps, on the other hand, are currently available and competitively priced. Utilities should not be using customer dollars to gamble on uncertain technologies when electric technologies are economic and available now.
Another rationale used to justify the massive scale of gas distribution system investment is that it is needed for safety. But evidence that accelerated utility infrastructure spending enhances safety is lacking. Many of these investments are not planned to occur for a decade or more into the future, further weakening the safety argument. Indeed, the safest and most economic way of enhancing safety may be to plan for the retirement of portions of the gas system by electrifying.
The state and its citizens cannot afford to stand by while the gas utilities lock in massive spending for decades to come. As a starting point, the legislature should repeal the state policy of “accelerat[ing] gas infrastructure” in the STRIDE law — a policy that conflicts directly with the state’s climate goals and the Climate Solutions Now Act.
At the same time, the state should engage in gas utility transition planning, a process under way in a number of other states. Such planning should evaluate strategies for phasing out gas use in residential buildings and substantially reducing its use in commercial buildings, consistent with what the data show is the most cost-effective means of meeting state climate goals.
We cannot afford to spend billions on gas infrastructure whose future is, at best, uncertain. Each day, gas utilities are locking in investment returns for decades to come. Delay in slowing the massive spending cannot be an option.