December 2013, Vol. 240 No. 12


Low Natural Gas Prices Create Jobs, Spur Economic Growth Across Country

Rita Tubb, Executive Editor

The American Gas Association, founded in 1918, represents more than 200 local energy companies that deliver natural gas throughout the United States. There are more than 71 million residential, commercial and industrial natural gas customers in the U.S., of which 92% – more than 65 million customers – receive their gas from AGA members. Today, natural gas meets almost one-fourth of the United States’ energy needs.

Christina Sames, AGA’s vice president of Operations and Engineering, recently talked with P&GJ about what member companies, regulators and local governments are doing to expand and upgrading the nation’s infrastructure and to adopt cost-recovery mechanisms that ensure the gas distribution network is of the highest integrity while expanding to serve new customers and maintain affordable rates.

P&GJ: With natural gas prices at historic lows, do you see this as benefitting the LDC?
Sames: Natural gas utilities are happy when their customers are happy, and there’s no doubt this is a great time to be a natural gas customer. Domestically abundant and efficient, natural gas is currently the best value energy choice for consumers – this is evidenced by U. S. Energy Information Administration data showing that customers who heated their homes with natural gas during the 2011-2012 winter heating season saw average savings of 70% compared to those using heating oil and 32% compared to those using electricity.

Gas utilities do not profit from the price of natural gas itself, so low natural gas commodity prices get passed onto the customer, resulting in lower monthly bills – especially when coupled with ever-increasing efficiency. Low natural gas prices also promote industry growth by generating interest from consumers, regulators and legislators in expanding natural gas service to homes, to businesses, and to areas not currently served by natural gas. Additionally, we see manufacturers seeking to benefit from low natural gas prices by opening plants in the U.S., which is creating jobs and spurring economic growth across the country. Current circumstances provide an opportunity to make long-term investments in our communities by upgrading infrastructure.

America’s natural gas utilities are seizing the moment and working with regulators to develop smart modernization plans to target areas where upgrades and expansion will be most feasible and to incorporate innovative cost-recovery mechanisms. This will help ensure more Americans can benefit from affordable, efficient and clean natural gas for years to come.

P&GJ: Is there a downside to these low prices for the LDC as well?
To truly ensure a future of market stability, and allow the nation to secure the societal benefits of increased natural gas use, the price of natural gas must provide sufficient incentives for producers to fully develop America’s abundant resources.

The growth we’ve seen in natural gas supply must be met with a corresponding growth in demand in order to establish price levels that elicit a response from producers. Many of the identified shale gas resource plays and more traditional production models become economically viable to the market at a projected development cost of $4 to $6 per MMBtu.
AGA sees a broad range of demand scenarios during the next decade that can be supplied by a diverse, dynamic and elastic domestic supply market supported primarily by the development of shale and other natural gas resources within an estimated price band of $4 to $6.50 per MMBtu. An increase in demand would have positive outcomes for natural gas utilities, consumers and the entire natural gas industry.

P&GJ: What do you see as the greatest problem or challenge facing the LDC going forward?
The low price of natural gas has driven an increased interest in service expansion not just among natural gas utilities, but among customers, governors, legislators, commissioners and other stakeholders. National policymakers are looking at natural gas infrastructure as key to driving economic development, reducing consumer energy costs and helping to improve environmental quality.

Investing in natural gas infrastructure is also crucial for helping ensure the safety of customers and communities, which is paramount. Yet, cost and logistics remain a consistent focus. Questions arise as to how to help ensure that expansion projects are economically viable, how to streamline processes for construction and obtaining environmental permits, as well as access land to conduct surveys. Depending upon the diameter, new line construction can range from $500,000 to $4 million per mile, and traditional rate plans often do not allow for these costs to be recovered in a reasonable time period without unduly burdening the ratepayer.

Addressing the issue of how to pay for necessary and beneficial infrastructure upgrades and expansion presents distinct challenges, but there are a host of innovative rate-recovery programs that exist to address these challenges. Successful approaches will result in positive outcomes for safety, reliability, energy costs and our environment.

P&GJ: How much credit do you give to LDCs for lowering serious pipeline incidents?
All stakeholders involved in protecting pipeline infrastructure deserve credit for the safety of the system; however, pipeline operators are ultimately responsible for safety performance. Safety is the number one priority for America’s natural gas utilities and a core tenet of our business. Our concentrated, day-in and day-out efforts to improve pipeline safety are not the only piece of the puzzle, but they certainly play a large role in the improving incident statistics we’ve seen over the past two decades.

The natural gas industry actively manages existing infrastructure to help ensure the reliability and safety for customers, and the Pipeline and Hazardous Materials Safety Administration’s Distribution Integrity Management Program (DIMP) put in place a risk management process that was formalized in 2011. Operators have developed substantial expertise in managing systems and assessing risks throughout their pipelines on an ongoing basis.

The industry has recognized the risks associated with various types of infrastructure, and is working to replace pipelines that may no longer be fit for service while continuing to increase maintenance and monitoring. As a result of these efforts, the amount of cast iron main – a material that can be prone to leaks – has been reduced by 46% over 28 years, and national distribution incident data shows a significant decline in the number of incidents on cast iron mains over the same period.

In addition to managing and upgrading infrastructure, natural gas utilities work with communities to educate the public and homeowners about natural gas safety. These efforts include promoting the safe installation and use of natural gas appliances, odorizing natural gas and educating customers about detecting and reacting to potential leaks, working with the Common Ground Alliance (CGA) to promote the use of “Call 811” to prevent excavation damage, and more.

While excavation damage remains the greatest source of pipeline incidents, CGA reports that excavation-related incidents due to “no call” have fallen by more than 10% between 2008 and 2011. Operators also educate emergency responders such as local fire departments about how to respond to natural gas incidents. All of these elements make up a comprehensive pipeline safety program that plays a significant role in preventing pipeline incidents.

P&GJ: Do you feel there is still room for improvements that have not yet been taken?
Our nation has a tremendous opportunity before us, and there is no better time for us to invest in our natural gas infrastructure and expand service so that customers throughout the country can experience the benefits of domestically abundant natural gas. Additional transmission infrastructure is needed in certain areas of the country, such as New England, where some seasonal volatility still exists due to increased demand on pipeline capacity from electric power generation. AGA and its members are working with the Federal Energy Regulatory Commission (FERC) to address how electricity markets in regions with constrained pipeline systems can support investment in natural gas infrastructure to help ensure this fuel can be used to meet our nation’s energy needs.

Additionally, there are still areas where there is currently no natural gas service. Continually investing in and expanding our infrastructure, along with investment in research and development, will enhance safety and contribute to lowering emissions from the natural gas delivery system.

P&GJ: What is being done to increase upgrades and modernization to the nation’s natural gas pipeline network?
The natural gas industry operates the safest energy delivery system in the nation, due to the dedicated efforts of utilities and pipeline operators. The industry consistently works to enhance the safety of the natural gas delivery system through upgrades and modernization where necessary, as well as to increase expertise in managing existing infrastructure through the sharing of best practices.

There is a great deal taking place on the state level as pipeline operator’s work with regulators to pursue policies and strategies that encourage cost recovery for infrastructure investment. These include adopting innovative rate mechanisms and accelerated replacement programs that streamline rate case approval processes, and include infrastructure cost trackers, infrastructure base rate surcharges and deferred regulatory assets. These mechanisms allow for reasonable recovery of infrastructure investment that includes replacement of pipe with more advanced pipeline materials, or repair of pipe using new technology.

To manage existing infrastructure, operators consistently assess the risks to their system through efforts such as leak surveys and winter patrols, and take actions to mitigate those risks, such as cathodically protecting their steel lines, promoting 811 and implementing operator qualification requirements. DIMP plans continuously assess, prioritize and mitigate risks throughout pipeline systems.

P&GJ: Are there new technologies LDCs are employing to add efficiency, lower costs, increase safety, etc.?
AGA and its member companies are dedicated to investing in and supporting research development and deployment of technologies to improve safety and efficiency, from advanced pipeline materials to new ways to assess the integrity of the infrastructure to mobile applications that enhance productivity and operations in the field.

This research has resulted in new leak detection technologies, robotics tools to assess the integrity of intrastate transmission pipelines that are operated by LDCs and use of new materials, such as plastic. Today, there are nearly 1.3 million miles of plastic pipe in the natural gas system. In the past decade, natural gas utilities have installed modern plastic lines at a rate of 30,000 miles per year, connecting new customers or replacing older pipeline infrastructure with more cutting-edge technology. Techniques for re-sealing pipeline joints and joint repair technology have also improved tremendously.

P&GJ: What sort of spending trends have you seen in recently by LDCs to replace infrastructure serving existing gas customers?
Utilities spend billions of dollars each year on maintenance, safety and operating expenses, as well as system repairs, renovations and new construction. In 2012, natural gas utilities invested more than $7 billion in pipeline systems and that amount continues to increase.

P&GJ: What’s being done so the LDC can upgrade existing systems without increasing the burden on ratepayers?
AGA and its member companies continue to work successfully with regulators and local governments to develop innovative rate mechanisms and “smart modernization” plans to help ensure that our infrastructure is of the highest integrity, while expanding to serve new customers and maintaining affordable rates. While the primary goal of efforts to upgrade infrastructure is to preserve public safety and maintain service reliability, it is critical that utilities, regulators and local officials work together to responsibly manage costs. AGA member companies work to develop “smart modernization” plans to optimize replacement costs through careful planning and operational efficiency.

Innovative rate mechanisms that include infrastructure cost trackers, infrastructure base rate surcharges and deferred regulatory assets help offset lag time between rate case approval and cost recovery, and allow reasonable recovery of infrastructure investment. Currently there are 34 states that have adopted active cost-recovery mechanisms. Pipeline operators are careful to monitor systems and classify leaks to determine where maintenance or replacement is most needed and beneficial. Pipeline operators also coordinate replacement and repairs with municipal construction projects whenever possible to help minimize both cost and disruption.

P&GJ: What regulatory or legislative changes do you see on the horizon that could negatively impact the LDC?
Going forward, regulatory and legislative actions should recognize the fundamental importance of natural gas and delivery infrastructure in fueling economic recovery. We should seek to effectively use our nation’s abundant energy resources and technologies to fuel economic growth while transitioning to a lower carbon energy mix by expanding the use of natural gas in homes, businesses, industry and transportation. Any legislative or regulatory changes that do not support a level playing field that allows for market-based outcomes, or helps to achieve an all-of-the-above energy strategy for our nation should be avoided. Additionally, regulation and legislation should align safety with efforts to modernize infrastructure, and recognize the significant efforts already underway and planned to enhance safety.

P&GJ: What about future positive regulatory or legislative changes for the industry?
We are seeing a lot of positive legislative trends. Congress, regulators and natural gas operators are in agreement that the focus really needs to be on expanding and upgrading our infrastructure and pursuing policies that enhance the safe delivery of natural gas. State regulators are actively investigating and adopting cost-recovery mechanisms that facilitate modernization and expansion. In 2013, the Board of Directors of the National Association of Regulatory Utility Commissioners adopted a resolution to encourage regulators and industry to “fully explore, examine, and implement alternative rate-recovery mechanisms that will accelerate the modernization, replacement, and expansion of the nation’s natural gas pipeline systems.” Many states are also encouraging the growth of natural gas in transportation through incentivizing fueling stations and fleet conversions. Regulators and legislators should work with industry to identify how to best promote information sharing and best practices, target policies that streamline and enhance infrastructure upgrades, encourage greater use of natural gas in all sectors of the economy, and allow us to truly benefit from this abundant, affordable, domestic and clean energy source.

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