The Natural Gas Paradox: Shutting Down a System Designed to Operate Forever

Abstract

The scientific consensus is clear. The earth’s climate is changing, and mankind must take collective bold action. While the pace of decarbonization is being debated as a political question, it is already impacting business decisions and needs to also be addressed by regulators. From a decarbonization perspective, most challenging is what happens inside the home: addressing natural gas used for heating, cooking, clothes drying and hot water. Eliminating natural gas usage for these activities will require societal change at a massive scale, with significant economic and regulatory implications.

As states move toward full decarbonization, the natural gas distribution system will need to become a central focus. Pipes put into the ground today have a lifespan of up to 80 years – far past the point where the scientific community has indicated we will need to be fully transitioned away from all fossil fuel use. Compounding this problem from a financial and regulatory perspective, natural gas distribution systems are monopoly regulated utilities, with their costs paid for by captive ratepayers.

The transition raises three interrelated questions, one political and two regulatory: 1) what policies are necessary to electrify household uses; 2) how regulators should shut down the natural gas distribution system; and 3) how should regulators compensate regulated monopoly utilities for the assets that have become stranded in the transition? The answer to the first question will have a direct impact on the other two.

To address these questions, this article starts with a description of the natural gas distribution system, including a quantification of value. The paper discusses options which exist for regulators as they plan to shut off, and subsequently decommission, natural gas infrastructure. Assuming some assets will become stranded, this paper reviews learnings from other stranded asset challenges, potential regulatory treatments, and what regulators could do to lessen future challenges as they are approving projects now. How to both incent and pay for the transition of all residential uses away from natural gas will be the most difficult challenge of decarbonization.

Keywords: natural gas, decarbonization, regulatory policy, fossil fuel, distribution system, monopoly, utility, utilities, energy transition, stranded asset, securitization, amortization, decommissioning, capital recovery, disallowance

JEL Classification: D42, G38, K23, K32, L50, L95, L98, Q38, Q48