Concurrent with FactSet’s semiannual “State Utility Regulator Profiles” publication, the article below highlights a roiling topic facing commissions across the U.S.: the present and future of natural gas. Two issues at the fore are proposed limits on gas infrastructure and trends in building electrification.
Utility commissions in several states are hearing arguments and making decisions about the cost, pace, and feasibility of electrification, and whether it can be implemented at a scale that provides safe, reliable energy. As part of these considerations, commissions are also addressing a host of technical, policy, political, economic, and logistical challenges related to electrification.
A major concern of gas utilities is the potential for stranded assets: infrastructure that earned commission approval as a prudent investment and has useful life remaining but may be forced to retire prematurely due to underutilization. In cases where natural gas infrastructure is required to retire early, commissions must decide whether the utility or customers pay these “sunk costs.” Another concern is whether commissions will approve revenue/throughput decoupling measures to compensate gas utilities in the event of declining sales volumes.
How did we get to this point?
In 2019, the city of Berkeley, California prohibited homebuilders from applying for permits to establish new—or connect to existing—gas utility service. The cited goal in the ordinance was to “eliminate the use of fossil fuels in the home, tackling climate change, while improving indoor air quality.” By the end of 2022, over 100 cities had also passed laws to implement limits on new gas infrastructure. Approximately three-quarters of these cities are in California, with others in Washington, Oregon, Colorado, Michigan, Maryland, and Massachusetts.
In response to this trend, 25 states enacted “gas ban preemption” laws prohibiting cities from restricting natural gas usage.
Figure 1: Gas Restrictions: State and Municipal Activity
Source: State and municipal legislation
A further blow was dealt to city bans in April 2023, when the U.S. Court of Appeals for the 9th Circuit ruled that Berkeley's 2019 law is invalidated by the federal Energy Policy and Conservation Act. Berkeley requested a rehearing, but in January 2024, the court decided not to reconsider its decision. In the last year, anti-gas policies in several states have been delayed or repealed.
Nationwide, both opponents and proponents of gas-restricting policies are unanimous about one thing: the legal territory is murky and in the earliest stages of testing. Nevertheless, some cities persist in proposing limits on gas in order to further their climate action goals. Whether their proposals are legally vulnerable due to the 9th Circuit’s ruling remains unknown, as does the impact of the 2022 Inflation Reduction Act’s incentives for homeowners and building owners to switch from gas to all-electric.
Recent rate cases are the locus of robust debate about the cost of electrification.
As noted in rate case testimony (Cause 45967) this year by Northern Indiana Public Service Company, “Industry data supports that natural gas is a very affordable heating fuel. The U.S. Energy Information Administration Winter Fuels Outlook 2023-24 indicates that natural gas heating bills for last winter (November 2023 – March 2024) were the lowest of any heating fuel choice and forecasted to be 21% lower than the prior winter period:”
Figure 2: Natural Gas Heating Bills (November 2023–March 2024)
Source: U.S. Energy Information Administration, Northern Indiana Public Service Co.
Similarly, Black Hills Natural Gas notes in its current rate case (2024-0001) in Iowa, “According to the American Gas Association’s 2024 Playbook, American families that use natural gas for heating, cooking and clothes drying save an average of $1,132 per year compared to homes using all electric appliances. A recent study conducted by the U.S. Department of Energy highlighted average unit costs for residential energy sources based on five types of energy. Natural gas was listed at $13.97 per million Btu compared to $46.19 per million Btu for electricity, making natural gas 3.3 times more affordable than electricity. Given the abundance of natural gas, the cost benefits are expected to continue into the foreseeable future.”
AltaGas, which operates gas utilities in several states, provided the following charts in recent presentations. The charts support AltaGas’ positive outlook on natural gas’ affordability and reliability, while highlighting “the importance of natural gas and the longevity of our utilities.”
Figures 3 and 4: AltaGas' Views on Natural Gas Affordability
Source: AltaGas
One can easily find the opposite point of view, though. In DTE’s current gas rate case (21291), a witness from the Environmental Law & Policy Center asserted, “...we are seeing the emergence of highly efficient electric appliances for space and water heating. In some jurisdictions, all-electric new residential homes are already less expensive than new residential homes that use gas. Electric heat pumps have now outsold gas furnaces two years in a row. These data do not account for the impact of the Inflation Reduction Act, which should help further accelerate the adoption of electric appliances through the program’s generous appliance rebates and tax incentives.”
How does one make sense of this array of contradictory assertions? One must understand there is no neutral, cookie-cutter, nationwide answer to the question of “how much does electrification cost?” Such an answer varies from utility to utility, depending on a specific utility’s volumetric gas charges, fixed monthly gas charges, and electric heating rate.
Perhaps the most compelling dialogue occurred in 2023 in North Shore Gas’ and Peoples Gas’ consolidated rate case (23-0068) in Illinois. A principal of the Brattle Group testified for the companies and a principal of Energy Futures Group testified for a pro-electrification group of intervenors.
The Energy Futures Group witness analyzed the economics of electrification, asserting it will provide thousands of dollars in cost savings for each single-family home over the next 20 years, due in part to Inflation Reduction Act incentives.
But the Brattle witness responded: “Whether these incentives and subsidies will persist for the necessary period of decades to motivate large-scale customer conversion is an open question. Can one realistically conclude that those advantages will persist for the next 20-plus years as hundreds of thousands of individual customers living in a wide variety of housing units address their appliance conversion decisions? And that all of the highly complex logistical challenges associated with such a conversion will be resolved in a manner that supports conversion? The conversion economics may fade. I am not saying the Energy Futures Group witness’ finding could not persist, but a more systematic study is needed before reaching a confident conclusion.”
Proposed limits on gas infrastructure, as well as trends in building electrification, pose a risk to the terminal value of gas assets. Presently, though, pure-play gas utility valuations are robust compared to their electric-and-gas counterparts. In 2023, the average P/E ratios were 17.5 and 16.06, respectively. This suggests the market believes, as noted by the consultant ICF in Illinois’ current “Future of Gas” proceeding, that “...natural gas infrastructure is foundational to reaching a net-zero, clean energy future with the greatest level of affordability for consumer. Decarbonizing the existing natural gas system and improving the efficiency of the end use gas equipment owned by customers could be a faster, less expensive pathway to reducing GHG emissions than policy-driven mandatory electrification.”
This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.
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