Donald Fry: It’s complicated, but gas pipeline replacement proposal worth a look

By Donald C. Fry

Much has been written and debated about the importance of transportation infrastructure to Maryland’s economy and quality of life and the need to invest in it. But residents and businesses in our state also rely on other critical infrastructure systems for energy, water and communication that must constantly be maintained and improved.

For one such critical infrastructure system – natural gas pipelines – Maryland is slipping behind competing states where utilities are stepping up their efforts to replace older underground natural gas pipelines.

The reason? It’s complicated, but it boils down to this: Maryland utilities have been unable to convince the Public Service Commission to adopt plans similar to those in at least 25 other states to accelerate the replacement of aging gas pipeline infrastructure.

Other jurisdictions that have put such initiatives in place include Virginia, New Jersey and Washington, D.C. in the mid-Atlantic region.

Typically, such infrastructure replacement mechanisms take pipeline replacement costs out of the normal utility rate-making process and instead institute a nominal monthly customer charge dedicated to aging infrastructure replacement.

In Maryland, thousands of miles of underground gas mains and pipelines provide safe, clean, efficient, and low-cost natural gas to more than 1.1 million customers, including nearly 80,000 commercial and industrial customers.

But 10 percent – more than 1,400 miles – of those underground gas mains in Maryland are older cast iron or bare steel pipes, according to industry data. BGE and Washington Gas Light Co. operate all but 15 of those aging pipeline miles.

Maryland’s natural gas utilities routinely replace pipelines that are reaching the end of their useful lives. But our state is one of the few with an abundance of older pipelines that hasn’t adopted legislation to help accelerate infrastructure replacement.

Of 20 states with the most “high risk” cast iron and bare steel gas mains, Maryland is one of only three that have not adopted infrastructure cost recovery programs, according to the U.S. Department of Transportation’s Pipeline and Hazardous Material Safety Administration, the federal agency charged with enforcing pipeline safety.

A bill before the 2013 Maryland General Assembly would enable the Maryland Public Service Commission to authorize a small, monthly surcharge to fund accelerated gas pipeline replacement programs. The “STRIDE” bill, short for Strategic Infrastructure Development and Enhancement, was proposed last year and came within two votes in the Senate of passing both houses.

This year’s enabling legislation would set a $2 per month cap on the amount of a residential customer surcharge for infrastructure replacement and directs that the rate the Public Service Commission could set for non-residential commercial and industrial customers cannot be less than the residential surcharge.

The Public Service Commission would retain full review and control of rates and surcharges. The legislation would simply create a regulatory environment for a gas pipeline surcharge.

For its part, Maryland’s Public Service Commission has declined several requests for surcharge mechanisms for a variety of purposes in recent years, noting that surcharges would represent a fundamental shift away from the traditional ratemaking principles. In this case, gas pipeline infrastructure costs are traditionally factored into rates.

Industry advocates note that the current process of paying for gas pipeline investments as part of the general rate-making process delays a utility’s recuperation of infrastructure replacement costs, sometimes by years. They point out that it requires the utilities to endure financing costs that could be avoided by implementing a more timely and cost-certain way – such as the proposed up-front surcharge – of paying for replacing aging infrastructure.

The Public Service Commission opposed last year’s proposed surcharge legislation. The bill also drew opposition from AARP, which generally views surcharges as mechanisms that confuse consumers and result in increased costs – not savings – for customers.

Industry advocates, however, make a strong case that this particular legislation proposes a proven mechanism that has enabled utilities elsewhere to replace critical infrastructure sooner and in a more cost-effective manner. It would, in fact, produce significant reduced costs for utilities and tangible savings to residential and business customers alike, utility advocates contend.

For example, Atlanta Gas Light Company and the state of Georgia pioneered the surcharge mechanism and cut replacement costs by 40 percent per foot. Annual gas leak repair costs have declined by 80 percent. These kinds of results are being repeated in other states that have adopted the surcharge mechanism, according to utility advocates.

BGE estimates that its interest expense savings resulting from enactment of STRIDE legislation could be as much as $40 million on infrastructure bonds to be issued in the next five years alone. Washington Gas estimates its Maryland ratepayers would save as much as $21 million over 10 years. These reduced costs would flow through directly to benefit ratepayers, say industry advocates.

The utilities industry is promoting the STRIDE legislation as an opportunity for Maryland to implement a win-win regulatory policy that enables utilities to replace critical aging infrastructure in a proactive manner that would reduce energy costs.

Advocates contend that it would make the state’s energy regulatory process more stable and predictable and would promote reduced costs of doing business, both of which are among core pillars for a competitive business environment compiled by the Greater Baltimore Committee’s “Gaining a Competitive Edge” initiative.

Admittedly the energy rate-making process in Maryland, or anywhere for that matter, is inherently bureaucratic and convoluted. It understandably lends itself to customer skepticism. Nevertheless, similar infrastructure cost recovery programs appear to have gained wide acceptance and success in other states.

It would be in the best interests of consumers and businesses for Maryland lawmakers to give the STRIDE proposal serious consideration as to whether it properly balances the legitimate infrastructure needs of natural gas providers while delivering appropriate rate protections and savings to customers.

In any case, with regard to our state’s aging gas pipeline infrastructure, let’s not repeat the inaction that has paralyzed our state’s transportation funding in addressing another vital public resource – energy.

The proposal before the General Assembly may not be perfect from everyone’s perspective. But in achieving progress on matters of policy, it’s worth remembering the adage that “perfect is the enemy of good.”

Donald C. Fry is president and CEO of the Greater Baltimore Committee. He is a regular contributor to Center Maryland.

Recent Center Maryland columns by Donald C. Fry:

Proposed budget frames state’s fiscal contrasts

Transportation funding: will it be a genuine priority in Annapolis this year?

As deficit pressure eases, what will state lawmakers focus on?

Competitiveness should be at the top of lawmakers’ priority lists

Community spirit: it’s alive and well in Baltimore’s business sector

Two agencies offer roadmap to competitiveness

State funding for new roads approaching zero