CenterPoint rate case is an opportunity to modernize Minnesota’s gas policies

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Update: On August 18, 2022, the Minnesota Public Utilities Commission voted 5-0 to approve the March 14, 2022, settlement in CenterPoint Energy’s rate case. Fresh Energy applauds the decision that will help CenterPoint move forward in modernizing its gas policies. Fresh Energy is looking forward to continuing to work with CenterPoint Energy on future Natural Gas Innovation Act dockets that will further address policies around line extensions, infrastructure replacement, green hydrogen pilots, customer charges, and more.

Update: On March 14, 2022, CenterPoint Energy and intervening parties filed a stipulated settlement in the utility’s current rate case at the Minnesota Public Utilities Commission. Fresh Energy and the Minnesota Center for Environmental Advocacy (MCEA) applaud the utility’s willingness to review some of its outdated and untested policies that are contributing to higher gas bills and climate change-causing greenhouse gas emissions. Read Fresh Energy and MCEA’s full statement here.

In the past, the headline in any utility rate has always focused on how much customers’ monthly bills might be expected to change. And that’s still an important figure, especially given the impact energy bills can have on our budget each month. But as the frequency and size of rate increases has accelerated over the past decade, and as the climate crisis has worsened, we need to look beyond the topline numbers and dig deeper to understand what our rates are paying for and whether it’s a prudent investment in Minnesota’s energy future. Minnesotans, policymakers, and clean energy organizations like Fresh Energy are now also pushing gas utilities to find their place in Minnesota’s transition toward a just and equitable clean energy future.

CenterPoint Energy, Minnesota’s largest gas utility serving more than 800,000 customers, filed a rate case in November 2021, and the proceeding kicked off with parties (called “intervenors” in rate case parlance) filing written direct testimony on February 7, 2022. Need a primer on rate cases? Check out our explainer blog.

Fresh Energy and our partners at the Minnesota Center for Environmental Advocacy (MCEA) filed direct testimony urging the Minnesota Public Utilities Commission to use this rate case as an opportunity for scrutiny of existing utility policies with a climate- and cost-focus. In particular, we addressed the expansion, replacement, and future of CenterPoint’s gas system in Minnesota.

Let’s dive into our recommendations!

Pumping the brakes on the expansion of the gas system

Ever wonder how the gas system grows? It grows via gas line extension policy—the policy that encompasses the utility’s construction of gas mains, service lines, and meters to serve a new customer. Gas utilities like CenterPoint Energy typically have a line extension policy that allows potential new customers to connect to its system for free, with all other customers covering the costs to add the new customer. For example, CenterPoint currently allows new residential customers to get the first 150 feet of gas main, 75 feet of service line, and the gas meter for “free,” with the actual costs (which are over $2,500) covered by everyone else. A pretty good deal, right?

So why does this policy exist? In the broadest sense, line extension policy is based on the gas utility’s assumption that the benefits of adding a new customer to the system outweigh the costs. Under this rationale, it is assumed that the new customer will pay enough in rates over time to make up for the cost to connect that customer. Further, it has been considered a public goal to expand access to natural gas, so it makes sense the policies are in place to encourage gas utilities to expand to new areas and add new customers.

Today, with our modern and clean electric grid powering homes and appliances, these policies make less and less sense. First, the natural gas sector is a significant and growing source of climate-causing emissions in Minnesota. To address this issue, state law has established goals to reduce these emissions and a goal to reduce the usage of fossil gas. Current line extension policies that are explicitly designed to expand the gas system make achieving these goals more difficult. Fresh Energy believes that it makes a lot of sense to eliminate these outdated policies.

Line extension policies also pose a growing financial risk for customers in the future. One pathway to reduce climate-causing emissions from the gas system is to transition away from using this energy source in the coming decades. This transition could mean that parts of the gas system will be phased out. If this occurs for a part of the system that has not fully been paid for, this asset becomes “stranded” and the utility is owed financial recovery for an asset that is no longer “used and useful,” in utility regulatory parlance. And most often, customers foot the bill for this. It can take decades for a piece of pipe to be fully recovered, so any new pipe that is installed today runs the risk of becoming stranded in the future. Stranded assets are akin to a bill that could become due in the future—the more we invest in new infrastructure today, the higher that bill could one day be.

Each year, CenterPoint spends about $20 million on main line and service line extensions. The vast majority of these costs are put into “rate base,” or the collection of assets from which customers’ rates are calculated. Simply put, the larger the rate base, the higher the rate customers must pay. Similarly, the larger the rate base, the larger the stranded asset.

Fresh Energy’s testimony at the Minnesota Public Utilities Commission (PUC) demonstrated that line extension policy is out of step with current state law and policy. It places a burden on both current and future customers and distorts the true cost of connecting to the gas system by subsidizing it for the gas utilities. Fresh Energy recommended a reduction of line extension budget allowances of approximately 70 percent from the current allowance with a goal to eliminate gas line extension allowances for all utilities within the next five years.

While line extension policy affects how the gas system grows, we must also closely evaluate the existing gas system. Our existing gas system is being replaced at an accelerated rate, and this spending directly impacts rates and customers.

Slowing the accelerated replacement of the gas system

Photo/Thomas Jewell

CenterPoint Energy has invested nearly $2 billion on the accelerated replacement of its system over the past decade, and it plans to spend at least another $1 billion in the coming years. Much of this spending has been focused on replacement of older, leakier pipe material like cast iron. Delivering energy safely and reliably is one of the core obligations of all regulated utilities. But, as utilities make progress on the replacement of the riskiest pipe material on their systems, it is important to take stock of things before another surge of spending is undertaken.

What are these things that we should take stock of, you ask?

First, it’s important to consider the rate impact that this surge in spending has had. Since 2008, for example, the base rate for residential customers has roughly doubled, meaning that they pay double for every unit of energy consumed today compared to 2008. This equates to a significant annual growth rate of approximately 5 percent. For customers, this substantial base rate growth came at a time when gas prices were unusually stable and low, so the impacts of the increases have not been felt as strongly. However, the bad news for consumers is that this period may be ending. The anticipated double-whammy of rate increases and higher, more volatile prices for natural gas means a bigger bill and increased energy burden for many consumers—especially under-resourced and Black and Indigenous communities of color that have disproportionately borne the costs of unjust and inequitable energy decisions. Since accelerated infrastructure replacement has driven these rate increases, it is important to consider whether the pace of spending is sustainable for rates.

Second, accelerated system replacement poses an even greater risk to future customers than line extensions do. This is because the replacement of the system is not adding customers to the system—which as we discussed above, would help to offset the rate impact of the additional costs. Rather, it is being done to replace the system that serves existing customers. This increases the impact that rate increases have on current customers while also increasing the stranded asset risk we‘ve already covered, which could be borne by future customers. Replacing large swaths of the natural gas distribution system is a risky proposition given the future energy system.

Our utility regulatory system was built upon an idea of expansion, where spending capital on infrastructure generally lowered costs for all customers by adding new ones. Under this historical ideal, a utility could go years between rate increases because its revenue could keep pace with the investments it needed to make. This assumption no longer holds today. A broader discussion must be had to balance the obligation for safety with unsustainable levels of spending (and resulting rates) that we are currently experiencing.

To that end, Fresh Energy has recommended that the Commission take up these concerns in its “Future of Gas” docket (#21-565), which was opened in 2021. CenterPoint is not unique in the surge of system replacement spending it has undertaken over the past decade, and it will be important for the Commission to take a holistic look at the costs and benefits of accelerated system replacement.

So far we have covered the expansion and replacement of the gas system. Our last topic will be the innovation of the gas system.

Hydrogen Pilots need targeted implementation and careful review

CenterPoint Energy proposed two pilot programs that would create and inject hydrogen produced by renewable energy into the distribution system. Hydrogen or, more specifically, the H2 molecule (science!), is a gas that can be burned for energy, much like the methane molecule (CH4, for those keeping score at home). It can be created through a process known as electrolysis, where electricity is used to break apart a molecule of water (the fan-favorite H2O) into hydrogen and oxygen. Hydrogen produced in this manner using renewable electricity is called “green hydrogen.” The many different ways to create hydrogen, and the respective colors that those methods are called, is a topic for another blog post. As a sneak peek—green hydrogen is better than brown hydrogen!

CenterPoint’s green hydrogen pilots would create hydrogen and inject it into the distribution system, where it would be delivered at exceptionally small concentrations to end users in homes, apartments, businesses, and more. Some see a future where this is done at an even larger scale as a way to decarbonize the gas system. But there are concerns with this approach.

For one, as we were reminded in the last paragraph, hydrogen is a different molecule than methane, which makes up 70-90 percent of natural gas. It behaves differently, and the current system and end uses (think furnaces) can only handle a certain amount of hydrogen blend before upgrades are required. So, to accommodate a future where hydrogen accounts for a higher percentage of gas in our distribution system, we may need entirely new pipes and new appliances. I just got done describing how expensive the replacement of our existing distribution system is. Injecting hydrogen could prolong an already identified problem!

There also may be better ways to use hydrogen. We talk a lot at Fresh Energy about best and highest use cases for alternative gaseous fuels. It boils down to this: Just because you can inject hydrogen into the distribution system doesn’t mean you should. There may be scenarios where hydrogen can be produced and used on site without the need to tap into and upgrade the surrounding gas distribution system, such as in heavy industry for example. But it’s still early days for all of these use cases, which means that it can be hard to assess which technologies may be a viable tool for the decarbonization of our gas system. This leads me to the main reason Fresh Energy expressed concern about CenterPoint’s hydrogen pilots.

In Fresh Energy’s testimony, we emphasized that CenterPoint’s hydrogen pilots were proposed in the shadow of the Natural Gas Innovation Act (NGIA)—a new law passed in 2021 that is already working to explore and drive innovation around alternative fuels like hydrogen. NGIA, among other things, provides a pathway for natural gas utilities to propose greenhouse gas-reducing “NGIA Plans.” These plans will include a portfolio of resources, including hydrogen, “renewable” natural gas, electrification, and energy efficiency, just to name a few. Importantly, NGIA also requires the PUC to create regulations to assess the costs, benefits, and greenhouse gas intensity of each of the resources so that they can be compared with one another within a proposed NGIA plan.

Without these regulatory frameworks in place, it is difficult to assess whether CenterPoint’s hydrogen pilot proposals pencil out or not. The good news is that help is on the way: Under NGIA, the Commission must institute these regulations by June 1, 2022. In fact, Fresh Energy, CenterPoint, and a group of stakeholders are currently at work developing these regulatory frameworks for the Commission’s consideration. Fresh Energy believes the most commonsense approach to these hydrogen pilots is to consider them within the bounds of the new regulations and against other alternative resources.

What’s next?

A rate case provides regulators, organizations like Fresh Energy, and all Minnesotans a unique window into the inner workings of a utility, and we were pleased to have the opportunity to engage in CenterPoint’s case. When you know what you are looking for, you can get a sense of a utility’s past, present, and future—which is crucial as we work together to forge a path for reducing carbon emissions in Minnesota.

On August 18, 2022, the Minnesota Public Utilities Commission voted 5-0 to approve the March 14, 2022, settlement in CenterPoint Energy’s rate case. Fresh Energy applauds the decision that will help CenterPoint move forward in modernizing its gas policies. Fresh Energy is looking forward to continuing to work with CenterPoint Energy on future Natural Gas Innovation Act dockets that will further address policies around line extensions, infrastructure replacement, green hydrogen pilots, customer charges, and more.