“Exploiting the Abundance of U.S. Shale Gas:  Overcoming Obstacles to Fuel Switching and Expanding the Gas Distribution System,” Energy Law Journal, Vol. 34, No. 2, 2013.

https://www.eba-net.org/wp-content/uploads/2023/02/5-17-541-Costello.pdf

Original Posting 

Kenneth W. Costello,
Features of good utility-initiated energy assistance,
Energy Policy,
Volume 34, No. 2
2013,
111345,
ISSN 0301-4215,
https://doi.org/10.1016/j.enpol.2020.111345.
(https://www.sciencedirect.com/science/article/pii/S0301421520301026)

Synopsis: The shale gas revolution has dramatically changed the outlook for natural gas in the U.S. It has fostered industry action and governmental policies aimed at increasing the consumption of natural gas both domestically and internationally. This article examines both the public-utility regulatory and market obstacles to achieving fuel conversions to natural gas. These obstacles, which affect either the demand- or supply-side of the natural gas market, can deter socially beneficial actions by energy consumers. As the saying goes, it takes two to tango: Without the willingness of consumers to change their energy source or the availability of an infrastructure to deliver the gas, fuel switching will not happen. This article focuses on what state public utility commissions can do to promote fuel switching and gas line expansions. It also examines the expected commission responses to positions proffered by stakeholders in their support or opposition to gas line extensions.

Table Of Contents


I. The Abundance of U.S. Shale Gas and Implications for the Demand Side of the Gas Market … 543
II. The New Interest in Gas Line Extensions and Fuel Switching … 544
III. Distinction Between Main Line and Service Line Extensions … .546
A. Three Categories of Benefits … 546
B. Main Lines Offer More Challenges for Policy … 547
IV. The Nature of Public Utility Regulation  … 548
A. State Commission Duties  … 548
B. The “Balancing Act” for Gas Line Expansion … 549
1. Inevitable Trade-Offs  … 549
2. Objectives of Gas Line Expansion …  550
V. The Economics Behind Fuel Switching and Pipeline Extension … 552
A. The Consumer-Side of Fuel Switching  … 553
B. Investment Criteria for Line Expansion   … 557
1. Investments and Utility Profits  …   … ..557
2. Criteria for System Expansion Investments … 558
a. Economic Tests for Evaluation  … 559
b. A Critique of the Economic Tests  … 559
VI. Obstacles Hampering Fuel Conversion and New Pipeline
Investments  … 562
A. Distinction Between Artificial and Natural Obstacles  … 562
1. Artificial Obstacles   … 562
2. Natural Obstacles  … 563
B. Major PUC Obstacles  … 565
1. Restrictive Ratemaking Practices  … 565
a. Rolled-In Versus Incremental Pricing  … 566
i. The No-Burden Standard … 568
ii. Economies of Scope, Incremental Prices, and RolledIn Prices … 568
(a) “Acceptable” Pricing Limits … 568
(b) What Constitutes Fairness? … 571
2. Conjunctive Decision-Making … 572
3. Utility Risk in Cost Recovery … 573
4. Restrictive Economic Test … 574
5. Competing Capital Needs … 575
6. Biasness Against Gas Demand Growth … 576
7. Uncertainty over the Utility Role … 576
VII. Remedies for Consideration … 578
A. Consumer-Side … 578
1. Dissemination of Information on What Energy Consumers Are Losing When They Fail to Convert to Natural Gas … 579
2. Lowering of Transaction and Inconvenience Costs Through the Expansion of the Utility Role … 579
3. Customer Incentives or Rebates for Gas Conversion and High Energy-Efficiency Gas Appliances … 579
4. Amortization of Required Upfront Costs … 580
5. Innovative Ratemaking Approaches … 580
B. Supply-Side … 581
1. Mitigation of Cost-Recovery Uncertainty … 581
2. Customer Funding of Marketing and Promotional Activities … 581
3. Shifting of Utility Funds from Energy Efficiency Initiatives to Gas Service Expansion Initiatives … 581
4. Utility Justification for Recovering a Portion of Line Extension Costs from Existing Customers … 582
5. Uniform Statewide Tariff and Policy … 582
C. Government Involvement … 583
VIII. What a Proactive Commission Can Do Promptly … 585

 

[2013] SHALE REVOLUTION & FUEL SWITCHING [pg. 543]

I. THE ABUNDANCE OF U.S. SHALE GAS AND IMPLICATIONS FOR THE DEMAND SIDE OF THE GAS MARKET

Shale gas has been one of the few bright spots in the U.S. economy since 2007. Hydraulic fracturing, along with horizontal drilling, has made it possible for the United States and other countries to recover large amounts of shale gas economically, which promises to serve domestic natural gas consumers for several decades. The energy guru Daniel Yergin has called this development the “biggest energy innovation” of this century.

The potential benefits of recovering these recently discovered vast resources in terms of job creation, cost savings to energy consumers, improved balance of trade, reduced energy dependency on foreign sources, and increased revenues for local, state, and federal governments are large and undeniable. Overall, the abundance of shale gas is a major positive development that promises to bolster the U.S. economy.

The shale-gas revolution has motivated the U.S. natural gas industry to increase the consumption of natural gas. Since 2007, increased domestic gas production has led to an oversupply of domestic gas supplies, as demand for natural gas has failed to keep pace. Potential areas for growing natural gas demand include natural gas vehicles; electricity generation; industrial demand; residential, commercial, or industrial fuel switching from electricity, oil, propane, or coal to gas; and exports. So far the most promising driver of increasing demand for U.S. natural gas is electricity generation, either from the retirement of coal-fired plants or the addition of new generating capacity. Exports more marginally have the potential to grow demand and make the domestic gas sector more profitable. Extending gas service to new areas, which is the topic of this article, would have the same effect.