Press Release: New Research Finds Century-Old Regulatory Framework Constrains Uptake of New Technologies and Exposes Gas Customers to Rising Costs
Gas and electric utilities have long competed for the same customers but the rules governing them were never built to manage competition. This is beginning to threaten stability and raise costs.
The Future of Heat Initiative (FoHI) announces publication of a new article in the Energy Law Journal, Managing Wasteful Competition Between Wires and Pipes Utilities, by FoHI’s Director of Research and General Counsel Justin Gundlach and Josh Lappen, a Postdoctoral Research Associate at the University of Notre Dame and FoHI Fellow.
At a time when gas bills across the country are climbing at an even faster rate than electric, the article examines a blind spot in American utility regulation that has begun to threaten the stability of gas utilities while raising costs for gas ratepayers. It diagnoses that problem, traces it to the foundation of utility regulation, and describes how confronting the problem head-on can resolve multiple looming challenges for gas utilities, utility regulators, and the public at large.
An unrecognized form of competition is at the heart of the matter. A local gas distribution system is constantly competing for customers and market share with the electric grid — even when both systems are owned by the same corporate parent.
“This structural competition has waxed and waned over the decades, and now it’s very distinctly on the rise. As heat pumps and other electric technologies keep developing, it’s only going to intensify,” said Justin Gundlach, FoHI’s Director of Research and General Counsel. “Gas distribution utilities are financially susceptible to that pressure even though they tend not to respond to it.”
The legal and regulatory framework in which distribution utilities operate does not recognize this intensifying competition, and in fact encourages the utility commissions charged with oversight to ignore it.
“Under the century-old framework that governs distribution utilities, the problem of competition between regulated utilities has always fallen through the cracks,” said Josh Lappen, a Postdoctoral Research Associate at the University of Notre Dame and FoHI Fellow. “This blind spot was built into utility regulation at its foundation, and it has never been directly addressed.”
How did this major gap develop and persist? In brief, state utility regulation developed in a moment when gas seemed to be in permanent decline, eclipsed by new electric systems that were outcompeting gas whenever the two provided similar services. Legislators, regulators, and advocates all assumed that gas and electricity would either not compete at all, or that exceptional instances of competition between them would resolve through a swift and decisive collision that left one victor standing. They never imagined the long chain of changing circumstances that have allowed gas utilities to persist and hold their own against electric service for cooking and heating in markets across the United States.
The framework did not foresee today’s situation, in which 45 million households have come to rely on gas service for space and water heating, in many cases intermingled with neighbors relying on electricity for those same needs.
The result is a gas system and gas ratepayers increasingly vulnerable to the wasteful and destructive effects of competition, the exact problems that the natural-monopoly structure of state utility regulation was created to avoid in other contexts. The solution, the authors argue, is to proactively address competition between gas and electric systems using the same tools that past generations of regulators deployed.
“Commissioners are watching gas costs climb as customers consume less and less gas, and the existing rulebook doesn’t give them a way to manage it. As it currently stands, utility regulation was not designed, and has never been updated, to structure or manage competition in energy services between different forms of energy,” said Jamie Van Nostrand, FoHI’s Policy Director and former Chair of the Massachusetts Department of Public Utilities. “In fact, as discussed by Gundlach and Lappen, the current regulatory framework actually steers PUCs away from addressing growing competition proactively, even though this competition promises to become a cause of increasing instability. The sooner commissions rewrite the rulebook, the more affordably and safely this transition can be managed.”
“Where early-20th-century policymakers focused on reducing competition between companies providing the same energy source, their 21st-century successors should use the many tools at their disposal to manage competition between companies providing the same service through different energy sources,” said Lappen.
The article lays out the foundational features of the sector that underlie FoHI’s other ongoing research into gas utility regulation, including its state-specific affordability primers and analysis published through the organization’s Based Rates Substack newsletter. The full article is available at the Energy Law Journal.