The vast majority of natural gas local distribution companies (LDCs) are optimistic about the industry’s growth prospects between now and 2020. This confidence is displayed in their expansion activities across the United States – 42 percent of LDC survey respondents said their company had an active expansion program that had either received regulatory approval, is awaiting approval or is under development.
According to the 2015 Black & Veatch Strategic Directions: U.S. Natural Gas Industry report, 54 percent reported feeling optimistic about the future, with nearly 28 percent selecting very optimistic. This buoyancy is evident when examining the fact that 35 states currently have some form of gas expansion initiatives either by the utilities themselves or facilitated by legislation or regulatory actions to make natural gas more available for consumers.
“Increasingly, we are seeing evolving state legislative and regulatory policies – largely due to wholesale market economics that are creating compelling opportunities for reaching customers who previously had no access to natural gas service,” said Ron Amen, Director in Black & Veatch’s Financial & Regulatory Services consulting practice. “The confidence is directly tied to how the industry is addressing some of its most pressing concerns.”
Cost Recovery Trackers Increase in Activity
The top five industry issues reported by LDCs are, in order of ranked importance: safety, aging infrastructure, available pipeline capacity, gas supply reliability, and rate and regulatory certainty.
“While safety has always been a top priority – and we are confident it will remain on top – other priorities may fluctuate with the changes in gas market economics,” Amen said.
The focus on these ranking issues reflects the current dynamics of the market — in short, consumers want reliable access to natural gas, he noted. Companies want to provide that reliable access, while at the same time ensuring that regulatory policies and cost recovery mechanisms are in place to do so economically.
With regard to the priority of aging infrastructure, more than 63 percent of LDC respondents indicated their company has an approved capital cost recovery tracker or accelerated infrastructure cost recovery mechanism. Indeed, the percentage of respondents indicating they have a cost recovery tracker has increased from 46 percent in 2013 and 53 percent in 2014.
“This is a clear signal these mechanisms are becoming even more prevalent as they meet the needs of various stakeholders,” said John Taylor, Principal Consultant in Black & Veatch’s Financial & Regulatory Services consulting practice.
Taylor noted that it is becoming a strategic move for utilities to be involved in new pipeline initiatives as an equity partner or long-term capacity holder.
“The growing participation by local gas distribution companies in new pipeline projects upstream of the city gate is particularly important,” Taylor said. “This will help to ensure that as new pipelines are built, they will serve the utilities’ market areas.”
LDCs have become increasingly more involved in developing interstate pipelines from shale gas supply basins. New England, Mid-Atlantic and Southeast LDCs, for example, are contracting for incremental long-term firm capacity or taking equity positions in pipeline ventures into their regions. Industry participants said they felt the New England market would be most in need of incremental natural gas pipeline capacity over the next five years.
“The reported optimism among the LDC respondents may be due in part to the success LDCs are having with regulatory support for natural gas expansion programs and capital cost recovery mechanisms,” Taylor noted. “These programs directly address the most important issues of the LDC market.”
Published originally on Black & Veatch Solutions.
