Surcharges likely for gas pipeline replacement

When Maryland utilities replace their gas pipelines, customers have had to fork out extra money afterward — not during. But that's poised to change.

Both chambers of Maryland's General Assembly, citing safety concerns, approved measures this month that would make it easier for utilities to add infrastructure surcharges of up to $2 a month to natural-gas customers' bills. It's the latest push in a tug of war over the best and fairest way to replace the nation's aging utility infrastructure, the price tag for which has been estimated in the trillions of dollars.

Maryland utilities, including Baltimore Gas and Electric Co., say the proposal would allow them to more quickly replace decades-old gas mains that are the biggest source of leaks. But consumer advocates say a surcharge is a bad idea that increases the likelihood of overcharging, coming as it does on top of the rates customers already pay for upkeep.

"You have a monopoly that owns these pipes," said Tammy Bresnahan, associate state director of advocacy with AARP Maryland, which avocates for the state's older citizens. "They're supposed to take care of them. That's their job."

Surcharges and similar add-on fees have gained momentum in a growing number of states as a way to pay for infrastructure replacement at gas, electric and water companies.

The state utility regulator in Maryland, the Public Service Commission, can approve a surcharge for gas infrastructure improvement. But it never has.

When Washington Gas Light Co. asked to levy a surcharge on Maryland customers in 2011 to replace pipelines, commissioners green-lighted the work but told the company to seek reimbursement in the usual way — by filing a rate-increase request afterward and letting interested parties pore over records detailing its overall financial situation.

"The Company's witnesses confirm that WGL has the operational and financial ability to accelerate its existing pipe replacement program, and we authorize the Company to do so," the commissioners wrote in their decision. "But the mere fact that the Company plans increased infrastructure improvements does not justify a surcharge, which would represent a fundamental shift from long-standing rate-making principals."

That approval of the plan but thumbs-down to a surcharge couldn't happen under the General Assembly's proposal. Consumer advocates think consumers are more likely to see such fees with the new measure, because surcharges would be mandatory if the commission approves the infrastructure work.

The surcharge proposal isn't a done deal yet — each chamber must approve the other's almost identical bill and the governor would have to sign it — but it's likely to get over the final hurdles.

If the law does go into effect in June as expected, BGE officials say they will seek a surcharge.

"The reason we're so supportive of this legislation is because we believe there is a pressing need," said Mark D. Case, vice president of strategy and regulatory affairs at BGE, which has more than 650,000 gas customers. "This is something that's very important to us, so you should expect that we would move forward in filing a plan sooner rather than later."

Utilities have been trying since the 2011 session to get a surcharge measure passed. Washington Gas, which serves customers in D.C. and nearby suburbs, led the way.

In a statement, the company said the traditional method of recouping expenses — starting a few years after the fact through a rate-increase request — "never envisioned the current aging infrastructure challenges and risks that gas utilities now face."

"It was designed at a time when pipes were new and only required routine maintenance," Washington Gas said in its statement.

Rate cases do allow for overhauls — BGE says it has tripled the amount of gas pipeline replacement in the last five years, spending $78 million last year alone. But Case says the normal process doesn't lend itself to the even more "rapid investment cycle" that utilities feel is needed.

BGE made its case to the General Assembly by pointing to the scale of the to-do list. About 20 percent of its 7,000 miles of gas mains is either cast iron or bare steel, both of which are more likely to leak or break than the protected steel and plastic pipes the utility switched to after the mid-1950s, BGE said.

Cast-iron and bare-steel pipes account for about 90 percent of BGE's 6,000 gas leaks a year, according to the company. Newer pipes would mean fewer leaks, improving safety and reducing repair costs for customers, Case said.

"We would say that our system is safe, but it's a level of degree," he added. "We know the pipe that's bare steel and cast iron … is not going to last forever."

The federal government wants to see these pipes replaced at a faster clip nationwide. The U.S. Department of Transportation's Pipeline & Hazardous Materials Safety Administration testified about the importance of maintaining safe networks of pipes.

Ten percent of Maryland's gas mains are cast or wrought iron, higher than all but four other states and D.C., according to the federal agency. (States that urbanized earlier are more likely to have old pipes.)

Though the Maryland surcharge bills were criticized as a utility "bailout" by some liberal Democrats and conservative Republicans in the General Assembly, the proposals easily passed both chambers. Supporters worry that people living near old gas mains are at risk.

The 30 "significant incidents" involving gas pipelines in Maryland from 2002 to 2011 killed one person, injured 16 and caused $12 million in property damage, the Maryland Department of Legislative Services reported in its analysis of the surcharge bills.

But the agency, which didn't note whether deterioration caused those incidents, added that surcharges could be said to shift financial risk from the companies to the customers because the flow of money starts sooner — and because a utility could have less incentive to rein in expenses.

The head of the Maryland Office of People's Counsel, which represents residential utility customers, said both she and the National Association of State Utility Consumer Advocates oppose infrastructure surcharges.

"From our perspective, this is not a safety issue," said Paula M. Carmody, the Maryland people's counsel. "Everybody agrees the companies [must] maintain a safe and reliable system. The disagreement between the consumers and the utilities has been over how do they collect the revenues."

One of the problems with surcharges, Carmody said, is that they separate a single type of expense from all the rest. In a rate case, a utility's intertwining expenses and the money it made are all looked at together.

AARP's Bresnahan said utilities don't like rate cases in part because they have to cough up so much information.

"I truly believe they're trying to get out of the whole rate process, and this is the beginning of that," she said of the surcharge measure.

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