While climate-induced natural disasters strike worldwide, Maryland utilities are investing more than a billion dollars in new fossil-fuel infrastructure. These investments — extending gas service areas and replacing pipes — are part of a last-ditch effort to benefit shareholders and make it more expensive to stop burning fossil fuels.
To put the scale of current spending in perspective, what is planned now and through 2023 will roughly double the natural gas infrastructure Maryland gas customers are paying for compared to 2018. The Maryland General Assembly has encouraged this spending, and the Public Service Commission (PSC) has approved it. While some new spending is certainly necessary and appropriate for safety and reliability, the current wholesale approach to infrastructure replacement is largely unconnected to safety considerations.
For example, in its multi-year plan approved at the end of 2020, the state’s largest utility, Baltimore Gas & Electric, proposed spending $411.6 million in 2021, $450.1 million in 2022, and $421.4 million in 2023, for a total of $1.3 billion over just three years — all for additional natural gas infrastructure. While observing that BGE had proposed “a multitude of aggressive programs,” the PSC accepted most of this spending, and much more is planned. This spending is moving forward without serious consideration of the implications for the climate or who will pay for this infrastructure if climate policy renders it obsolete.
Gas utilities have a tremendous incentive to build new gas infrastructure, despite the changing climate. More capital investments — such as natural gas infrastructure — mean greater shareholder returns.
Capital investments are recovered from the utility’s captive customers over time — often as long as 30 years. If the infrastructure stops being useful before it is paid off, it remains a liability on the utility’s books; that liability may be allocated to shareholders, but it could be borne by the utility’s captive customers.
State and federal climate change policy will affect the viability of these investments long before they are paid off. The state’s current plan identifies reducing natural gas use as key to meeting the state’s emission reduction targets. And policymakers likely won’t wait 30 years before requiring additional reductions for all fossil fuels.
Unfortunately, gas utilities are accelerating their investments without any guidance on who will pay the unrecovered costs of obsolete infrastructure. Will shareholders pay? Or will customers? The PSC has been silent on this matter. But utilities would not be spending so aggressively if they didn’t expect customers to pay.
In a competitive market, investors would think twice before betting on fossil fuel infrastructure that requires 30 years for payoff. For utility monopolies, state regulation theoretically substitutes for competition. The PSC’s job is to allocate risks, providing clarity to both shareholders and captive customers. But it has remained silent on climate policy’s impact on these large investments.
Policymakers reasonably can disagree on whether shareholders or customers should bear the risks of investments stranded by climate change policy. Utilities must ensure safe service and meet customer demands. They need some assurance of an opportunity for compensation. On the other hand, since regulation’s purpose is to imitate a competitive market, the risk of obsolete investments should be with shareholders, forcing utilities to consider the financial consequences of their spending plans — and, properly applied, the law provides for this result.
It is inexcusable to proceed with these investments without considering the implications of inevitable changes in climate policy. But that is exactly what is happening. Maryland’s gas utilities — confident that customers will be there to bail them out — are investing in new infrastructure at an unprecedented scale.
Maryland must slow the gas utilities’ acceleration of investments in new gas infrastructure if it hopes to ever achieve its climate goals. It will take a collective effort by the General Assembly and the PSC, but it will save Maryland customers from unnecessary costs that likely will disproportionately fall on low-income communities. At the very least, the PSC should clarify going forward who — customers or investors — will be responsible for new natural gas investments when they are no longer useful.
David S. Lapp (firstname.lastname@example.org) is the Maryland People’s Counsel.