Lost but not forgotten: The hidden environmental costs of compensating pipelines for natural gas losses

The last decade has seen a dramatic rise in the use of natural gas in electricity generation and other applications. This has been widely heralded as a vital step in the transition to a clean energy economy, with supporters arguing that natural gas can act as a bridge fuel, providing a lowemission alternative to coal while cleaner renewable energy technologies develop. Recently however, concern has been growing about the environmental impacts of natural gas production. Natural gas is comprised principally of methane, a short-lived but potent greenhouse gas that is released through intentional venting and accidental leaks during the production process. Many of these releases originate from the natural gas transportation system – the network of pipes used to move natural gas from production sites to consumer premises – as gas leaks from damaged pipelines and malfunctioning equipment. This not only wastes a valuable resource but also poses a threat to public safety and the environment. Unfortunately, current federal and state policies do little to encourage the repair of leaking pipelines. At the federal level, pipeline safety regulations require hazardous leaks to be repaired promptly but impose no repair requirement for other leaks. Just five states – Florida, Kansas, Maine, Missouri, and Texas – have adopted their own safety regulations establishing timeframes for the repair of non-hazardous leaks. In all other states, pipeline operators can and often do leave such leaks unrepaired for months or even years, regardless of their environmental impacts. The classification of a leak as hazardous or non-hazardous is generally based on its proximity to buildings, rather than its size. Therefore, leaks in isolated areas may be classified as nonhazardous and left unrepaired, even if they emit substantial amounts of natural gas. There is little incentive for pipeline operators to voluntarily repair non-hazardous leaks as the cost of leaked gas can be passed through to ratepayers. In West Ohio Gas Co. v. Public Utilities Commission, 249 U.S. 63 (1935), the U.S. Supreme Court held that pipeline rates must include an allowance for gas lost through leakage, condensation, expansion, or contraction. Following this decision, all jurisdictions now allow pipeline operators to recover the cost of lost and unaccounted-for gas, measured as the difference between gas flows into and out of the pipeline system. Recovery may occur in various ways, depending on the nature of pipeline operations. Historically, pipeline operators offered bundled services, which combined the sale of natural gas with transportation under a single price. In such cases, the pipeline operator will generally recover the cost of lost and unaccounted-for gas through a charge in its rates (i.e., reflecting the cost of gas purchased by the operator to make up for system losses). Alternatively, where gas sales are unbundled, a pipeline operator transporting gas on behalf of other entities (shippers) will typically recover lost gas in kind. That is, the pipeline operator may retain a percentage of the gas volumes tendered for transportation to make up for lost and unaccounted-for gas. That percentage is specified in the operator’s tariff. The tariff may permit the operator to sell retained gas and/or purchase additional gas when necessary for operational reasons. Where this occurs, the operator must provide its shippers with a credit for any gas sales and may collect a surcharge from its shippers for any gas purchases. Since pipeline operators can recover the cost of lost and unaccounted-for gas from customers, they have little incentive to improve system management to reduce gas losses. This White Paper examines the current frameworks for recovery of lost and unaccounted-for gas in each U.S. jurisdiction. It recommends changes to those frameworks to encourage improved management of pipeline leaks, namely: Lost and unaccounted-for gas should be reported based on a standard definition and calculated using a consistent methodology. With few exceptions, pipeline operators report lost and unaccounted-for gas based on their own definitions, which may vary substantially between and even within jurisdictions. This has led to inconsistent and erroneous reporting, preventing accurate tracking of lost and unaccounted-for gas across jurisdictions. To facilitate this, all jurisdictions should adopt a uniform definition and standard formula for calculating lost and unaccounted-for gas, modeled on that used in Pennsylvania. This process could be led by an industry body, such as the North American Energy Standards Board, which may issue a recommended definition to be used in all jurisdictions. The cost recovery framework should be reformed to incentivize reduction of lost and unaccounted-for gas. Currently, in most jurisdictions, pipeline operators track changes in the amount of lost gas and periodically update rates to account for those changes. Consequently, ratepayers bear the risk of any increase caused by excessive lost and unaccounted-for gas, and enjoy the benefit of any reduction. Since pipeline operators are unaffected by such changes, they have little incentive to significantly reduce gas losses. This incentive could be strengthened by rewarding operators for any decline, and penalizing operators for any rise, in gas losses. Such an approach is currently used by regulators in New York, whose experience could serve as a guide for other jurisdictions. Pipeline operators’ claimed gas losses should be carefully scrutinized. In allowing cost recovery for lost gas, the U.S. Supreme Court noted that some loss of gas is unavoidable, no matter how carefully the pipeline system is managed. This does not, however, entitle the pipeline operator to recover the cost of gas lost through avoidable causes. Nevertheless, regulators currently do not distinguish between avoidable and unavoidable gas losses. Many regulators currently lack the information needed for such an analysis as, despite the advent of new measurement technologies, pipeline operators often do not directly measure gas losses due to leaks and other causes. In the future, operators should be required to measure the quantity of gas lost from their systems and report the results of those measurements annually. The report should include a breakdown of gas losses by cause. The federal and state regulations should establish an appropriate cap on cost recovery. Several states have promulgated caps on allowable cost recovery for lost and unaccounted-for gas. Expanding this approach would create a powerful incentive for operators to reduce gas losses. New caps, designed to encourage pipeline operators to reduce gas losses over time, should be adopted in all jurisdictions.