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In recent years, legislatures and utility regulatory bodies in a growing number of states and cities have begun giving greater scrutiny to gas distribution extension policies and the related costs.
Since 2023, seven states have eliminated line extension allowances through legislative or regulatory action, driven primarily by state climate and decarbonization policy objectives. These states include California, Colorado, Washington, Oregon, Maryland, New York, and Massachusetts.
While not necessarily a nationwide trend, these recent actions do draw greater attention to considerations regarding distribution system expansion.
Financial health
Strong financial management over capital investment in distribution system expansion is essential for effective gas utility operations. Gas utilities must ensure that the capital investment for extending the system to add customers is adequately matched with growth in gas sales, revenues, and margin.
Financial management processes that carefully assess the incremental capital and operating costs of extending the distribution system to add new customers are critical.
Fairness among customers
Who pays when the extension cost exceeds the financial contribution it is expected to generate? There are competing considerations when it comes to how to share the costs of adding new gas customers. A growing customer base helps to spread fixed costs and avoid continual rate increases that can otherwise lead to a downward spiral.
Alternatively, a series of underperforming investments in system extensions can leave existing customers bearing costs they neither benefit from nor caused.
To establish a more rigorous approach to distribution system expansion, we recommend municipal gas utilities implement a straightforward set of practices.
Tools for assessing capital investments
The financial performance for system expansion projects should be assessed using a Natural Gas Payback Model that incorporates the projected capital costs and forecasted new gas sales volumes and revenues, and incremental operating costs to calculate key financial performance metrics, including net present value and payback period.
The model should test the investment under less-favorable participation, cost, and usage scenarios, rather than relying solely on a base case. Use the results to determine whether the utility can support the investment on its own or whether a contribution from the customer or developer is required.
Utilities may use project-specific financial analysis or standardized allowances to determine their contribution toward an extension, as shown in the table below. Each is broadly based on the principle that revenues from extending service to a new customer will equal or exceed the cost of serving that customer.
Documented policies
Municipal gas utilities should also maintain a comprehensive system expansion policy that documents key practices, including minimum financial performance targets and contributions in aid of construction (CIAC) requirements. The policy should set consistent approval criteria, contribution requirements, and rules for exceptions.
Raftelis helps natural gas utilities answer the expansion question with more confidence: which projects make sense to pursue, and how to structure policies so new growth pays its way.
Building the tools to grow with confidence. A natural gas utility wanted to grow its system but needed a clearer way to judge which expansion opportunities would pay off. We built a financial model and analytical tools to evaluate extensions, then worked side by side with utility staff to use them to shape a market strategy. Together, we looked across the customer base for growth opportunities and identified specific steps to strengthen the utility brand and what it offers customers.
Taking a hard look at past expansion decisions. The gas utility of a large municipality wanted to know whether its approach to extending service was holding up. We went back and reviewed how a set of recent expansion projects actually performed, evaluated the financial tools the utility used to approve new extensions, and compared its policies and practices with the rest of the gas distribution industry.
If your gas utility is ready to bring more financial discipline to system expansion, reach out to Steven Courtney or Collin Drat.
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