Davis, Lucas and Hausman, Catherine “Who Will Pay for Legacy Utility Costs?” (June 2021) | WP-317
The growing “electrify everything” movement aims to reduce carbon dioxide emissions by transitioning households and firms away from natural gas toward electricity. This paper considers what this transition means for the customers who are left behind. Like most natural monopolies, natural gas utilities recover fixed costs by spreading fees out over time across their customer base. In periods of a shrinking customer base, this can lead to a lack of fixed cost recovery. To shed light on these dynamics, we use historical evidence from growing and shrinking utilities. We show that in the U.S. during the period 1997-2019 there are many growing utilities, but also hundreds of utilities that experienced sustained periods of customer loss. We then study how the loss of customers impacts utility operations and finances. Utilities that lose customers maintain their pipeline infrastructure even as the customer base financing their operations is shrinking. As a result, historical capital cost recovery and some operations and maintenance costs do not decrease. In keeping with this, we observe that utility revenues shrink, but not one-for-one – indicating higher bills for remaining customers. We highlight resulting equity implications – both across income levels and across racial groups – of the current push for building electrification and other energy transition policies. We conclude by discussing alternative utility financing options, such as recuperating fixed costs through taxes rather than rates.