Natural Gas Pipeline Explosion Stirs Debate over Upgrade Expenses

Ken Silverstein | Mar 22, 2012

 

Pacific Gas & Electric is agreeing to pay $170 million to help both San Bruno, Calif. and the victims of a 2010 pipeline explosion there. That disaster cost eight people their lives, resulted in numerous burn victims and wiped out 38 homes.

The accident, meanwhile, has triggered lawsuits that are expected to cost the utility's stockholders at least $1 billion. If there is a silver lining, however, the crisis has also jumpstarted a discussion about updating and expanding the nation’s natural gas pipeline infrastructure. It’s an issue that is taking on unprecedented importance as shale gas that is extracted from rock formations continues to grow.

“At a time when people are demanding reliability, this will put significant upward pressure on rates,” says Tony Earley, chief executive of PG&E at the EnergyBiz Leadership Forum. “We will spend billions and be forced to write off some of it.”

Earley, who was tapped to lead the San Francisco-based company in August 2011, says that utilities are often pulled in disparate directions that allow some issues to be neglected. That is happening now to natural gas pipelines that have been in the ground since the World War 11 era.

Earley is therefore emphasizing the need to continually work hand-in-glove with regulators to explain that a vibrant pipeline infrastructure will fuel the American economy. With natural gas expected to comprise an ever-increasing piece of the electric generation portfolio, it is especially true.

Improving and expanding the pipeline infrastructure will be expensive. For starters, there are 2.4 million miles of existing interstate oil and gas pipelines in the United States as well as 1.8 million miles of distribution lines. According to the Pipeline and Hazardous Materials Safety Administration, about 7 percent of the nation's pipelines are classified as "high consequence areas."

Moreover, the Interstate Natural Gas Association of America says that 29,000-62,000 miles of additional pipeline is required to meet future demand. That will cost $8 billion a year for the next 25 years. 


“We need to educate regulators for the renewal of the system,” says Earley. “We need to show them where we have to invest. We can’t run a system until it breaks. If we don’t take care of this and start to upgrade, we will have more tragedies.”

System Renewal

As for the San Bruno accident, the National Transportation Safety Board has determined that PG&E bears much of the blame. Why? It didn’t have a quality assurance program in place to detect a poorly welded pipe section. The board also says that the lines did not have automatic shut-off valves or remote controls that could have limited the explosion’s severity -- a crisis that went on for 95 minutes before it was isolated and brought under control.

The transportation board is also critical of state and federal regulators, who should have properly monitored PG&E to ensure that it had been “pressure testing” its lines. That would have detected weaknesses in the structure.

The need for pipeline improvements is obvious. But it is less apparent as to whom will pay for those modernizations. Utilities would like the expenses to be included in the rate base. As for PG&E, it says that the “new” mandates to enhance its pipeline network will cost about $2.2 billion.

Community activists, on the other hand, are saying that record keeping and testing pipeline pressures are the costs of doing business. Those are expenses that should be borne by shareholders, they say. An administrative process is in the midst of deciding who pays what.

“In the wake of the explosion, PG&E’s disregard for customer safety has been documented again and again,” says Mark Toney, executive director of the Utility Reform Network. “In some cases, safety and maintenance were ignored even after the California Public Utility Commission awarded PG&E ratepayer funding to fix problems. It would be patently unfair for PG&E to collect ratepayer funds twice for the same repairs.”

Beyond the technical improvements and the financial considerations, PG&E realizes that it must make some cultural changes too. That’s something that requires the implementation of benchmarking and best practices, which is what Tony Earley was hired to do.

PG&E must follow through with those exercises to not just improve its own results but to also prime the industry for growth. If shale gas is to become more prominent, then the nation’s pipeline infrastructure must expand.


EnergyBiz Insider is the Winner of the 2011 Online Column category awarded by Media Industry News, MIN. Ken Silverstein has also been named one of the Top Economics Journalists by Wall Street Economists.

Twitter: @Ken_Silverstein

energybizinsider@energycentral.com