Colorado regulators have set in motion an overhaul of natural gas utility regulations — advancing an ongoing inquiry into the gas grid's future in the state as policymakers work to meet ambitious climate goals.

The Colorado Public Utilities Commission recently proposed substantial revisions to the state's gas utility regulations that aim to reduce the sector's greenhouse gas emissions and align infrastructure planning with statewide emissions reductions goals. (21R-0449G) The proposed rulemaking kicks off a yearlong process of soliciting feedback from gas distributors and other stakeholders.

The outcome of that process stands to determine the trajectory of gas use in homes, workplaces and industrial facilities in Colorado, one of several states reviewing the fuel's role in a decarbonized future. The rulemaking also ties together several proceedings and "will be comprehensive and at the forefront of the evolution of the gas utility industry," the PUC said in an Oct. 1 filing.

"In one sense, this is just kind of setting the stage for the utilities to come forward later with those plans, and that's where we're going to see how far reaching those are, how ambitious they are," Mike Henchen, a principal at RMI who focuses on building decarbonization, said. "But ... the commission is ... taking a leadership stance in saying, we're going to take on some of the bigger questions about the future of the gas system and what that means for spending money and for planning right now."

While some of the proposed revisions will mostly impact large gas distributors, the changes will broadly affect all state gas distributors, including Xcel Energy Inc. subsidiary Public Service Co. of Colorado, Black Hills Colorado Gas Inc., Summit Utilities Inc. subsidiary Colorado Natural Gas Inc. and Atmos Energy Corp.

Implementing clean heat, energy efficiency laws

Many of the proposed rules seek to incorporate two recently passed pieces of climate legislation into the state statute. Those laws seek to align gas utility operations with the state's target of reducing greenhouse gas emissions by 90% from 2005 levels by 2050.

Colorado Senate Bill 21-264 aimed to reduce greenhouse gas emissions from distribution systems, homes and industrial facilities by improving energy efficiency, encouraging building electrification and facilitating the use of low-carbon gases. It established a Clean Heat Standard that requires gas utilities to cut emissions 4% by 2025 and 22% by 2030 against a 2015 baseline, with future reductions to be determined.

Gas utilities will have to file Clean Heat Plans to demonstrate how they will achieve the reductions. Those plans must demonstrate how utilities intend to use clean heat resources identified in the legislation. Those resources include green hydrogen, electrification, renewable natural gas and other recovered methane, pyrolysis of tires that meets methane protocols, and other technologies that the commission determines are cost-effective and reduce emissions.

Colorado lawmakers also voted in the 2021 session to require electric utilities to operate programs that incentivize gas customers to switch to electric heating.

The proposed new regulations also incorporated companion legislation, House Bill 21-1238, which updated standards for demand-side management, or DSM, the final clean heat resource identified in SB 21-264. HB 21-1238 required gas utilities to consider the social cost of carbon dioxide and methane when determining the cost-effectiveness of DSM programs, which seek to reduce customer gas usage. It established a social cost at $68 per short ton for CO2 and at least $1,756 per short ton for methane.

The bill also clarified that DSM programs include weatherization, insulation and high-efficiency electrification programs. It required gas utilities to develop energy savings targets every four years beginning in 2022. To address equity, it required 25% of residential DSM programs to target low-income households.

PUC tackles gas planning

Colorado lawmakers ordered the PUC to initiate a rulemaking by Oct. 1 to harmonize DSM programs with the new clean heat targets, prompting the commission to open the docket. However, the PUC went beyond simply fulfilling mandates, saying the rulemaking provided an opportunity to align the new provisions with an ongoing effort to reform gas system planning.

While Clean Heat Plans will be "essential" to meeting Colorado's emissions reductions goals, they will not address all of the transitions required to meet those goals, the PUC said. "The development of Gas Planning Rules concurrently with the promulgation of the rules governing [Clean Heat Plans] will enable the utilities, their customers and the commission to examine the future use of the utility pipeline system and economics of the retail service they provide over the long-term, culminating in the 2050 statewide reductions in emissions," PUC explained.

The gas-system planning review began in October 2020 when the PUC opened an investigation into gas utility emissions and the sector's role in achieving state climate goals. (20M-0439G) The PUC said it has continued to review applications and rate case filings that include "substantial investments" in gas infrastructure, including for reliability and safety. In light of Colorado's climate goals, those requests raise "many issues" about planning transparency and cumulative short- and long-term investments and expenditures in the state's gas grid, the PUC added.

Seeking to better understand the scale of future gas grid expenditures and improve planning to protect the public interest, the PUC proposed rules that would establish a process to determine the need for additional investment and spending, consistent with new climate considerations. The new rules include a proposed schedule and requirements for future gas planning reports, as well as guidelines for making forecasts, procuring gas, developing non-pipeline alternatives and managing capacity expansions and safety and integrity projects.

Rules address project approvals, gas grid growth

Anticipating the Oct. 1 rulemaking deadline, PUC in August sought input through a separate proceeding to craft the proposed rules. (21M-0395G) Through that proceeding, the PUC also sought information on safety and integrity investments, rates and costs for the next 15 years, and emissions data. Those comments are due Nov. 19.

The PUC also addressed short-term gas infrastructure planning rules proposed in April by gas utilities, PUC staff and other state agencies. (21M-0168G) The commission denied the parties' request to open a rulemaking to implement the proposed rules, instead opting to tackle the issue in a broader rulemaking that would also address long-term planning.

Under a proposed rule, utilities would need commission approval to construct and operate projects that cost more than $10 million or $15 million, depending on the utility's customer count. Currently, utilities do not need to seek approval for certain projects completed in their ordinary course of business. The provision would not only apply to reliability projects, as previously proposed by state utilities, but also to investments in system safety and integrity.

The PUC also added a rule that says policies, procedures and conditions for extending gas mains and service laterals must align with the state's greenhouse gas emissions goals — though the commission stressed that lawmakers prohibited them from banning new gas hookups. The PUC also proposed that utilities must base their service extension policies on the principle that new customers should generally bear "the full incremental cost associated with new development and growth."

While the provision is broadly worded and subject to feedback, it indicates that the PUC is at least considering ending a practice, common throughout the U.S., of socializing the cost of service expansions among the entire rate base, Henchen noted.