By Kevin Cianfarini and Erik Shilts
Over the next five years, Richmond Gas Works intends to heavily invest in obsolete infrastructure beneath the city’s surface. Richmond’s most recent Capital Improvement Plan allocates $100 million in new funding, sourced substantially from revenue bonds, to replace an aging methane distribution network.
Since the utility and its debt are municipally owned, residents of Richmond are effectively shareholders in the gas network, whether they pay for gas or not. As shareholders, Richmond residents should be concerned that public and private gas utilities around the country are becoming stranded assets that will require bailouts.
Revenue bonds are a form of debt issued by governments to finance long-lasting infrastructure projects that require steep upfront investment. This debt is gradually paid off by the revenue a development generates, in this case customer gas bills. There’s a catch – Richmond Gas Works is accruing debt under the assumption that its customer base will pay for gas indefinitely. Amid worldwide energy trends, this assumption requires scrutiny to protect city residents.
New gas bonds are worrisome because the barriers to electrifying buildings are shrinking daily. The easier and more cost effective it becomes to install electric appliances in a building, the more likely owners are to divorce from gas. In Europe, Russia’s aggression is accelerating electric building adoption. In the United States, the Defense Production Act recently invoked by President Biden and the initiatives in the newly revived Inflation Reduction Act aim to make heat pumps ubiquitous. Together they will reduce the costs of electrification, driving down building gas consumption.
When customers choose to adopt electric appliances and disconnect from the gas network, preexisting bond debt necessitates utilities imposing price hikes on a shrinking customer base. As service costs rise, more people choose to go electric. This feedback loop is commonly referred to as a utility death spiral. As technology advances and heat pump adoption accelerates, Richmond Gas Works’ death spiral will be swift and severe, stranding bond debt that it cannot pay.
Although revenue bonds are not backed by the credit and tax base of the city like general obligation bonds, defaulting would seriously harm Richmond’s ability to finance water, sewer, school and street repair projects. For this reason, the city would likely request a taxpayer bailout.
It’s not just Richmond that’s plagued with this debt. Both municipal and private gas utilities around the country are grappling with this problem. In testimony before New York’s Public Service Commission concerning Consolidated Edison’s gas main replacement program, the Natural Resources Defense Council concluded that continuing business as usual would add $3,500 to annual household energy bills by 2050 in gas distribution costs alone, not including the cost of fuel.
These costs would be pushed onto the people least capable of departing the gas network – renters and low-income households. Considering the burden the upcoming 40% gas price hike will put on Richmonders this winter, business as usual appears less viable than ever.
Richmond’s leadership needs to consider these risks today or be left in financial ruin just several years from now. Most of Richmond’s currently operating pipes in the distribution network are at least 40 years old, but the planned replacements certainly won’t operate for that long. City council has several options it can exercise to avoid requiring a taxpayer bailout.
First, the council should require prospective customers to pay their connection costs upfront. If we cannot reasonably expect new connections to use the infrastructure for its full lifetime, then current customers and city taxpayers shouldn’t subsidize the system’s expansion.
This is particularly important given the utility’s recent spending. Despite being allocated only $500,000 this year in the Capital Improvement Plan, it spent $6 million on new business in the past nine months, according to the city’s quarterly status reports. This money came from a $120 million fund that Richmond Gas Works maintains, allowing it to operate without accountability.
Second, the council should immediately halt any investment, large or small, in expansion. Given how the utility has accessed its liquid fund with impunity, this would require governance. Since new gas expansion has occurred mostly outside of the city limits, recently in Chesterfield, Hanover and Henrico, Richmond residents will be expected to bail out suburban infrastructure when the utility customer base contracts.
Third, the council should require Richmond Gas Works to offer rebates for energy efficiency. Energy experts from local nonprofits project:HOMES and Viridiant use rebates from Dominion to insulate electric hot water heater pipes but skip over their gas counterparts because of the lack of rebate. Paying them to consider whole-home efficiency would help buffer customer bills from rising service costs.
Finally, rather than replacing currently existing leaky pipes as is mandated by the U.S. Department of Transportation, Richmond Gas Works could offer financing for customers to go electric, thus terminating their gas connections. Given the borrowing capacity and liquid assets our utility has, it could offer extremely competitive financing to customers for electrification and still turn a profit. This business model pivot could be the very plan city council is looking for to equitably phase out our collective stake in gas.
We must act now to avoid being caught asleep at the wheel.
Kevin Cianfarini is the volunteer data and tech lead at Climate Changemakers. He lives in Richmond. He can be reached at [email protected]. Erik Shilts is a local volunteer climate advocate with the Sierra Club’s Falls of the James Group chapter. He also lives in Richmond. He can be reached at https://twitter.com/eshilts.