Consumer advocacy group dings Minnesota gas utilities for overspending on capital investments

Minnesota's three large gas utilities are on track to spend more than $19 billion on capital investments by 2040, increasing their residential customers' base costs by two to three times, according to a report by a ratepayer watchdog group.

CenterPoint, Xcel Energy and MERC — in order the state's three largest gas providers — more than tripled expenditures on their distribution systems from 2013 to 2022, said the analysis released by the Citizens Utility Board of Minnesota (CUB).

The utilities have indicated to investors they will continue with the same level of capital investments for the foreseeable future, the report said. All that spending will have "significant impacts" on customers' monthly bills.

"For the [gas companies] to hit their investment goals, customers' bills will have to multiply," said Annie Levenson-Falk, CUB's executive director. "They are making investment decisions that we will be paying for four decades."

Utilities defended their investments as necessary.

CenterPoint said in a statement that it "has made, and continues to make, essential investments in the safety and reliability of [its] system. ... Most of these investments are not discretionary, but required by stricter federal pipeline safety regulations."

MERC, an arm of Milwaukee-based WEC Energy Group, said in a statement that "the critical investments we make modernizing our system ensure customers have the reliable heat they depend on."

The utility also said that the study's assumptions on future spending and costs are "unrealistic."

Xcel in a statement said: "While we are still reviewing the Citizens Utility Board report, we do not agree with its conclusion that our investments in natural gas infrastructure are resulting in significant bill increases for customers."

The CUB study found that Minnesota gas utilities operate some of the safest distribution systems in the country with fewer leaks than peers in other states. All three Minnesota utilities have low levels of older, potentially more hazardous types of pipelines.

"It would seem reasonable to expect that, given the lower relative risks on the Minnesota [utilities'] systems, there would be less need for investment in the coming years" — and therefore capital expenditures wouldn't need to rise at the same high rates, the CUB report found.

The study was conducted for CUB by DH Infrastructure, a consulting firm in Massachusetts, which sifted through state regulatory records to chart investment trends. To make forecasts, DH used annual compound growth rate targets made by the publicly traded utilities, and an inflation rate of 2.04 %

Several elements comprise residential gas bills. The two largest are the cost of gas — which varies with natural gas prices — and the delivery charge, which covers investments in the utilities' distribution systems.

The delivery charge, which CUB studied, is base cost set in a rate-making process by the Minnesota Public Utilities Commission.

The study found that CenterPoint's capital investments rose from $74 million in 2011 to $282 million in 2021, before jumping to $415 million last year. Xcel's rose from $35 million in 2011 to $128 million in 2021, and then climbed to $242 million last year. MERC's spending showed a similar pattern.

The study projects that CenterPoint's investments would rise to $750 million annually by 2030 and $995 million by 2040. Xcel's and MERC's would grow at a lesser rate.

With all that spending, CenterPoint's delivery charge to residential customers would jump 3.3 times between 2023 and 2040; Xcel's, 2.5 times; and MERC's, 2.5 times, the study concluded.

Ultimate costs to Minnesota ratepayers could be affected by how much natural gas energy is replaced by "electrification" — renewable electricity via heat pumps, the study said.

Electrification has its own host of challenges, so CUB modeled its effects with the idea that a high proportion of homeowners who adopt heat pumps will continue using gas as a backup.

Homes with heat pumps will use far less gas, leaving ratepayers who fully use gas to bear a greater share of utility investment costs, the report said. And those who remain on the gas system would likely be lower-income customers who can't afford heat pumps — or rising gas bills.

"This potentiality has been called the 'utility death spiral,'" the report said.

"Obviously we can't stop investing in gas — most people are still using it," Levenson-Falk said. But the report "should make [the utilities] think about their investment model and get in front of some of the changes that are coming."