Blog Post

A Retrospective Look at the 2009 PHMSA Gas Distribution Rule and Its RIA

Aug 21, 2018 | Alan J. Krupnick, Justine Huetteman, Arthur G. Fraas

When natural gas pipelines under city streets leak, explosions can occur, manhole covers can fly, and people and property can be seriously affected. In 2009, the Pipeline and Hazardous Materials Safety Administration (PHMSA) issued a rule requiring inspection and repair of natural gas distribution pipeline, which distribute gas to final users. The utilities responsible for these pipelines already had programs in place to catch big leaks, but the Obama administration published this rule to comply with the Pipeline Inspection, Protection, and Enforcement Safety Act of 2006, which required “integrity management planning” on the gas distribution pipeline network. The rule does not set stringent timelines for inspection and repair, but does require utilities to submit annual reports on these activities as well as install devices to automatically shut off the flow of gas if gas pressure reaches a certain threshold.

The regulatory impact analysis (RIA) accompanying the final rule stated that the rule would result in $159 million to $1.6 billion in net benefits over a 50-year time period. This rule has not yet been targeted for repeal; however, we analyzed the impact of repealing this rule as part of a series examining the cost savings and forgone benefits of repealing regulations affecting the oil and gas sector, a priority for the Trump administration according to Executive Order 13783.

In our new report, we replicated PHMSA’s original analysis, updated various inputs (such as natural gas price and wage rate), accounted for sunk costs and benefits, incorporated data on how well the rule has been performing since it was issued in 2009 (known as a retrospective analysis), and included the social benefits from capturing methane (the primary component of natural gas) that were not part of the original RIA. The bottom line: repealing this rule would be a bad idea on efficiency grounds, as the forgone benefits of repeal exceed the cost savings.

As in previous analyses in this “Should It Stay or Should It Go?” series, the analysis starts by generating a baseline against which to assess the cost savings and benefits forgone of repeal. The baseline updates inputs and accounts for sunk costs and benefits and represents our simplest estimate of repealing the rule. In our baseline for this rule, we preserve the range in net benefits, which stems from the original calculation of benefits (including reduced fatalities, property damage, and emergency response as well as revenues from the sale of captured gas that is not leaked from accidents that the rule prevents). PHMSA estimated that the rule would reduce accidents on distribution pipelines by between 20 percent (the low benefit estimate) and 50 percent (the high estimate). According to our baseline, repealing the rule has net benefits to society of $789 million if the rule would have reduced incidents by only 20 percent, but repeal has net costs to society of $972 million if the rule would have reduced incidents by 50 percent. For the cost savings from repeal to equal the benefits forgone from repeal—in other words, the break-even point—the rule would need to reduce incidents by 31 percent.

Because the rule was promulgated nearly a decade ago, we were able to conduct a retrospective analysis of the rule. Using data from 2010 (the first full year of the rule’s implementation) through 2016 (the last full year of data at the time of our analysis), we found that the effectiveness of the rule varied significantly based on whether the incident was excavation-related or not. The costs (and therefore benefits of reducing incidents) vary by incident type, so differentiating by incidents could make a difference in determining the cost effectiveness of implementation (or repeal). We did not conduct a causal analysis, but rather, as a simplification, we assume that the rule itself is responsible for these incident reductions. Between 2010 and 2016, excavation incidents with the rule in place were 49 percent below what was expected by the RIA to occur without the rule—very close to the high effectiveness rate estimated by the RIA. On the other hand, non-excavation incidents with the rule in place were 11 percent below what was expected by the RIA to occur without the rule, which is about half of the low effectiveness rate estimated in the original RIA.

Given these findings, it is clear that PHMSA’s expectation that the rule would be uniformly effective in reducing incidents across types is wrong. We recalculated benefits differentiating by incident type. We found that society has benefitted on net from the implementation of the rule thus far (between $47 million and $477 million); on the other hand, in the longer term, we reached the opposite conclusion. We found that repealing the rule would have net benefits to society between $265 million and $436 million when differentiating effectiveness by incident type.

However, the original RIA did not quantify the climate-related benefits of capturing the gas that would otherwise leak without better inspection called for in integrity management planning. We valued the leaked gas using two alternative social costs of methane (SCM): the $1,100/metric ton estimate used in more recent methane rules promulgated by the Obama administration (which encompasses global damages from climate change) and the $150/metric ton estimate used by the Trump administration (which encompasses damages only to the United States) to repeal or stay some rules. Using the global SCM, repealing the rule would be inefficient, as there would be net costs to society between $3.8 billion and $5.6 billion. Using the domestic SCM, the high benefit estimate yields net costs of repeal of $1.5 billion, but the low estimate yields net benefits of repeal of $299 million. If we combine the SCM analysis with the retrospective analysis we did, repealing the rule is a net cost to society using either the domestic or global social cost of methane. Thus, from society’s perspective, this rule should not be repealed on efficiency grounds.

The views expressed in RFF blog posts are those of the authors and should not be attributed to Resources for the Future.