Working Paper

Price Regulation and Environmental Externalities: Evidence from Methane Leaks

Jan 31, 2018 | Catherine Hausman, Lucija Anna Muehlenbachs

Summary

Using data from natural gas distribution utilities on expenditures and volume of methane leaked, this paper estimates the amount of money utilities are spending to abate leaks. Expenditures are suboptimal at less than the cost of gas itself.

Key Findings

  • For decades, the Energy Information Administration has kept records of lost and unaccounted for gas, yet the data's usefulness has been criticized. However, there are empirical strategies to overcome the data quality issues.
  • Natural gas distribution is a price-regulated industry and this can introduce distortions. This paper examines the outcome from allowing utilities to pass the cost of lost gas on to customers.
  • Utilities are spending between $0 per Mcf to $0.48 per Mcf on leak detection and repair; this is considerably lower than the sample average cost of natural gas of $5.67 per Mcf.

Abstract

We estimate expenditures by US natural gas distribution firms to reduce natural gas leaks. Reducing leaks averts commodity losses (valued at around $5/Mcf), but also climate damages ($27/Mcf) because the primary component of natural gas is methane, a potent greenhouse gas. In addition to this private/social wedge, incentives to abate are weakened by this industry's status as a regulated natural monopoly: current price regulations allow many distribution firms to pass the cost of any leaked gas on to their customers. Our estimates imply that too little is spent repairing leaks—we estimate expenditures substantially below $5/Mcf, i.e. less than the commodity value of the leaked gas. In contrast, expenditures on accelerated pipeline replacement are in general higher than the combination of gas costs and climate benefi ts (we estimate expenditures ranging from $48/Mcf to $211/Mcf). We conclude by relating these fi ndings to regulatory-induced incentives in the industry.