State utility commissions are being asked to make decisions today that will shape the future of the natural gas system for decades to come. As states adopt clean energy and climate goals and advance policies to reduce gas use, regulators must weigh how to maintain safe, reliable gas service while protecting customers from financial risk in a system that may shrink over time.
In a previous article, I discussed how Minnesota looked to address the changing needs of long-term resource planning. In this article, I turn our attention to cost recovery and a decision by the Colorado Public Utilities Commission (PUC) in Public Service Company of Colorado’s (PSCo) gas rate case, where regulators recently took up one of the more technical but consequential parts of this challenge: how utilities recover the cost of retiring gas infrastructure, known in regulatory terms as “net salvage.”
The challenge of cost recovery in a transitioning gas system
For decades, utility accounting and ratemaking assumed the gas system would continue to expand in perpetuity. Cost recovery practices were built on this expectation, spreading the cost of building, maintaining, and eventually retiring infrastructure over long periods and across a growing base of customers. However, expanding electrification and state clean energy and climate policies are prompting commissions to reconsider assumptions around future gas system growth and to manage associated affordability and reliability risks for customers.
Decommissioning costs are a particular concern because they can be very expensive. Traditionally, regulators allowed utilities to recover “net salvage” costs—the cost of dismantling equipment minus any scrap value—through small charges to customers each year, spreading the burden over time.
The challenge is that these cost estimates are now based on outdated assumptions about system growth and customer numbers. If the system contracts instead, future customers may be saddled with disproportionately high costs as they are spread over a smaller base.
Colorado’s review of net salvage recovery
The Colorado PUC addressed these questions in PSCo’s most recent gas rate case. The case highlighted three main concerns:
- Planning for a shrinking system is difficult under current rules. The company noted that while state policies point to lower future gas use, it still faces a legal obligation to serve all customers who request service (PSCo Brief, p. 20; PSCo Ex. 124, p. 51–52). The company also noted that lower overall gas use alone does not necessarily lead to retiring system segments, since it must preserve capacity for backup heat and “preserve assets for future use” (PSCo Ex. 124, p. 52–53). As a result, it has not adjusted cost planning to reflect a potentially smaller system.
- Utility accounting and reporting of collections is technical and opaque, complicating oversight of cost recovery. Commission staff found that while PSCo collected about $65 million a year from customers for decommissioning, it spent only about $13 million annually (). PSCo explained the difference reflects the fact that current charges are meant to cover the eventual retirement of today’s much larger system, and any cost assumptions are right-sized in separate depreciation proceedings. However, because accounting assumptions are technical and spread across multiple dockets, it is difficult for regulators and the public to assess whether collections align with actual costs.
- No dedicated fund exists for future costs. The company estimates it will need about $3.7 billion to retire its system. However, most of the money collected for this purpose is used for other projects, with only an accounting entry showing the balance. As the company explained, it is more cost-effective for customers to spend recovered cost revenue on other present-day projects as it reduces its need to borrow, and customers receive a credit at rates equal to the company’s weighted average cost of capital for these funds (Decision No. C24-0778, ¶¶ 125 & 127). The commission still raised concerns that future customers may bear significant risk if those funds are not available when needed.
New trust fund and future-focused studies
To address these issues, the commission adopted two reforms:
- Creating a trust fund. PSCo must now deposit $15 million per year into a dedicated account for future decommissioning costs. This approach provides greater assurance that funds collected today will be available when needed. To balance the impact on the company, the PUC allowed a parallel adjustment to depreciation that maintains cash flow (Decision No. C24-0778, ¶136). The tradeoffs are administrative costs and potential investment risks, which are being explored further in PSCo’s ongoing depreciation case (Docket No. 24AL-0049G).
- Requiring forward-looking depreciation studies. In its next study, the utility must include 25-year forecasts that consider scenarios of lower gas sales, shorter asset lifespans, and different methods for decommissioning (Decision No. C24-0778, ¶¶ 137–39). This requirement aims to improve planning transparency and ensure assumptions better reflect a system in transition.
Why it matters for utility regulators
The Colorado decision illustrates how regulators are beginning to adapt legacy accounting practices to new realities. While technical, these decisions have far-reaching implications:
- Affecting how fairly costs are shared among current and future customers.
- Shaping the financial stability of utilities as their business models evolve.
- Determining how well regulatory frameworks align with state clean energy and climate policy.
In Colorado, the changes are intended to improve accountability, safeguard customer dollars, and provide a clearer view of how the gas system may evolve in the coming decades.
This decision also highlights the challenges regulators face in adapting long-standing accounting practices to a changing energy landscape, along with new methods to start addressing the issue. The case calls out several areas that commissioners in most states are likely facing:
- Legacy requirements like obligation to serve complicate planning and must be reconciled with state decarbonization goals (e.g., Harmonizing States’ Energy Utility Regulation Frameworks and Climate Laws: A Case Study of New York).
- Analyzing utility accounting methods requires highly technical expertise, underscoring the need for strategies that make this information more transparent and accessible.
- Net-zero carbon commitments have shifted the long-standing assumptions about how long the gas system will operate, requiring a broader review of customer protections to match a changing utility business model.
Setting a precedent
Colorado is emerging as a leader in rethinking how gas system costs are managed in the context of clean energy and climate policy. By wading directly into complex accounting issues like net salvage, the state’s commission sets an example of how regulators can adapt long-standing practices to new realities.
Other states are beginning to follow suit: Massachusetts regulators, for instance, have questioned how gas utilities collect and account for removal costs (Docket No. 24-GESP-05, Order, p. 67–68). With gas utilities investing about $23 billion a year nationwide, commissions across the country are now building on approaches like Colorado’s as they seek to balance utility finances, customer protections, and the broader energy transition.