Is there such a thing as too much pipeline safety?

While it may be heretical to say in some quarters, Ken Costello asserts that there canbe too much pipeline safety, especially for those gas systems operated by local distribution companies.

Costello is an economist by trade and a principal in the National Regulatory Research Institute, which assists state utility regulators in improving public-interest decisionmaking.

No stranger to controversy, Costello has been prodding federal and state regulators on a variety of issues for more than 22 years.

In his latest paper, “Balancing Natural Gas Pipeline Safety with Economic Goals,” he says that from an economic perspective, “utilities can have overly safe pipelines. The view that ‘we can’t compromise on safety’ ignores the fact that safety carries a cost that policymakers should compare with the benefits.”

“Some readers might find this statement provocative, but it reflects the reality that lowering safety can produce a net gain to society,” he said. “Generally, as safety increases, the incremental cost increases but the marginal benefit decreases.”

Costello said the concern over gas pipeline safety has been heightened over the past two years because of major accidents, like the September 9, 2010, disaster at San Bruno, California, where eight people were killed. As a result of this and other accidents, “the temptation is for gas utilities to spend an amount on safety that fails a cost-benefit test and passes on excessive costs to ratepayers,” he said.

Studies have shown that the largest source of waste from health, safety and environmental regulations is the inability to achieve cost-effective outcomes when utilities were instructed to use certain technologies and or take actions that drive up the cost of meeting regulatory goals.

“Because technology-based standards mandate a specific technology, they ignore other options that might be cost-effective for a subgroup of utilities,” he said.

Costello said he believes utilities are aware of safety issues — they now spend about $7 billion annually on safety-related projects. But he also said he believes state regulators can help local distribution companies spend that money more wisely.

He suggested utilities focus on categories over which they have some control, such as pipeline replacement and leak detection programs.

To get the attention of third-party contractors who are sloppy about complying with federal and state safety rules, he suggested state regulators “heavily fine” contractors and others who do not contact the utility first before digging. “Economics tells us that compliance with a law or regulation is more likely if the cost of compliance to a firm is less than the expected penalties from noncompliance,” he said.

“Spending excessive money on safety might result in less money being available to improve productivity or customer service,” he said. The ‘balancing act’ of regulation — which history has shown best promotes the public interest — requires utility regulators to consider safety jointly with other objectives aligned with the public interest. Without this joint consideration, an imbalance and an asymmetrical outcome will likely compromise the public interest.”

Platts