In 2010, a gas main explosion in San Bruno, California ripped apart a neighborhood and killed eight people. The 30-inch natural gas pipe was owned by Pacific Gas & Electric (NYSE:PCG). Taking into consideration all of the fines the company has either paid or are pending (there is an appeal process for a recent $1.4 billion penalty), the company is looking at roughly $2 billion in costs associated with resolving just this incident. San Bruno and the huge fines show why upgrading natural gas infrastructure is so important -- but it's also a huge opportunity for utilities and their investors.
Although the actual reason for the San Bruno explosion is far more complex, a contributing factor was that the pipe was installed in 1954 -- over 50 years ago. However, don't think that's all that bad, because some pipes in Manhattan are twice as old. Those century-old pipes are owned by Consolidated Edison (NYSE:ED). Con Ed has had its own troubles with natural gas explosions: An East Harlem explosion killed eight and collapsed two five-story buildings earlier this year.
And while these are horrific disasters, they are clear evidence of why the American Society of Civil Engineers gave the country's energy infrastructure a less than favorable grade of D+ during its 2013 review. Although unsettling, that was also the average across all categories, including bridges, dams, and roads, among many other categories of things we use every day and believe to be safe.
While you can look at pipeline incidents and the poor grade the country's energy infrastructure received with a glass-half-empty attitude, there's also a great deal of opportunity in it for utilities and their shareholders. For example, Con Edison has over 800 miles of pipes earmarked for replacement. It expects that to take up to 40 years and cost up to $10 billion. (That's a lot of money, but if one explosion can cost $2 billion in fines, $10 billion over four decades isn't so bad to ensure everyone's safety.)
And that's where the really big benefit for utilities and investors comes in. These are upgrades to vital infrastructure, something that regulators tend to look upon favorably when it comes time to adjust the rates a utility gets to charge its customers. And, thus, the costs of pipeline upgrades will very likely be borne by customers while at the same time providing decades of investment for Con Ed and its shareholders.
No easy fix
Why would it take so long to fix something that could be so deadly? That has much to do with where the pipes are: New York City. The population density and "always on" social pace make digging up streets both complex and time consuming. For example, Con Ed hopes to replace around 25 miles of pipe this year -- not exactly a speed-demon pace.
To be fair, National Grid (NYSE:NGG) also has old New York City pipes that need replacing, so this isn't a Con Ed specific issue. That said, National Grid's service area reaches into less dense areas in Long Island, Staten Island, Brooklyn, and Queens. National Grid spokesperson Karen Young explained to the New York Daily News earlier this year that, "We have a team of engineers that reviews the condition, maintenance history, and other factors to decide which segments of pipeline to replace. Through the program we replace more than 100 miles annually." Faster, but it still leaves years of work ahead.
Keep an eye on the mains
But every inch of the 100 miles is a capital expense that National Grid can use to convince regulators it deserves to charge customers more for its services. Which is exactly why investors should be keeping a close eye on pipeline infrastructure upgrades at gas utilities across the country. Although the New York City area and San Bruno may be extreme examples because of the disasters that took place, they certainly aren't the only areas of the country in need of gas pipeline upgrades. We've been coasting on old infrastructure for a long time, and the time is nigh for dealing with the issue.