Southwest Gas faces pressure from climate groups, investors as it charts future

Regulators are turning their attention to natural gas as the state seeks to transition away from burning fossil fuels to meet a goal of net-zero carbon emissions by 2050.

At the center of this transition is one company with deep connections across Nevada: Southwest Gas. The company is the state's largest utility provider of the methane gas used in businesses and homes — and it is working to grow its footprint. In recent years, the company has received permission to expand its service into rural communities, including Spring Creek and Mesquite.

Southwest Gas wants to double-down on the fossil fuel — calling for expansion of natural gas infrastructure and labeling gas as a “bridge” in the energy transition — even as a coalition of climate and environmental justice organizers call on policymakers to move toward renewables.

Their calls fall in line with Gov. Steve Sisolak’s state climate strategy, which recognizes the need for an organized transition away from natural gas. Nevada’s climate plan states that a potential first step could be to “require all-electric [appliances] in new construction,” as across the state, homes are being built with gas as the default option for heating and cooking. 

But Southwest Gas sees a future where the fossil fuel is not phased out quite yet. Last month, the utility urged more, not fewer, investments in gas. The company told regulators that “not only is it unnecessary to reduce natural gas use in Nevada, but to accelerate Nevada's [greenhouse gas] emissions reductions, the strategic use of natural gas and the related [gas] infrastructure should be expanded to drive down [greenhouse gas] emissions economy-wide.”

NV Energy, which provides natural gas service to customers in some parts of Northern Nevada, filed similar comments with state regulators. The utility told regulators that it “does not believe it is necessarily required to reduce natural gas usage to achieve greenhouse gas emission goals.” In some cases, the utility said expanding natural gas could help achieve emission goals, if it is used to replace fuel oil and propane, an argument that Southwest Gas has similarly presented.

The comments came as part of an ongoing investigation into long-term planning for natural gas. The Public Utilities Commission of Nevada (PUCN) launched the investigation in May. In doing so, regulators solicited comments from the public and interested parties, including gas utilities operating in the state. Those comments will help inform the PUCN’s thinking moving forward.

The investigation comes after environmental groups pushed a bill in the Legislature earlier this year that would have required gas companies to undergo a more rigorous planning process before building new infrastructure. Opponents of the legislation, which died shortly after it was introduced, launched a well-coordinated campaign to describe it as effectively banning gas. 

Construction on a Southwest Gas natural gas pipeline at a new home development in Las Vegas on Friday, April 16, 2021. (Jeff Scheid/The Nevada Independent)

Climate groups see the utility argument as denial. Decarbonization, they say, means a transition that moves away from natural gas and to electric appliances tied to a renewable electric grid.

On Friday, Matthew Vespa, an attorney for environmental justice groups CHR Inc. and Chispa Nevada, wrote that comments from the companies were “a disingenuous effort to maintain the status quo at the expense of the communities that are forced to breathe dirtier air and live in areas exposed to extreme heat waves and other consequences of the climate crisis.”

Mary House, CEO of CHR Inc., said she is advocating, through the PUCN investigation, for removing barriers that currently make it challenging for low-income communities of color to transition away from natural gas. In an interview, House said she opposed expanding the gas system, citing indoor pollution and the negative health effects associated with burning natural gas. Expanding the system, she said, would also run counter to the state climate goals. 

“Expansion does not address environmental justice,” House said. “Period.”

At this point, the commission has not made any findings. Among the issues it is weighing are cost considerations, the feasibility of natural gas alternatives and how to decarbonize in a way that is equitable for ratepayers. Moving forward, serious questions face the utilities commission.

Chief among them is what any transition to the state’s net-zero by 2050 goals might look like for underserved communities. If more residents and businesses leave the natural gas company in favor of electric service, a smaller pool of utility ratepayers could be responsible for paying off long-term investments the utility has made. Additionally more natural gas customers switching to electric could put further strain on an electric grid that is also working to decarbonize.

Because utility infrastructure investments are paid off over decades, climate groups stress the need to plan for the future now. They want to avoid investing in “stranded assets,” infrastructure that is no longer needed. And they worry that expanding the current system would do just that. 

PUCN staff, independent analysts who make recommendations to the commission, echoed these concerns Friday. They wrote that the “easiest and quickest” action that utility regulators could take to achieve Nevada’s net-zero emission goal is to limit major natural gas expansions.

“Limiting future expansions will avoid the potential harm of future stranded costs as well as the issues of expanding gas use to under/unserved areas when the expansion could be viewed to be in direct conflict with the 2050 net-zero carbon emission policy goal,” staff wrote in a brief.

But climate groups are not the only ones to put pressure on Southwest Gas in recent months. 

Sign for State of Nevada Public Utilities Commission on front of building.
The State of Nevada Public Utilities Commission sign as seen in Las Vegas on Tuesday, March 27, 2018. (Jeff Scheid/The Nevada Independent)

After Southwest Gas Holdings announced its plans to purchase a pipeline distribution company for $1.9 billion, activist investor Carl Icahn sent a sharp letter criticizing the utility’s management for frayed relationships with regulators and poor decision-making. He noted that administrative expenses have increased since John Hester became its CEO in 2015. Southwest Gas Holdings oversees Southwest Gas. Hester is the CEO of both companies. Icahn has sought to take over the company, recently threatening a lawsuit if the utility sold stock for less than he offered. 

State utility regulators and large ratepayers, in recent years, have criticized Southwest Gas’ administrative spending. Reporting from the Las Vegas Review-Journal found that the company had tried to charge ratepayers for luxury cars, a manicure and a dinner tab of more than $4,700.

In 2019, Southwest Gas sued the PUCN over a rate decision, a case the company appealed to the Nevada Supreme Court after a Clark County judge said the utilities commission had acted in an equitable way when deciding how much the utility should earn. In approving rates, the commission’s job is to balance the interests of utility shareholders and the ratepayers utilities serve, shielding customers from paying for mismanagement and unnecessary expenses.

As part of the case, the Nevada Resort Association filed an amicus brief and also criticized the company, in oral argument, for its management decisions in spending $51 million on software work. The Supreme Court has yet to release a decision after oral arguments were held in June.

Still, of all the headwinds facing the company, the outcome of the PUCN investigation and the politics of climate change could be the most consequential for the company in the long-term.

Scott Leedom, director of public affairs for Southwest Gas, acknowledged that the company has had disagreements with its regulator over the years — not uncommon with an investor-owned utility. Overall, he said the company views its relationship with the PUCN as “pretty positive.” 

Leedom sees a strong future for the company, and he hopes the outcome of the investigation is to solidify, not diminish, the company’s footing in the state. The company’s argument echoes rhetoric used across the industry: Natural gas could serve as a “bridge fuel” in the economy.

The company argues that expanding natural gas in transportation and in homes could displace more polluting forms of energy in the short-term. In the long-term, the company wants to lower emissions through policies that would repurpose its existing infrastructure to use fuels that are less polluting. Southwest Gas is also contemplating programs to sequester carbon emissions.

“We are hopeful that one of the outcomes of this process will be us being able to determine how the natural gas industry decarbonizes in a manner consistent with [state climate] targets, rather than having our future dictated to us by out-of-state special interest groups,” Leedom said. 

That strategy, climate organizers say, is short-sighted and rests on faulty technical assumptions. Alternative fuels, such as biomethane (known as renewable natural gas) and green hydrogen, have limitations and are not capable of fully replacing natural gas to the extent that is needed, Western Resource Advocates, the Natural Resources Defense Council, Sierra Club, Nevada Conservation League and the Southwest Energy Efficiency Project noted in a filing.

Elspeth DiMarzio, an organizer with the Sierra Club, said Southwest Gas’ comments could be read as a continuation of a business model that is no longer sustainable with cleaner options.

“Methane gas is harmful for the climate, and it is increasing climate impacts that we're seeing in Nevada, from smog to wildfires,” DiMarzio said last week. “And Southwest Gas, their business has been built on this harmful pollutant. They are trying to advocate for the continuation of that.”

The company’s strategy, DiMarzio said, is out of line with the state’s climate goals. Most local, state and national governments are moving to greater electrification as they advance efforts to decarbonize. Major auto manufacturers have announced commitments to phase out gasoline car sales in the coming decades, and other major companies, with big sway in local and state economies, have announced plans to phase out fossil fuels as part of sustainability pledges.

Sarah Steinberg, who works with Advanced Energy Economy, an association of businesses looking to source clean energy, said “investors are coming around to recognize gas as a risk investment even from a straight financial perspective.” She noted recent spikes in gas prices.

Governor Steve Sisolak and California Governor Gavin Newsom tour the damage from the Tamarack Fire and speak with media in Douglas County on Wednesday, July 28, 2021. (David Calvert/The Nevada Independent)

Last year, the Sisolak administration released a climate strategy that called for a transition away from fossil fuels. In April, during the legislative session, Sisolak released a statement saying that the state “must reduce the amount of natural gas used in Nevada” and said the PUCN was the proper venue to discuss the issue. Regulators opened up the investigation a few weeks later.

In July, Sisolak’s office agreed to an interview with the governor on the climate plan, but after multiple postponements, the office declined last week to make the governor available to discuss the issue.

Leedom, with Southwest Gas, draws a distinction between the state’s goals and policies. While moving away from gas is an option in the climate plan, he said it lacks the force of law. 

“Absent any legislative action on those options, it’s not the policy of the state,” Leedom said this month. “We would actually argue that the Legislature repudiated that policy in the last session.”

When the Legislature met this year, Southwest Gas organized a campaign casting a proposed bill as an effort to ban gas, a characterization that authors of the bill disputed. Some of those same allies, including the Latin Chamber of Commerce, filed letters in the PUCN investigation. 

Several business interests, including the Nevada Manufacturers Association, the Mechanical Contractors Association of Las Vegas, the Henderson Chamber of Commerce and International Union of Operating Engineers Local 12, filed comments cautioning that a transition from the natural gas grid could have serious economic effects, causing job losses and higher costs. 

Amber Stidham, vice president of government affairs for the Henderson chamber, echoed the utility’s argument, highlighting new technologies that could improve the current gas system.

“So many of our businesses depend on the availability and affordability of natural gas as an energy option to sustain and grow their business,” Stidham wrote in a letter on Tuesday. 

Construction on a Southwest Gas natural gas pipeline at a new home development in Las Vegas on Friday, April 16, 2021. (Jeff Scheid/The Nevada Independent)

In addition to facing questions about its future in Nevada, Southwest Gas is also facing pressure from investors outside of the state. In October, Southwest Gas Holdings announced its plans to purchase Questar Pipeline, a natural gas distribution company, from Virginia-based Dominion Energy for $1.9 billion, more than Berkshire Hathaway had offered for the same company. 

Shortly after, Icahn disclosed an interest in Southwest Gas Holdings and wrote an open letter in which he said “we are extremely disappointed with management’s performance over the past few years.” In a response, Southwest Gas defended its position in the market and transaction to purchase Questar Pipeline as strategic for its long-term goals.

Icahn and Southwest Gas have continued to trade barbs. 

As the first line of a recent open letter, Icahn wrote: “We are writing in reference to the blatant disregard of fiduciary duties that has been signaled by your recent (in)actions and statements.”

On Monday, Icahn announced a 10-person slate to run for the company’s board of directors. Later in the day, Southwest Gas Holdings responded with a statement. The company said “the Icahn slate is the latest step in Icahn's efforts to take control of Southwest Gas without paying a control premium to Southwest Gas stockholders and otherwise pursue his self-serving agenda.”

For some climate activists in Nevada, the purchase of a pipeline company has raised eyebrows. Is it the company doubling-down on fossil fuels? While the pipeline distribution company would be held under the holding company and not regulated by the PUCN, is it a prudent decision?

Southwest Gas does not see it that way. In multiple public statements, they have said that the Questar purchase is vital to its long-term vision of putting alternative fuels through its pipes.

The deal, Hester said last month, “accelerates our energy transition strategy by strengthening our ability to provide affordable, low carbon energy to customers while positioning us to transport renewable natural gas, responsibly sourced gas, and eventually, hydrogen and CO2.”