As California moves to decarbonize its electric grid by 2045 and implement its broader economy-wide decarbonization targets, state regulators are beginning to develop a coordinated, equitable and cost-effective plan to proactively manage the transition of the legacy gas system.
Tomorrow, the California Public Utilities Commission is set to open a new rulemaking on its long-term gas planning, the first such rulemaking since 2004 — well before the state’s greenhouse gas laws went into effect. The California energy system has evolved dramatically in the last 15 years, which is why this type of planning is so important for customers, workers, the economy, and ultimately, the success of the state’s climate goals.
Why we need a plan
Generally, California’s gas utilities can incorporate the costs of building gas infrastructure into the rates they charge customers, so long as the CPUC deems the investment to be “used and useful.” When the gas system no longer meets this threshold of being “used and useful,” the remaining investment value is considered stranded. The risk of this stranded value is that it will make California look like a riskier, and therefore more expensive place to do business, at the exact time we need to make major new investments in our energy infrastructure.
As California reduces gas use in buildings, the pool of customers footing the bill for the gas system will shrink, which could raise costs and unduly burden lower-income and other vulnerable communities.
In May 2019, EDF released the report, “Managing the Transition: Proactive Solutions for Stranded Gas Asset Risk in California” in which we discuss how an unmanaged departure from the gas system could lead to severe financial consequences for customers, and outline various regulatory strategies to mitigate these impacts. After an extensive stakeholder process, Gridworks followed up this report with the release of “California’s Gas System in Transition: Equitable, Affordable, Decarbonized and Smaller.” Both reports recommend considering the financial implications of this transition and highlight the need for a gas planning process.
Concurrent with the release of these two reports, we have quickly seen that this is not a hypothetical conversation. In 2019, more than a dozen cities or local jurisdictions have started to ban new natural gas hookups. The first and perhaps most prominent of these cities was Berkeley in July 2019.
What California’s plan includes
We are pleased to see the CPUC taking stakeholder recommendations seriously by opening this new rulemaking, which contains several critical points:
- The CPUC seeks to establish new rules for gas pipelines that supply natural gas-fired power plants. As California moves toward a carbon-free electric grid, we will need to rely upon our existing natural gas-fired generation in different ways to supply our electricity. Our existing gas electric generation fleet will be used less often, but will continue to provide critical reliability support as we rely more heavily on solar, wind and other intermittent generation resources. As a result, the reliability and market rules for the gas pipelines feeding these natural gas-fired generators will need to evolve as well.
- The CPUC will need to reconsider the cost allocation of the gas system. Presently, residential customers pay the bulk of the gas system cost. As residential customers rely less on gas in homes and buildings, the customer base who pays for the gas system will need to change. The residential customers who remain connected to the system are more likely to be low-income, many of whom are already struggling to pay their energy bills, and cannot afford an increase. To ensure customers are not left holding the bag, California will need to reconsider how we equitably allocate the gas system costs to other non-residential customers, such as electric generators.
- The CPUC seeks to implement a long-term planning strategy to manage the state’s transition. Over the next few decades, Californians will replace their existing gas appliances with low-emitting electric options that run on clean energy. As a result, the amount of gas that we need will go down, and the need for gas infrastructure itself will go down. As we electrify more of our economy and reduce our reliance on gas, we need a plan to manage that transition. While it may not happen tomorrow, California will have to deal with these potentially stranded assets soon, so it is prudent for this to be a proactive, planned transition, which will allow costs to be spread out.
EDF strongly supports the CPUC taking this step. We encourage them to adopt the new rulemaking and to start planning this transition in the most effective and equitable way possible.
We also encourage other states to consider California as a model as regulators and stakeholders undergo this rulemaking process. The challenge of long-term gas utility planning is not unique to California. As we see more states adopt climate goals, they will have to consider how best to transition their legacy gas system without imposing severe financial consequences.
A proactive approach is best, and the CPUC’s new rulemaking can be used as a model. They are asking the right set of questions, which are directly transferable to other markets. Making rules for long-term gas planning that considers reliability, cost allocation, electric generation and right-sizing the system for future use is a critical win for the customer and the environment.