Can this California bill help get neighborhoods off gas?

Every year, California’s gas utilities spend billions of dollars operating, maintaining, repairing, and replacing aging pipelines that deliver a fossil fuel incompatible with the state’s long-term climate goals. 

What if those utilities could just shut down their oldest and most expensive pipelines one neighborhood at a time, and give the customers living there all-electric heating systems and appliances instead? 

That’s the idea behind SB 1221, a bill working its way through the California legislature. It would pave the way for the state’s gas utilities to set up 30 ​“zonal decarbonization” projects — entire neighborhoods where the cost of electrifying customers would be significantly lower than the cost of upgrading or replacing the old gas pipes. 

Similar concepts are being explored in states including Colorado, Illinois, Massachusetts, New York, and Washington. The common goal is twofold: to provide gas utilities with a way to invest in assets that don’t conflict with state mandates to dramatically reduce the use of fossil gas in buildings, and to avoid burdening gas customers who can’t afford to go electric with rising bills to cover the sunk costs of an increasingly underutilized pipeline network.

Gas pipeline replacements can cost more than $3 million per mile, California state Senator Dave Min (D), SB 1221’s author, said during an April hearing in Sacramento. That expense is borne by utility customers at large making ​“decades of payments into an energy system that may be obsolete before those investments are paid off,” he said. ​“By piloting cost-effective zero-emissions alternative projects, California can save ratepayers money” while fighting climate change. 

California has taken several steps to limit the extension of gas pipelines to new buildings. But it is ​“falling behind other states on managing gas transition costs” for existing gas customers, said Kiki Velez, an equitable gas transition advocate for the Natural Resources Defense Council (NRDC), a supporter of SB 1221. 

Massachusetts has already turned on the first of a number of neighborhood-wide ​“thermal energy network” projects that augment electric heat pumps, for example. And New York utilities have submitted plans for a dozen thermal energy projects from midtown Manhattan to upstate Ithaca.

In California, by contrast, only one utility has started similar work. Pacific Gas & Electric (PG&E), the state’s largest utility, has implemented about 100 ​“targeted electrification” projects, each with a handful of customers served by isolated gas lines. 

PG&E’s first ​“zonal electrification” pilot, now in the process of obtaining final approval from the California Public Utilities Commission (CPUC), aims to replace an aging pipeline with electric heating and appliances for about 1,200 units of student, staff, and faculty housing owned by California State University Monterey Bay. 

That project involves a lot of buildings, but required negotiations with only one customer. That’s quite a bit simpler than projects targeting hundreds of customers at a time, any of whom can object and prevent things from moving forward. 

“Obligation to serve” — the elephant in the room

Such holdups can occur because utilities have an ​“obligation to serve” every customer. That’s a central tenet of the state-by-state regulatory compacts that allow utility corporations to hold a monopoly over delivering gas or electricity in their allotted service territory. 

Whether that obligation means that utilities have to keep providing gas, or can simply provide the ​“service” of energy for heating, cooking, and other needs, is a matter of some legal dispute, Velez said. 

But as part of a long-running proceeding on the future of gas service in California, the CPUC issued a February staff report that found that the agency would be challenged to structure zonal electrification regulations on its own, ​“absent a statutory modification to the obligation to provide gas service — such as, a change to make clear that electric-only service satisfies the obligation in certain circumstances.” 

This legal ambiguity complicates things for zonal electrification, Velez said. ​“If you’re getting to a bigger project serving an entire neighborhood and there’s one objector, right now PG&E and the commission feel their hands are tied,” she said. If that one customer refuses to take up the offer of switching from using gas to being equipped with electric-powered systems, the pipeline can’t be closed down, and the economic proposition of the project is lost. 

Rachel Kuykendall, a principal decarbonization strategic analyst at PG&E, agreed with that assessment during a January presentation hosted by the Building Decarbonization Coalition, another nonprofit group that’s supporting SB 1221. Even for PG&E’s targeted electrification projects, ​“if we do have a customer that we approach for this potential savings and they say no, that sort of sinks our project,” she said. ​“The ​‘obligation to serve’ is the big elephant in the room.” 

SB 1221 would change that, at least for the 30 pilot projects it would authorize utilities to undertake. Instead of unanimous consent among all customers in a zone, it would require a supermajority — 67 percent — to agree, Velez said. ​“Then the utility could move forward.” 

To be clear, any project must prove that it’s cost-effective for all participating customers, Velez said. But the effort to redefine ​“obligation to serve” requirements to allow alternatives besides gas delivery has struck a nerve among gas utilities and workers. 

A previous version of SB 1221 initially included language that would have allowed gas utilities to ​“cease providing service if adequate substitute energy service is reasonably available” to support customers, for instance. But Southern California Gas, the state’s biggest all-gas utility, and labor unions representing utility workers opposed that provision, and it was stripped from the current version of the bill. 

California isn’t the only state grappling with this issue. In New York, the NY HEAT Act, a bill that would replace gas utilities’ ​“obligation to serve” gas to households with an energy-neutral obligation to provide heating, cooling, cooking, and hot-water services — a step opposed by gas utilities and labor groups — failed for the third time in as many years to pass in the final hours of the state legislative session last week. In Illinois, unions are pushing state lawmakers to slow down on policies aimed at phasing out gas pipeline expansions. 

Jose Torres, California director at the Building Decarbonization Coalition, emphasized that any pilot project authorized by SB 1221 must prove that it’s cost effective for both the participating customers and a utility’s customers at large. 

“How do you allow utilities and communities to make fuel-neutral decisions that benefit the majority of Californians? That’s the spirit of this bill — to move us forward in that conversation and take on those complicated issues,” Torres said. 

Threading the needle of climate, customer choice, and cost-effectiveness

At the same time, pressure is building on policymakers, regulators, and utilities to find an alternative to continuing to invest in the country’s gas delivery network. A 2021 report from consultancy Brattle Group stated that existing plans to revamp pipelines could saddle U.S. gas utilities with $150 billion to $180 billion in​“unrecovered” investment over the coming decade.

California spends nearly $14 billion per year on buying and using fossil gas and building and maintaining a gas delivery network that connects to nearly four-fifths of all homes, according to a 2020 analysis presented to the California Energy Commission by consulting firm Energy and Environmental Economics. A decarbonization strategy that relies on electrifying California’s buildings to get them off gas could cost between $5 billion and $20 billion per year less by 2050 than an alternative approach of using biogas, hydrogen, or synthetic gas to replace fossil gas, the analysis found. 

Every year that gas utilities keep replacing pipelines represents a year of potential electrification savings lost, said Mike Bloomberg, managing partner at Groundwork Data. The nonprofit consultancy has issued a set of reports with the Building Decarbonization Coalition on the challenge of decarbonizing gas utilities in New York, Illinois, and Massachusetts.

“The gas transition is not going to happen overnight,” Bloomberg said. But neither will it proceed rapidly enough to avoid excessive costs for gas utility customers or the worst impacts of climate change if utilities and regulators don’t find a way to deal with the disconnect between how gas infrastructure is paid off today — spread out across all customers and over decades — and the costs of electrification, which are now borne almost entirely by individual customers. 

SB 1221 would task the CPUC with coming up with the details of how the state’s gas utilities will carry out the 30 zonal electrification pilot projects, the NRDC’s Velez said. One potential problem with the current legislative language is that it would not allow gas utilities to collect the costs of installing new electrical appliances or doing other necessary work in customers’ homes and buildings from their customer base at large over the same decades-long timeframe as they’re allowed to do with gas pipeline investments, which Velez worries could discourage utilities from participating. 

At the same time, SB 1221 does require every utility in the state to develop maps of their planned longer-term pipeline replacement needs, along with equity data to help state agencies and municipal and local leaders find pilot projects in lower-income and disadvantaged neighborhoods, Velez said. That’s important, because it can take years of planning ahead for cities, community groups, and neighborhoods to prepare for making the switch to all-electric heating and appliances at a pace that matches a utility’s pipeline replacement schedule. 

That planning ahead is essential, said Neha Bazaj, a director at Gridworks, a nonprofit consultancy that advises regulators and communities on how to carry out complicated energy transition projects. Last year, Gridworks began working with municipal and community groups involved in a California Energy Commission grant-funded project examining the potential for zonal electrification in the San Francisco Bay Area city of Albany. 

One of the key findings, Bazaj said, is that California gas utilities’ current three-year planning horizon for gas pipeline replacements is ​“still not a lot of time to get buy-in” from individual customers and community representatives that need to be involved. That’s a problem, because lack of community engagement and agreement can make or break these projects. 

“Obviously the obligation to serve is a challenge to implementing these projects at scale,” she said. ​“It is likely unrealistic to anticipate 100 percent buy-in from everyone.” Even so, ​“the goal should be to have as much buy-in from people as possible.”