California Public Utilities Commission Proposes Eliminating Financial Incentives to Developers for Natural Gas Appliances and Service Line Extensions

Downey Brand LLP
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On November 16, the California Public Utilities Commission (CPUC) issued a staff proposal in its ongoing building decarbonization proceeding (Rulemaking 19-01-011) that would eliminate approximately $145 million in annual natural gas-related financial incentives for developers of residential and commercial properties. The purpose of eliminating the financial incentives is to encourage developers to move toward all-electric buildings. Because the largest portion of the financial incentives are tied to natural gas appliances, the CPUC’s proposal will impact a wide range of manufacturers, as well. If adopted, the CPUC’s proposal will go into effect on July 1, 2023.

Existing Natural Gas Financial Incentives

California’s largest investor-owned natural gas utilities—Pacific Gas and Electric Co., San Diego Gas & Electric Co., Southern California Gas Co., and Southwest Gas Co.—are regulated by the CPUC. The utilities’ natural gas rules provide three types of incentives for developers: allowances for each natural gas appliance installed; 10-year refunds of costs to extend gas distribution lines to new developments; and 50 percent discounts on the cost to extend gas distribution lines. The appliance incentives cover a wide range of uses, including space heating, water heaters, clothes dryers, ovens and ranges, pool and spa heating, and miscellaneous appliances. In 2020, the four large utilities provided a combined total of $95.5 million residential and $19.9 million commercial incentives for natural gas appliances; $2 million residential and $603,000 commercial incentives for 10-year distribution extension refunds; and $21.2 million residential and $4.9 million commercial with 50 percent discount incentives.

Proposal to Eliminate Financial Incentives

The CPUC staff proposal states that the natural gas-related financial incentives currently provided for in the investor-owned utilities’ gas rules are a barrier to California achieving its building decarbonization and GHG reduction goals; CPUC staff recommends eliminating all three categories of natural gas allowances for residential and commercial buildings. Eliminating the allowances will force builders to “shoulder greater expense if they choose to construct a building that uses gas,” and those costs would be passed on at the point of sale for a new building or directly absorbed by a the customer for an existing building. CPUC staff believes the added up-front cost burden would send a signal to builders that new gas infrastructure is more expensive and would make dual-fuel construction less desirable and financially riskier. Builders will therefore be more likely to favor all-electric new construction.

In contrast to the increased cost burden on developers, CPUC staff does not anticipate a significant cost increase in average property prices. Real estate buyers and tenants are expected to experience cost increases of less than one percent per incentive eliminated. The staff proposal is structured such that the financial pressure associated with continuing to develop dual-fuel properties will fall almost entirely on developers, and, as a downstream impact, appliance manufacturers.

CPUC Proceeding to Adopt Staff Proposal

The CPUC is required by Public Utilities Code section 783(b) to consider seven issues when it reexamines electric and natural gas service extensions:

  1. The economic effect on agriculture, residential housing, mobile home parks, rural and urban customers, employment, and commercial and industrial building and development;
  2. The effect on future customers who request natural gas service extensions;
  3. The effect of making customers responsible for replacements, extensions, relocations, or reinforcements of gas distribution infrastructure;
  4. The economic effect on projects, including redevelopment projects, funded or sponsored by cities, counties, or districts;
  5. The effect of the modifications on existing utility ratepayers;
  6. The effect of the modifications on the consumption and conservation of energy; and
  7. The extent to which there is cost justification for special line and service extension allowances for agriculture.

The CPUC will conduct a public workshop on the staff proposal in December 2021, followed by comments from interested parties on the staff proposal in December and January, potential evidentiary hearings and briefing in April and May 2022, and a final decision on the elimination of natural gas incentives by October 2022. The final decision adopted by the CPUC will provide for a July 1, 2023 effective date for the incentive elimination, to give parties and industry participants approximately six months to prepare for the changes.

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