Will the Shrinking Ratepayer Base be Protected from Gas Utilities’ Sunk Costs?

By Published On: July 7, 2021

The move to decarbonize buildings is prompting questions about how gas utilities and their customers will fare in an increasingly electric landscape. Turns out, their fates may diverge.

U.C. Berkeley Haas School of Business Professor Lucas Davis and Associate Professor Catherine Hausman from the University of Michigan found that when the customer base of a gas utility shrank, revenue did not shrink proportionately. Gas companies get their fixed costs covered in rates. A shrinking pool of customers, however, have to shoulder that burden. The researchers presented their findings at a July 7 webinar.

If left unaddressed, the impact of the growing push to electrify buildings to slash greenhouse gases in California and across the United States will harm poor customers left on the system to pick up a larger share of the gas tab because they’re unable to electrify their abodes.

Lucas and Hausman discovered that a 10% increase in residential customers leads to a 10% increase in revenues. At the same time, a 10% decrease in customers results in only a 5% decrease in revenues. That is because “the pipelines don’t go away,” Hausman said, and they must be maintained. There also are continued capital expenditures and worker pensions.

The majority of gas utilities outside of California and the west have been losing customers for many years. Some of that is due to white flight from the cities to the suburbs, and some to shrinking rural populations and the decline in the Rust Belt.

In contrast, Pacific Gas & Electric, which provides gas to a third of Californians, and SoCalGas, are in the minority of private and public gas companies that have seen steady growth. The last decade, PG&E saw an increase of 792,000 customers and SoCal Gas more than 1 million, according to the two researchers.

Source: Haas School of Business

With the push to decarbonize buildings, which produce one fourth of California’s greenhouse gases, strategies are needed to protect the vulnerable who may be left behind holding the bag.

Exit fees or taxes?

Proposed remedies include adding exit fees to gas customers who electrify their residences. This would be similar to what electric customers who leave a private utility pay to be served by community energy, known as the Power Charge Indifference Adjustment.

However, a proposed exit gas fee could face considerable backlash.

Some call for shareholders to bear the costs.

Severin Borenstein, a Haas professor, and California Independent System Operator board member, proposed that California taxpayers pick up the tab for ongoing costs from gas infrastructure as well as rising electric rates. He said any state tax should be structured so those with higher incomes pay more to help protect low-income customers.

Energy economist Richard McCann with M.Cubed pointed out that the divvying up of infrastructure costs among consumers is not debated in other industries facing obsolesce, “even in telcom when cell phones started making land lines obsolete.”

Jim Lazar, author of Electricity Regulation in the US and the Electricity Brain Trust group moderator, added that landline phone companies “have lost 60% of their access lines since 1990,” but neither public subsidy nor exit fees have applied “and those companies that have not been smart are failing.” 

Protecting remaining gas customers

Also needed are strategies to move poor customers of color off of gas use in their dwellings to electric power. That may include increasing the amount of weatherization funds to help defray the cost of the switch, and help the state attain its zero carbon goal by 2045.

Both a pending bill and a CPUC staff proposal to use Self Generation Incentive Program funds could cover needed costly electric panel upgrades and the higher costs of electric heat pumps to allow replacements of worn out gas heaters.

SB 68 aims to reduce “barriers for people who are trying to help us meet our climate goals,” author Sen. Josh Becker (D-San Mateo) said. Proposed SGIP incentives for heat pump water heaters would be higher for low income customers.

The new Haas Business School paper, which is its first effort at analyzing building decarbonization ratepayer impacts, does not factor in the loss of industrial gas customers. It also does not look at ongoing ratepayer subsidies that incentivize growth of the natural gas system, including payments for new gas connections and rebates for efficient gas appliances.

According to Terrie Prosper, CPUC spokesperson, the private utilities spent $81 million on gas appliance efficiency rebates in 2020. That is out of combined efficiency budget for PG&E, SoCalGas, San Diego Gas & Electric and Southern California Edison of about $500 million. Funds also were directed to energy efficient electric appliances, weatherization, workforce trainings and administration costs.

-Elizabeth McCarthy

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