California implements revolutionary new utility model for gas leaks

It is widely expected that the Environmental Protection Agency will soon release a proposal to weaken methane standards from oil and gas production. Such a blunder would result in increased climate pollution, energy waste and regulatory uncertainty. So, while the federal government looks to take another step backwards on oil and gas climate pollution, California just took another big leap forward.

Last week, California’s Public Utilities Commission adopted a rule that not only implements a new way to look at methane emissions from utility systems, it fundamentally alters the utility business model for leak control and sets an approach for the rest of the nation to follow.

The significance of natural gas leaks

Natural gas pipes and equipment can emit tremendous amounts of methane that contributes to climate change and can even cause explosions. One study from researchers at CalTech, released just last week, found an alarming amount of natural gas in Los Angeles was lost from the utility operated distribution network — mainly from equipment in homes and businesses.

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In addition to harming the climate, gas leaks are also wasteful. Recent data suggests California gas customers have been paying about $18 million a year for gas that is never delivered because of leaky pipelines and other equipment.

Where the new law comes in

Historically, states have required gas companies to fix gas leaks that can cause fires and explosions, but have not incentivized or required them to address the thousands of tiny (and some not so tiny) leaks that waste gas and cause climate pollution. As a result, gas companies tend to spend mountains of money — over six billion dollars a year in California — to operate and maintain their gas systems, yet still leak significant amounts of climate pollution.

In California, a CPUC decision from last year requires utilities to fix a wider array of leaks to address this problem, but the utilities themselves have been falling short of making all of the cost-effective repairs possible. That is where last week’s ruling at the CPUC comes into play — fundamentally remaking how utilities value gas reductions and lost gas.

First, it changes the way utilities can set gas prices for lost gas by requiring the utility itself to absorb the value of gas it emits into the air, in excess of the state’s methane reduction targets. The utility cannot pass on the cost for the extra methane to their customers. Put into practice — this means that since utilities should reduce methane emissions by about 20% by 2025, if they do not meet that target they are prohibited from raising rates to cover the value of the extra gas they release. Utilities can no longer look to ratepayers to pay for the lost gas that companies are required to keep in their pipes.

This is the first time a state has made a move of this caliber. Several states, like Massachusetts and New York (with well-documented leaky systems), have implemented standards that require companies to use advanced technologies to find and fix leaks, but they have not limited recovery for lost gas because of its climate impact. Others, like Virginia, have capped total lost gas recovery as a way to combat excessive waste, but those limits were so high that they had little effect on driving modern leak reduction efforts. Until now, none have tied utility rates to both climate and waste as a means to reduce lost gas.

Why is limiting recovery for lost gas so important?

The CPUC decision is the first to include a performance-based regulation for gas systems of this nature, though electric utilities have followed PBR models for years. When combined with a mechanism to grant gas utilities permission to invest in leak management programs, this new standard ensures gas companies have a clear path to financial benefits when they make approved investments to reduce leaks — and recover less when they fail to meet environmental standards. In essence, since utilities have historically recovered, this decision removes an age-old disincentive for utilities to control leaks.

California previously set aggressive standards to control leaks, so the total amount of gas recovered through these new law changes may be small. However, the overarching impact of this new rule is huge. It sends a signal to the rest of the nation’s utility commissions that it is possible to move away from the longstanding practice of allowing recovery for the full value of gas lost to the air without meaningful limitation. After all, losing gas is no longer an unavoidable part of the utility business model.

A new look at the value of gas system investments

The law also sheds new light on the total costs and benefits associated with investing in gas leak reduction and gas replacement options. For example, through this decision utilities now have a mechanism to evaluate, and must actually evaluate the costs of methane’s emissions on the climate, and the costs associated with potential fires and explosions that may occur because of gas use and leakage. As a result, the CPUC decision will help us better understand the costs and benefits of gas system investments.

The historic approach to gas utility regulation has had limitations when it comes to reducing the carbon footprint of natural gas use. But the new standards in this law, along with other thoughtful approaches to address the gradual and strategically planned retirement of our gas system, will play a major role in cleaning up utility systems and delivering a safer climate.

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