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HomeMy WebLinkAboutStaff Report 2507-49222.Discussion of Gas Utility Transition Study Scoping; CEQA Status - Not a Project DISCUSSION: 6:50PM – 7:50PM Item No. 2. Page 1 of 4 7 5 3 7 Utilities Advisory Commission Staff Report From: Alan Kurotori, Director Utilities Lead Department: Utilities Meeting Date: September 3, 2025 Report #: 2507-4922 TITLE Discussion of Gas Utility Transition Study Scoping; CEQA Status - Not a Project RECOMMENDATION This is a discussion item and no recommendation is being presented to the Utilities Advisory Commission (UAC) at this time. Staff is seeking UAC feedback on the scope for a study of the financial and operational impacts of electrification on the gas utility. EXECUTIVE SUMMARY Achieving the community’s greenhouse gas emissions reductions goals requires options including deep reductions in building emissions. Regardless of how quickly the community reaches these goals, impacts on the gas utility’s financial structure and physical operations are expected if community members participate in electrification efforts sufficiently to achieve adopted City Council emissions reduction goals. Staff is beginning a study of those impacts and is seeking feedback on its approach. The study will simulate different patterns of electrification throughout Palo Alto; identify opportunities for gas main and service abandonment which may include operational efficiencies; and estimate abandonment costs, changes in operational costs, and customer class cost allocations. The study will prioritize continuing to operate the gas system safely and identify portions of the gas system that should be retained for operational reasons even after substantial parts of the system have electrified. BACKGROUND Gas utilities throughout California are planning for the possible impacts of widespread building electrification. The California Public Utilities Commission (CPUC) has a gas transition proceeding for the investor-owned utilities (IOUs), but many of the issues IOUs face differ from Palo Alto. IOUs have a different capital structure, service territories with different characteristics, and different system designs. City staff monitors the CPUC proceeding to learn potential lessons and Item No. 2. Page 2 of 4 7 5 3 7 participated in an early workshop that led to the proceeding, however analysis specific to Palo Alto is also needed. The UAC received preliminary high-level staff analyses of the potential cost of abandoning the gas utility, staffing impacts, and rate impacts on November 4, 20201 and January 2021,2 but additional study is still needed. Abandonment costs are likely significantly higher than the prior studies showed because they did not sufficiently account for the physical system constraints or the difference in rate impacts by customer classes. ANALYSIS The objective of the Gas Transition Study is to assess the potential financial and physical impacts of large-scale building electrification on the gas system and identify strategies to manage those impacts. The study will be conducted primarily in-house, with consultants assisting in physical gas system modeling and rate modeling. Staff will simulate four electrification scenarios for single-family, multi-family, and nonresidential sectors, simulating 20%, 40%, 60%, and 80% reductions in gas sales (see Attachment A for full scenario definition). Gas usage will be modeled down to the meter level. For each scenario, staff will estimate the number of gas main segments that could be retired and the resulting abandonment costs and changes in operational costs. Staff will then estimate rate impacts by customer class. Safety will remain the top priority throughout the hypothetical transition, and the study will analyze resulting cost impacts. Due to the complexity of electrification for some commercial customers (e.g. restaurants), and for larger industrial and medical users, a core network of gas lines is expected to be preserved to serve these users. The analysis will assume that retiring entire blocks of gas mains is more cost-effective than retiring individual services. Abandoning gas infrastructure at the block level is more efficient than retiring individual services, primarily because it significantly reduces the number of excavation events. Block-level abandonment involves digging into the street to cut and cap the main at each end of a block and removing all associated meters in one operation. This contrasts with the more labor- intensive process of retiring services one at a time, which also requires much more excavation and pavement restoration to abandon each customer service lateral. The study will look at the cost of both block-level and service-level abandonment as strategies and a range of estimates for the total associated costs. 1 Staff Report ID#11639, November 4, 2020, Discussion of Electrification Cost and Staffing Impacts on the City of Pa lo Alto's Electric and Gas Distribution Systems, http://cityofpaloalto.org/civicax/filebank/blobdload.aspx?BlobID=7 8897 2 Staff Report ID#11751, January 6, 2021, Discussion of Projected Electrification Impacts on Gas Utility System Average Rates, https://www.cityofpaloalto.org/files/assets/public/agendas-minutes- reports/agendasminutes/utilities-advisory-commission/archived-agenda-and-minutes/agendas-and-minutes- 2021/01-06-2021special/01-06-21-uac-item-1.pdf Item No. 2. Page 3 of 4 7 5 3 7 Operational costs that may vary during the transition will also be evaluated, such as customer service, leak monitoring and repair, meter investigation, and overhead allocations. Many of these functions are shared across utilities, and their costs are allocated based on factors such as the number of meters served or total revenues. As gas sales decline and parts of the system are retired, both actual workload and allocation factors will shift—though not always simultaneously. Operational costs may decrease in increments as work reductions reach critical thresholds. The study will analyze these patterns, assess positive and negative impacts on other utilities, and identify strategies on cost management and secondary impacts on other utilities. Key output metrics will include: Number of gas mains with low or no usage Estimated abandonment costs Changes in operational costs Financial impacts on other utilities Effect of reduced natural gas on natural gas cap-and-trade revenues Effects on General Fund revenue reduction (18% General fund transfer, utility user tax, cost allocation). The study will model different likelihoods of residential customers disconnecting gas service after electrifying space and water heating. This will help assess the influence of disconnection rates on system outcomes. Staff will also evaluate strategies including funding needed to encourage disconnection, including incentive programs, rate design, and block-level electrification initiatives. Commercial buildings will be assumed to retain gas service . Assumptions like these are only for modeling and do not represent an assessment of whether this level of electrification is feasible. The study will also examine the physical layout of the gas network under various electrification scenarios. Unlike many regional systems, the City’s gas infrastructure is highly networked, allowing for block-level disconnections. However, not all unused mains can be removed without affecting system capacity and functionality. For example, a medium-diameter main with no active services might still be needed to maintain pressure or flow. The study will analyze these constraints and explore targeted main upsizing and replace to enable other residential main retirements. FISCAL/RESOURCE IMPACT The study is expected to require about $150,000 in consulting costs ($60,000 for building a gas model and $90,000 for rate analysis and scenario simulation) funded by the Utilities Gas Engineering and Resource Management Division budgets and about 0.3 FTE in staff time (0.15 FTE from Utilities Water-Gas-Wastewater Engineering and 0.15 FTE from the Utilities Resource Management Division and the Climate Action Team combined). The gas utility fiscal and resource impact of widespread electrification on the gas utility and the costs of gas system abandonment will be assessed in this study. Item No. 2. Page 4 of 4 7 5 3 7 STAKEHOLDER ENGAGEMENT This topic was discussed by the UAC at its November 2020 and January 2021 meetings, as noted above, and since then the need to more carefully assess the costs of transitioning the gas utility has been raised in several meetings of the UAC, S/CAP climate stakeholders, the Council subcommittees focused on climate contexts, and at City Council. Staff also discussed this topic with the City Council’s Climate Action and Sustainability Committee on June 13, 2025 and the Climate Action and Sustainability Working Group prior to that meeting. There was support for the general direction of the analysis. There was also interest in exploring ways to increase the likelihood customers choose gas disconnection after electrifying space and water heating. Staff clarified that this will be the subject of subsequent policy discussion through 2026 and 2027 after the initial analysis. The Committee also recommended looking at the studies and pilots of other gas utilities doing similar work while acknowledging there are a limited number of utilities pursuing this type of analysis. ENVIRONMENTAL REVIEW The UAC’s discussion of this topic does not meet the California Environmental Quality Act’s definition of a project, pursuant to Public Resources Code Section 21065, and no environmental review is required. ATTACHMENTS Attachment A: Draft Scenario Design for Gas Transition Study Attachment B: Staff Presentation AUTHOR/TITLE: Alan Kurotori, Director of Utilities Staff: Jonathan Abendschein, Assistant Director, Climate Action 8 2 9 7 Attachment A Draft Scenario Design for Gas Transition Study Scenari o Gas Sales Reductio n Residential Space and Water Heating Electrification Small and Medium Non-Residential Space and Water Heating Electrification Medical and Industrial Electrification* 1 20%25%25%0% 2 40%50%50%0% 3 60%75%75%0% 4 80%100%100%0% * In practice, some electrification will occur in this sector, but staff does not have good visibility on the potential for electrification in this space due to the prevalence of unique / process loads Methodology: • For each scenario staff will run a large number of random iterations assigning space and water heating electrification to different meters / gas mains. A sensitivity will be run for each scenario varying the likelihood of resident gas meter disconnection. • For each scenario staff will calculate the range of gas mains with low or no gas usage resulting from all the iterations for that scenario. • Staff or the City’s consultant will add one or two sample iterations for each scenario to its gas system model and identify how many mains noted for removal by the simulation could not actually be physically removed. Scenario results will be adjusted accordingly. • Staff will estimate the average abandonment costs for each scenario including sensitivity analyses between higher costs of individual services abandonment versus larger block abandonment costs. • Staff will estimate changes in operational costs, allocations between utilities, and reductions in General Fund revenues resulting from the decreased gas sales and gas main abandonment. • Staff and the City’s consultant will estimate the customer class average rates for each scenario based on the estimated abandonment costs, reduced gas sales by customer class, and changes in operational costs. Based on these results staff will identify physical and financial issues and develop feasible strategies to mitigate them. July 9, 2025 www.cityofpaloalto.org Gas Transition Study Scoping Utilities Advisory Commission Why Study the Gas Transition? •City, State, and Regional policies drive building electrification •If successful, gas use will decline significantly •The City must plan for financial, physical, and safety impacts •Goal is a safe, smooth, equitable transition Council 2025 Priority Objective #32:Share preliminary analysis of strategies for a physical and financial transition of the gas utility to relevant policymakers and stakeholders 2 Study Goals •Understand physical impacts of electrification on gas infrastructure •Quantify physical, operational, and financial impacts •Estimate cost of gas main and service abandonment •Develop strategies to: •facilitate abandonment •mitigate physical and financial impacts 3 Study Outputs 4 Other Outputs •Cost impacts to other utilities •General Fund transfer and UUT impacts For the Gas Utility •Cost of gas main/service abandonment •Operational cost impact •System average rate changes by class •How much funding would be needed from some other source to keep gas rates in line with current forecasts •Cap and Trade cost and revenue impacts Electrification Scenarios to Model 5 Scenario Reduction in Gas Sales Water and Space Heating Electrification Residential Commercial 1 20%25%25% 2 40%50%50% 3 60%75%75% 4 80%100%100% •Medical/industrial, commercial cooking excluded •Gas disconnection likelihood evaluated for buildings with water and space heating already electrified Impacts on Gas Infrastructure 6 Potential Opportunities and Constraints •Mains of certain sizes may need to be retained for operational purposes •Need to maintain service for key users (e.g. medical, industrial, restaurants) •Retirement of certain mains (e.g. PVC, steel) may yield more savings Impacts on Gas Infrastructure •Fewer customers using the system •Result: underused or unused gas mains •Opportunity to retire entire blocks Cost-Efficiency of Block-Level Gas System Retirement 7 Drawbacks and Challenges •Requires all homeowners to remove all gas appliances before it can be accomplished •A single person with a single appliance can hold up gas main abandonment •May be forced to do service by service abandonment – unsafe to leave unused gas services in place for long durations Block Level Retirement Benefits •Standard practice: dig & abandon unused lines for safety, avoided maintenance •Abandoning by block cheaper than by service – fewer excavations, less labor, less street repair. Gas Utility Impacts Declining gas use, gas abandonment reduces workload Workload may not decline enough to enable staff attrition – this could increase per-unit gas cost for remaining customers Changing Utility Costs with Electrification 8 Other Utility Impacts Shift fixed shared costs between utilities (e.g. as gas customers disconnect customer service cost may shift to other utilities) General Fund Impacts Reductions in General Fund transfer, UUT Potential for increased City gas utility bills Next Steps •Summer 2025: Advance study with the goal of having preliminary results by Fall 2025, if feasible •Fall 2025: •Preliminary study results to UAC and CASC •Results can be used to inform 2026-2027 S/CAP strategies •Late 2025 / Early 2026: Final report 9 CITY OF PALO ALTO