It’s Time to End Subsidies for New Gas Hook-Ups

This blog was co-authored by Azara Negron, NRDC spring 2021 graduate student intern.

California utility customers contribute over $100 million every year to subsidize gas connections for new customers. But it doesn’t make sense to keep extending gas pipelines as California moves away from using fossil fuels that add to the climate problem and are unhealthy, and it certainly doesn’t make sense to subsidize this cost on the backs of other Californians, which is what is happening now.

The Public Utilities Commission should end the subsidies supporting new gas hook-ups to align our investments with the state’s climate and clean air goals, and so millions of Californians can breathe easier.

What is a “line extension allowance”?

Utilities have historically provided support to aid new customers connecting to the gas system. These subsidies are called line extension allowances (LEAs), and cover all or some of the costs to connect the new customer. The LEA amount is based on the number of gas appliances in a residential dwelling, or the projected use of gas by new commercial and industrial facilities.

This funding is provided to new customers for free and is paid for by all the current customers through an increase in rates. So, every time a new customer is added to the gas system, the Public Utilities Commission allows the utility to increase rates to existing customers to pay for extending the pipeline.

The three large California investor-owned utilities (IOUs) offer gas line extension allowances ranging from roughly $1,600 to a little over $1,800 per home or apartment. For example, the current allowances offered are up to $1,727¹ for PG&E, $1,615² for SoCalGas, and $1,863³ for SDG&E.

While the total subsidies for new gas connections are not reported publicly, we estimate that this amounts to over $100 million paid for by other customers each year. Our conservative estimate is: $1,300 average line extension allowance per new housing unit⁴ x 100,000 new units built annually⁵ x 80 percent of these homes built with gas connections⁶ = $104 million annually.

Why is it time to end these subsidies?

The climate crisis requires that we reduce the use of gas. This was confirmed in the California Energy Commission (CEC) funded study by Energy+Environmental Economics (E3) and University of California Irvine (UCI), which projects a sharp decrease in statewide gas demand ranging from roughly 30 percent in a “no building electrification” scenario, to a 60 percent decrease in a “high building electrification” scenario where heating and hot water switches from gas to electricity.

We also know that new homes are cheaper to build all-electric, that so-called “renewable” gas is both expensive and extremely limited in supply, and that burning gas in homes is detrimental to our health.

We have worked with other stakeholders to identify a detailed set of principles, policies, and financial tools to safely manage changes to the gas delivery system. The number one no regrets strategy is to stop “digging the hole” we are in and avoid new expansions of the gas system. This means that all subsidies and support must end for new gas infrastructure that will become a stranded (unused) asset before the end of its life, a liability to gas utilities and customers left on the system.

We urge the Public Utilities Commission to end these subsidies, which are misaligned with the state’s climate goals and place an additional burden on millions of other customers. Californians deserve cleaner, healthier indoor air, which they could enjoy by switching to electricity for space heating, water heating and cooking. These subsidies are an obstacle because they keep buildings and people hooked on gas for years to come.

1. PG&E: Gas Rule No.15, Sheet 5, downloaded March 26, 2021.
2. SoCalGas: Rule 20. Gas Main Extensions, Sheet 4, downloaded March 26, 2021.
3. SDG&E: Rule 15 Gas Distribution Line Extension, Sheet 3, downloaded March 26, 2021.
4. While the maximum LEA is $1,600 to $1,800, we assume that single family homes will use an allowance of $1,600 and a multifamily unit will use an allowance of $1,000. Assuming an even split between single family and multifamily new construction, this is $1,300 per unit.
5. An average of 108,000 units were built annually in California between 2015 to 2019 according to Construction Industry Research Board. For the last few years, this has been roughly half single family and half multifamily units. However, the CEC projects that over 170,000 new housing units will be built in 2023, so the number of new housing units could increase substantially.
6. We assume that most new single family homes and about 60 percent of multifamily homes are built with gas; i.e. 80 percent of units are built with gas assuming an even split between single family and multifamily new construction. This is a conservative estimate. The confidential data we have reviewed shows that almost all new single family homes are built with gas and that for low-rise multifamily about 95 percent have gas water heating and about 55 percent have gas space heating.