Calif. law judges balk at ratepayer funding for SoCalGas hydrogen initiatives

Southern California Gas Co.'s first major attempt to secure funding for hydrogen initiatives through a rate case found little support in a proposed decision to state regulators.

A pair of administrative law judges recommended that the California Public Utilities Commission (CPUC) deny SoCalGas' attempts to recover the cost of hydrogen pilot projects and initiatives to blend the low-carbon fuel into the company's natural gas pipeline network. The judges supported other proposed clean energy initiatives but said SoCalGas did not demonstrate that hydrogen was directly related to its core business of providing safe, reliable gas service.

In the past, the CPUC has supported certain hydrogen projects for gas utilities broadly and SoCalGas specifically. However, asking ratepayers to fund hydrogen initiatives at SoCalGas and fellow Sempra subsidiary San Diego Gas & Electric Co. was "premature and not reasonable," Judges Manisha Lakhanpal and John Larsen said in an Oct. 18 proposed rate case decision.

"We acknowledge SoCalGas's and SDG&E's commitment to exploring hydrogen technology," they said. "However, to justify ratepayer funding, further planning and cost-benefit analysis are needed to align their sustainability efforts with the state's energy goals."

The proposed decision may be considered at the CPUC's Dec. 5 meeting.

SoCalGas is a sector leader in piloting hydrogen applications. In a 2023 review of 39 hydrogen pilot projects at gas utilities, S&P Global Commodity Insights found that SoCalGas accounted for at least 12. SDG&E accounted for three.

SoCalGas also experienced setbacks in seeking cost recovery for renewable natural gas (RNG) and carbon capture initiatives in the rate case. SoCalGas said it planned to file comments on the proposed decision ahead of a final CPUC order.

"We are confident, as state policy recognizes, that hydrogen, renewable natural gas, and carbon management, as well as the associated connected infrastructure, will all play vital roles in achieving California's decarbonization goals, and we will continue working with the state to advance those goals with our infrastructure, skilled workforce, and expertise," SoCalGas told Commodity Insights.

Hydrogen pilot projects deemed premature for cost recovery

In the rate case, SoCalGas sought to recover a range of costs tied to its newly formed Clean Energy Innovations unit, which "supports early development and implementation of innovative technologies." The unit requested $47.2 million in operations and maintenance (O&M) expense and nearly $13 million in capital costs.

The judges denied the entire capital costs request. The request included $4.6 million in cost recovery for one of Clean Energy Innovation's better-known projects: the Hydrogen Innovation Experience, styled as [H2] IE. The highly publicized hydrogen-powered microgrid and home landed on Fast Company's annual list of world-changing ideas in 2021. The judges said [H2] IE did not directly benefit ratepayers because hydrogen is neither available at scale nor authorized by the CPUC for use to serve gas customers.

The judges also took issue with SoCalGas redirecting nearly $2.6 million in approved funds from its 2019 rate case for [H2] IE without the commission's knowledge or approval. They expressed confusion about why SoCalGas did not present the project for scrutiny in that rate case. They called the company's assertion that it has flexibility to reprioritize ratepayer funds "a misplaced understanding of ratemaking principles." The judges removed the amount from SoCalGas' forecast rate base.

The judges also denied SoCalGas' $8.4 million request to build two hydrogen refueling stations to serve its own fleet and the public. They concluded that "producing, delivering, and storing hydrogen for public access is not a core utility business."

The judges also rejected SoCalGas' plan to procure light-duty hydrogen vehicles as part of its fleet, saying that segment of the car market is moving toward electric vehicles. They did support SDG&E's request to pilot hydrogen fleet vehicles because the proposal included medium-duty work trucks, a vehicle segment where hydrogen fueling has more momentum.

Separately, the judges said SoCalGas should not seek cost recovery for a collaboration with Ford Motor Co. to develop a hydrogen fuel cell truck and hydrogen refueling station in Bakersfield, California. They found no basis for ratepayers to fund the project outside of a research, development and deployment proposal.

Funding for hydrogen, carbon capture business development denied

The judges denied a substantial portion of SoCalGas' $20.4 million clean fuels infrastructure development proposal, one of four key areas of the Clean Energy Innovations unit's overall O&M request. The judges recommended approving spending at just $4.7 million.

They rejected a $2.3 million increase for business development activities. They cited a failure to present "clear, transparent evidence to support the request," which included $333,000 to hire commercial development managers for hydrogen and carbon capture, utilization and sequestration (CCUS). The remaining $2 million covered consulting services, feasibility studies and strategic initiatives.

The judges additionally ordered SoCalGas to reduce its rate base forecast to exclude $2.3 million for past consultant contracts. They said the work was geared toward influencing public officials' decisions on businesses other than gas service. Ratepayers "should not bear the cost of stimulating demand for the company's potential future carbon capture and hydrogen-delivery business," the judges said.

They also said ratepayers should not have to fund the Hydrogen Council's work, ordering SoCalGas to remove $561,789 in fees paid to the trade group from its forecast rate base.

The judges also denied a $2.5 million request for a program to integrate hydrogen and carbon infrastructure into SoCalGas' existing gas system. SoCalGas said the program would prepare the company to transport low-carbon fuels and engage in carbon management. The judges said SoCalGas failed to identify specific projects and direct ratepayer benefits. The company should pursue the projects in ongoing proceedings focused on those subjects, they said.

The judges also rejected a nearly $6.7 million feasibility study for an open-access CO₂ pipeline network to support CCUS in Southern California. Given the reductions to the overall clean fuels infrastructure development proposal, the judges also denied a $1.3 million request to expand Clean Energy Innovations' staff and stand up a project management office.

RNG proposals get mixed support

The judges approved $3.9 million to upgrade and enhance SoCalGas' existing network of RNG vehicle refueling stations, but denied a nearly $2.1 million request to build at two more locations. Among their reasons, the judges noted an uptick in RNG refueling stations in Southern California, which undercut the case for burdening ratepayers with expansion costs.

SoCalGas also failed to recover nearly $20.3 million in project cost overruns tied to a program to pilot pipeline interconnections to dairy farm RNG projects. The judges said the company did not demonstrate why the "large cost overruns" were reasonable. They directed SoCalGas to file an application for cost recovery. The CPUC recently allowed Pacific Gas and Electric Co. to recover about 57% of the company's $8.5 million in cost overruns tied to the pilot program.

The CPUC has also supported RNG endeavors. In addition to greenlighting the dairy farm interconnection pilot program, commissioners approved a renewable gas standard in 2022, requiring gas utilities to procure RNG in volumes equal to about 12.2% of annual supplies to core customers.