City Council
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: Planning and Development Services
Meeting Date: February 26, 2024
Report #:2402-2644
TITLE
Adoption of a Resolution Suspending Enforcement of Municipal Code Sections 16.14.090,
16.14.110 and 16.14.300 Requiring All-electric Construction and Direction to Staff to Commence Work on Local Amendments to the California Energy Code Establishing a One Margin Standard.
CEQA Status – Not a Project.
RECOMMENDATION
Staff recommends that Council:
1. Consider adopting a Resolution (Attachment A) suspending enforcement of Municipal Code sections 16.14.090, 16.14.110 and 16.14.300, which require new residential and non-residential buildings to be all electric, in light of the decision of the U.S. Court of Appeals for the Ninth Circuit in California Restaurant Association v. City of Berkeley; and,
2. Direct staff to return to Council with amendments to the California Energy Code as codified in Title 16 of the Palo Alto Municipal Code Building Regulations establishing a “One Margin” standard, which would allow for installation of natural gas plumbing while imposing more stringent energy efficiency and all-electric readiness requirements to all new buildings, which incentivizes the additional efficiency and lower emissions of all- electric equipment using clean electricity.
EXECUTIVE SUMMARY
In the last five years, more than seventy U.S. cities and states have adopted regulations requiring or strongly incentivizing new building construction to be all electric. The first of these laws was passed in August 2019, in the City of Berkeley. In response to a court challenge the Ninth Circuit Court of Appeals found that Berkeley’s gas infrastructure ban is invalid because it is preempted by the federal Energy Policy and Conservation Act (EPCA). That decision is the final opinion of the
Ninth Circuit 1 and applies throughout the Ninth Circuit’s jurisdictional area, which includes California and many other western states. Moreover, the Ninth Circuit found that EPCA preemption applies to state and local building codes.
In support of its 80-by-30 and carbon neutrality goals, in November 2022 Palo Alto adopted a set of policies requiring that new construction and substantial remodels utilize all-electric design, effective January 2023.2 In light of the Ninth Circuit decision, staff proposes that Council consider two parallel paths forward.
First, staff recommends that Council consider a temporary moratorium on enforcement of Palo Alto’s current all-electric requirement. For Council’s consideration, staff has prepared a Resolution (Attachment A) establishing a moratorium on enforcement of Municipal Code sections 16.14.090, 16.14.110, and 16.14.300 effective on adoption through December 31, 2024, or until further Council action, likely on adoption of an alternative electrification program. If adopted by Council, the Resolution would apply to pending and future development applications, including retrofits to add gas to already-constructed buildings, and to requests to modify previously-issued permits.
Second, staff recommends Council direction to pursue a replacement Reach Code. For a replacement Reach Code, staff is aware of various options being considered by other agencies and by environmental advocacy groups. Of these alternatives the codes most likely to conform to the EPCA-preemption standards set by the court in its decision is the “One-Margin” code. Staff believes timeliness is critical in adopting this code. Work for the 2026-2028 code cycle begins next year in 2025, so any replacement code the City adopts in 2024 will only be in effect for just over a year. Rather than considering and researching a variety of policy options, staff recommends Council provide direction to proceed with development of a One Margin code.
BACKGROUND
Cities, Counties and States Adopt Building Electrification Requirements In the last five years, more than seventy U.S. cities and states have adopted regulations requiring or strongly incentivizing new building construction to be all electric. The first of these laws was passed in August 2019, in the City of Berkeley. Since then, dozens of cities and counties throughout the U.S., and several states, including Palo Alto, adopted all electric requirements for new buildings. The laws differ in a number of respects, including the type of regulation used (e.g. building code or health and safety regulation) and whether exceptions are made for certain uses 1 Cal. Rest. Assoc. v. City of Berkeley, 89 F.4th 1094 (9th Cir. 2024). The denial of en banc review includes a lengthy dissent from the denial, signed by 11 of the 50 active judges who participated in consideration of the petition for rehearing. While a dissent has no force of law, the dissenting judges explained in detail why they believe the original three-judge panel misinterpreted EPCA and reached the wrong result, in order “to urge any future court that interprets the Energy Policy and Conservation Act not to repeat the panel opinion’s mistakes.” Id. at p. 1119. 2 https://portal.laserfiche.com/Portal/DocView.aspx?id=59084&repo=r-704298fc or building types or can be requested based on feasibility or hardship. Lawsuits have been filed challenging many of these laws.
Palo Alto’s All-Electric New Building Requirement
In support of its 80-by-30 and carbon neutrality goals, in November 2022 Palo Alto adopted a set of policies requiring that new construction and substantial remodels utilize all-electric design, effective January 2023. 3 There is no provision for exceptions. The City implemented this all- electric policy though local amendments to the California Green Building Code. These amendments can be found in:
•PAMC Section 16.14.090 (for residential uses) – requiring “full electrification” for new buildings, substantial remodels, and new outdoor appliances/equipment such as grills, firepits, swimming pool heaters, and similar equipment. The Code prohibits plumbing for natural gas in addition to gas appliances. “Full electrification” is defined as “[a] building or parcel of land whose sole source of energy is electricity and contains no combustion equipment or plumbing for combustion equipment.”
•PAMC Section 16.14.110 (for residential uses) – requiring that Heat Pump Water Heaters be utilized for all existing structures replacing or adding a water heater. •PAMC Section 16.14.300 (for non-residential uses) - requiring “full electrification” for new buildings, substantial remodels, and new outdoor appliances/equipment. The Code prohibits plumbing for natural gas in addition to gas appliances. “Full electrification” is defined as “[a] building or parcel of land whose sole source of energy is electricity and contains no combustion equipment or plumbing for combustion equipment.” Note that the base California Energy Code (CEC) already includes several measures that effectively require heat pump space conditioning and water heating in Palo Alto’s climate zone.
Heat pumps are required for both space heating and water heating in new single-family homes, and for space heating only in new multifamily residences and most commercial uses. While the base CEC allows a developer to show that an alternative approach is just as energy-efficient as heat pump space and water hearing, the vast majority of developers use the pre-approved path.
The City’s local codes go further than the base California Energy Code by: (1) requiring electrification without allowing a theoretical alternative, (2) requiring electric appliances for cooking and accessory uses in new single-family homes, (3) requiring heat pump water heaters for new multifamily and commercial projects; and (4) requiring heat pumps when replacing a water heater.
3 https://portal.laserfiche.com/Portal/DocView.aspx?id=59084&repo=r-704298fc Legal Challenges to Local and State Building Electrification Laws In adopting its all-electric requirement, Berkeley invoked its general police power to amend its Health and Safety Code to prohibit gas piping in new building construction. 4 In November 2019, the California Restaurant Association (“CRA”) sued Berkeley, alleging, among other things, that Berkeley’s gas infrastructure ban is invalid because it is preempted by the federal Energy Policy and Conservation Act (EPCA).
CRA is an association of restaurant owners and chefs, purportedly including members that seek to open or relocate a restaurant in a new building in Berkeley but for the ban on natural gas. 5 CRA has publicly stated that it believes other cities’ regulations would be similarly preempted by EPCA but sued Berkeley because it was the first city to adopt a local gas ban for new construction.
The federal trial court dismissed the suit, holding that EPCA preemption is limited to ordinances that directly regulate covered appliances. 6 CRA appealed to the Ninth Circuit. The U.S.
Department of Justice and Department of Energy weighed in, and amicus briefs were filed by numerous state Attorneys General, associations of cities and counties, academics and interest groups.
On April 17, 2023, the Ninth Circuit issued a decision holding Berkeley’s regulation invalid because it is preempted by EPCA.7 Berkeley sought rehearing from a larger en banc panel of Ninth Circuit judges. On January 2, 2024, the Ninth Circuit denied the request for en banc rehearing, with 39 of the 50 non-recused active judges declining to review the matter. The decision of the original three-judge Ninth Circuit panel was reissued with minor amendments that do not change the substance or reasoning of the opinion. That decision is the final opinion of the Ninth Circuit.8 The Ninth Circuit decision applies throughout the Ninth Circuit’s jurisdictional area, which includes California and many other western states. 9
Berkeley has 90 days from the denial of rehearing en banc to ask the U.S. Supreme Court to hear the case (approximately April 1, 2024). If Berkeley requests review, the Supreme Court has discretion whether to accept the case, and there is no specific time for the Court’s response. In practice, the Court accepts only a small fraction of the review petitions it receives. Berkeley has not announced whether it will seek Supreme Court review. 4 Berkeley Municipal Code, Chapter 12.80.
5 Cal. Rest. Assoc. v. City of Berkeley, 547 F. Supp. 3d 878, 882 (N.D. Cal. 2021). 6 Ibid.
7 Cal. Rest. Assoc. v. City of Berkeley, 65 F.4th 1045 (9th Cir. 2023). 8 Cal. Rest. Assoc. v. City of Berkeley, 89 F.4th 1094 (9th Cir. 2024). The denial of en banc review includes a lengthy dissent from the denial, signed by 11 of the 50 active judges who participated in consideration of the petition for rehearing. While a dissent has no force of law, the dissenting judges explained in detail why they believe the original three-judge panel misinterpreted EPCA and reached the wrong result, in order “to urge any future court that interprets the Energy Policy and Conservation Act not to repeat the panel opinion’s mistakes.” Id. at p. 1119. 9 The Ninth Circuit includes Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Washington, Guam and the Northern Mariana Islands.
Outside of the Ninth Circuit, legal challenges have been filed against electrification requirements in New York City and the State of New York.
The Ninth Circuit’s decision in California Restaurant Association v. City of Berkeley The initial issue in CRA v. City of Berkeley is whether CRA has sufficient standing to challenge Berkeley’s regulation. To establish associational standing, and organization must demonstrate that (1) at least one of its members has suffered an injury in fact that is (a) concrete and particularized and (b) actual or imminent, rather than conjectural or hypothetical; (2) the injury is fairly traceable to the challenged action; and (3) it is likely, not merely speculative, that the injury will be redressed by a favorable decision. 10 Because the case came to the Ninth Circuit on appeal from an order granting a motion to dismiss—a preliminary motion that requires the court to assume the truth of facts pled in a complaint—the Ninth Circuit held that CRA’s bare assertion that one or more of its members would open a restaurant in a new building Berkeley but for the all-electric ordinance was sufficient to establish standing, even without identifying an affected member, a specific location, or a plan or timeframe for opening a restaurant.11 After finding sufficient standing, the Circuit turned its focus to the Energy Policy and Conservation Act (EPCA). Congress adopted EPCA in 1975, in response to the OPEC oil embargo in 1973-74 that plunged the U.S. into a recession. The primary goals of EPCA were to increase energy production and supply, establish the Strategic Petroleum Reserve, reduce energy demand and require energy efficiency, and bolster the authority of the President and executive agencies to respond to disruptions in energy supply. Among other programs, EPCA established the Energy Conservation Program for Consumer Products, which gives the Department of Energy (DOE) the "authority to develop, revise, and implement minimum energy conservation standards for appliances and equipment." 12 As currently implemented, DOE enforces test procedures and minimum standards for more than 60 products covering residential, commercial and industrial, lighting, and plumbing applications. By its terms, EPCA implements a national energy policy and expressly preempts state and local regulations concerning the energy efficiency, energy use, and energy conservation standards for covered products.13
In CRA v. City of Berkeley, the Ninth Circuit held that the EPCA preempts Berkeley’s ordinance because by banning gas piping in new construction Berkeley effectively rendered gas appliances useless even though gas service is available, thereby impermissibly regulating energy use by covered products. The court characterized Berkeley’s regulation as an attempt to circumvent 10 Cal. Rest. Assoc. v. City of Berkeley, 89 F.4th at p. 1099, citing Nat. Res. Def. Council v. EPA, 735 F.3d 873, 878 (9th Cir. 2013).
11 Id., p. 1100.
12 42 U.S.C. §§ 6291–6309.
13 EPCA includes the following definitions: “Energy efficiency” means “the ratio of the useful output of services from a consumer product to the energy use of such product…” 42 U.S. Code § 6291(5). “Energy use” means “the quantity of energy directly consumed by a consumer product at point of use...” 42 U.S. Code § 6291(4). And “energy conservation standard” is defined, among other things, as “a performance standard which prescribes a minimum level of energy efficiency or a maximum quantity of energy use.” 42 U.S. Code § 6291(6).
EPCA preemption by doing indirectly what Congress has said may not be done directly: “Berkeley can’t evade preemption by merely moving up one step in the energy chain and banning natural gas piping within those buildings. Otherwise, the ability to use covered products is ‘meaningless’ if consumers can’t access the natural gas available at the meter on the premises.”14 While the trial court had determined that the EPCA does not preempt Berkeley’s ordinance because the ordinance does not directly regulate either the energy use or energy efficiency of covered products 15, the Ninth Circuit found that EPCA preemption is not limited to facial regulations of consumer products but rather reaches regulations that “concern” covered products (i.e., banning delivery of natural gas to appliances “concerns” the energy use of covered products).16 The Ninth Circuit concluded that a regulation that imposes a total ban on natural gas is not exempt from the EPCA just because it lowers energy use to zero.17 Moreover, the Ninth Circuit found that EPCA preemption reaches state and local building codes since there would otherwise be no need for EPCA’s building code exemption.18 The Circuit noted that there is “no doubt Berkeley’s ban, if adopted by States and localities throughout the country, would significantly burden the sale of covered products on a national basis.”19 Finally, in a tangential discussion that may become relevant to future electrification initiatives, the Circuit determined that its interpretation of EPCA does not conflict with the Natural Gas Act, which prevents the Federal Energy Regulatory Commission (“FERC”) from regulating local distribution of gas. While the trial court reasoned that an expansive interpretation of the EPCA would sweep into areas that the Natural Gas Act allocates to state and local government, requiring localities to continue providing natural gas in all but the rarest of circumstances 20, the Ninth Circuit stated that finding EPCA preemption in this context does not necessarily require Berkeley to affirmatively make natural gas available everywhere. Rather, the Ninth Circuit stated that its decision is limited: the EPCA prevents Berkeley from banning gas piping from the point of delivery at the meter within new construction buildings. The Circuit stated that its holding does not address the question of whether Berkeley has any obligation to maintain or expand the availability of a utility’s delivery of gas to meters21, effectively leaving that question open for now.
ANALYSIS
Staff proposes that Council consider two parallel paths forward. First, staff recommends that Council consider a temporary moratorium on enforcement of Palo Alto’s current all-electric requirement. As proposed, the moratorium would be in place until Council adopts replacement 14 Cal. Rest. Assoc. v. City of Berkeley, 89 F.4th at p. 1107. 15 Cal. Rest. Assoc. v. City of Berkeley, 547 F. Supp. 3d 878, 891-892 (N.D. Cal. 2021). 16 Cal. Rest. Assoc. v. City of Berkeley, 89 F.4th at p. 1103-1105. 17 Id., p. 1102.
18 Id., p. 1101.
19 Id., p. 1104 (internal quotations omitted).
20 Cal. Rest. Assoc. v. City of Berkeley, 547 F. Supp. 3d 878, 891 (N.D. Cal. 2021). 21 Id., p. 1106.
reach code provisions—called One Margin—that staff, with Council direction, will bring forward as soon as possible. Second, staff seeks Council’s endorsement to pursue development of the One Margin program as the quickest way to implement strong incentives for new building electrification. Staff will continue to evaluate potential regulatory approaches for the Council to consider with the next cycle of Building Code regulations that are slated to come to Council in 2025, for 2026-2028.
Moratorium on Enforcement of PAMC Sections 16.14.090, 16.14.110, and 16.14.300 Although Berkeley implemented its gas ban within its Health and Safety Code and Palo Alto implemented its gas ban as a local amendment to the California Building Standards Code, both ordinances prohibit installation of natural gas plumbing in new building construction, which the Ninth Circuit found to be preempted by the EPCA. Given this similarity, the City of Palo Alto faces legal risk if it were to continue enforcement of its blanket prohibition on natural gas plumbing in new buildings.
Following the Ninth Circuit’s April 2023 opinion in CRA v. Berkeley, state and local government agencies within the western region covered by the Circuit that have regulations prohibiting the installation or use of gas have repealed their regulations, suspended enforcement, or initiated substantial changes to the regulations. 22 Staff is not aware of a jurisdiction with a regulation similar to Palo Alto’s that is continuing active enforcement.
With the law in the Ninth Circuit settled (unless and until Berkeley asks and the U.S. Supreme Court accepts review of the matter and issues a stay of enforcement), project applicants are requesting clarification with respect to the all-electric requirement. Development Center staff have received inquiries or applications from approximately one dozen applicants seeking permission to install gas infrastructure to varying extents. This includes a number of applicants seeking to revise previously-approved permits to add gas infrastructure.
For Council’s consideration, staff has prepared a Resolution (Attachment A) establishing a moratorium on enforcement of Municipal Code sections 16.14.090, 16.14.110, and 16.14.300 effective on adoption through December 31, 2024, or until further Council action, likely on adoption of an alternative electrification program. If adopted by Council, the Resolution would apply to pending and future development applications, including retrofits to add gas to already- constructed buildings, and to requests to modify previously-issued permits.
Develop a One Margin Reach Code
Following a moratorium, the City’s building code requirements would revert to the 2022 version of the California Code of Regulations, Title 24 Part 6 (California Energy Code) until a substitute is adopted by local ordinance. The current California Energy Code permits the construction of 22 This includes Washington state; the City of Eugene, Oregon; and the California Cities of Encinitas, Brisbane, San Luis Obispo, Sacramento, Santa Cruz, Menlo Park and San Jose. mixed-fuel buildings but requires them to be highly energy efficient and electrification ready, i.e. constructed with the electric infrastructure (space in the electric panel and electric circuits) to accommodate future electric appliances. In practice, the California Energy Code is an “electric preferred” code, with mixed-fuel allowed but compliance being easier with all-electric equipment since it is difficult to comply with the California Energy Code without installing electric heat pump space and water heating systems.
In staff’s experience, most inquiries about constructing a mixed-fuel home relate to gas-fueled stoves, barbecue grills, outdoor fire pits, and fireplaces rather than space and water heating and it seems likely that new construction under the California Energy Code will follow this pattern.
Moreover, because space and water heating account for the majority of GHG emissions from a building (as much as 80% to 90%), it is possible that reverting to mixed-fuel buildings will not result in significant increases in GHG emissions in the short term. The City can focus on outreach and technical assistance to encourage voluntary electrification in the short term to help mitigate GHG emissions from mixed-fuel buildings.
Local governments and environmental advocacy groups have identified three alternatives to all- electric requirements. They include:
•High-performance approach with additional efficiency requirements for new mixed-fuel buildings only (All-Electric Preferred reach code)
•High-performance approach with additional efficiency requirements for all new buildings (One Margin reach code)
•Emissions limit approach with local air quality requirements for nitrous oxides (NOx) or other greenhouse gases
Of these, the approach most likely to conform to the Ninth Circuit’s ruling in CRA v. City of Berkeley is the “One-Margin” reach code. The decision specifically acknowledges an exception within EPCA that allows for reach codes, provided they satisfy seven requirements. 23 The One- 23 42 USC 6297 (3)”… [A] regulation or other requirement contained in a State or local building code for new construction concerning the energy efficiency or energy use of such covered product is not superseded by this part if the code complies with all of the following requirements:
(A) The code permits a builder to meet an energy consumption or conservation objective for a building by selecting items whose combined energy efficiencies meet the objective. (B) The code does not require that the covered product have an energy efficiency exceeding the applicable energy conservation standard established in or prescribed under section 6295 of this title, except that the required efficiency may exceed such standard up to the level required by a regulation of that State for which the Secretary has issued a rule granting a waiver under subsection (d). (C) The credit to the energy consumption or conservation objective allowed by the code for installing covered products having energy efficiencies exceeding such energy conservation standard established in or prescribed under section 6295 of this title or the efficiency level required in a State regulation referred to in subparagraph (B) is on a one-for-one equivalent energy use or equivalent cost basis. (D) If the code uses one or more baseline building designs against which all submitted building designs are to be evaluated and such baseline building designs contain a covered product subject to an energy conservation standard established in or prescribed under section 6295 of this title, the baseline building designs are based on Margin reach code applies additional efficiency requirements to all new buildings, but takes into account energy use at the source, which favors the additional efficiency and lower emissions of all-electric equipment using clean electricity. It uses standard energy modeling practices to set its requirements rather than novel approaches like local air-quality standards. It does not discriminate between gas and electric appliances like an “Electric-preferred” code.
Given the significantly higher efficiency of electric heat pump equipment compared to gas equipment, it is easier to comply with the One Margin code with an all-electric design. In fact, the standards being established by most One-Margin codes currently being developed are high enough that while an all-electric home can meet them with thoughtful efficiency measures, a mixed-fuel home would require the highest level of efficiency and the addition of on-site solar and storage to meet the standards.
To date, the Cities of San Luis Obispo, San Jose, and Santa Cruz have also adopted One Margin reach codes. Those Cities also had ordinances prohibiting natural gas infrastructure in new construction. Staff expects it could bring a reach code amendment to Council as quickly as feasible later this year. The reach code amendment process also involves approval by State agencies. After the reach code amendment is adopted by Council, it needs to be submitted to the California Energy Commission (CEC). The CEC will verify that the reach code is at least as stringent as the base requirement of the California Energy Code and demonstrates cost effectiveness, and will then post the reach code for public comments for 60 days. Following the public comment period, CEC Commissioners will vote on the reach code at their business meeting. A final step includes the filing of the reach code with the California Building Standards Commission (BSC). Using the experience of San Luis Obispo, San Jose, and Santa Cruz as a guide, staff estimates the additional approvals will take four to five months. the efficiency level for such covered product which meets but does not exceed such standard or the efficiency level required by a regulation of that State for which the Secretary has issued a rule granting a waiver under subsection (d).
(E) If the code sets forth one or more optional combinations of items which meet the energy consumption or conservation objective, for every combination which includes a covered product the efficiency of which exceeds either standard or level referred to in subparagraph (D), there also shall be at least one combination which includes such covered product the efficiency of which does not exceed such standard or level by more than 5 percent, except that at least one combination shall include such covered product the efficiency of which meets but does not exceed such standard.
(F) The energy consumption or conservation objective is specified in terms of an estimated total consumption of energy (which may be calculated from energy loss- or gain-based codes) utilizing an equivalent amount of energy (which may be specified in units of energy or its equivalent cost). (G) The estimated energy use of any covered product permitted or required in the code, or used in calculating the objective, is determined using the applicable test procedures prescribed under section 6293 of this title, except that the State may permit the estimated energy use calculation to be adjusted to reflect the conditions of the areas where the code is being applied if such adjustment is based on the use of the applicable test procedures prescribed under section 6293 of this title or other technically accurate documented procedure.
Thus, if the City were to pursue the One Margin reach code amendment, then time is of the essence. Because staff will begin it work on comprehensive building code updates for the 2026- 2028 code cycle early next year, any replacement code the City adopts in the interim will be in effect for approximately one year. Rather than considering and researching a variety of policy options, staff recommends Council provide direction to proceed with development of a One Margin code. Staff would aim for fall of this year for adoption if possible. Staff will continue to track other approaches by state or local agencies, and if they appear viable staff can present them as policy options as part of the work on the updates for the 2026-2028 code cycle.
FISCAL/RESOURCE IMPACT
Staff expects that this effort will require up to 1.5 FTE of staff time combined for five to eight months and additional consulting costs to complete the One Margin code if Council directs staff to proceed. This effort will involve staff from both the Planning and Development Services (PDS) and Utilities Departments. Re-prioritization of work will impact other efforts, including Sustainability and Climate Action Plan (S/CAP) programs and studies and advancing the seismic upgrade ordinance.
If a Budget Amendment Ordinance is required it will follow in a separate report. Amendments or new contracts with consultants will likely be required (contract expenses are not expected to exceed $500,000), and these will require Council approvals and may require sole source exemptions to the Purchasing Code due to the speed at which this project needs to move to fulfill Council environmental policy objectives.
STAKEHOLDER ENGAGEMENT
If directed to proceed with the One Margin code staff will develop a stakeholder engagement plan to share the draft code with key stakeholders including the developer, architecture, environmental, and contractor communities.
ENVIRONMENTAL REVIEW
Council action on this item is not a project as defined by CEQA because temporary moratorium and development of an alternate reach code is a general policy making activity. CEQA Guidelines section 15378(b)(2).
ATTACHMENTS
Attachment A: Resolution Suspending Enforcement of Municipal Code sections 16.14.090,
16.14.110 and 16.14.300.
APPROVED BY:
Jonathan Lait, Director of Planning and Development Services